James Gorman: The Fed’s Got A Ways To Go

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James Gorman: The Fed’s Got A Ways To Go
Image source: CNBC Video Screenshot

Following is the unofficial transcript of a CNBC exclusive interview with Morgan Stanley (NYSE:MS) Chairman & CEO James Gorman on CNBC’s “Mad Money” (M-F, 6PM-7PM ET) today, Thursday, September 29.

Interview With Morgan Stanley CEO James Gorman

Part I

JIM CRAMER: Ever since James Gorman took over in 2010, Morgan Stanley’s stock is up more than any of the other major banks. More importantly, Gorman knows the industry better than anyone and that’s why I’m so thrilled to speak with James Gorman, the Chairman and CEO of Morgan Stanley to get a better sense of this moment. Mr. Gorman, welcome to “Mad Money.”

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JAMES GORMAN: Hey Jim, great to be here. Thank you.

CRAMER: I cannot think of someone I want more on this show than you right now James not because I want hand holding. But I'd like rationality. You lived through bull and bear markets. A lot of people feel this bear market will never end. What's your historical perspective?

GORMAN: Well, firstly, I've seen a lot of markets. I think you have to look at what drives the change in sentiment. And to me, I'm just not surprised. What do we expect? We've got a war in the Ukraine.

We've got inflation at the highest we've had for 40 years, we've got the Fed moving aggressively on rates having done nothing for 10 years. Rates have been zero. The market is awash with money.

What did we expect? So you've had the bubbles that have been out there, the SPACs, the cryptos and so some of them are getting washed out. So it's not totally surprising where we are. That's where I start from.

CRAMER: If that's the case then we hear the Fed talking tough, it should talk tough and it should take tough action.

GORMAN: Listen, you can't have free money forever. Of course, you you'll end up with an imbalance. I mean, it's all about GDP growth and interest rates and the Fed tries to moderate that about I think half the times that they've tightened in the last 30, 40 years, they've overshot a little bit.

But half the times they haven't so we're in we're in that zone and everybody obviously is making the bet whether they've overshooting gonna push us into a serious recession, whether we're going to have a mild recession, whether we're going to have a soft landing, or we're going to get perfection, and that remains to be seen.

CRAMER: And what does James think? I like your view. You know more than almost everybody I speak to you.

GORMAN: Yeah, well, I think I think it's unlikely that we're gonna have a hard landing at this point. I think the Fed will keep pushing. I mean, we're, we're at a little over 3% now. They'll probably end up at you know, 4.5, 4.75%.

Listen, we’re totally in between inflation, unemployment and rates. And my sort of nirvana scenario for now would be 4, 4 and 4. Get inflation back to 4%, bring rates up to 4% and have unemployment which is slightly below four. It'll tick up a little bit. That’s nirvana. We probably won't get that.

But I don't I don't think I don't see yet enough to tell me this is a real crisis. Geopolitical issues aside, that could tip things very differently. Obviously, if I'm wrong about the Fed’s ability to tame inflation, that tips things differently.

So there, there are reasons to be concerned. Clearly, the market is not stupid. The market reflects that. So we've got to respect the market. But and we've got an inverted yield curve at the moment.

So there's a lot going on. But I personally am not seeing the sort of very dark crisis we've seen through my career.

CRAMER: Well, that's really important because I’ve studied your career and I recognize that if you felt that it wasn't worth staying the course, you would actually say it. You would say, you know what, Jim? It's actually not a bad idea to sell a lot of stock here. I'm not hearing that.

GORMAN: And I'll also tell you, I’ve watched the behavior. We're dealing with 15 million clients through their places of work, through E*TRADE platform, which I'm sure we'll talk about, through our wealth management advisors, we're managing over $4 trillion.

And with our asset management business, wealth and asset together, nearly 6 trillion. I'm not seeing panic in there. This is not ’87, it's not even ’91. It's not the dotcom crash, and it's certainly not the financial crisis. That doesn't mean it can't become one of those, but it's not there yet and behavior supports that.

CRAMER: Well, we are going to talk about how you have really revolutionized the firm in a way that, you know, I'm, I think you’re the best at but before we get to that, it sounds like to me that if we don't get nirvana, even if we don't get nirvana.

We're still not in a situation like a 2007, 2009 where Morgan Stanley was, you know, 11, 10, 9 and I was concerned about the viability of a lot of the firms. That's not going to happen.

GORMAN: Well, there are two things that are very, very different from frankly, all those crisis periods I've talked about. The first is the bank's capital and balance sheet.

These, the US banks and okay, I'm talking my own book but on behalf of our peers, the G-SIBs, the globally systemic banks are in the best shape financially they've been in in decades as a group, different business model issues, etc.

But as a group from a capital liquidity perspective going into a crisis, you want your financial system and you want your call backs, banks to be strong and they are. Secondly, consumers, they refinance a lot of their mortgages.

They had the luxury of very low rates for a long time, they saved during Covid, consumers coming into this with their personal balance sheet better. Those two things are very different from some of the other periods we've had the last 20 years.

CRAMER: Now, what are you looking for to see that perhaps the Fed might be done? What has to happen? Does unemployment have to go to five? I mean you talk about 4, 4, 4 but when I listened to Loretta Mester today, very important Fed member.

I felt like that a lot of the work that we've done toward slowing inflation really didn't mean much then that they're not happy at all with how this economy but wages are too high. Homes are too high. They're not happy with how they are cooling things.

GORMAN: Well listen the Fed’s got a ways to go. I mean, we might have another 75. We're about you know, again, a house caller is 75 followed by 50 followed by 50. I felt for a long time the Fed was very late. I said I'd be like a squirrel.

I like putting a few nuts away because you never know when you're going to need them. Right so we didn't do that. Covid obviously delayed that, the Ukrainian, Russian Ukrainian war delayed that. There are reasons why the Fed didn't act so I understand it, you know, I accept it.

But now they've got to move aggressively. So they're, in my view, going to be less concerned about whether we tip into a mild recession than they are about taming inflation, which if they don't, creates all sorts of havoc.

CRAMER: All right, well, what we're doing when we come back, we'll talk about your amazing wealth advisory business, what you're telling people and how you've reinvented the firm, because I can tell you that you're the largest financial wheel in my trust and there's a reason because of your leadership.

GORMAN: Thank you.

CRAMER: “Mad Money” will be back after the break with James Gorman, CEO of Morgan Stanley.

Part II

CRAMER: We’re back with James Gorman. He's the Chairman and CEO of Morgan Stanley, the investment bank I like so much that I own it for my charitable trust. Let's get right back to it. James, you have reinvented this firm.

I remember the Morgan Stanley that I applied to was kind of, let's say a trade ‘em wamma jamma firm. Your company is now the premiere wealth advisor company in the world. How were you able to do that?

GORMAN: Well, what firstly, we had a view. You got to start with a point of view and the view was that a separate trading banking business on its own was much less attractive because of its volatility to investors.

So we needed some annuitize fee business. We had it in the old Dean Witter business and a smaller asset management, but they weren't at scale. So the view was is we knew what the answer was, but we had to get to scale.

So we bought Smith Barney back in 2009. We bought E*TRADE, we bought Solium, we bought Eaton Vance, we bought Mesa West. All of these were building blocks to get us to scale so it was it was actually very simple concept.

Executing it required, you know, we had to we had to make some calls and some people thought we overpaid for some of those assets. I don't think so anymore.

CRAMER: But they're these are assets that are sticky.

GORMAN: Yeah.

CRAMER: And they go up, up, up. The old days, you were what I regard as an episodic firm. Those days are now past.

GORMAN: Well, I think it's all about stability. I mean, if you look at the wealth businesses, which generate, you know, roughly $6 billion a quarter for the last couple of years, look at those businesses, they they don't move very much in their daily numbers.

I mean, plus or minus 5 million on 100 million, so incredibly stable, sticky, but also stable when you've got them and we love that. But then you've got the investment bank, which is like a turbocharger. When the markets are good, the bank is doing phenomenally.

CRAMER: But at the same time, people all lump these together. They say you have investment banking, investment banks doing poorly, so why don't we just sell the stock down? It's not any different from the way it used to be. That's just not a fair characterization.

GORMAN: Well, it's honestly just not looking at the numbers. I mean, some people have looked at and said because of the investment banking market and capital markets market at the moment, which is tough, right?

Because of that, these stocks are much less attractive. I say, seriously? Take a look at what percentage of the revenues that we're we have that are tied up in those kinds of activities that are depressed right now. By the way, they're delayed, they're not shut down.

CRAMER: Right.

GORMAN: They're gonna happen, companies will go public, deals will get done. So I'm not concerned about at all. I think, you know, where the stock is trading in this environment obviously I feel very good about what we're doing.

CRAMER: Well obviously because you've been buying back more stock than anybody else and you've been returning nice dividend. You've got the best in the group.

GORMAN: And we're retiring, we’ll retire, you know, 6, 7% of the stock this year, and we've got a dividend yield of 3.5%. So shareholders are getting a nine plus percent return without getting out of bed. It's not bad, right?

So I feel very good about the position. We should bring the share count down. We started after the E*TRADE around 2 billion shares outstanding. And, you know, then you're paying smaller dividends because you're not paying dividends on the shares you retire.

CRAMER: Now, there was a time when if you told me that Morgan Stanley was going to own E*TRADE, I said I would say are you kidding me? But it turns out that the wealth is in Solium and E*TRADE, that's where it starts. You are going for the long haul. These are people who if they say well, we'll become the premium wealth clients for the next 20 years.

GORMAN: Well and just give a call out to E*TRADE, they just got rated the number one online brokerage business yesterday just which is great. Now listen, we we owned the financial advisor piece.

Second leg, we needed to own the direct piece Schwab Ameritrade phenomenal companies Fidelity we needed to be in there we could build it or we could buy it. We bought a E*TRADE. Third leg, we want to own or at least be one of the top two competitors in the workplace with Fidelity and through Solium and E*TRADE.

We’ve got that so we're now managing something like 30, 35% of S&P stock plans in this country. So if you've got all three legs, you're getting people through advisors, you're getting them through trading online, and you're getting them through their workplace, you can provide incredible capability to them because you're amortizing it across a huge, fixed costs based on revenues.

CRAMER: Now, you're not getting away entirely from risk. We know it's difficult. I know you can't talk about any individual clients but you've got a big one, Elon Musk, and he may end up owning Twitter. And you could be on the hook for that. Is that true or not?

GORMAN: Well, I think you said it. I can't talk about it, Jim.

CRAMER: But we don't want you on the hook. The shareholder doesn’t want you on the hook.

GORMAN: Do I look distressed right now.

CRAMER: No.

GORMAN: Okay, that's all I’ll say. We'll see how this plays out.

CRAMER: Well, I like, I like that attitude. Now if you were with your wealthiest clients, what do you say that's different from the clients who aren't that wealthy, who want to be wealthy.

GORMAN: Well, the clients who aren’t wealthy should you know what I've been worried about the last few years is the number of people who have been speculating in crypto, but, you know, it's fine if you bought it at 600 and it’s and it’s at 20—

CRAMER: But do you believe in it?

GORMAN: People are buying, listen, I think it's it's an asset. It's a speculative asset by definition. I don't think it's a new form of stored value. I think it's subject to a lot of regulatory risk—

CRAMER: Do you own any?

GORMAN: No, I don't own any. I wish I bought it at $60—

CRAMER: Of course we all do.

GORMAN: But I didn't buy it at 60,000 so what I've been worried about and what I've seen a lot of individual investors is that they got caught up in the hype. We've seen this before, the .com. We saw this in the early 90s and you know, ‘87 with a Black Monday crash and so on.

So my worry for that group is listen, your job is not to speculate. It's to build long term wealth for stability. The very wealthy person completely different. They can put 1% of their money on anything. They can put on resources, put on crypto, put it on whatever they like, that's fine, that's no risk because they can afford to lose that. So completely different focus.

CRAMER: How about the young, we have a lot of young watchers 25, 30. Isn't this a time to start? The market is so nowhere near its top.

GORMAN: You know, Australia has a scheme called the superannuation scheme where government mandated, you save 15% of your income. Right and it's created these huge sovereign wealth fund asset pools in Australia.

If there's one thing I could tell every 22-year-old person starting a job, maybe they can't save 15%, but save five and the compounding impact of putting money into the market, maybe start with an index just get in the market. It's all about duration. You're in the market for 50 years, it's better than 30, it's a whole lot better than 10.

CRAMER: One last question. James Gorman is a little bit close to me in age. Can you stay longer? How much longer do you want to stay?

GORMAN: Well, I I truly believe in in succession planning and I've been very clear with the board. But you know, these organizations do best when you regenerate and provide growth and part of that is giving opportunities to people. So we've got a plan. I won't give you the date right now. But no, I'll step down at the right moment.

CRAMER: Alright fair enough.

GORMAN: But I will step down and we’ve got a great team to follow me.

CRAMER: Well, I'm sure you do—

GORMAN: But it’s not today.

CRAMER: But you've done the best in the group. And it's, I know you have great team, but I'm looking at the top of it.

GORMAN: Thank you. Thanks man.

CRAMER: Okay. That's James Gorman, Chairman and CEO of Morgan Stanley. Thank you so much, James.

GORMAN: Thank you.

CRAMER: Good to talk to you. "Mad Money" is after the break.

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. 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)www.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
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