Wells Fargo senior research analyst Mike Mayo joins Yahoo Finance Live to discuss his take on what Janet Yellen’s reported selection for Treasury secretary under President-elect Joe Biden means for markets and the economy.

Video Transcript

- All right, well, let's talk a bit more about what a Janet Yellen appointment as Treasury Secretary could mean for the banking sector, what it means for the future of the economic recovery. For more on that, we're joined now by Mike Mayo. He's a senior research analyst over at Wells Fargo. Mike, it's great to talk with you this morning. I'd love to begin with just your initial thoughts yesterday when you saw the reporting that suggests Janet Yellen will indeed be tabbed as the next Treasury Secretary.

MIKE MAYO: Well, I think this should be good for banks because it should be good for the economy. Janet Yellen, to us, is non-tribal. She's not part of the anti-bank tribe. She's not part of the pro-bank tribe. She transcends tribe. She transcends politics. Her scorecard is economic growth. It's jobs. It's a vibrant economy.

And so it could've been worse for bank stock shareholders, but I think we have a centrist right down the middle of the fairway, a very measured person who checks three important boxes. One box is she's already helped the economy recovery-- recover from the global financial crisis when she was at the Fed last decade. So she's an economic recovery specialist.

The second box is she speaks the language of the Fed, obviously. But the Treasury will still need to work with the Fed during these still uncertain times. And third, she's known. She's known collectively to the capital markets. So it's no time to change strategies in the middle of a crisis. So I think, you know, bank stock investors are breathing a collective sigh of relief. And let's not miss the point that this is the first woman Treasury Secretary. So we now have a government that better reflects the mix of today's society.

- Hey, Mike, it's Julie here. It's good to see you. So when we look at what Yellen's priorities will be when she gets in place, we don't know if there will already have been a stimulus package put together by Congress. But if that duty does end up falling to her, how do you think she'll do in that kind of a situation? Because, obviously, as Fed chairperson, she had the Open Market Committee to preside over, but she wasn't necessarily doing the kinds of negotiations that might be required to get a stimulus package done.

MIKE MAYO: Yeah, it's kind of like coming in the game when you're down by a couple of touchdowns and trying to get everything back in order. So she's inheriting-- or if she gets confirmed, she will inherit one very tricky, troubled economy. As it relates to bank loan losses, we still expect those to increase two- to three-fold over the next 12 to 18 months. So it's incredibly important that, in addition to the incredible monetary response so far, the Fed's balance sheet has gone from $4 trillion to $7 trillion this year alone-- incredible. Now it's time for the fiscal side to pick up the slack.

And so TBD-- to be determined-- about her ability to negotiate with Congress because it's such a difficult task. Having said that, I think she can probably get a pretty strong team in place that would help her achieve that, but that waits to be seen.

- Mike, what do you think it means for the broader stock market over the next couple years to have a Janet Yellen, who I would argue was dovish as Fed chairman? And you have Jerome Powell, who's, I think, proven to be dovish as well.

MIKE MAYO: Well, it means liquidity, liquidity, and liquidity. So the economy is awash in liquidity, and that's good for these troubled times. Eventually, it won't be so good, and they're going to have to turn off some of that liquidity. So I think there's different horses for different courses. And I think, in this case, during a pandemic, COVID cases are skyrocketing, the next two to three months are likely to be horrific from that standpoint.

So from an immediate-term perspective, I think that works really well. I think the rubber meets the road with monetary policy versus fiscal policy. Perhaps later next year, if the vaccine does get distributed and it works and the economy can reopen, that's when there could be some tension. But let's just get out of this deep hole that we're in now.

BRIAN CHEUNG: Hey, Mike, Brian Cheung here. So I don't want to skip too many steps here, but was there anything interesting to be gleaned from the bond market in reaction to the Yellen news yesterday that might tell you about the operating environment for banks in the future? So we did see the 10-year yield, for example, creep up a little bit. Do you expect that the yield curve would continue to steepen off of expectations for what a Chair Yellen-- or rather what Treasury Secretary Yellen might be doing in the future, or is this not as much of a big deal as maybe some are making it out to be?

MIKE MAYO: I mean, between the potential head of the Treasury and the head of the Fed, you have a double barrel shotgun shooting liquidity. So for those who think there might be a reflation trade, this only reinforces that idea. So the idea of getting to a more normal yield curve and what that means for in the case of banks, you know, bank margins and eventually bank loan growth because, right now, while there's not much loan demand, there's also not much incentive for banks to go ahead and make those loans at these artificially low interest rates. But down the road, eventually, you'll need a handoff from the government to the banks to make loans and facilitate economic growth. But Brian, I think that reflation trade, it's another data point that we're going in that direction.

- And Mike, what about maybe the more diplomatic parts of being Treasury Secretary? Being nice to our major trading partners, showing up to G7 meetings and everyone has a good time, I mean, that's been not really a big part of the Trump playbook, and I would imagine that that's kind of a more status quo situation that Joe Biden and his Treasury Secretary would like to get back towards.

MIKE MAYO: Well, this is what's nice about having a person who knows the process. She knows how Washington, DC works. She was with the Council of Economic Advisors under President Clinton. She was Fed chair, she was Fed vice-chairman, she was an economist at the Fed, she was in academia. She understands the importance of trade to global economic growth and how it's a win-win scenario. So from that standpoint, the idea of growth and global capitalism, growth in global markets, the benefits to all sides that participate, I think it's a little notch forward in that direction, too.

BRIAN CHEUNG: And Mike, lastly, I want to ask you about bank regulation-- not that I'm gonna ask you to talk about the supplementary leverage ratio or anything that's specific, but we know that the Treasury and the Fed do coordinate sometimes on the policy of how to supervise and look at capital levels of the banks. Do you expect this Yellen appointment here to make it more or less aggressive under a Biden administration when it comes to bank reg?

MIKE MAYO: Well, look, I mean, the major law governing banks today is Dodd-Frank, and that was passed when President Obama was at the helm. So there's not likely to be major structural overhauls to bank regulation. Frankly, banks are not the cause of today's problems as they were with the global financial crisis. Today, banks are more part of the solution than not.

Having said that, yes, it's the absence of additional deregulation, but I think we're talking tweaks as opposed to major overhaul. So I think the economics trump any potential tweaking of bank regulation when it comes to bank stockholders.

- All right, Mike Mayo, senior research analyst with Wells Fargo. Mike, great to get your thoughts this morning. Thanks for joining the show. We'll talk soon.

MIKE MAYO: Thank you.