Brian Moynihan: No Fed Rate Cuts This Year

Bank of America CEO Brian Moynihan tells Fox Business Network’s Maria Bartiromo “I don’t think they [the federal reserve] will” cut rates this year

Bank of America CEO Population Growth Rates

Image source: Fox Business Network Video Screenshot

In an interview with FOX Business Network (FBN) anchor Maria Bartiromo live from the Economic Club of New York this afternoon, Bank of America CEO Brian Moynihan discussed international trade tensions with China and Mexico, immigration reform, the Federal Reserve, and his outlook on the U.S economy. When asked his beliefs on whether the Federal Reserve will cut rates this year, Moynihan said, “I don’t think they [the Federal Reserve] will” cut rates “unless something goes really wrong in a trade, I think the economy is stronger than people think.”

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The discussion will air tomorrow on FBN’s Mornings with Maria (weekdays 6A-9A/ET) and parts will be available on the web at FoxBusiness.com.

Bank of America CEO: Capital spending is slowing down

On whether he believes the Federal Reserve will cut rates this year:

“I don’t think they will… unless something goes really wrong in a trade, I think the economy is stronger than people think. I just – and that’s personal belief, so you can take that with a grain of salt, but I’m telling that unless something goes really wrong and confidence breaks, unemployment breaks, you know, this economy’s going to move along in a two percent plus growth rate, and they’re raising rates, Maria, at this growth rate.”

On whether he believes not passing USMCA would disrupt the economy:

“So, the -- so, I think the economists have already, just because of the delay -- in the perceived delay in the resolution of China, because it -- even going to a few weeks ago when the negotiations broke down and why everyone said “Oh, by the G20,” and now it's a little more debate. We'll see what happens. But, that -- and then USMCA, Canada and Mexico started the process, so -- and then the change. So I think the clarity around that would add back. What would it add back? I think, until it was past tense, I think it's going to be harder to add it back. So, they went from 2.6, which assumed it was all going to get done in late last fall, to 2.2 to when it wasn't getting down, back up to about 2.5, this GDP for ‘19 in the U.S. and then back down to 2.4. And so, I think what you're seeing is delay now. If it stopped cold and it was clear nothing was going to get done, I think it would come down further. I still don't think the U.S. economy -- I still -- they don't believe, by what they published this morning, the U.S. economy would go into recession.”

On the current economic environment and uncertainties:

“Access to credit is good. The people's wages are growing. Unemployment is at levels that are unprecedented, 50, 60 years so when we think about all the stuff going on in society, you know, when was the last time new claims for unemployment ran 200,000, raw number? 1968, 1969. When was the last time -- society was in pretty rough shape then. You think about from 1968, 69, through ’72 – ’73 – ’74, think about what happened. Nixon, Vietnam was raging, Kent State, Martin Luther King, Bobby Kennedy, the DNC, think about all that went on, then ultimately an oil shock and an oil -- more than a shock. You think about all that, and yet, here are we are on other side. You know, how many people were employed in 1968 in America? 70 million. You know how many people are employed today? 150 million. So the ingenuity of that capitalist engine we’re talking about solved the problem. By the way, technology was going to take away all the jobs if you were around the '68 and stuff like that, computers and stuff like that; we made it through. Now how we’re going to make it through, I don’t know, but I think people get too worried about some of the stuff when you really think about it long term, it’s a very powerful engine, this economy has, and it'll ebb and flow. And that's the point, 10 years in, everything’s got to flow, when does it -- or whatever the right analogy is. And they're saying, why does it have to? And that's going to be the interesting debate every quarter now, and that's why you're seeing this boom-boom-boom.”

On whether he is seeing uncertainties in corporate America as uncertainties with trade negotiations continue:

“Yes, we won't see it until it happens. But, right now you don't see any -- the impacts. You see some companies that are starting to feel the effect of tariffs, from taking equipment out of China. They've -- it's gotten expensive, so -- an example, a client today that I got relayed to me was they were going to buy two pieces of equipment, they bought one. And that level of uncertainty is just unhealthy for -- when you discount future cash flows, which is what every business assessment does, anything that puts a variability around those cash flows, you as a senior executive are going to ask people ‘What's the range of outcomes here?’ And if that range gets wider, you're going to have people that are more reluctant to do it. And that's what you're feeling right now, is people are saying, ‘Wait a second, if this trade goes really long, what happens to me? And, do I need to buckle down? Do I need to hoard some cash? Do I need to slow down a little bit?’ So, I think the relief valve might be more than we expect. That was three percent in the first quarter when a lot of this was going on, and there's some technical reasons for that and happy stuff, but -- so I think they would better, I think would impact it, but I think they took part of that into consideration, they -- especially delay in the way our experts looked at it today. They were clear, they said, ‘This is starting to reflect the trade disruption.’”

On immigration:

“But, I -- the thing that we have to forget -- we think about trade, but we also have to solve immigration, because at the end of the day, the population in the United States and those statistics that I gave you, went from 200 million to 300 million people, workers went from 70 to 150 and a big chunk of that was when the participation changed drastically from the late '60s to now. We need people from outside the United States, it takes 21 years to create a 21-year-old, so the population growth rates just don't -- I'm one of eight kids, so I can -- population growth rates don't change fast. And if you study the economies that struggle, China, Russia, places where population declines, you're always fighting a shrinking pie and we need population growth and it's going to come -- and so we have to have some resolution to that, because we need the people, I think, to help fuel the economy.”

On where he sees growth in the company over the next five years:

“We – we have lots of markets in the U.S. that we haven’t been in traditionally. And we’re opening up in whether it’s Denver, Salt Lake City, Minneapolis, et cetera. We have lots of markets, we’re under penetrated, so our market share in Los Angeles is one half our market share in Washington D.C. area and wealth management so we got a lot of work to do there. Then we have trillions of dollars in assets and deposits and loans that are with other companies that our clients have relationships with and don’t have it. And likewise in the commercial business, we got about – we’re growing fast but we have low double digit market shares in middle market investment banking. We have a relationship with – you know, all those companies, we should own that space. And so all that’s just hard work, and so to come around wealth management, come around applying technology -- but it’ll come around a good old fashioned base and the 200,000 teammates going out and helping our clients solve their problems and this – the consistency applying more and more teammates to it.”

On where he believes there could be economic weak spots:

“I think the issue that’s there, that is in the leverage financed – has at terms gotten too favorable to the borrower, numbers of, you know, EBITDA multiples, confidence, things like that. It’s just a smaller asset class. And it’s a smaller … amount. And that’s good for society at large. But it won’t -- it’ll be ugly for those companies and ugly if the economy slows down and can’t carry the debt and they have to be restructured and there’ll be the usual carnage that goes on. And then there’s the debate about people who are barely investment grade and what happens if levered up, and what happens if they go into non-investment grade. But that’s people watching that, people are thinking about that. And frankly the operators of those companies are starting -- trying to figure out how to deleverage. If you remember back in the crisis, the commercial real estate, they’re the walls of refinancing. Those -- the walls in this business are a little more spread out and people are trying to push them out which then gives you time.”

FULL RUSHED TRANSCRIPT:

MARIA BARTIROMO, FBN ANCHOR: Brian, you talked a lot about capitalism versus socialism. I want to get your take on the broad economy for a bit before we go back to that, because I do want to get your sense on why you think younger people think maybe socialism is better than capitalism. So if we could go back to that. We're seeing some signals recently that things may slow down. We’ve got a GDP of 3.1 percent in the first quarter, we know just a week and a half ago, but we’ve seen purchase in mangers index come down, the global purchasing managers showing that manufacturing may be coming in. How do you see the broad economy right now?

BRIAN MOYNIHAN, CEO, BANK OF AMERICA: Well I think, let me start by sort of the debate that's been going on since last fall, which is the debate between what it will feel like to go through slowdown that levels off, 1.5, 2 percent, versus a line that just keeps going down. And that's the debate that goes on every day, and some days some people win and some days the other people win.

And so -- but what do we see today? So when we think about Bank of America, we have our experts that -- we have one of the best research platforms in the world… that runs it and the team does a fantastic job. Their prediction for 2019 GDP growth in the United States, they just moved from 2.4 -- 2.5 down to 2.4. But they followed this travel, 2.6, 2.2, 2.5, 2.4, all across the last six months. And that’s largely bouncing around some of the topics… of what the trade issues will solve or whatever.

And on the world wide basis, its 3 -- low 3's. So, they believe that the economy is still growing. What we then have, the different insight is what our customers are doing, and if you think about the U.S. economy, it’s 2/3 consumers. If you -- the size of that economy is basically equivalent to China’s economy. And so when we think about what’s going to happen to economy, I focus a lot on what consumers are doing.

And in Bank of America so far this year through May, we’ve had $1 trillion in payments made by consumers, a check written, a debit card payment, cash out of the ATM, ACH wires. That is up 5 percent plus from last year. ’17 and ’18 was 8.5, and it was like 4 to 5 the year before that.

So what you saw is the economy grew faster, went up to 8, and now it’s come back down. It’s very strong. And it’s actually picked up during the year a little bit. And so, we feel very good about the consumer.

Then when you talk to our business clients, they’re borrowing money. They’re making things. They're worried about all the things that we’re all worried about in this room and the ebbs and flows, and what you talk about every morning in the terms of trade and was it resolved and those types of things. They’re worried about getting employees. But overall, they're making money and they’re happy, and they’re borrowing at the highest rate on the middle market lines of credit that they borrowed at in 10 – 15 years. That means they're putting money to work somehow.

They stored a lot of cash which means they have more money to invest, and I think it’s just going to take a little bit of clearance the way some of these potential bumps that will then kick them back in.

BARTIROMO: Yes, it’s interesting that you see an economy that is still strong despite all of the uncertainty around trade and tariffs. So that is really what I wanted to get your take on because CapEx numbers are something we look at very closely in terms of an indication for the economy. And while CapEx was up about a year ago, I believe the “Journal” reported it was up 20 percent; now it’s up about 3 percent. Are you seeing uncertainties set in, in corporate America as a result of the uncertainty around trade and tariffs?

MOYNIHAN: So we’d have different numbers but same trend, which is that last year you saw it at about twice the rate of this year, a little higher this year than the number you gave. But it is slowing down, again, because there was a rush to get things done. You have to think about late ’17 nobody believed tax reform could get done.

There had been a plan in place for the entire administration in the two administrations of Obama that was agreed to tax reform. It never got through, it was the six, the gang, whatever they called themselves and everything and all of the sudden it happened.

And so the enthusiasm out of that took off and so people went and spent the money and did the things, and of course you only need to buy so much. There’s a slowdown on the other side of it and that’s what we’re feeling, but it’s still consistent with a healthy economy but albeit an economy of probably 2 percent-ish versus 3 percent. That is what is playing out.

So we feel, if you look at the businesses and even capital spending and stuff, it is slowing down. It was predicted to slow down. That was what everybody said early '18 about ’19 in their second year, it was going to slow down. The question is, will it slow down – or will it slow down or keep going on

BARTIROMO: And you know it’s interesting, we are in year 10 of an economic expansion about to break the record of the longest economic expansion --

MOYNIHAN: By definition we have to break it. Now unless they revise backwards, in the quarter that would break it.

BARTIROMO: Exactly. People are saying, well maybe – maybe it’s just the age of this expansion that could turn it around, I don't know, but so far it sounds like you're not seeing all that much change, even though yes, things have come in a bit, you’re not seeing all that much change from the consumer or business as a result of this uncertainty.

MOYNIHAN: Access to credit is good.

BARTIROMO: You’re expecting it but --

MOYNIHAN: Access to credit is good. The people's wages are growing. Unemployment is at levels that are unprecedented, 50, 60 years so when we think about all the stuff going on in society, you know, when was the last time new claims for unemployment ran 200,000, raw number? 1968, 1969.

BARTIROMO: Wow.

MOYNIHAN: When was the last time -- society was in pretty rough shape then. You think about from 1968, 69, through ’72 – ’73 – ’74, think about what happened. Nixon, Vietnam was raging, Kent State, Martin Luther King, Bobby Kennedy, the DNC, think about all that went on, then ultimately an oil shock and an oil -- more than a shock. You think about all that, and yet, here are we are on other side.

You know, how many people were employed in 1968 in America? 70 million. You know how many people are employed today? 150 million. So the ingenuity of that capitalist engine we’re talking about solved the problem. By the way, technology was going to take away all the jobs if you were around the '68 and stuff like that, computers and stuff like that; we made it through.

Now how we’re going to make it through, I don’t know, but I think people get too worried about some of the stuff when you really think about it long term, it’s a very powerful engine, this economy has, and it'll ebb and flow. And that's the point, 10 years in, everything’s got to flow, when does it -- or whatever the right analogy is. And they're saying, why does it have to? And that's going to be the interesting debate every quarter now, and that's why you're seeing this boom-boom-boom.

BARTIROMO: We have to talk about interest rates and the Federal Reserve; of course I want to get your take there. But you just said something that I want to stay on for a moment, and that is about your employees and wages.

You made the conscious decision to actually raise wages at the BofA. You’ve gone from -- well you're now at $17 and its going up to $20. Tell me about this, what was behind this decision, because you have been also very prudent and conservative in terms of your expenses, and yet you're raising wages in a significant way.

MOYNIHAN: Yes. You know, what the team's done a great job of, is figure out how to transform the company while a lot of you are thinking about all the stuff you’d talk about us in 2012, '13, '14 what was going on. Underneath it, the team was doing a fabulous job. We had 280,000, when I became CEO, we have 205,000. The company is bigger. That was by applying technology, improving the process and changing stuff.

What's that's also given us the ability to do is to go from $90,000 average comp in our company to 150 in that time frame. For people in a lower two quintiles of wages, they’ve had -- they were since 2010, every year, 6 to 7 percent wage and salary increase every single year.

At the same time, we drop for the people paid; we dropped the healthcare cost contribution in half and have not raised it since 2011. All that was to have teammates that felt better and better about the company and could do a better and better job for our customers, and to keep the turnover against this 3.5 percent unemployment, 3.6 percent -- it's hard.

And so we've bought the turnover down by half, but it's still high. And so we need very talented people. And so the last thing we did is we also made -- we as a company have profit margin, ability to earn money and ability to do business the right way, that we would not let employees -- employees would always be way above sort of the minimum poverty for work, family, even their individual. And we said...

BARTIROMO: Above minimum wage.

MOYNIHAN: Way above minimum wage, way above that. So we set a 25 percent buffer that, now we're running 50 percent. That was a conscious decision that we didn’t believe that our teammates should ever be in a position that they don’t earn significantly more than the prevailing standard of living in --

BARTIROMO: Well, that was a big deal and I -- you did it right before you were testifying in front of Maxine Waters, Financial Services Committee, so that was quite clever of you as well.

MOYNIHAN: It was a natural progression. We crossed 15 in 2017, which was a great debate, and I think I talked to you about that in Davos that year.

BARTIROMO: Yes.

MOYNIHAN: And we were going to cross 16 and change, but just for the merit, I said “Let’s end the debate and go to 20,” which is $40,000-some a year. So -- and lets just end it and let people know the course. And again, so our teammates would feel good, our -- the rest of our teammates feel good about it.

But importantly, if we can shutdown the turnover a little bit -- it’s the lowest it’s ever been, but if I can get a couple -- if we can get a couple hundred basis points out of that turnover rate, that's a big deal.

BARTIROMO: Are you getting the feeling that we could be walking into a tougher regulatory environment for the banks? I mean, obviously this administration has lowered regulations, but the big banks haven’t really felt it. I mean, it's been small and midcap companies that have really gotten the relief on the regulatory side.

Where are you on that issue? Are we walking into a period with the Democrats in control in the Congress, ready to put further pressure on you as a large SIFI bank, or do you feel the opposite, given Trump's deregulatory environment?

MOYNIHAN: Well, I think the key was to get in place, between capital liquidity resolution… resolve a major company, get everybody under the tent, change the activity scope. And that was all put in place, and they're still fine-tuning that. And if we could just stop and make sure we've got that right. And so what we talk a lot about is, if you are -- 15 percent of FDIC insured deposits, and whenever there’s a failure -- basically the fund pays for it, and then we build the fund back up, we have a higher interest in making sure people are safe and sound that anybody else.

And so I want capital liquidity and asset quality and all the things. The problem is when you swing the pendulum too far, you’ve got to make sure you swing it back. And so I think we're advocating to get the pendulum back to the middle, but not change the scheme. Stress testing is very strong and we’ll find out this year's test here in a bit. And what that says is these banks should not -- these banks meaning not just the big SIFI, but everybody, shouldn’t be the problem.

And by putting more stuff under the tent, in an event of stuff creeping out… you shouldn’t have the same problem, because people sort of rewrite history from the back -- from where we are today, but most of the people who failed weren’t in the tent. And the issue was what Chairman Bernanke and others were doing, is they had to make a -- I shouldn’t say make -- they had to figure out ways to solve problems that weren’t really the banking industry's regulatory framework. So we fixed a lot of that and that's good.

But we've got to be careful because there's a real cost benefit analysis here which is, the simple numbers, we have 10 percent capital requirements, three percent of that is, is for the SIFI buffer -- and its only 2.5, but let's just make it 3 – the math’s easier. Three percent of that is for the SIFI buffer, 7 percent is the base capital. So the regional has seven, we have 10. If you think about that, that doesn't sound like a lot, you say, “Oh it’s 3 percent.” That difference is $50 billion in capital we can take no risk on.

So if you said – let’s say that 2 versus 3 percent, so you take 100 basis points, we can make $100 billion more loans that we can't make today. So calibration is a key and that's what we're looking for.

So -- and we believe by the way, that our … shouldn’t be visited on other people's houses, that you need to have less regulation for smaller banks. We were clear on the, the SIFIs were, and because if they fail, they don’t create the same problems, we clean them up and go on.

BARTIROMO: Let me go to another gap, which a lot of people are talking about, and it’s the gap in interest rates. We're seeing the 10 year, drop like a rock, down to 2 point -- it broke 2.07 percent actually. The yield curve has now inverted, where you’ve got the 10 year actually lower than the three month at 2.3 percent. Important conference going on in Chicago in terms of Fed policy, Jay Powell this morning said he's ready to act. What does the inversion tell you, for starters? Is this indicating that a recession is on the horizon?

MOYNIHAN: You know, there's a common view that there's a correlation between the number of yield curves and recession, and it proves to be true a number of times, it also proves not to be true. And so I think you’ve really got to focus on the real underlying economic data and what you're seeing come out. And so business confidence is strong -- not as strong as it was at its highest point, spending, et cetera.

So I think you’ve got to concentrate on that. I think the thing about the yield curve, which is different this time -- so people -- I read an article today that said this is like 2006 and so get ready. The German 10 year rate, I think in 2006 at the same time was 3 percent positive. It's now 30 basis points negative. So the question is, is how much the capital flows around the world are creating the massive rally in the American bond market, because we're positive.

And so you’ve got one side that -- a group of people that say it’s a recession indicator and they can prove that out, and you’ve got another side proving, no it has nothing to do with it, and there's other factors at bay, and they can prove that out. What I try to do is avoid the debate, other than to watch people argue with each other -- which is kind of fun, and really just sit there and say, “What do we see in day to day activity?” And the activity consumer in America has gotten incrementally stronger during the year.

And so unless people, don’t have jobs and aren’t getting paid more, I think what will slow them down will be that, and we don’t see that. And by the way, when you talk to our clients – I’ve asked the question, the number one issue for most of the people here, I can't get enough employees. And so they're all hiring, they're all trying to -- and replacing people.

Last year, we hired 27,000 people in our company; 27,000 people. Now the people that left us went someplace, they have jobs -- some retired, but most of them left and had jobs. And so we had 27,000 --

BARTIROMO: And you want to see that, you want to see that kind of -- that tells you that the economy is strong.

MOYNIHAN: -- which is very healthy for economic -- healthy 200,000 jobs, 197,000 jobs, I mean so on. So I wouldn’t -- I think people are overlooking at that market, but I can fully understand why. And it’s a trading question and people making money. But the real question is, what's going to go on the underlined data, and I think Chair Powell this morning, in many cases and the whole group of people have been clear, that if they need to help the economy, they will, but they're not going to help it unless they need to, and that's what being in the neutral range means.

So, until they – until they got to – they’ve got in the neutral range, and now it's really going to be, as one of the former chairs told me, it's like climbing a mountain. It's a handhold the next meeting and then a handhold -- everybody thinks there's a pattern to it, but it's really literally just, where's the next place to put my hand so I can hold up, and they're trying to figure that out.

BARTIROMO: So, what you're saying is, number one, that backdrop still feels very strong to you. The consumer, when you look at what the consumer is doing, in terms of spending habits, it -- it remains quiet robust. And on the other hand what you're saying is, yes, rates have dropped and treasuries have gone up, but that's because there aren't a lot of alternatives across the world.

MOYNIHAN: And now the market has, and our economist, Michelle Meyer, put out this morning, I think, three cuts between now and next year I -- something like that. We'll see if that holds. If these trade things fall into place and you see some calm down, it will be interesting to see how fast that comes back.

By the way, it was in the market, came out of the market, it was in the market, literally ebbing and flowing based on the debate, and so it's -- it's not really there, I think for -- as fundamental reasons yet. Now, we'll see the data and if data starts getting weaker then I think it's more fundamental.

BARTIROMO: But, what a change in conversation though. A year ago we were talking about the Federal Reserve raising rates three times, winding down the balance sheet so that it could get the balance sheet way down from the $4 plus trillion, and we now we're talking about a cut in interest rates. Is that largely because the Federal Reserve wants to get to its inflation target, maybe that's it?

MOYNIHAN: This -- when you get to this debate about monetary policy, I've always said my debating with the Fed about how they're going to set monetary policy is not a high value task for me, because it -- I'm not sure. They are concerned that the inflation will stay in the range as it stayed, they've been clear of that.

I don't think anybody -- you don't need to have some divine whisperer here, you can just go read the minutes. They're worried that the inflation's -- they worry the job -- wage growth is not as strong as they'd expected at this point, so there's a Phillip curve –what's happening is the Phillip curve is getting back in sync now as each of the wages have been rising three percent as opposed to two. We see much more wage inflation. I'm sure that business owners and operators here do too. It -- the idea that wages are only growing three percent, I'd like to find one cohort in our company that's close to that. Just -- not -- I'd like to, it just isn't true.

And so, I think they're debating the inflation issue, but it is interesting that -- it wasn't last year, it was last November we were debating --

BARTIROMO: Yes, right. Thank you. Six months.

MOYNIHAN: -- whether they're going to raise rates and stuff and it was predicted. If you look at --

BARTIROMO: That's right.

MOYNIHAN: -- our financial plans that were developed late last year, it had rate increases this year in them. And by the way, we don't make it up, we just take the market's blue chip consensus, so you don't have to go back that far.

So, what's happened in six months? The trade war, Brexit isn't getting solved, people are worried about the impact on China slowing down, the impact on Europe, which is much more into that, and then you're worried even about Brazil which has come along a little bit.

So, the world estimates have come down and Europe's estimates have come down. And so, it's been six months, now half empty says, “Oh my gosh.” People are advising down. Half full is -- it's only been six months, so what would be the condition back to put us back in a different mode? Six months time.

I don’t think in November we thought -- in October, November, we thought we were in some crazy environment that was over -- it wasn't real estate prices growing 15 percent a year, it was real estate prices growing three percent a year.

So, all we can do is sort of get people back into that mode, the thought process back in the mode and that's going to come down to, I think, solving some of these core issues, which the Mexico government is up here today trying to figure out the -- I was down there last Thursday and Friday, it was an interesting time to be there.

The president, as he's announced, spoke at an event that we had down there for our teammates from around the world and some were before the situation changed from him that afternoon and talking to his cabinet and stuff. They need to solve this. They're trying to figure out a solution, and they're up here doing it right now.

BARTIROMO: Do you feel like it's actually worsening the trade worries, because now the president is looking at Mexico, or do you feel that this is just bluster, the president is playing poker in a sense?

You're right, Mexico officials in Washington, this week, meeting with Secretary Pompeo. He's got to get USMCA passed, and you've got this political dysfunction in Washington, where you're not seeing a lot get down because the two sides hate each other so much.

If they don't get USMCA passed, does that blow what you're talking about? Does that disrupt this strength in the economy?

MOYNIHAN: So, the -- so, I think the economists have already, just because of the delay -- in the perceived delay in the resolution of China, because it -- even going to a few weeks ago when the negotiations broke down and why everyone said “Oh, by the G20,” and now it's a little more debate. We'll see what happens.

BARTIROMO: Right.

MOYNIHAN: But, that -- and then USMCA, Canada and Mexico started the process, so -- and then the change. So I think the clarity around that would add back. What would it add back?

I think, until it was past tense, I think it's going to be harder to add it back. So, they went from 2.6, which assumed it was all going to get done in late last fall, to 2.2 to when it wasn't getting down, back up to about 2.5, this GDP for ‘19 in the U.S. and then back down to 2.4.

And so, I think what you're seeing is delay now. If it stopped cold and it was clear nothing was going to get done, I think it would come down further. I still don't think the U.S. economy -- I still -- they don't believe, by what they published this morning, the U.S. economy would go into recession.

BARTIROMO: And you don't see it in your -- when you see raw – you see raw data --

MOYNIHAN: We -- yes, we won't see --

BARTIROMO: -- about the consumer.

MOYNIHAN: Yes, we won't see it until it happens. But, right now you don't see any -- the impacts. You see some companies that are starting to feel the effect of tariffs, from taking equipment out of China.

They've -- it's gotten expensive, so -- an example, a client today that I got relayed to me was they were going to buy two pieces of equipment, they bought one. And that level of uncertainty is just unhealthy for -- when you discount future cash flows, which is what every business assessment does, anything that puts a variability around those cash flows, you as a senior executive are going to ask people “What's the range of outcomes here?”

And if that range gets wider, you're going to have people that are more reluctant to do it. And that's what you're feeling right now, is people are saying, “Wait a second, if this trade goes really long, what happens to me? And, do I need to buckle down? Do I need to hoard some cash? Do I need to slow down a little bit?”

So, I think the relief valve might be more than we expect. That was three percent in the first quarter when a lot of this was going on, and there's some technical reasons for that and happy stuff, but -- so I think they would better, I think would impact it, but I think they took part of that into consideration, they -- especially delay in the way our experts looked at it today. They were clear, they said, “This is starting to reflect the trade disruption.”

BARTIROMO: Actually, I was surprised that the GDP wasn't revised downward more, from 3.2 to 3.1 in the most recent reading. You just mentioned real estate. What can you tell us about housing right now? Because mortgage rates have also come down, and I'm wondering if that has been a bit of a spark in an area that we were seeing some signs of weakness within real estate?

MOYNIHAN: Yes, and so this is, again, would be glass half full, half empty. Real estate prices are going up about three percent year-over-year, three to four percent, almost every city is seeing rises. In the hottest cities, faster.

BARTIROMO: Every city? Wow.

MOYNIHAN: Yes, the 20 cities were up three percent, so that's the top 20 cities where -- and so, the long-term trend, if you looked at the curve coming up to five -- four, five, six and then saw it shoot up and then come back down and get back up, it's basically on the same trend at three percent, it's just it found some ways up and way down. This is healthy.

So, a million in change units, the population is only growing at a half a percent, household formation about a million a year. A million units is healthy. Car sales at 16 million versus 17 million, and people can ring their hands, but 16 million is higher than all but a couple years in the history other than the last four or five.

There's 40 million used cars sold a year, so the underlying activity, if people are employed at the 3.5, it's going to be fine. It should -- we don’t want housing to go up to six, seven, eight percent a year.

That's -- that's what we had and that's fueled by -- it's the biggest leverage bet all Americans can make, five percent down, 95 percent credit. You can't make that. You buy social securities, it's 50/50 at most. You -- a lot of the things is less, so the idea -- we don’t want that. So, three percent is fine.

Now, when it gets out ahead of that, that's usually due to San Francisco and places like -- Boston, places like that, they're just hot for jobs and that will settle back down, but -- and there's housing shortages in those environments, that's a different question. But -- so, housing is very constructive and probably has more room to run honestly.

But, I -- the thing that we have to forget -- we think about trade, but we also have to solve immigration, because at the end of the day, the population in the United States and those statistics that I gave you, went from 200 million to 300 million people, workers went from 70 to 150 and a big chunk of that was when the participation changed drastically from the late '60s to now.

We need people from outside the United States, it takes 21 years to create a 21-year-old, so the population growth rates just don't -- I'm one of eight kids, so I can -- population growth rates don't change fast. And if you study the economies that struggle, China, Russia, places where population declines, you're always fighting a shrinking pie and we need population growth and it's going to come -- and so we have to have some resolution to that, because we need the people, I think, to help fuel the economy.

But housing in that regard is actually very healthy right now, and I believe personally as some room to run. I think mortgage rates being down always help that. And a lot of people have very low rates. The refinancing -- people that really get something out of refinancing is pretty low, because you’ve got to remember that there’s been a long ten years of rate being in a fairly low environment.

But it does allow a little more purchase power on the buy, and then the new millennials coming in who have been slower to buy, largely because they’re urban. If you think about where they’re living, you don’t want to -- you’re not going to buy a house co-op in New York City if you’re coming to work for one company. They never did. It’s just more about coming to the cities to work now. So that’s part of the change. That’ll change overtime, I think.

BARTIROMO: So, is there anything that you’re seeing in the credit cycle that has caused you to increase your provisions? I mean, how are you competing with some of these easier lenders out there who perhaps don’t have the standards? Are you lowering standards in any way right now?

MOYNIHAN: Yes, we aren’t lowering standards, because we tried that and it didn’t work so well, so.

(LAUGHTER)

And we had a -- we bought a couple companies that had really done it and--

BARTIROMO: Yes.

MOYNIHAN: -- it didn’t work so well. And so we have this idea of responsible growth. And so if you look at the stress test, we have lower aggregate charge offs and everything.

We run the company that way which means we’ll fair better in a recession, we’ll be able to be keep growing the company and driving. That’s kind of a basic philosophy. And I also think some of the products as we observed in the past tense were not the right products for consumers.

But in terms of credit quality overall in United States on the consumer side, you know, the credit card, delinquencies charge off’s in very good shape, always the issues more in the subprime category. Auto, very good shape overall. People brought back the credit lines. The real debate right now is about the leverage finance markets.

That’s largely financed outside the banking system’s balance sheet, to be clear. And that’s in the hands of investors who will see marks if they go the wrong way. There’s a concern whether that can -- and Chair Powell talked about it, because he -- two weeks ago or something.

It’s not clear how big an impact it has. It’s a $2 trillion asset class. It’s what he called NAV holders, in other words people whose liabilities float with their assets. Their duration’s more matched than a bank would be and stuff.

So, people don’t feel it, but I think we should worry about that and then the impact of corporate credit. That’s really the thing. We don’t see anything yet because the economy’s good and companies are making money.

But we think at the margin if society at large is going to face -- this recession would feel more like the ’99-2000 was driven more on the commercial side than on the consumer side. Because a consumer, you’ve had 12 years of pretty strong underwriting on the consumer side. And that has driven the consumer to be in pretty good shape.

BARTIROMO: Yes, because I mean Bank of America, the legacy business was always strong. You go back to the crisis in 2006, 2007 going in to ’08, and it was the companies that you acquired that were really having issues, like a countrywide financial or well at that time Merrill Lynch, so.

MOYNIHAN: You’re going to ruin my lunch before I eat it.

BARTIROMO: No, no. I just want to know--

(LAUGHTER)

-- where you are seeing the potential fallout in terms of the next crisis. What do you worry about that we ought to be worried about, in terms of where to look, which could have the weak spot, so that we’re not blindsides like we were?

MOYNIHAN: I think the issue that’s there, that is in the leverage financed – has at terms gotten too favorable to the borrower, numbers of, you know, EBITDA multiples, confidence, things like that. It’s just a smaller asset class. And it’s a smaller--

BARTIROMO: That’s good.

MOYNIHAN: --amount. And that’s good for society at large. But it won’t -- it’ll be ugly for those companies and ugly if the economy slows down and can’t carry the debt and they have to be restructured and there’ll be the usual carnage that goes on.

And then there’s the debate about people who are barely investment grade and what happens if levered up, and what happens if they go into non-investment grade. But that’s people watching that, people are thinking about that. And frankly the operators of those companies are starting -- trying to figure out how to deleverage.

If you remember back in the crisis, the commercial real estate, they’re the walls of refinancing. Those -- the walls in this business are a little more spread out and people are trying to push them out which then gives you time.

BARTIROMO: You’ve been the leader in terms of digitization and moving the company toward new technologies. Talk to us about the products that are most popular, that are most effective. And everybody wants to know, what does this mean for workers in terms of replacing so much with technology? Tell us how you use tech and where it’s most prevalent at the bank.

MOYNIHAN: So, there’s probably four or five trends in technology that everybody has to -- every business has to become expertised in and really understand how they’re going to affect their customer base and the change.

One is voice recognition, another is data storage retrieval, the third is network speed, efficacy, latency and all that stuff, the fourth is machine learning, artificial intelligence, the fifth is robotics. Now in different industries robotics will have something different. But in our industry, it’s ability to prepare information and do it all mechanically.

Other industries, it’s literally picking a raspberry if you saw the article the other day. And so if we think about those five things at Bank of America, what we’ve been able to do is to apply more and more technology and digitization. Taking out paper, taking out process, and have it travel digitally -- having customers -- so about 50 percent of customers plus are getting digital statements and things. So you apply that across all the businesses. and that’s a lot to – to really go from 288,000 people to 205,000 people with a bigger company in terms of more customer activity.

Customer activity, payments and stuff will grow 5 percent, as I said or 9 percent in this one. And you’re doing it with the same amount of people year over year. Trading volumes go up every year. We deal with the same amount of people. That’s by applying technology.

Now, let me give you a few specific examples. Erica which is a -- if you open your Bank of America mobile app, which all of you should have, and you talk to Erica, you can say to Erica, “Erica find all my recurring payments.”

Now, you’re going to say that. You could be in a room that has background noise. You could have a connection that’s -- where I live at home, the cell service doesn’t work that well. So it’s choppy. You can have all these things. But Erica will come back and tell you all your recurring payments.

Now think about -- it’s a combination of all the technology, first, voice recognition. We had to go out and create a new language for financial services. So we have seven million people on this now, 50 million customer interactions. But we had to create new language. Why’d you have to create a new language? The phrase what’s my balance, if you ask a typical voice recognition, could send you to a yoga class, OK?

(LAUGHTER)

BARTIROMO: That’s cute.

MOYNIHAN: So you had to have a financial -- so we built that. Then we had to then have a -- there’s 110 systems that go behind the mobile platform that you’re finding information from.

So you think of all the accounts, all the entries, and all the systems. And you’re not going to wait ten minutes for an answer. So you had to have an ability to do the artificial intelligence and find it.

Then I have to be able to transmit to it. And I always said about Erica, I said it’s nice in a quiet room but what if somebody’s driving in a car 60-70 miles an hour, 60 miles an hour, can you hear here? Will the thing be able to get it done? And we’ve been able to do that with that pace of network, because the networks have picked up.

And then what it does is it saves you a lot of time, because at the end of the day if you’re worried about cutting off the gym membership you haven’t gone to in six months and stuff, it’s -- you can scroll through and figure it out and call the people. And they won’t answer the phone or something.

Or you can just say “Erica, what are my recurring payments?” and it’ll tell you, boom, right there. And so, that’s a massive convenience to the customer. And so, what does it really do? There’s a thing called a routing number on your check. And most -- looking at the age of the crowd, they probably know what a routing number is, because they had wrote checks and knew it was on the bottom of every check. There’s a different cohort of age that has no idea. And so we get six million calls a year asking, what’s my routing number?

So now if you’ve ever asked that question, Erica comes up and says “Do you need to know your routing number?” And that cuts off hundreds and thousands of calls. Now that means somebody isn’t doing a -- not a high value task to answer the phone and tell it. So, that’s how you do it.

Now you go to the commercial side, you have the same things. We have 27.5 million mobile customers out of the last Friday. We have 37 digital customers. On the commercial side, we have about 500,000 commercial customers fully on cash pro. One of them sent a $1 billion payment on a mobile device last year.

BARTIROMO: Wow.

MOYNIHAN: And you’d say “Holy crap,” but at the end of the day it’s just as secure. It might not be what I would -- you would do. But it’s just as secure, and it’s pretty fantastic.

BARTIROMO: Real quick before we end, bottom line, do you--

MOYNIHAN: But we go to retrain all the people. That’s one of the things.

BARTIROMO: Well, that’s important.

MOYNIHAN: So, we have 40,000 people go through academy every year whether it’s in tech ops or whether it’s in technology period, operations or consumer to keep retraining for the jobs of the future.

And to me, going to my earlier discussion, that is something you can do in your own company. How do you retrain your workers so they can make the transition and have a full career knowing that activity A, activity B, activity C, activity D may go away? So how do we have people who are in audit that we can now do automated robotics come over to some other business? That is the duty – that is the duty of companies and CEOs and executives in the companies. And if we do that, we can deal with the fourth industrial revolution, that’s the point I’m trying to make.

BARTIROMO: This is important, because that’s what worries people obviously that their jobs are going to go away. Where does the growth come from it -- I mean you’re not a celebrity CEO, you’re unassuming, low key, you’re grinding out growth. Well seriously, I mean you’re grinding out growth here, and you’ve done a great job since taking over the bank. Congratulations. But where do you see growth coming specifically from the company -- let’s call it the next five years?

MOYNIHAN: We – we have lots of markets in the U.S. that we haven’t been in traditionally. And we’re opening up in whether it’s Denver, Salt Lake City, Minneapolis, et cetera.

We have lots of markets, we’re under penetrated, so our market share in Los Angeles is one half our market share in Washington D.C. area and wealth management so we got a lot of work to do there.

Then we have trillions of dollars in assets and deposits and loans that are with other companies that our clients have relationships with and don’t have it. And likewise in the commercial business, we got about – we’re growing fast but we have low double digit market shares in middle market investment banking.

We have a relationship with – you know, all those companies, we should own that space. And so all that’s just hard work, and so to come around wealth management, come around applying technology -- but it’ll come around a good old fashioned base and the 200,000 teammates going out and helping our clients solve their problems and this – the consistency applying more and more teammates to it.

BARTIROMO: You keep – you keep lending and those lending numbers go up and you keep gathering assets in terms of AUM for wealth management. Do you want to get to a place where some of your competitors are in terms of dividend payouts?

Some of the banks are paying 35 to 40 percent of earnings out in dividends, what are you, 21 percent?

MOYNIHAN: Yes, we’ll keep pushing it up, our earnings are growing faster than other people’s. That’s one of the reasons why we’re a little – a little behind. So you can – you can take that for what you want.

But – but we believe the stock is so cheap, so we’ll $6.25 billion buying stock this quarter and we’d rather take the share count down because those companies that we bought created the delusion that we got to get out of the system.

Twelve billion shares nearly at peak 11.7 down to now 9.6 and coming down about 150 or so a quarter at least, maybe 200 million a quarter. You know, and we’ll keep raising the dividend, it went from penny, nickel, 7.5, 12, 15, you know, we’ll keep going up.

But on the other hand, as a person who owns – net worth is in the stock and, you know, the job is to have the people who want to own the company long term own more of it every year.

BARTIROMO: All right, we will leave it there. The final question Brian, because I know this audience wants to know, your gut. Will the Fed cut rates this year? What is your gut – what does your gut tell you? Don’t tell me what your economist says.

MOYNIHAN: I don’t think they will.

BARTIROMO: You don’t think they will?

MOYNIHAN: I – unless something goes really wrong in a trade, I think the economy is stronger than people think. I just – and that’s personal belief, so you can take that with a grain of salt, but I’m telling that unless something goes really wrong and confidence breaks, unemployment breaks, you know, this economy’s going to move along in a two percent plus growth rate, and they’re raising rates, Maria, at this growth rate.

BARTIROMO: Brian, thank you.

MOYNIHAN: OK.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver