Fed Rate Cuts, Wall Street Booms & Silver Goes Wild

Hello and welcome back to the Market Maker podcast. It is the end of the week, Friday the 17th of October. So we've got 3 real areas we're going to focus on. Number 1, bit of a macro update because Jerome Powell has signaled another rate cut. I think last time I checked, it's baked in for about 98% or something like that for a rate cut in 12 days' time from when we're recording, citing weak hiring pressures, unemployment, and said that the Fed may stop shrinking the balance sheet in the months ahead. There's probably a few people listening going, okay, I get interest rates might be dropping, but what is the balance sheet? Why is it shrinking? Is this expected? What does that mean? So we'll look to explain. The second thing is Wall Street has had its best quarter in years. This is to do with quarterly earnings season underway for the big mega banks. Deal making is back, trading is booming, even BlackRock is breaking records. So we'll have a look at that as well. And then you'll love this headlines as ever, Piers. I know you love sensationalism. The Business Insider wrote this week how an epic short squeeze drove silver's first record in 45 years. So yeah, I mean, it's true, it is a 45-year high for the price of silver. So what exactly is a short squeeze and why is silver in the crosshairs? And you know, I'm very mindful of Short squeeze was a big talking point with GameStop, but GameStop is a number of years ago now. So, feels like it's fairly historical rather than recent. So we'll probably have to get people up to speed as well about short squeeze. But before we dive into these topics, quick shout out, forgive me if I don't nail the surname, but Stephen Faggy Malusi. So there was a guy, basically I was in, I was in Victoria earlier this week. I was on an escalator and this guy's looking at me and I'm like, okay, why is this guy looking at me? And then he shouts out, are you Anthony Cheung? And I was like, I could say yes. I could say no.

Who's asking?

I'm not, yeah, I'm not exactly sure what the purpose of that question is. And I was like, yes. And he said, oh, cool, cool. So actually Got off the escalator, actually had a chat, chat with him actually. And he said he's been an avid listener for many years. He was a Cambridge student. He said that listening to the podcast helped immensely with him getting a Citi internship, of which then we actually trained him in the internship.

Of course.

And then now he's a quant analyst at a major energy trading firm. Now he's graduated. So yeah, really cool.

And then good work, Steven.

Yeah. So, shout out Stephen.

You've just got that segment so you can flex about your, your, your kind of Z-list fame, right? Getting spotted on Oscillator.

Do you know where I'm, do you know what country I'm the biggest in?

Uh, I'm gonna go for Bangladesh.

Okay. Bangladesh. Yeah. It was, you know, Philippines, they used to be quite a hit, but Joel Agaba, who I met earlier this week as well, was running a session at UCL, and he's been listening for a number of years from Uganda.

Ah, wow. Yeah. There you go.

All right. Oh, good. But the other thing I was going to say was that over the last 3 episodes, this will be my last time I'll say it, is we were trying to gun for 1,000 star ratings on Spotify because that's the predominant platform that the community listens on. First time I said it, we went from 820 to 847. So we moved to dial 27. The next episode, we've gone from 847 to 920.

Oh, all right. That's what I like to hear.

We've 3x'd the size of increase here.

This is exponential growth.

This is it. It's the NVIDIA hockey stick. Here we go.

So hang on, let me just do the math. To do it, to continue this exponentiality, we need another 225 ratings this week. Just saying.

Oh, I mean, we should hit it. I mean, if we continue, we should smash through it.

Come on.

But look, momentum is in the hands of the community here. So if you haven't done so, please drop us a star rating on Spotify. It really helps get the show out. So enough chatter. Let's dive in and let's get into Jerome Powell. And he gave a speech earlier this week. And obviously, as I said, We are running into the final 2-week now runway to the Fed decision. So what did he say and why are markets so now solid in their belief that the Fed are going to cut rates in 2 weeks?

Well, he said we're going to cut. I mean, in kind of, well, actually it's worth probably noting that the Fed's meeting is in 2 weeks, so they go into a blackout period from a sort of comms point of view. So 2 weeks out they go dark and they're not allowed to talk to the Fed, which just means that just before that 2-week blackout curtain comes down, you are always going to get a load of Fed speakers wheeled out just to give their final little tidbits of information ahead of the meeting. But central bankers, they're normally quite vague. They normally sort of flip-flop and they're quite non-committal. But I, you know, you come off the back of what he was saying earlier in the week, and basically he said, translated, we are cutting rates in 2 weeks. Basically, he's just saying, we've talked about this in the past, their dual mandate is price stability and full employment. We've been talking about the problem they've had because on the price stability side, that's about keeping inflation low and stable around their target 2%, but it's been rising. Kind of rising back up towards 3%, right? And so some people are going, yeah, that's awkward. How can they cut when inflation is rising? The other mandate is full employment, and there we've seen a real weakening in the job market. The data— well, this is the problem. The data we have had is continuing to show that's getting worse, but the only data we've had is the private sort of sector data. That's because the government is still shut. So there was no non-farm payrolls data this month. We were supposed to get inflation data out of the US yesterday. We were supposed to get US CPI, big number, except we didn't. So we're in the dark a little bit. So I think the stance is whilst we're in the dark, let's assume and extrapolate forward and think, right, this job market is the the weaker of our two mandates here. And so he is basically saying the bigger risk is there, so we're going to cut. Yeah.

And just to go over the specifics of language, he said the labor market is softening and that the Fed's job is to balance, as you said, the mandate, inflation, employment. And right now the bigger risk is rising unemployment. So you don't get more, the vocabulary, if you like, doesn't get more clear than that, right?

No. And there is now, I mean, I don't know why it's not 100% chance of a rate cut. I mean, it's basically as close as you're going to get to 100%. I guess you never know what might happen in the next 2 weeks. You can never get it bang on 100% probability, but it's as close as you're going to see it. So yeah, the meeting is on the, well, the decision will be on the 29th of October and they will cut, people. That's a fact.

Oh, I did actually have a group of students. I was asking them to like, what could be a scenario that could stop them?

Hmm. I don't like in, okay, let me just think about that.

It's tough. It's tough.

It is tough right now. I can't think of anything because if something comes out of left field, it's normally something bad. Right. I guess something that could stop them is the earnings season. Look, we've only got 2 weeks left, but if the big tech giants, I don't know, came out and their earnings were just sensationally spectacular again, I mean, all right. But even that is quite, that's quite narrow to that one sector. Of course, I don't think it's necessarily going to have that super broad positive impact for growth across the entire nation. Therefore, you know, suddenly we revise up our expectations about the labor market. I can't. And so whilst the government's shut, there's no data, right? So yeah, I really can't think of a scenario, to be honest.

What happens if the Bureau of Labor Statistics reopens and actually, actually, no, this unemployment situation wasn't correct and the private data was incorrect by a wide margin.

And in fact, that's true.

There was no need to cut.

That's a good one. But will the government reopen before No, the next meeting. I very much doubt it. Right. So, but that's a good point. Yeah. That's maybe the only thing that could kind of prevent this.

Okay. So with, yeah, with policy then just, you know, what I really wanted to probe you on and your experience and knowledge is that we talk about these kind of the blunt instrument, which is pulling the interest rate lever, but the advent obviously of quantitative easing through initially the financial crisis many years ago. And then the unwinding of that. And so this concept of quantitative easing, quantitative tightening, QE, QT, and then its connection now to this terminology around the balance sheet roll-off or run-off, which the Fed been talking about. So what are they talking about?

Well, yeah, I mean, this is the kind of lesser-known part, I would say, of the investment bank's role in the economy. So unless you've studied this at university, Or, and you know, unless you're working on the desks already and you're an avid reader of the press and whatever, you're probably not going to know about this. So this is where they control the money supply. And so they actually, this is a kind of, other than interest rates, it's another lever they can use to just try and engineer, you know, the economic conditions that they're trying to aim for, right? And so here they control the money supply. And they do this through what's called quantitative easing and quantitative tightening. Easing is increasing the money supply. Tightening is reducing the money supply. The idea is this is a mechanism in a way to actually control interest rates via a different route. Because like during the financial crisis in '08, during COVID in 2020, they let loose on a monster QE program. So that just means they print money, right? They're printing new money. So that's how the money supply's increasing. But the way they get it into the system, 'cause fine, you print it, that's one thing, but how do you shove it into the economic system is the other. And so given the volumes of money we're talking about, and their balance sheet, which peaked in 2022, was north of $8.7 trillion. That's how much money we're talking about, right? This is a lot. So you need a vehicle to get it into the system that's super large, and really the largest is the government bond market. So really they, what they do is they print money and then they buy government bonds. That is taking government bonds out of the system and onto what's called their balance sheet. So their balance sheet is the value of the assets that they own, the assets they've bought through their QE program. Okay? So they're buying bonds, taking them outta the system and replacing those bonds with cash. Into the system right now. This, you might think, great, that cash then just disperses evenly across the country, which it does not, because who's holding the big volumes of these bonds? Well, it's the banks. So they've really— QE is really a kind of process utilizing the banking system. So they'll buy bonds off the banks, the cash then sits on the bank's balance sheet, Now, what do the banks do with it is the bit that's a little bit out of the Fed's control. And it's not a perfect system because the banks don't just lend all that money out into the system. It gets funneled off for other funky stuff. They might go and buy some stocks, they might go and buy Nvidia, or maybe they don't want to lend. And we'll talk a little bit about later in this episode, the private credit markets are getting a little bit spicy. We're starting to see some defaults. Are we seeing some cracks in that system, meaning that lending appetite is maybe reining in a little bit? So anyway, the point is that they go via the banking system. So QE and, and the other function of this, you know, why does it lower rates, which I mentioned? Well, they're buying bonds, right? So if you buy, if the demand for bonds goes up, it drives up the price, which drives down the yield. And so that function basically makes borrowing cheaper for corporate America. It also makes borrowing cheaper for the government, by the way. Separately, QE does devalue the dollar. So what, and that's an interesting point to make because after COVID, this QE thing just got outta control. Like to the point we got above 8, yeah, as I said, $8.7 trillion, right? And it was like, whoa, this is just insane. When's this thing ever going to stop? There's never going to be a road back here. And so actually since spring of 2022, the Fed have been trying to reverse this QE process by going through quantitative tightening. And actually they've done quietly and steadily, they've actually done a pretty good job because they've unwound now over the last 3 and a bit years, they've been doing solid QT throughout pretty much. Um, apart from the Silicon Valley Bank incident, which was spring of 2023, which saw another little uptick in QE very briefly because there was a bit of a mini crisis. But outside of that, uh, the balance sheet's been dropping. I'll talk about how they do that in a second. But my main point is here, they've actually unwound almost all of the COVID QE now over the last, uh, 3 and a bit years, which is pretty impressive, but they're still sat at above $6.5 trillion. So the, you know, the monster wave of QE from the financial crisis back, you know, 17 years ago is still on their balance sheet. So they've been quietly getting on with this. Now, QT, the problem with it is the reverse of QE. Now QE is stimulative, it lowers borrowing costs. Okay? So therefore obviously QT does the opposite. So they're doing it very slowly and very gradually. And the way they do it is they call, they talk about the balance sheet runoff. Now they're buying bonds, right? Well, all bonds have a maturity date. You might buy 5-year government bonds, 2-year government bonds, 10-year government bonds. They're also buying mortgage-backed securities as well, I should say. But all these fixed income products have maturity dates. So when, let's say they bought a, whatever, a 2-year government bond in 2023 and it's now reaching maturity. Well, what happens when a bond reaches maturity? The borrower pays the lender back the money and the loan ends. Okay. So what the Fed have been— if they want to maintain the money supply, when you get to these maturities, what the Fed do is they take the money that's coming in from the borrower and they just buy more bonds, maintaining the money supply, right? But what they've been doing in the last few years is they have not been reinvesting. So all the maturing or some of the maturing bonds, they're saying, all right, we're not— that money coming back in from the borrower, we're not going to release that back into the system. We're going to basically scratch it, burn it, take it out of the supply. So the money supply has been dropping very gradually through this runoff process. And the other point to say is probably that this sort of QT that, as I said, began summer 2022. The rate at which they're doing this, so when they first launched it back in the summer of 2022, they said, right, we're going to allow $30 billion a month of treasuries to mature each month and $17.5 billion of agency debt and mortgage-backed securities, right? So the rate was $47.5 billion per month, which feels like a monster amount of money that's just getting sucked out of the system. But when they pumped in $8 trillion, you know, $47.5 billion isn't so much. They, they actually accelerated it then. After 3 months, they thought, actually, this is going quite well. No one's freaking out here. All right, let's just quietly raise the pace. So they raised it to $60 billion of government debt and $35 billion of mortgage-backed securities. So they went up to $95 billion a month. And they stayed there until May '24. Then they started to slow. They're like, okay, we're actually doing a really good job here. But then they started to slow in May '24, and currently they're on that same slower rate, which is basically, um, $60 billion a month. Okay. So that's where we're at. The analysts out there have been seeing this COVID finish line. Approaching, i.e., let's unwind all of that COVID QE. And the thought has always been that the Fed will probably hit that point and then they'll just go, let's just pause. And that's what's now going to happen, we think. So Powell will probably talk about this at the next meeting. So we're expecting probably the end of that QT program for now.

So in summary then, for this segment, Things are kind of going to plan in a sense of cut to rates. Trump's going to be satisfied at least. I know Myron's gagging for another 50, but it'll be 25. Stop to QT, maintain liquidity, which makes sense. Probably also if Trump can understand the mechanics of it, it's probably another thing that you could say to pacify him a little bit if you are If you're Powell. So keeping inflation in check while operating with this limited information that we have to hand during the government shutdown, there doesn't seem a great deal of surprise here then, is what you're saying.

No, and I think it's probably also— look, we'll talk a bit about credit markets in a minute, but there's a little hint and a whiff of a bad smell. Coming out of the credit markets. There's a few situations of bankruptcies that are like, oh God, all right, that shouldn't really have happened. And with that's coming maybe the hint of a sign of a lack of liquidity in the credit market. So yesterday we had a couple of banks tapping something called the Fed's standing repo facility. This is like for the second day in a row. This doesn't normally happen. It's quite a rare event, but basically when banks run out of liquidity, they, you know, there's an emergency window they can borrow money overnight from the Fed, right? So a couple of banks tapped that yesterday and all this kind of stuff is saying, okay, hang on, let's just, let's stop sucking money out. 'Cause that money is liquidity, right? And we know, you know, in the end, if there's not enough liquidity in the banking system, you get a credit crunch. That's what happened in '08. I'm not saying at all that we're anywhere near an '08 credit crunch, by the way. But look, it's just some little signs that says for that reason alone, I think it's right to pause. But you know, it's also a milestone. We've unwound the COVID stuff. Cool. Obviously there's always risks and uncertainties on the horizon. We're worried about that labor market being primary one. So the Fed are like, look, let's just call this, let's stop, let's wait before then making another move.

That's interesting then connecting the dots. 'Cause we are going to talk about some of these bankruptcies and why and their connection to the banks. And as you were describing, but makes sense then why Powell used the speech on Tuesday, even though the event is not for 2 weeks, granted there is a blackout period, just to get ahead of any more skeletons in the closet. Yeah, we are going to provide the necessary liquidity via stopping the runoff.

Yeah, it was, it was well played, I would say, from Powell.

Yeah. All right, well, let, let's move on to some of these banks because this will be a continuation sort of of this general thing. And we had JP Morgan, GSMS, Bank of America, BlackRock. I mean, These guys are crushing earnings on the quarter. Deal making, trading, everything's back comparative to the last relatively slow 2 years. So kind of got a bit of a summary of all, but as we were discussing, let's focus on JP because I think they have an interesting angle. So on a top line, their investment banking revenues up 16%, 1-6, to around $2.6 billion. Couple of other things, while not as dramatic as its rivals, we'll talk about MS in particular. JP's had pretty steady growth across those divisions. So M&A, equity, debt underwriting, and so on. But it was really not so much those numbers, which were kind of fine. It's what Jamie Dimon, Jamie Dimon loves to have a little comment, doesn't he? More than most CEOs, I would say, when it comes to corporate earnings season. But People often, because of that nature and because of, I think, his influence. I mean, his influence is certainly growing, I would say, both as a size and magnitude of his organization is becoming more dominant, almost it feels. And also the influence he carries with potentially some other political ambitions that he might carry. He tends to be fairly vocal in his opinions of things.

He's saying he's going to be the next Democrat president. Is that what you're saying?

Well, we'll see. But, um, the, what did he say? Because he always does like to add a little extra insight that gives us almost like a heads up or a pulse on the economy of what he's seeing. Because obviously JP is so big that it does get to see consumer trends, borrowing, and these sorts of things, not just M&A deal making and so forth. So what were those?

Yeah, I mean, you're right. He is the boss, right? He's the boss of JP Morgan, but he is the boss of Wall Street. He's the longest serving bulge bracket bank CEO. I mean, like what, it's over 20 years now, isn't it, that he's been CEO? He was CEO in the crisis. So it's definitely, I think it's over 20 years he's been on that. I mean, it's quite remarkable actually, the length of his tenure. And obviously during that time he's taken JP Morgan to be the biggest bank on the planet. So yeah, in terms of his influence over the US economy, he's right up there. You'd say like Trump, Powell, maybe Yellen, then Dimon, maybe, right? In the kind of hierarchy of people and individuals that could perhaps have an influence. But yeah, it was interesting then, obviously smash out quarter, blowout numbers. Amazing, amazing. But one interesting point he made was, Cause JP Morgan, in the little finer detail, they took a $170 million charge-off stemming from the bankruptcy of a subprime auto lender, Tricolor. So actually, you might have read in the press, there's been a couple of quite high-profile bankruptcies. First Brand was probably the bigger one, but then Tricolor was the other one. And JP have owned up and have gone, We've had our fingers burnt here. And what Jamie Dimon said about that event, because ultimately JPMorgan didn't do enough due diligence, they didn't do enough digging, right? They're lending a business money and they just did not do enough analysis. And, and in the end it's turned out to be pretty fraudulent activity that's going on. And basically they've lent a load of cash anyway, and oops, uh, that cash has now vanished. And so Dimon's going, look, we make mistakes, hands up. And then he went on to say, and this is the most important comment, he said, my antenna goes up when things like that happen. I'm directly quoting here. And he said, I am probably, and I probably shouldn't say this, but when you see one cockroach, there are probably more. So he said everyone should be forewarned on this one. Right now, he said that on, I think it was Wednesday morning. Okay. Then what happened on Wednesday afternoon, uh, two mid-size US banks also came out and said, hands up, we've had our fingers burnt on different deals here. So Zion Bank Corp, um, they disclosed in a regulatory finding that it had recently become aware of apparent misrepresentations and contractual defaults, uh, with two of their corporate borrowers, and they did a $50 million write-down. You have mid-sized bank Western Alliance. They also just disclosed that basically in August it initiated a fraud lawsuit against one of its commercial real estate borrowers. Point is, right, that you're starting to get some defaults. Zion Bank share price down 13% yesterday. Western Alliance down 10%. These aren't small moves, right? It's got a whiff of, for different reasons, but it's got a whiff of kind of Silicon Valley Bank share price. Action on the downside here. But I think the broader thing is, if you've been reading about the explosion in private credit markets, you know, whilst, and couple that with the fact that interest rates have stayed high for probably a lot longer than people imagined. And so businesses that have got a lot of debt and it's stayed really expensive are starting to get into trouble. And the thing is, when you get into trouble, you either just own up and roll over and die, or you start to get creative, as in lying and fraudulent, desperate activity to try and maintain the credit line with these banks. And that's what's obviously happened. And Jamie Dimon's point is that this is starting to come out of the woodwork here, and he's basically saying there's definitely going to be more to come on this front. Now, does the, the big question is, How many of these are there? Are they small enough that it's interesting to write an article about, but huh, you know, JP Morgan can afford $170 million, no big deal. Or is it a much bigger kind of cesspit that's kind of lurking underneath the surface that might become an issue that's big enough to kind of really change the narrative.

So A question then, where do you look? Because there's, let's call it the smart money, let's say in the fixed income space where you might have some exposure to these sorts of things, where, like, where could, what assets or what parts of the market, what corners could you look at to sort of see, oh, hang about, this has happened and these people are starting to show some signs of repositioning, so to speak. Like, not that they're like you said, this isn't a 2008 credit crunch situation. However, we've had a period of strong growth in a certain area, private credit, and now actually maybe we just need to sort of reposition slightly that this could be something that could, yeah, unearth a few more.

It's a good question. And the answer is credit spreads. So when we think about bond markets, You know, one health check of the system is, well, all right, what's the difference in the cost of the government borrowing? The government in theory being the biggest, safest entity in the system, right? The government should be able to borrow at a cheaper rate than anything else in the system, right? So what's their cost of borrowing versus the cost of companies borrowing? So companies are smaller and therefore more risky from a kind of lender's perspective. So you should be seeing borrowing rates from corporations being higher than the government, right? And we think about the difference between the two, that's the credit spread. Now the credit spread has narrowed and narrowed and narrowed and tightened and tightened over the last few years to basically the tightest it's kind of be— ever gets, I would say, right? And it's actually at 0.8 percentage points. That's the difference right now between investment-grade credit and basically government debt. All right. Less than 1% spread. That's the tightest since before the financial crisis in 2008, by the way. So we're at a 28-year tightness in the credit spreads. And a lot of some of these big asset managers like BlackRock, like M&G, Fidelity, they're basically, they're flagging in some of their research reports that, hang on a sec, there's no more room to go here. You can't get any tighter. They're basically saying these markets are pricing the absolute perfect Goldilocks scenario where, you know, the Fed keeps cutting, the economy stays solid, you know, the AI secular revolution carries on booming, everything's going to be amazing. That's basically what this credit spread is saying. And so these asset managers are like, They're saying, well, there's not really much more upside in trading a continued tightening. So they're actually starting to flip and they're starting to say, look, there's enough risk on the table. You know, if you're thinking about Trump tariffs, obviously there was a bit of a flare-up last weekend when he threatened China again. All right, he backed off it, but there's that labor market deterioration. We've got government debt that's way outta control around the planet, right? There's plenty of stuff there to be worried about. So these, Asset management firms are saying, well, look, really the trade should be, there's no more juice in the tank for tightening. Let's now flip this and expect this to widen. And these stories, First Brand, Tricolor, and so on, are just feeding into that same narrative that maybe we've gone a little bit too tight here. Conditions aren't as good as that. And so maybe the trade's now to see this widen back out.

Yeah, this is getting really interesting now. This is almost, it feels though it's like a Netflix script is coming together here. I just had, when you were describing, so it's kind of cutting to scenes and there's the different types of market participants. So basically Jamie Dimon gets the call and he's this really grumpy character and he goes into, he gets called to like 2:00 AM.

Robert De Niro. Robert De Niro.

Robert De Niro. There we go. Shoo-in for that role. Yeah. And he's just grumpy and he comes in and there's a few other old faces. It's the Heat reconnection. Al Pacino's there and then there's Leonardo DiCaprio and Brad Pitt. We've got them all there and they're on this table at 2 AM and they're like, and then the regulator goes, guys, we've got the, Tricolor's gonna go bankrupt. We're going to announce it on Wednesday. And they're like, he's like, what? And then, then all of a sudden it's like, And then the regulator guy goes, there's gonna be more. And then Jamie Dimon's there at 2:00 AM going, right, 6:00 AM, he's gonna deliver a speech with the earnings.

Yeah.

He's gonna say the comment at the same time over the other side of Wall Street. All the fund managers are together going, the geek in the corner doing the models, just ran the numbers and gone, this credit spread's gonna flip, guys. This is just perfect.

Let's get it commissioned. Let's go.

So yeah, anyone's got deep pockets, I can write a script for you. But so that was JP. So yeah, the interesting takeaway here is there's some definite things to be monitoring here. Certainly from a student's perspective, I know this is a lot to comprehend, but if you can start to at least synthesize this level of information, I think you would be country miles ahead of a lot of your peers applying for roles at the moment. If you were talking to people on desks in relation to markets roles. But let's talk about MS and quickly run through a few of the others. I mean, MS arguably seemed like one of the standouts. I mean, their net income was up almost 50% year on year, £4.6 billion. Their investment banking revenues were up 44%, went north of $2 billion. So matching the Goldman rebound. Obviously they have this tremendous asset that Goldman doesn't, which is their wealth management business. And wealth management inflows were huge, $81 billion, well over and above forecasts. But what I was going to mention was really the breakdown maybe on the equity capital markets, because I think the ECM division doesn't really get a lot of light. This being the team where, you know, going through IPOs, and we've seen a bit of return of that. We've had some really big ones starting to come back to life, not in London, US. But Morgan Stanley led its peers with an 80% third quarter increase in the category versus year on year. The actual amounts here are quite small. Because I think a lot of people are drawn to M&A advisory fees, ECM, but it's actually DCM where you get like big chunks of volume. So they're pulling in $652 million, which is a solid figure actually for this type of business. And to give you an idea, they were up 80%. Goldman's meanwhile was 53%, or JP was 53%, Goldman's was 21%.

Yeah.

Great business.

That year-on-year growth for them, 80%. I mean, that obviously, that's just off the scale good. So this is, yeah, equity capital markets. This is where they're underwriting these IPOs. And just to be very simplistic about it, they're basically, as one of their clients is going public, so they're selling share, issuing shares and selling shares to the public. Well, you need a bank to kind of facilitate that. So and this is where the company's raising capital to then whatever, drive growth. But the bank gets in the middle by, I'll simplify it, basically buying all these shares off their client that's been issued and then selling them out to their network. And they often take a bit of a spread on that. They're obviously earning a lot of fees in that process as well. So they, yeah, the ECM desk at Morgan Stanley's had a stellar move. And actually what's Probably the most important thing for Morgan Stanley, that epic growth there has actually seen their equities trading revenues now go back up above Goldman's and they're above JP as well. So they've basically retaken top spot on the Street for equity trading revenues, a spot that they occupied for many, many years, right? Basically pre-COVID, Morgan Stanley, they're the equity guys. COVID kind of messed things up a little bit. And during COVID and the preceding few years, you saw Goldman's and JP Morgan move above Morgan Stanley on the equity trading revenue side. But yeah, this is finally Morgan Stanley kind of getting back up into their rightful seat, you might say, in terms of being top dog when it comes to the equity division.

So equity division firing, investment banking revenues up, wealth management inflows, huge.

Yeah.

Good time at MS at the moment.

Yeah, absolutely. Okay. Oh yeah. I mean, literally across the board. Yeah. Very positive.

Well, let's move to their kind of arch rival Goldman's then. So here by the numbers, you had again, investment banking revenues up 43%. So this is all sprung to life. In the last quarter for sure. And in fact, that pace beat rivals and helped the company as a whole report revenues of $15.1 billion. It's the largest whole for that quarter in its history and the third highest overall for all quarters. It's kind of hard to fathom, I think, if you are just a Main Street person and all you hear is such negatives, unemployment rates, going up, or labor market's not looking great, economy's slowing. Hang about, these banks are making the most money they've made in their entire history.

Yeah.

Like it's quite a weird scenario and how this is playing out.

Yeah. And I mean, it's a good point. I mean, maybe it's another sort of measure of the growing division perhaps between those who have and those who do not. The division between maybe Main Street and Wall Street perhaps. But yeah, look, they're running a business, right? And what they do just so happens to be firing on all cylinders. You know, you've got Donald Trump to thank for this. The banks should be going cap in hand to Donald Trump going, thank you very much. Because market volatility is awesome for their trading businesses. And look, it took a while to come through, but finally through Donald Trump's kind of more deregulatory kind of stance, getting rid of people like Lina Khan and so on, the antitrust office, it's kind of right, actually deals are starting to come, deal flow is coming. And of course that's great for their investment banking division. So look, the swap in presidency there is now coming through in the numbers for these big monster banks. Yeah, for sure. Yeah.

And talking of deal flow, a milestone is global deal values have topped $1 trillion in the third quarter. It's only the second time on record that that's happened. So yeah, definitely we're back in business.

What I would say is though, you, what there is a little bit of, so that $1 trillion, right? What you're seeing is really some really large deals come through. If you look, I don't have the numbers to hand, but if you look at the number of deals rather than the value of deal, the number of deals is actually quite a lot lower than the normal. So you're getting some mega deal. I think the mega, obviously this is great, mega deals, fine, more fees, but I think it's painting a slightly disingenuous picture perhaps. It's not like we've got the best deal flow conditions, like the third best deal flow conditions in the history of mankind. Cause I don't think we have, but in terms of volume of deals, but But anyway, obviously there's deals and they're making money and they're very happy.

Well, one thing that might have struck some people as a bit strange was in the same week that Goldman's come out with these numbers, they also come out and say, we're going to cut jobs. So they told their staff to expect an additional round of job cuts this year as the bank seeks further savings across its businesses to take advantage of opportunities presented by artificial intelligence. So yeah, I mean, it's interesting. And I think a lot of, just to kind of make it crystal clear that what they've got is this thing called 1GS 3.0 strategy. That's what they're calling it. I think that's their marketing attempt at trying to sound AI.

I think they failed there. That's terrible. 1GS 3.0. Okay.

But I think it's just the clarity of, because I've been with students all week, all around the country, and obviously it's a challenging time of year. It's application season, competition is high, and they're sort of reading headlines like the economy's a bit fragile, cutting rates, and, you know, all these different sort of things. And then they see job cuts at one of these target firms and they just go, right, 1 1 4. They're not actually thinking about where are these job cuts actually materializing. And I think this is a really interesting case about the division of how things like AI machine learning is being used by cutting-edge buy-side hedge funds. And large, more historical legacy-based technology firms, which are big financial institutions, a la Goldman Sachs, Bank of America, these other ones. And so when you, I think when you hear about AI and when you hear about job losses, yes, banking and markets can be boom or bust to a certain degree, but they're both booming right now. So definitely you are in a good place there. So here, this 3.0 strategy that Goldman Sachs have, it's a multi-year effort and it's implementing AI in areas like client onboarding, lending processes, kind of similar, I guess, to what you were talking about, this credit. A lot of that, I'm sure, could be automated. And one of the most onerous things for any bank is the regulatory conditions post the financial crisis. So over the last 10, 15 years, regulatory compliance is so much tighter now. And what can you do to speed that up, to make your business more efficient, to have more transactions, more business, you know, vendor management, all these sorts of— not going to say they're boring because a lot of people's jobs are to do these things, but these are a lot of the type of mid-back office functions that, sure, a lot of students will be going to work in, but this isn't front office so much in terms of how it's being adopted on a lot of the sell-side institutions, I'd say. But yeah, that's why it was just, yeah, I thought it was interesting. But I know you are a bit of a BlackRock fan, so maybe to finish on this side, how did BlackRock, a little bit different area of the industry, of course, not an investment bank, but an asset manager. So what were we seeing with them?

Well, we've seen again, so like just amazing numbers and the CEO, a guy called Larry Fink, who I'm sure most people have heard of. Basically begging, okay, this is the biggest opportunity we've ever seen, is a direct quote from the earnings call. But look, they had, I mean, one thing is obviously with asset management, you, one measure is assets under management, right? What is the value of the assets you have on your books that, you know, you don't own directly, you own on behalf of your clients, right? Your client's money invested. So their assets under management has gone to a new record high, $13.5 trillion. Dollars, which is just, whenever I hear that figure, it's just, well, you just can't even imagine what that is, to be honest. But $13.5 trillion, that's just a function of, look, markets have been going up, right? So the assets they already own are going up in value. Okay. So partly their assets under management is a function of where markets are going, but then actually they're, the other thing is their inflows. So how much money, how much new money is coming in from new clients or existing clients putting in more. And that's a, what happened there is they had a record ever Q3 inflow. So $205 billion of new money came in. Three-quarters of that went into ETFs, exchange traded funds, which are just tracker funds, right? I want to track the NASDAQ or whatever it might be. So yeah, that, so I think that's, the most important number here is that kind of record inflow. The other side was, and it's kind of talking a little bit about circling back to our earlier conversation, expanding fast into private credit is one of their angles as well as other alternatives like infrastructure deals and stuff. And they did a $12 billion HBS Investment Partners deal. So they're kind of diversifying which is obviously a good thing. Lots of private— they wanted to get in on this private credit boom. There is risk there, as we've just previously discussed. But that aside, yeah, look, they're having a great time of it and they're scaling out, they're diversifying. It's tech as well, obviously, is a big part of their offering with their— a lot of their tech products that are getting licensed out to customers as well. So yeah, strong stuff.

And we talked about, you mentioned their infrastructure and we've talked about in previous episodes with NVIDIA, the circular kind of AI ecosystem. What was interesting this week as well, there's been another deal with BlackRock heavily involved. That was the acquisition. So there's something called BlackRock's Artificial Intelligence Infrastructure Partnership, shortened to AIP. And the first investment has been made by AIP. This is a $100 billion AI-focused consortium founded by, guess who? BlackRock, Microsoft, NVIDIA, MGX, and GIP. So interesting.

How's OpenAI not in there?

No. So But one, yeah, one of the things here is just that, that, you know, the race to just gobble up these data centers is just incredible. So this deal that they're doing, they're acquiring Aligned Data Centers is what they're called. It's $40 billion, this deal. So yeah, no wonder these fees that these sell-side banks are making are astronomical. Yep. Quite crazy. But final story to cover was moving somewhere completely different, which is commodities. And some people often joke that if you want some serious market movement, go to commodities. But if you really want to have some fun, look at silver, not gold. 'Cause we talk about gold a lot. Yeah. And this rally it's been on, but silver, you've got to have some thick skin if you're going to tackle tackle the silver market, but we, what we had here was a, yeah, massive spike in prices. I mean, the type of spike which, as you are going to explain, doesn't necessarily have all on fundamental rationale.

Yeah.

There's some market mechanics of how markets work, which is exacerbating this price movement. But silver essentially hit a record $53 an ounce. That's up 85% this year. And it's this principle around a short squeeze hitting the London market. So I wonder if you could just do as you are always so good at doing and just simply explaining, okay, the short squeeze.

Super quick. Well, but gold, that's like gold. Silver was trading, it was trading $30 basically in May. Now it's $54, right? Like any good like epic market move, you need a combination of really powerful, strong fundamental forces, which then lead to lead and force price to places that then triggers a whole new set of forces around market liquidity conditions, you know, around traders getting stopped out, exacerbating kind of buy-side flows and all the rest of it, and a lack of supply, right? So basically this is a classic story of all the possible positive factors, forces that you can have on a price. They've all come together in this perfect storm and it smashed $50. Why is $50 important? That was the 2010 high. That was like the financial crisis high. We spiked to 50. Then it pulled back off. So just this week we have broken that 2010 high to make an all-time ever high in silver. So what are the fundamentals that have kind of driven the, at least the first part of this trend? You'd probably say we got to $40 because of fundamentals. Look, there's a whole set of stuff in there. We know most of them. It's around, you know, there is some, you know, some signs of economic risk with that labor market situation in the US. People are worried about tariffs. I've already talked about this, right? So there is, there are some people are looking for safe havens. So precious metals always kind of offer that. Also, silver, unlike gold, has a lot of industrial kind of applications. About 60% of silver supply goes into industrial usages such as solar panels, weaponry as well, actually. So there is a lot of industrial use cases. Then you've got the weakening dollar story. Which has been a feature of 2025, which is, you know, all these factors are why gold is moving up as well, by the way. And then I'd say finally, maybe not yet on the mainstream radar, the rise of stablecoins generally has really brought in, I would say, a new demand element to this. So there are some silver, there are some stablecoins where silver is the kind of underlying pinning physical asset. And so, as people buy more stablecoins and as that asset class, if you want to call it, is increasing, then you, these stablecoin operators, they need more of the physical underpinning asset to kind of make sure that's all working right. It's the same for gold as well, by the way. So this is another reason why you're getting a slightly new demand side factor coming into the market. On the supply, supply's low, so exacerbating those increases in demand, right? So these are the fundamentals, okay? Fine. Now, when markets rise, people start to think, ooh, that looks expensive. I'm going to go short because I think that's too high and I think that market's going to come back down. And they might use derivatives to do this. Maybe they'll sell some, some, some silver futures, for example. Okay. Which is a derivative product. Great. I'm going to go short at $40. Okay, then what happens? Well, then the market starts to go up and up and it goes to 41, 42, 43, and I'm starting to sweat because I'm losing money now and I'm short. 44, 45, 46. Ah, this is super painful. Super painful, right? Ah, you know what? I've got two choices here. And as we're coming to, and as a futures contract, a few, I should just say a futures contract has an expiry. Date. Now the thing about commodity futures, it's physically delivered. That just means that, so a futures contract means I don't, I'm not selling physical gold at $40. I'm actually entering into a contractual agreement with my counterparty to sell them gold at $40 on a date in the future. That date being the expiry date of the contract. Right. So as I'm approaching, as this futures contract is approaching expiry, I've got two choices. I either allow the contract to expire, I'm still holding it, and then I'm legally obliged to deliver physical gold to the counterparty. They pay me $40 an ounce.

Silver.

Silver. I keep saying gold. Why? You can use AI to kind of sort that out in the edit, right? So I can either carry it to expiry and then deliver silver, right? The problem is to deliver the silver to my counterparty, I've got to buy the physical silver first at whatever the price is. $54, right? I'm buying it at $54 and then I sell it at $40. Making a huge loss, but that's my legal obligation with these contracts. The problem is there isn't any silver. I can't get any. Right.

Also, there is a physical implication of this, 'cause one thing I was reading is that traders are literally booking cargo planes, right? To fly silver bars from New York to London. And if you think about it and the math, That's almost never done because silver is, it's just bulkier and more expensive to, to do that. Crazy stuff. It's, it's, it's insane.

Yeah. So this is the desperate nature and the lack of supply. And supply's been dropping, like physical supply of silver's been dropping for a few years in London, which is one of the key trading hubs. So you're getting this ridiculous extreme situation where people are starting to go, right, I'm going to have to fly in this stuff from the US. There is a second option. Instead of carrying my futures contract to expiry, I can just buy it back to— I can buy some futures, which basically nets off and closes out my short futures position. Then I don't have to touch the physical stuff at all. The problem being that's me buying futures. That's where this extra upside price force is coming from. This is why we call it a short squeeze, because those who are short are losing so much money, they're being forced or squeezed out as we say, that the pain is so much they're just having to get out, meaning they're buying, meaning the upside spike just gets even more momentum.

Is there another force then being the illiquidity of the market? Because if you're going to call up a broker and say like, I need a price, two-way price in silver. And they're going to just say, nah, no thanks. I can't, I cannot quote you a price. And there's no orders in the market.

Volatility has obviously gone up dramatically. And so, and so there's two things actually. So number one, the spread in the silver market is like, I can't, I had the number somewhere. Maybe you can help me out with how much the spreads have blown out.

It blown out from 3 cents to over 20 cents an ounce.

Right. Wow. And then the other thing is to look at the price of silver in London versus New York. And so actually the price of silver in London is now $3 higher than it is in New York because of this quite, you know, this chronic supply problem we have in the London Metals Exchange, which is where a lot of the volume of this stuff gets traded. And so it's trading at such a premium now because of these supply issues that it's the highest it's ever been, that the spread between the two is the highest it's ever been at $3 now. So interesting arbitrage opportunity there for you if you've got a jet plane.

Well, yeah, if you want to go for a ride, I'm always open. All right, well look, we'll wrap it up there. A bit of a longer episode, so thank you if you stuck with us, but lots of good stuff there from what's happening with some of the banks and their earnings. If you're going to be interviewing with some of these firms, some insights into the private credit market, what the Fed are doing on the macro and interest rates and what we can expect from a rate cut and the balance sheet. And then what is a short squeeze? So one thing you can do is you can always get transcripts and then get the AI tool to— we are maybe cooking up a little AI assistant here at Amplify to facilitate this for you listeners. But that is one tip, because I know that if you listen to this podcast or if you listen to— I know Goldman Sachs, they share the podcast on their exchange episodes, which can be like an hour long. A good hack is to just actually use the transcripts to surmise and pick out key things if you're doing interview prep. So if you're going to listen to one podcast, it should be ours. If you're going to do the rest, use the AI tools to accelerate your application processes. But on that note, thank you everyone. And do help us push to that goal of 1,000 Spotify ratings. Hopefully we can get there by the time we do the next episode. Thank you, Piers.

Cool.

Have a great weekend. You too.