It is a thursday in new york city. Im Erik Schatzker. Im stephanie ruhle. Lets talk about wall street. Times it be the best of and the worst of times at the same time . That is the question for wall secondquarter earnings season winds down. Quantitative easing is still crimping profits, new revenue is still scarce, but most of the big banks are lending more and cutting costs. Our contribute in editor with us andskype says it is a paul miller is with us from greater dcaa paul, i suspect you are not so inclined to agree with bill. Do you see positive signs . We do see positive signs. I went into the Second Quarter thinking more pessimistic than i should have been, that there are some signs of lending going on. The margins are still very skinny, you have some liquidity out there. Jpmorgan said utilizations are up two Percentage Points from the first. Wanted to dou skype only because you know i disagree with you on this golden age. But lets talk about fixed income. Fixed income numbers are still low. They are lower than they were last quarter, lower than they were a year ago, and the leveraged financed state used to be where you would sit inside a bank. Stephanie, fixed income except for people like you,ho are knowledgeable about it, is basically a black box. We will never really know how they make money in fixed income. But i look at it more on a macro basis. Me, all the macro factors are here. I have been saying this for a while now. Between the fact that there is a post amount of competition 2008 we only have a few major banks now the economy is improving. Ir cognitive soul is zero they did not get their money for free and blended out at great margins. Look at the credit card business alone. Y get money for people from people at 0 and led to customers at whatever 15 percent, 20 . That is a huge return on investment. Paul, is bill wright . Is the Banking Industry set for a powerful rebound . So. Dont think the credit card industry is smaller than it used to be. Is growing very rapidly. Outside that, home lending his the lowest home lending is the lowest it has been in years. 2000 ando fast between 2007, and now we are going through that deleveraging phase. It is not a golden age for banking at all. We have a couple of years for deleveraging before we get through it all. You cannot really grow that fast. Are analysts just sort of gaming the market when we say Morgan StanleyBeat Estimates that have already been lowered . So the numbers are not that good . The same thing with jp morgan. Everybody lower their numbers throughout the quarter because the commentary was fixed income trading and equity trading will be poor. Then they came in and beat the estimates. And heu look at it yearoveryear basis, and a lot of bearings were flat to down. That is where you will get the multiples Going Forward. You cannot just Beat Estimates you can talk down. Can i just jump in there . Goldmans earnings were goldmans earnings estimates were lowered, and then they blew them out. They beat the consensus estimate before they were lowered. Sachs, nobodydman else is competing with you. The money will do for its clients with goldman will do for the moment. Morgan stanley is not in that kind of business anymore. Expect private equities firms are now doing middlemarket lending. People are doing direct to investor business. Goldman sachs does not even need to be a player anymore. Goldman sachs is a player, stephanie, you know that well, and they will find out a way to make money. With the lack of competition, what otherroving, firm or business on the face of the earth does not have to pay for its good soul . This is about to be a golden age. You may not see it yet that you are going to see it. It is already happening. Look at the Second Quarter at these firms. Paul, you mentioned loan growth. Morgan stanley does a little bit but it is not elemental to their business. There is a bit of a mistake here. B of as loan growth was half a percent. Almost all of it seems to be coming from corporate and commercial lending. Is stillmer deleveraging, but what does it say about the process for these banks that Corporate America is stepping up and borrowing more . Bank of americas loan growth was small because they have a lot of big runoff word folios. There core growth was up because their core growth was up a percentage point. To absorbbig enough all those deposits or that liquidity out there. And therefore the interest markets on the spread are still a pressure point. We have always had great loan growth. Out we are starting to see it in the numbers but it cannot it in you. It has to go on for the third, fourth, and into 2016 for the banks to start earning expectations. How much is left in banks to cut heads . When they talk about cutting expenses and jobs, what jobs are left . I think the banks are still too fat relative to their revenue base. You will still see cuts across the board not just in the big banks but through the regionals. It is the only way they can get earnings growth, and they have to become more efficient. The only way they can do that is to continue to cut heads. Years,e next couple of not just this year. Bill, does it give you any concern when we look at where jobs have been created over the last couple of years . It is compliant and tech compliance and tech. Just announced they were going to hire more levels . Es at junior yes, but they have cut 24,000 jobs in the past year. Junior level, those are people grinding it out, not necessarily people bringing in dollars. The other option banks could do is cut compensation rather than cutting heads. They like to cut heads so that otheront lose jobs in competitive situations. They have huge leverage on their compensation structure. They could definitely cut compensation. Instead, they cut heads. With the economy rebounding, demand for corporate loans is going to be up, the man for personal loans will be up. Demand for mortgages is high. Im telling you, we are about to see a huge leverage effect on wall street. You know i hate talking about cutting conversation at bank, at banks, so that means we do not have any time left. Thank you. With us via skype, contributing editor phil . I like paul, two. Of our other favorites has big news out of redmond, washington. Microsoft is cutting up to 18,000 jobs. Bloomberg west editor at large and one of our favorites, cory jo, has more. If they are cutting 18,000 jobs, how much do they have total . This in some ways was in the cards. Microsoft is painting this as a change in direction. Usingla not dela is this to cut all these jobs. To discuss the focus of the company and where it is Going Forward with its offerings. A lot of emphasis on the notion of software to service. Software on the cloud. Office 365. I have been meeting with microsoft salespeople, and they are having some success in the corporate arena marketing of the. Ew upgraded office thin and a lot of them are about this acquisition of nokia, downsizing nokia where they said they would have 600 million they could take out of the business and continue to have a growth in the mobile phone market. More fundamentally, it is about redirecting microsoft toward software on the cloud and a different kind of offering from reduced staff of microsoft. Wehow much information do have on which areas the job cuts are focused in . We dont have a lot of detail. Thise will find out about difficult thing today. Also in europe where we expect as much as half of this will be at nokia. Those jobs just came into microsoft recently with an acquisition. When you look at this business, one of the things you have to think about is the different competitive sets we are talking about with microsoft. Their competition now includes google and Companies Like eachook, whose revenue for employee is so much higher because you talk about a jobless recovery. We are seeing that in a complicated case. I want to make a point. Of course you are right, revenue per employee at Companies Like google is higher. But microsoft has higher margins. Ebitda because it gives a higher apples to apples comparison. Facebook by quite a lot, but facebook is the outlier in this chart that we have put together on ebit the margins. If you think about where they are Going Forward, who will they be competing against and what they are trying to do . Microsoft will be facing more facebook and less oracle in the future. N you think about microsoft is the kind of place i spend a lot of time up there, and it is the kind of place where people have worked for a very long time, carved out their places in the world and they often have careers that run 15 or 20 years, unlike a lot of other hightech companies. There are probably people who have worked there a long time that do not have the same kind of function that they used to. But they are hiding out and living well . Co until today. Thank you so much for giving up the latest on the news that microsoft. California talks tough about the drought. Plus, Corporate Tax runaways. The treasury secretary says it to drop those comp to abcshose companies and on those companies overseas. We are streaming on your apple tv and amazon fire. The treasury secretary, Jack Lew Thomas says it is a matter says it is aw, matter of patriotism. Cracking down on companies that move overseas trade it is called tax and version it has become increasingly popular, a way to avoid paying u. S. Corporate taxes. Most republicans say the way to stop it is to cut the Corporate Tax rate. Lets talk with ed lazear, who served as president george w. Bushs chief economist. Good to see you. The irony is that jack lew also things that we should cut the Corporate Tax rate. He says so in his letter to house ways and means and a chairman david cap. He says Congress Needs to take action first to stop the inversion problem. There is an inversion problem. Actually, lets open up the question to you. Is there an inversion problem . Yes. There is no doubt that tax avoidance is not a good thing. Avoidswhen one entity paying taxes, it means the rest of us have to make up for the lost revenue, so you have to get the taxes somewhere else, and that can be distortionary. The second point is more important. You want corporations to be basing their location decisions not on taxes but on economic efficiency and on where it makes sense from a production point of view, not from a tax point of view. If companies are relocating overseas to avoid taxes, that is not a good thing. I am sympathetic to the president and the treasury secretarys point of view. There is a problem here and something that needs to be solved. My difficulty with it is that i think the solution they propose will cause more harm than it does good. That really is the problem. How would it cause more harm than good . The big problem is that if you look at the administrations numbers on this, what they are talking about is getting Something Like 2 billion of revenue per year, Something Like 20 billion over a decade. While that is not chump change, of 3 billion on a budget trillion is less than. 1 of revenue. We are talking about appearance rather than substance. The other side of that is you have to ask what will be the effect of this legislation on the location of capital in the United States. To give you an analogy, here is how i think about it. Suppose youre watching a baseball game and you notice there are two bank many home runs being there are too many home runs to being hit. Bunt. Tell them to that is such a good analogy. So should we be criticizing these companies who are playing by the rules . Well, i dont think criticism is going to be very effective. First of all, the companies are doing the right thing in terms of fiduciary responsibility. Obligation to maximize shareholder value. If they do not do that, they are in trouble because they are not doing the right thing. We all believe in patriotism. Oferved with a number patriotic americans, and i do not dispute we should be doing the right thing for our country. The question is, how do we get there . As you mentioned right at the beginning, the tax code is something we need to focus on. We have a tax code that rather than encouraging capital to move to the United States, it discourages it. The only reason we have capital is because we are a pretty good place to invest, particularly with respect to the rest of the world. We could attract more and have a lot more investment with steeper recovery, more job growth, more wage growth, if we were to be more investment friendly. So again, the problem is that congress both sides of the aisle, democrats and republicans, and for that matter the treasury and the secretary agreed that tax reform is necessary, but nobody is doing anything about it other than document it. You can understand why the treasury secretary says something needs to be dumb in the interim because tech perform is a big challenge. , even if we have a reagantip oneill type of agreement that paves the way for tax reform, it will take a while. I certainly understand the chair jury secretarys frustration. What i dont understand understand the treasury secretarys frustration. What i dont understand is the solution. Enacting legislation of the kind he has in mind would actually, i amount ofuce the investment and capital and perhaps the amount of tax revenues we get in the United States. There are a number of examples in this. If you think about another sector of economics where you look at europe and what they did with their labor markets a couple of decades ago, they were worried about having too little employment. They passed legislation that said you cannot lay off workers. Penalize that, we will you and you have to pay severance pay. That worked in terms of reducing layoffs, but what it did was that employers did not want to hire them in the first place because they would enact penalties they would incur penalties in laying them off. Companies inome the United States, but new capital will not want to come here because they are going to see that you get locked in once you come, and that will be counterproductive. Moving in that direction is the wrong thing to do, even in the short room. Ash in the short run. We have to end it there. Next time we want you in new york for the hour. And we want to keep going. Ed lazear is an economics professor, former chief economist at george w. Bush. The Obama Administration is cracking down with more sanctions on russia over the crisis in you came ukraine. Coming up, one of my favorite topics credit market mania. Stay with us. You are watching Market Makers. Live from bloomberg headquarters in new york, this witharket makers here co. Erik schatzker and stephanie ruhle. Good morning once again. You are watching Market Makers. Im Erik Schatzker. Im stephanie ruhle. It is credit line insanity. The riskiest investors are the ones winning the biggest. How long until their luck runs out. Heargulies is with runs a 31 million portfolio of tradable credit. In the bestt it possible terms the stupidest guys look at the smartest. How long can that continue . We have certainly been in a bull market for a while now. The question is how long does this go for and where do rates go. That is what drives credit markets more than anything else. That itef right now is has some legs to go. We are toward the end of the cycle, but we i know youre looking at me the reason we companies,r 1000 invest in over 1000 companies. And none of them are defaulting . We have unbelievably low default rates. More important, most of the companies are beating topline estimates. The notions that the dumbest are winning the most makes me feel like we are in the bubble. Is we flip side to that are beginning to see flashing yellow signs in the marketplace. Where . Proceeds. Seeing it in more deals are getting down to shareholders,ng to recap shareholders. That is a dangerous sign. Companies that you do see are being watered down. Leverage levels are back up to where they were in the last week. Leverage is trickling back into the system again. These are all things pointing to setting ourselves up for a credit cycle change. It is not today, but it is setting ourselves up area is it time to sound the alarm . It does not mean we are moving up the credit curve, but we are definitely getting more selective. Why dont you take a moment to describe what you invest in. At areas within we run to 8 billionon in assets. High yield loans on a global basis, mostly from northern and western europe. Today we are in a 3 trillion market. Is there enough liquidity in that right now . Where are you getting it from . It has gone up 50 . Trillion to 3 trillion. Wall street is no longer the risk taker, they are Market Makers. Which is fine. I got it, i got it. There is enough liquidity on the buy side. We have had dozens of influence to highyield funds and loan funds over the course of the year. It is on negative loans recently but there is still a lot of liquidity out there. Going back to the stupidest guy looking the smartest, how do you stupidest isk a word. Do you think it is . Im not going to argue with the guy interviewing may. I have probably used it before. Youdo you generate are concerned, you see warning signs. How do you stay competitive . Notur pitch to investors is that we are going to be the highest return in every market because if you are doing that, you are to reaching for yields. That is asymmetric risk. Not reaching from the high yields to the decimal turn, it adjustbest risk to return. Us andritical for critical for investors. So that investors understand that you have to adjust your expectations for the risks you are taking. Do you have new investors at a time when everyone is searching for yields . Are there potential investors knocking on your door saying spend your money . Is interesting. Everyone is basically saying how can i get a 7 yield in a 3 environment. It is retail. We are looking to build retirement accounts. Insurance companies are optimizing their portfolios. We have a lot of flow coming in. 6 to 8 yield where is it coming from . It is across the board for its sovereign wealth funds but are they taking money out of other Asset Classes . A l