Morgan Stanley CEO James Gorman On Rate Hike & Inflation

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Morgan Stanley CEO James Gorman On Rate Hike & Inflation
Image source: CNBC Video Screenshot

CNBC Transcript: Morgan Stanley Chairman & CEO James Gorman speaks with CNBC’s “Closing Bell” today and discusses Fed rate hike outlook and inflation.

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Q1 2021 hedge fund letters, conferences and more

WHEN: Today, Monday, June 14, 2021

This Tiger grand-cub was flat during Q2 but is ready for the return of volatility

Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More


WHERE: CNBC’s “Closing Bell”

Morgan Stanley CEO James Gorman on Fed rate hike outlook, inflation

All references must be sourced to CNBC.

WILFRED FROST: Shares of Morgan Stanley finishing the day lower by 1.5%. The bank holding its annual US Financials Conference earlier today with Chairman and CEO James Gorman among those speaking. He joins us now in a Closing Bell exclusive interview. James, great to see you, thanks so much for joining us.

JAMES GORMAN: Great to be with you, Wilf.

FROST: We wanted to kick off if we can on macro topics with a Fed meeting coming this week. You've raised some eyebrows of late at a conference in Tokyo saying you think rates will, will move higher early next year as opposed to later than that described yourself in your conversation with Betsy today as a hawk a couple of times so talk us through why you have that view and how it's altering your behavior as a CEO.

GORMAN: Sure. Well, you know, we're a very unusual situation we have record low rates, historically low. We have record high fiscal stimulus and we have synchronized recovery of the global economy, it's not every single country, but most countries and I just heard the comments about Europe and Europe's following the US which is following Asia. So, there's an enormous number of positives going on right now. We're seeing inflation creep in and the question is when does the Fed move, it has to move at some point. And I think the bias is more likely earlier than the current thoughts would suggest rather than later and that's what I expressed. Obviously, I have no special wisdom on it but my gut tells me this economy is recovering faster, inflation is moving quicker and it may not be quite as transitory as we all think.

FROST: So, do you think that we’re therefore in an era potentially of a major policy mistake by not starting that process sooner and do you think that equity markets will correct meaningfully when they, when or if they come to join you in your current opinion?

GORMAN: I don't think it's a policy mistake. No, I think these are, these are judgment calls and listen, the Fed has a deep responsibility to help the US economy recover and to get people back working. And as we know, wage employee participation is not there yet so we'll see when the extra bonus if you will comes up in September how those numbers change right now if you go anywhere around the country there are help wanted signs everywhere but no I don't think we're in a policy mistake by any stretch we're still got plenty of time for the Fed to move. I just think my, my bias is, it's likely to happen sooner rather than later.

SARA EISEN: James, it’s Sara. I just wanted to follow up on something you just suggested which is that you don't think inflation is necessarily going to be transitory. Why do you disagree with the Fed and now the markets, the bond market on this point, what do you see?

GORMAN: Again, Sara, it's just, it's my judgment from looking at the numbers, looking how the economy's behaving and looking at the kind of inflation that we're seeing which in very short term is extremely high. So, how that rebalances with all the disruption to the supply chains and what's going on in the commodity cycle remains to be seen but my gut is not all of it is going to go away as we'd all like in the next several months.

FROST: In terms of the action that you're seeing if we start on, on the investment banking side of things, James, clearly SPACs’ activities has trailed off a little bit but it seems your comments earlier we're, we're pretty optimistic on IPOs and M&A pipeline. Are they picking up the slacks sufficiently to repeat last quarter?

GORMAN: Well no, the first quarter was extraordinary across the street it was record breaking absolutely everywhere. That said, the banking franchise certainly ours, M&A and underwriting has been strong through the second quarter. So, those numbers are holding up quite well but you know we're in a market where we're getting these moments of extreme froth inside a market which is supported by very strong economic recovery. What's going on with the SPACs, with the cryptos, with the meme stocks, etc. are all evidence of sort of spurts of exuberance, if you will. But underneath it is a very solid market and it's supported by a very solid economic recovery.

FROST: On the wealth and investment management side of things, Andy Saperstein and his morning presentation I think said that you guys could reach a $7 trillion franchise and you upped within the space of a couple of hours to $10 trillion. I think you're throwing investment management with wealth rather than the growth being that fast across the pace of, pace of a morning but can you give us a timeframe of when you might hit that number?

GORMAN: You know Wilf, 40 years ago when I joined Morgan Stanley, I think our total number was something like 700 billion. We’re around 5.6 before we got into this quarter, so it’ll be higher than that 5.6 trillion in that time period, we had net new money across wealth and asset management first quarter of 145 billion. I don't expect that pace to continue but we could be easily bringing in 300 plus billion across the franchises and with normalized growth, we will get to 10 trillion and I'm not putting it out as a goal just stating a fact. And if you translate revenues on that of about 50 basis points, that's a $50 billion business which I think Morgan Stanley will see, maybe not in my tenure but certainly over the next several years.

FROST: So that's all of the positive news in recent months I want to touch on, on the kind of obvious negative which was the $900 million loss from Archegos. A huge loss for a single client in a single quarter. I mean even really in a single week really. Why such a big loss? What, what did you get wrong and what have you learned from it?

GORMAN: Yeah, it was 911 actually. The worst loss in my tenure in over a decade that we've had. The first real own goal that we've had since the financial crisis so I was very, very disappointed with it. We are, as you know, the largest prime broker I think in the world. We had very large exposure to this particular family office and that exposure grew dramatically as the portfolio that he had which then had been extremely levered rose exponentially, we increase the margin not enough but fortunately we increased it and there were some complications around how quickly we could or couldn't unwind certain positions given other client obligations but the main point is that we've gone back and looked at all our margin exposures across prime brokerage, our wealth management business here, in Asia, we've changed some positions. You know, this one, it grew too fast, it's a classic case Wilf of leverage combined with concentration combined with rapid rate of change and there were warning signs and you know this was a miss on our part.

FROST: When you said there are complications about how quickly you could unwind positions to what extent is that because of one stock in particular Viacom, CBS, the fact that you were the front runner, the book runner, of a secondary placement in that stock that had begun earlier that week. And is that why you had a big loss and Goldman Sachs didn't. Did they start selling that stock quicker than yours and is that something that annoyed you perhaps? Should you have all been on the same page?

GORMAN: No, it definitely didn't annoy me. I mean I don't want to speak about what they did, but that they did nothing wrong in my view at all. We had a different obligation, we’re lead left underwriter and we did the right thing by the client in that particular case, caused us some pain but we also sold out in the following week a number of various relatively small short long positions of Asian securities that, frankly, I determined we did not want to hold as of 4pm on the 31st which was Wednesday. It was bad enough having a loss, we were not going to carry that loss into Q2 and we crystallized it, that cost us some money. I said at the time I thought it was money well spent. But the bottom line is we should never have been in this position the first place and we've taken some lessons from it.

FROST: My final question James on, on, on Archegos if it's all right. On the earnings call, you were asked by Steven Chubak about your long term commitment to prime brokerage and you said, it's not going to change how we feel about prime brokerage, we probably generated I don't know something close to 40 billion in revenue over a decade, it's a core part and backbone of the equities business so it doesn't change that at all. Are you in any way concerned that some staff junior or senior will read that comment and think, don't let's worry about taking undue risk  as long as we print high revenue numbers that you know the risks we're taking don't really matter?

GORMAN: I would hope not. The commitment to the business is different from how you conduct the business. It is a world class business, we've been doing it for 30 years. To my knowledge we've never had a loss in it. And if we have, it's small enough, it never got to my desk so it’d be very small. But Wilf, we've been very clear internally about the positions that we have the exposures we have and no I think nobody wants to be the next person walk into my office and tell me we've got a problem in that business. So, I think everybody understands exactly what are standards are.

EISEN: Wanted to talk about another part of the business which is retail stock trading, obviously there's E-Trade but just what you make James of the meme stocks and GameStop and AMC. Is this a good thing that retail traders are in the market in a way that they have not been before or is it dangerous?

GORMAN: It's both. Honestly, people investing in the market and learning the lessons of the market the good and the bad at a relatively young age is a positive because it helps them be fortified to be long term investors, which is ultimately how you make money. I mean, it's the, Buffett had it right, you stay in this business multi decades and be consistent, you will do well. I, you know, I worry obviously when I see something up 1,200% year to date which at least one of these, one of these stocks is. I mean that, that, that's a recipe for disaster at some point, maybe it never happens and defies reality but, you know, I would not want to be, I would not want to be investing at the levels that they're at and that's just my personal view. I just, I don't think it's healthy, I mean I don't want people to have expectations that stocks can go up, you know, hundreds of percent in six months and it's all just something that happens naturally.

EISEN: Where do you think it goes? Not just, not the stock prices themselves but this whole trend of the retail participation?

GORMAN: Well I hope we've introduced millions of retail investors to the market. We've certainly had incredible account openings at E-Trade and the business has done just beautifully, better than we’d, our wildest dreams were when we bought it just a year ago so I hope we've brought a whole bunch of people in the market but I equally hope that they understand that this, this is not speculative, you know, to win in the market, you have to take long term positions and, you know, remains to be seen I mean some people will blow out, there'll be a number of accounts closed I'm sure in the next several years, but I still think millions of people would come back into the market, but for a decade, post the financial crisis, weren’t there, that's a great thing for their long term financial health.

FROST: James, you announced some promotions recently and new titles for some of your top lieutenants and in and around that announcement was sort of guided that you wanted to remain in place for three or four more years still yourself, it's the first time we've had a sort of specific number of years from you. Is that it or next year will it be three or four more years still like sometimes we hear from, from other leaders? Is it three or four more years definitively?

GORMAN: Well I, you know, I, my, my job is to manage Morgan Stanley to the best of our abilities for the businesses we're in now, but also to reposition them for the next decade and two decades. Great companies have durable strong performance not just short term one off performance and we, we've had a terrific run here but my satisfaction will be 10 years from now looking at how Morgan Stanley's doing seeing it lead really well by the talented internal folks we have and growing from that base. So, I gave the board a general understanding won't be the next couple of years I need to get these deals properly bedded in and make them successful. But yeah, I won't be here five years past, I'm just not going to be Wilf. I think there's a period where it makes sense to transition. We're not there yet. The team that could step up is not ready yet. We need to develop some folks but that's the general plan and I'm committed to that.

FROST: And we just showed, final question, James, you know, a picture of the four individuals who have been sort of named as the four people competing out for that role. Are you, are you disappointed that they are all white men?

GORMAN: I mean, of course, I mean, I'm a, have been a preacher of diversity my whole career on Wall Street. I put the first, one of the first ever CFOs, Ruth Porat in as our CFO, we just appointed Sharon Yeshaya as our CFO. The current leadership group that is most likely to replace me over the next few years happened to be four white men. That is obviously disappointing but that's the reality I can't change the reality just to make ourselves look better by throwing in names that frankly aren't going to be there as the likely next leader but I point out and you know, our head of Europe and Middle East and Africa is a woman, our co-head of Asia and China is a woman, the head of internal audit is a woman, the co-head of investment banking is a woman. We have a number of diverse leaders in my operating committee in fact of my direct reports, 13 direct reports, six of them are diverse. It just doesn't happen to be the ones that are gonna be the likely next CEO remains to be seen what happens. But the group behind them and the group behind that and the group behind that, we've got legions of talented diverse people that I'm very proud of.

FROST: James, thanks so much for joining us. Always great to chat.

GORMAN: Great to be with you guys. Thank you.

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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)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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