1 00:00:08,130 --> 00:00:10,320 Sean Aylmer: Welcome to Fear and Greed, The Week Ahead. I'm Sean 2 00:00:10,320 --> 00:00:14,730 Sean Aylmer: Aylmer, and as always, I'm joined by economist, Stephen Koukoulas. 3 00:00:15,090 --> 00:00:17,940 Sean Aylmer: You'll find him at thekouk. com, T- H- E- K- O- U- K. 4 00:00:18,120 --> 00:00:21,420 Sean Aylmer: com, and on Twitter using the handle thekouk. Stephen, good morning. 5 00:00:21,900 --> 00:00:25,470 Stephen Koukoulas: Good morning. I'm still standing, but only just after last week. 6 00:00:25,530 --> 00:00:29,820 Sean Aylmer: Wow, what a difference a week makes. I'm not quite 7 00:00:29,820 --> 00:00:34,589 Sean Aylmer: sure how. This time last week, the Silicon Valley Bank 8 00:00:34,890 --> 00:00:37,409 Sean Aylmer: stuff was unraveling and then after we spoke, there was 9 00:00:37,409 --> 00:00:43,080 Sean Aylmer: a rescue package, and then Credit Suisse. Can you take 10 00:00:43,080 --> 00:00:43,620 Sean Aylmer: us through it? 11 00:00:44,460 --> 00:00:47,159 Stephen Koukoulas: Yes. I think there was a bit of an assessment 12 00:00:47,190 --> 00:00:52,800 Stephen Koukoulas: of how banks are funding and managing their balance sheets. 13 00:00:52,800 --> 00:00:55,290 Stephen Koukoulas: So in a sense, I don't think there's a systemic 14 00:00:55,290 --> 00:00:59,580 Stephen Koukoulas: problem from the Silicon Valley Bank to other banks. However, 15 00:01:00,390 --> 00:01:03,300 Stephen Koukoulas: it is actually funnily a legacy of some of the 16 00:01:03,300 --> 00:01:06,150 Stephen Koukoulas: reforms that were put in place after the global financial 17 00:01:06,150 --> 00:01:09,930 Stephen Koukoulas: crisis 12 to 15 years ago that banks had to hold a 18 00:01:09,930 --> 00:01:15,479 Stephen Koukoulas: higher proportion of their deposits in government bonds. They thought 19 00:01:15,480 --> 00:01:17,730 Stephen Koukoulas: that would be liquid, safe, and all the rest of 20 00:01:17,730 --> 00:01:21,959 Stephen Koukoulas: it, but of course, there was never this discussion of mark- to- 21 00:01:21,959 --> 00:01:25,560 Stephen Koukoulas: market. So when they bought these bonds, all banks this 22 00:01:25,560 --> 00:01:27,630 Stephen Koukoulas: is, and if they didn't hedge it correctly, which of 23 00:01:27,630 --> 00:01:31,770 Stephen Koukoulas: course, was Silicon Valley Bank's problem, when yields rose, which 24 00:01:31,770 --> 00:01:33,750 Stephen Koukoulas: of course, they have been for the last year, both 25 00:01:33,750 --> 00:01:37,050 Stephen Koukoulas: official rates and bond yields, when they had to sell 26 00:01:37,050 --> 00:01:41,640 Stephen Koukoulas: those to fund depositors withdrawing their money, they were selling 27 00:01:41,640 --> 00:01:43,530 Stephen Koukoulas: them at a big loss and if they had too 28 00:01:43,530 --> 00:01:46,650 Stephen Koukoulas: much of a withdrawal of cash from their banking system, 29 00:01:46,950 --> 00:01:49,410 Stephen Koukoulas: they were selling and making very big losses. I think 30 00:01:49,410 --> 00:01:54,510 Stephen Koukoulas: that's why banks across the globe, frankly, were sold off 31 00:01:54,510 --> 00:01:55,530 Stephen Koukoulas: and some more than others. 32 00:01:56,340 --> 00:01:59,700 Sean Aylmer: Okay. The Credit Suisse situation is a bit different though. 33 00:01:59,700 --> 00:02:02,640 Sean Aylmer: It's not about deposit base. That's more about the fact 34 00:02:02,640 --> 00:02:04,350 Sean Aylmer: that one of its biggest shareholders doesn't want to put 35 00:02:04,350 --> 00:02:05,250 Sean Aylmer: any more money into it. 36 00:02:05,760 --> 00:02:08,250 Stephen Koukoulas: They've burnt so much money on that one, yes. I 37 00:02:08,250 --> 00:02:11,040 Stephen Koukoulas: think when I was checking, I saw a headline that 38 00:02:11,490 --> 00:02:16,800 Stephen Koukoulas: Credit Suisse is down 98% from its peak level in 39 00:02:16,800 --> 00:02:17,970 Stephen Koukoulas: terms of its share price. 40 00:02:18,000 --> 00:02:18,060 Sean Aylmer: Wow. 41 00:02:18,060 --> 00:02:21,630 Stephen Koukoulas: So it's a basket case. Look, I must confess, I 42 00:02:21,630 --> 00:02:25,500 Stephen Koukoulas: don't look at the entrails of how it's fallen so 43 00:02:25,530 --> 00:02:30,240 Stephen Koukoulas: dramatically and rescue packages abound, obviously. But it's clearly a 44 00:02:30,240 --> 00:02:36,330 Stephen Koukoulas: combination of mismanagement, of poor judgment, and it is spreading 45 00:02:36,330 --> 00:02:39,030 Stephen Koukoulas: a bit of contagion through Europe where other banks have 46 00:02:39,030 --> 00:02:41,370 Stephen Koukoulas: exposure to Credit Suisse. It's one of those ones. But 47 00:02:41,490 --> 00:02:46,169 Stephen Koukoulas: again, I don't think it's as bad as 2007, '08, '09, but 48 00:02:46,680 --> 00:02:49,440 Stephen Koukoulas: it won't take much to tilt us a little bit 49 00:02:49,440 --> 00:02:50,459 Stephen Koukoulas: more in that direction. 50 00:02:51,389 --> 00:02:54,450 Sean Aylmer: Almost makes things like the labor force figures for February 51 00:02:54,450 --> 00:02:59,910 Sean Aylmer: and business confidence and consumer sentiment almost dull, but not quite. 52 00:03:00,389 --> 00:03:03,090 Stephen Koukoulas: Well, from a markets perspective, they went through to the 53 00:03:03,090 --> 00:03:06,300 Stephen Koukoulas: keeper largely, even though there was important information in there. 54 00:03:06,300 --> 00:03:08,610 Stephen Koukoulas: When we take a step and what's happening in the 55 00:03:08,610 --> 00:03:11,669 Stephen Koukoulas: economy, taking the labor market first, there was a lovely 56 00:03:11,669 --> 00:03:17,070 Stephen Koukoulas: rebound in employment, plus 66, 000 jobs in February. Now, that 57 00:03:17,070 --> 00:03:18,720 Stephen Koukoulas: has to be put in the context that the prior 58 00:03:18,720 --> 00:03:22,530 Stephen Koukoulas: two months were both negative, so everyone was expecting some 59 00:03:22,530 --> 00:03:24,270 Stephen Koukoulas: sort of rebound, but it was lovely to see it 60 00:03:24,270 --> 00:03:26,730 Stephen Koukoulas: and it was actually a touch more than the market 61 00:03:26,730 --> 00:03:29,850 Stephen Koukoulas: consensus and it fed through to the unemployment rate going 62 00:03:29,850 --> 00:03:34,380 Stephen Koukoulas: back from 3. 7% down to 3. 5. So basically, 63 00:03:34,380 --> 00:03:37,230 Stephen Koukoulas: the unemployment rate, which had been looking to creep up 64 00:03:37,290 --> 00:03:40,170 Stephen Koukoulas: late last year and early this year, crept back down 65 00:03:40,170 --> 00:03:42,900 Stephen Koukoulas: again. But when we put a trend line through the 66 00:03:42,900 --> 00:03:46,680 Stephen Koukoulas: whole lot, that monthly volatility, you can see that employment 67 00:03:46,680 --> 00:03:51,420 Stephen Koukoulas: growth is moderating. It's still okay, but moderating from where 68 00:03:51,420 --> 00:03:54,090 Stephen Koukoulas: we were, say, six to nine months ago and the 69 00:03:54,090 --> 00:03:58,320 Stephen Koukoulas: unemployment's just stabilizing around this 48, 49- year low of 3. 5%. 70 00:03:59,820 --> 00:04:02,130 Sean Aylmer: How worried should we be about consumer sentiment? 71 00:04:02,910 --> 00:04:06,510 Stephen Koukoulas: Consumers are gloomy. Gosh, we saw Bill Evans at Westpac 72 00:04:06,510 --> 00:04:10,200 Stephen Koukoulas: putting out his consumer sentiment number and it was remaining 73 00:04:10,200 --> 00:04:13,320 Stephen Koukoulas: below 80 index points. Now, 100 index points is where 74 00:04:13,320 --> 00:04:16,740 Stephen Koukoulas: you've got as many optimist as pessimists in the consumer 75 00:04:16,740 --> 00:04:19,289 Stephen Koukoulas: side of the economy. So clearly, we've got a lot 76 00:04:19,290 --> 00:04:23,369 Stephen Koukoulas: of pessimists. This is the thing that I found extraordinary, 77 00:04:23,370 --> 00:04:26,190 Stephen Koukoulas: Sean, that it's at a level that's lower than the 78 00:04:26,190 --> 00:04:28,950 Stephen Koukoulas: lockdowns when we were in COVID, so we are feeling gloomier now 79 00:04:28,950 --> 00:04:30,839 Stephen Koukoulas: than when we were stuck at home and not able to 80 00:04:30,839 --> 00:04:33,330 Stephen Koukoulas: go out. It says to me that it's cost of 81 00:04:33,330 --> 00:04:37,380 Stephen Koukoulas: living pressures, it's interest rate hikes, it's concerns about the 82 00:04:37,380 --> 00:04:41,400 Stephen Koukoulas: broader economic outlook that's feeding into people's sentiment. How worried 83 00:04:41,400 --> 00:04:44,130 Stephen Koukoulas: should we be? When consumers are gloomy, they tend to 84 00:04:44,130 --> 00:04:46,770 Stephen Koukoulas: hunker down. They tend to sort of be a little 85 00:04:46,800 --> 00:04:50,700 Stephen Koukoulas: cautious or very cautious in their spending patterns. I think, 86 00:04:50,700 --> 00:04:52,350 Stephen Koukoulas: as we discussed a week or two back with the 87 00:04:52,350 --> 00:04:55,950 Stephen Koukoulas: recent retail sales numbers, there's clear evidence that retail spending 88 00:04:56,010 --> 00:04:57,480 Stephen Koukoulas: is slowing down. 89 00:04:57,930 --> 00:05:02,099 Sean Aylmer: Okay. Well, business sentiment is falling somewhat, but conditions are 90 00:05:02,100 --> 00:05:02,880 Sean Aylmer: still pretty strong. 91 00:05:03,270 --> 00:05:06,089 Stephen Koukoulas: That's the good news, thankfully, thankfully. This is one reason 92 00:05:06,089 --> 00:05:08,279 Stephen Koukoulas: why I don't think we're going to have a recession to the 93 00:05:08,279 --> 00:05:10,380 Stephen Koukoulas: extent that we were ever going to have one. The 94 00:05:10,380 --> 00:05:13,260 Stephen Koukoulas: business sector has actually got a lot of internal momentum, 95 00:05:13,290 --> 00:05:15,779 Stephen Koukoulas: if you like, that a lot of the projects that 96 00:05:15,779 --> 00:05:18,660 Stephen Koukoulas: they had ready to rock and roll during the COVID 97 00:05:18,660 --> 00:05:23,370 Stephen Koukoulas: lockdown were actually postponed. They postponed their decision for IT 98 00:05:23,400 --> 00:05:26,580 Stephen Koukoulas: investment, for buildings and structures, and these sorts of things 99 00:05:26,820 --> 00:05:28,529 Stephen Koukoulas: because they just weren't sure what was going on or 100 00:05:28,529 --> 00:05:30,660 Stephen Koukoulas: they couldn't even find the machinery and equipment. There were 101 00:05:30,660 --> 00:05:33,990 Stephen Koukoulas: supply chain problems. So now, we have this situation where 102 00:05:34,050 --> 00:05:37,770 Stephen Koukoulas: businesses, when they're asked, " What's your outlook for CapEx?", for 103 00:05:37,770 --> 00:05:41,640 Stephen Koukoulas: example, it's pretty upbeat and their measure of conditions is 104 00:05:41,640 --> 00:05:45,510 Stephen Koukoulas: pretty good. So not booming, but certainly way more optimistic 105 00:05:45,510 --> 00:05:50,190 Stephen Koukoulas: than we consumers, and when you extrapolate those numbers from the 106 00:05:50,190 --> 00:05:54,000 Stephen Koukoulas: NAB survey, it points to business investment growing this year 107 00:05:54,060 --> 00:05:57,270 Stephen Koukoulas: and next by a pretty decent amount. And to get 108 00:05:57,360 --> 00:06:01,080 Stephen Koukoulas: negative GDP, you really need something else to go horribly 109 00:06:01,080 --> 00:06:02,880 Stephen Koukoulas: wrong and that just doesn't look likely. 110 00:06:03,300 --> 00:06:05,070 Sean Aylmer: Okay. Now, this week, there's not a lot on this 111 00:06:05,070 --> 00:06:07,349 Sean Aylmer: week. We've got the Reserve Bank minutes, which of course, 112 00:06:07,350 --> 00:06:12,480 Sean Aylmer: is always interesting, but the interest rate setting Policy Committee 113 00:06:13,080 --> 00:06:15,150 Sean Aylmer: in the U. S. also meets. So we'll find out 114 00:06:15,150 --> 00:06:16,919 Sean Aylmer: whether U. S. rates are going to rise again. 115 00:06:17,310 --> 00:06:19,980 Stephen Koukoulas: Oh, and yes, with all the choppiness of last week 116 00:06:20,339 --> 00:06:23,460 Stephen Koukoulas: with bank failures and news and all the rest of 117 00:06:23,460 --> 00:06:26,460 Stephen Koukoulas: it, the market pricing for the U. S. interest rate 118 00:06:26,460 --> 00:06:28,800 Stephen Koukoulas: setting this week is all over the place. We got 119 00:06:28,800 --> 00:06:30,990 Stephen Koukoulas: to a point where, I think just before the bank 120 00:06:30,990 --> 00:06:33,270 Stephen Koukoulas: failures, they were pricing in a high probability of a 121 00:06:33,270 --> 00:06:37,109 Stephen Koukoulas: 50 point hike. When markets were absolutely in turmoil, they 122 00:06:37,110 --> 00:06:39,690 Stephen Koukoulas: were pricing in zero chance of a hike, and I 123 00:06:39,690 --> 00:06:42,420 Stephen Koukoulas: think there's a small probability of a rate hike, as 124 00:06:42,420 --> 00:06:45,150 Stephen Koukoulas: we speak, priced into the market, but it is so 125 00:06:45,150 --> 00:06:48,420 Stephen Koukoulas: fickle. And one thing that I think we've learned over 126 00:06:48,750 --> 00:06:51,150 Stephen Koukoulas: many, many years, many decades in fact, is when you 127 00:06:51,150 --> 00:06:54,270 Stephen Koukoulas: have a financial or a banking problem, the last thing 128 00:06:54,270 --> 00:06:56,880 Stephen Koukoulas: you want is more interest rate hikes. And as we've 129 00:06:56,880 --> 00:06:59,820 Stephen Koukoulas: been discussing and everyone's discussing, there's a lot of rate 130 00:06:59,820 --> 00:07:03,570 Stephen Koukoulas: hikes in the pipeline that haven't impacted just yet. So, 131 00:07:03,750 --> 00:07:05,969 Stephen Koukoulas: to me, it seems if it would be prudent for 132 00:07:05,970 --> 00:07:09,330 Stephen Koukoulas: the Fed to pause. They can always resume their hiking 133 00:07:09,330 --> 00:07:12,030 Stephen Koukoulas: cycle if the dust settles and things are okay, but 134 00:07:12,030 --> 00:07:14,100 Stephen Koukoulas: pause for this month because if they hike rates and 135 00:07:14,100 --> 00:07:16,950 Stephen Koukoulas: the market has a bit of a turn, it could 136 00:07:16,950 --> 00:07:18,000 Stephen Koukoulas: be very, very nasty. 137 00:07:18,570 --> 00:07:20,970 Sean Aylmer: It's going to be very fascinating to watch, Stephen. Have 138 00:07:20,970 --> 00:07:21,570 Sean Aylmer: a great week. 139 00:07:21,870 --> 00:07:22,530 Stephen Koukoulas: Thank you, Sean. 140 00:07:22,950 --> 00:07:25,350 Sean Aylmer: That was economist, Stephen Koukoulas, better known as The Kouk. 141 00:07:25,350 --> 00:07:27,330 Sean Aylmer: You can find him at thekouk. com and follow him 142 00:07:27,330 --> 00:07:30,510 Sean Aylmer: on Twitter using the handle thekouk. I'm Sean Aylmer and this is Fear 143 00:07:30,510 --> 00:07:31,500 Sean Aylmer: and Greed, The Week Ahead.