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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoid's along

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Speaker 1: with Tom Keane and Jonathan Ferrell. Join us each day

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Speaker 1: for insight from the best in economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance undemand on Apple, Spotify and anywhere

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Speaker 1: you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal and the Bloomberg Business app. Luis Is

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Speaker 1: and Galas of the University of Chicago Booth School calling

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Speaker 1: for an independent commission to look into the FED rights

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Speaker 1: in the following In the last two years, the FED

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Speaker 1: has failed twice. It is failed to see inflation coming,

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Speaker 1: and it has failed to see the banking crisis coming

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Speaker 1: to the nation needs to trustworthy FED to combat inflation.

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Speaker 1: The only way to recover this trust is through a transparent,

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Speaker 1: independent and authoritative commission whose findings are believable. President Biden

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Speaker 1: should appoint such a commission without delay. Luigian please to

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Speaker 1: say joins us right now, Luigika Mornic. Is it the

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Speaker 1: FED chair fault or is this an institutional problem? I

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Speaker 1: think that that's what we need to find out. I

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Speaker 1: think I fear that it's an institutional problem or the

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Speaker 1: just a German problem. Is easier to replace the German

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Speaker 1: than to sort of rethink an institution. But I think

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Speaker 1: that is a very consensus institution. So I think the

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Speaker 1: failures were shared and something has gone wrong. Is that

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Speaker 1: a polite website that's too much group think at the fat?

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Speaker 1: I think that definitely is the case. But I think

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Speaker 1: maybe maybe there is more. Maybe they're not inough economists.

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Speaker 1: This is this is I think a low point on

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Speaker 1: the board. I think only half of the PhD so

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Speaker 1: in economics. Now you don't need to have a PhD

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Speaker 1: in economics, but helps in understanding situation like the one

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Speaker 1: where now, what are they getting wrong right now? I

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Speaker 1: think that they're getting wrong how unstable the banking system is.

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Speaker 1: I think that they have this idea that deposits are sticky,

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Speaker 1: and I think that first of all, we have never

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Speaker 1: experienced in recent time spread of four under business points

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Speaker 1: between what you get on the money market and what

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Speaker 1: you get on your deposit. And second, the WAD has changed.

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Speaker 1: The posits are mobile, they are really Google say, a

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Speaker 1: click away, and so I think that if the posits

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Speaker 1: move in search of better eels then banks have to

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Speaker 1: realize their losses. The idea of losses automaturity that can

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Speaker 1: stay there and not have any impact, I think is

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Speaker 1: sort of a fantasy. Well, what do you think the

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Speaker 1: FAD should be doing? I mean, at a certain point,

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Speaker 1: this is really the consequence of banks not managing their

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Speaker 1: assets well enough, isn't it. Or do you really think

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Speaker 1: this really lies with the FED? No? I think that

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Speaker 1: the FED is a huge responsibility of the fact that

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Speaker 1: they should have understood then they couldn't raise rates so fast,

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Speaker 1: because when you raise rates so fast, you're going to

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Speaker 1: impose losses in the bond market. And who's going to

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Speaker 1: bear those losses? Insurance companies then you have to bail

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Speaker 1: them out. Banks then you have to them out. So

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Speaker 1: unless all the losses are among us investors individual investors,

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Speaker 1: then something happens, and so there was an extra reason

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Speaker 1: to intervene early on inflation said they were very complacent.

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Speaker 1: They said, oh, we have the tools, we're going to

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Speaker 1: do it. We let it go a little bit, but

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Speaker 1: no worry, because we have the tools. I think that

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Speaker 1: their tools were not very sharp, and they should have

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Speaker 1: recognized that. How much do you think that the banking

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Speaker 1: crisis that people talked about three weeks ago has abated,

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Speaker 1: has really sort of moved from some sort of acute

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Speaker 1: phase into perhaps a chronic question around flows and with

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Speaker 1: respect to credit creation, but not necessarily a crisis. I

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Speaker 1: think it's possible and hopefully that this is not going

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Speaker 1: to be an open crisis like we've seen in the past. However,

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Speaker 1: clearly put a lot of softness in the banking sect,

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Speaker 1: particularly regional banks, which we need to remember those are

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Speaker 1: the ones who land to small and medium enter prices.

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Speaker 1: The large banks tend to do syndicated loans or big firms,

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Speaker 1: but the brand and bottom of the economy is with

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Speaker 1: the original banks, and they're very soft, and they see

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Speaker 1: deposits flowing out, and they are not going to make

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Speaker 1: loans because if they make loans and then the posits

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Speaker 1: flow out, they have to solve securities and have to

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Speaker 1: make losses. So I think that the first thing they

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Speaker 1: do for sure is not make new loans, and then

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Speaker 1: probably they're going to try to slowly divest their securities

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Speaker 1: when they can. We saw there was an article on

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Speaker 1: the ft showing that at the beginning of the year,

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Speaker 1: cash over assets in banks were particularly law and they

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Speaker 1: say this is the cause of the current crisis, and no, no,

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Speaker 1: this is an effect or the fact that we have

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Speaker 1: a withdrawal of the posits, and so banks don't want

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Speaker 1: to divest the securities at the loss. So what they

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Speaker 1: do is they reduce the cash they have the deposits.

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Speaker 1: Let's touch on them. You've been highly critical at the

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Speaker 1: Federal Reserve. I'll be the last in line to defend

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Speaker 1: the Federal Reserve, so let me be clear about that.

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Speaker 1: But we need to talk about the role of the

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Speaker 1: banks and all of this. You could only credit the

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Speaker 1: and for the way the banks have been run. Look,

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Speaker 1: I think that if you don't expect some bankers to

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Speaker 1: be stupid, you have not learned the lesson. It's just

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Speaker 1: green Span were surprised. Yeah, we're surprised how little people

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Speaker 1: were trying to do the right thing, even if they

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Speaker 1: had the writing centers. So we learn that people make mistakes.

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Speaker 1: A resilient system is a system that can bear the

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Speaker 1: mistakes of individual bankers, especially when these bankers are not

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Speaker 1: the CEO of JP Morgan. If I go and open

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Speaker 1: an account this morning, if we went out at least

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Speaker 1: for a night and I open a joint account. It's

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Speaker 1: a valance account without Tom's name on it, because we

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Speaker 1: know what would happen to the cash. But that's another story.

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Speaker 1: They'd probably offer a zero percent one of the big names. Still,

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Speaker 1: we've got Barclays out in the last twenty four hours

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Speaker 1: saying that money market funds could go up another one

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Speaker 1: point five trillion. Do you think they concern right now

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Speaker 1: at the banks is return off capital or return on capital?

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Speaker 1: And can they prevent deposit flight by quite simply just

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Speaker 1: putting up interest rates on deposits. No, they can't. They

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Speaker 1: don't have the return to do that. If you look

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Speaker 1: at the Silicon Valley Bank, if they had increased their

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Speaker 1: return on their deposits by I think seventy five business points,

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Speaker 1: they would have wiped out all the profits last year.

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Speaker 1: So I don't think that they have a return on

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Speaker 1: assets to justify a higher deposits. That's the conundrum. If

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Speaker 1: the problem was solved simply by increasing rates would be easy,

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Speaker 1: but they cannot afford to. So you're saying this banking

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Speaker 1: system does not work with rates of four percent plus?

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Speaker 1: Is that basically what you're saying? Yes? So does the

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Speaker 1: fat have to cut interest rates and then we just

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Speaker 1: have that tolerate inflation. That first of all, I think

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Speaker 1: the inflation might not be as big of a problem

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Speaker 1: if we get into a recession. I think the recession

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Speaker 1: would do the job. Now, that was not the plan

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Speaker 1: of the FAT was a soft landing, not crashing the

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Speaker 1: banking sector. But that's the part that they should have seen.

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Speaker 1: But so let's just put this in a perspective in

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Speaker 1: terms of bad news being bad news, which seems to

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Speaker 1: be the you seem in markets right now. How much

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Speaker 1: is what you're talking about underpinning that that there is

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Speaker 1: an imminent tension that's going to perhaps accelerate some sort

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Speaker 1: of economic downturn because the banking system just is not

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Speaker 1: going to function at these rates. I think that that

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Speaker 1: is the underlying bad news. Now, this is tempered by

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Speaker 1: the fact that this will come with a reduction in

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Speaker 1: interest rates, and as we know, that compensates some of

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Speaker 1: the problems. So I think that the real tension is

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Speaker 1: the FED will not raise interest rate modes, will probably

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Speaker 1: at some point count them, and that is there going

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Speaker 1: to be enough to transform what is likely to be

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Speaker 1: a hard lending into a more soft lending. That's the

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Speaker 1: question I think that we are softening up and there

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Speaker 1: will be a lending At this point in my way,

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Speaker 1: there is little doubt. The question is how hard let's

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Speaker 1: finish where we started. The changes you want to say,

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Speaker 1: the changes you want to see over time, But I

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Speaker 1: want to talk about the changes you want to say

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Speaker 1: in the nice couple of months. What would you like

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Speaker 1: to see announced. From the point of view of the

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Speaker 1: fat of the government for the Federal Reserve, I think

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Speaker 1: that a serious analysis of what are the softness in

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Speaker 1: the banking sector. I think that was a regulatory failure

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Speaker 1: and the FAD needs to own it and change. And two,

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Speaker 1: I think that be honest about the fact that probably

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Speaker 1: we need to soften up into at rates because the

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Speaker 1: banking crisis is coming, and trying to find way to

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Speaker 1: soften up this banking crisis, especially I think for landing

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Speaker 1: of the mill a small and medium businesses because those

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Speaker 1: are the one affected the most. You said, be honest.

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Speaker 1: It implies that they know, but they're not saying it

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Speaker 1: to truly believe that I don't know what you know.

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Speaker 1: You can be honest and being wrong, And I think

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Speaker 1: sometimes people believe their own view of the world. I

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Speaker 1: think that I honestly did not understand the twenty five

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Speaker 1: business points increase last meeting. I thought that was just

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Speaker 1: a signal to say, I want to reassure the things

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Speaker 1: are not as bad as they might be. Was not

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Speaker 1: determined by the objective situation. Again, but I've been wrong before,

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Speaker 1: I can be wrong now. I just wonder whether there's

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Speaker 1: a role of regional banks anymore, which are such a

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Speaker 1: mainstay of lending. I mean, basically under your paradigm. Not really, No,

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Speaker 1: there is a very important role of regional banks because

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Speaker 1: we know that small businesses don't borrow the large distance.

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Speaker 1: They depend on local banks, and particularly also minorities depend

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Speaker 1: dramatically on, for example, minority banks. I had the students

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Speaker 1: who went on the market this year showing how important

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Speaker 1: is bank ownership in determining who gets the loans. So

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Speaker 1: I think we cannot say we only go with a

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Speaker 1: few large banks, because that means a complete change in

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Speaker 1: the US economy. This was so good. You can promote

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Speaker 1: your podcast what's the code? Capital isn't? What is working

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Speaker 1: in capitalism? And what isn't nice? Where do I find

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Speaker 1: that anywhere? You get your podcast? From there we go.

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Speaker 1: That's perfect. You were that good that. He basically was like,

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Speaker 1: you know, go for it. You have won yourself an

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Speaker 1: advertising second promo. You'll get in trouble with care for

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Speaker 1: a now given that away, Luigi. Thank you. This was fantastic.

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Speaker 1: Thank you, Luis. She's in Ghanas there of the university.

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Speaker 1: If she can't go to school of business, Wiseman regret

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Speaker 1: my currency strategistic aquarium already, Terry, thanks for VIM, sir,

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Speaker 1: I'm going to see you. This from Towson Slot literally

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Speaker 1: just moments ago in my inbox, he said. The credit

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Speaker 1: crunch has started. He said, a survey of seventy one

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Speaker 1: banks in the Dallas FED District, done after SVB went

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Speaker 1: under shows of dramatic reversal and nine volumes. The FED

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Speaker 1: survey was carried out from March twenty one to twenty nine.

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Speaker 1: Do you agree with that statement the credit crunch has started. Yes, absolutely.

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Speaker 1: I want to call it a credit crunch. You might

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Speaker 1: want to credit call it a credit crumble, but the

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Speaker 1: direction I think is un ambiguous. And I would add

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Speaker 1: here that it's not just about the part of leaving

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Speaker 1: the system right deposits can you come out of the

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Speaker 1: small banks and they can find their way into the

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Speaker 1: large banks, they can find their way into money market funds.

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Speaker 1: In fact, the system has a way of recycling those

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Speaker 1: deposits and potentially bringing them back to the small banks,

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Speaker 1: especially if the government leans on the large banks to

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Speaker 1: recycle those deposits, as we saw with the First Republic situation.

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Speaker 1: I'm not so much concerned about the flight of deposits

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Speaker 1: as the origin ideology of a credit crunch or credit

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Speaker 1: carbal I'm much more concerned with the regulatory overhang. I'm

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Speaker 1: concerned with the fact that Congress is going to be

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Speaker 1: doing compensation call backs, at least considering that for bank

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Speaker 1: CEOs that get themselves or their or their balance sheets

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Speaker 1: into trouble. I'm worried about the more variegated stress tests

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Speaker 1: stressing the banks for duration mismatches. I'm worried about the

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Speaker 1: banks going back into their balance sheets looking at very

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Speaker 1: and scrutinizing them. I'm worried about the regulators doing the

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Speaker 1: same for the banks. I think that is going to

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Speaker 1: cause an overhang of concern, of worry, of less risk

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Speaker 1: taking in the banking community. That's what's going to drive

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Speaker 1: the credit crunch or credit crumbled, not the flight of

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Speaker 1: the posits necessarily if there is a flight of deposits,

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Speaker 1: all right, then we're talking about not just a credit crumble,

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Speaker 1: but a real credit crunch. Okay, two questions. One policy consequences,

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Speaker 1: well the Fed does ultimately in the coming months. And

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Speaker 1: to market outcomes, How are you thinking about those two

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Speaker 1: things now? So the good thing with regard to market

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Speaker 1: outcomes is we've gotten ten year yields coming down, right,

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Speaker 1: and I think to some extent that's supporting multiples. But

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Speaker 1: I'm afraid about the market because if you have a

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Speaker 1: credit slowdown and you have an economic slowdown that follows

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Speaker 1: from it, you're going to have an earning slowdown. You're

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Speaker 1: going to have a revenue slowdown, effectively an operating slowdown.

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Speaker 1: In the corporate world, we're already seeing that with what

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Speaker 1: happened with the Manufacturing Ism survey and the high Headline Index.

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Speaker 1: When it falls to the levels it fell in the

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Speaker 1: March report, it's typically historically associated with a big declining

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Speaker 1: growth in corporate revenues, with a big declining growth in

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Speaker 1: corporate earnings. It's also associated with negative revisions from bottom

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Speaker 1: up analysts who cover companies in the five hundred and

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Speaker 1: the broader indexes so that's what's in front of us

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Speaker 1: right now. Now there could be multiple elevation or because

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Speaker 1: of the low yields, which you can't expect the market

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Speaker 1: to do well in the context of downward revisions and earrings,

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Speaker 1: and I think we're just on the verge of seeing

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Speaker 1: that start. Just to sort of underscore your point, do

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Speaker 1: you agree with professors in Galis that this banking system

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Speaker 1: cannot handle rates where they are? No, and I'm going

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Speaker 1: to qualify it. I would have said something different. I

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Speaker 1: would have said, the banking system cannot handle a very speedy,

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Speaker 1: aggressive and abrupt increase it interest rates to four percent.

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Speaker 1: If any economic agent, not just banks, any borrowers, any creditors,

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Speaker 1: get accustomed to very low interest rates and expect those

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Speaker 1: to continue, that their behavior is going to accommodate to

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Speaker 1: those low interest rates, and when interest rates rise by

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Speaker 1: a lot, that behavior is going to suddenly be forced

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Speaker 1: to shift, maybe because of what happens in their balance sheets.

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Speaker 1: Duration mismatch with the banks is a good example. So

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Speaker 1: it's not the level of interest rate that matters. We've

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Speaker 1: had percent interest rates in the past. We've glided through

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Speaker 1: that pretty comfortably, not necessarily associated with a lot of

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Speaker 1: inflation or low inflation. What has troubled me and I

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Speaker 1: think what is troubling the economy right now, and certainly

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Speaker 1: the credit economy, is the rapidity which interest rates ever risen.

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Speaker 1: That is what is unprecedented, not the fact that interest

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Speaker 1: rates at four percent. Translate this into the global market.

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Speaker 1: A lot of people are looking at signs that perhaps

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Speaker 1: things are cracking a bit more in the US than

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Speaker 1: in Europe, and that things are slowing down as a

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Speaker 1: sign that Europe is strong and go into European assets.

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Speaker 1: Do you disagreed? Do you think that they're just six

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Speaker 1: months behind the US and that they're going to see

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Speaker 1: the sort of tensions emerge in the economy at the

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Speaker 1: same kind of pace based on some of their outside

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Speaker 1: rate high There something to be said for the synchronicity

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Speaker 1: of business cycles around the world. If the US slows down,

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Speaker 1: it's almost impossible that Europe will completely escape the impact

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Speaker 1: of a US slowdown. But Europe's got a good things

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Speaker 1: happening as well. First, we'll keep in mind that it

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Speaker 1: was in its duldrums and it was in its slump

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Speaker 1: in the fourth and third quarters of last year. So

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Speaker 1: it's coming off a low base, and when you come

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Speaker 1: off a low, you know, you can't imagine that it's

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Speaker 1: going to be hit hard unless there's another shock. And

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Speaker 1: I have to imagine it's going to have to be

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Speaker 1: more than a credit crumble in the US. China's recovering,

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Speaker 1: that's going to help Europe. Right, there's the prospect that

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Speaker 1: the initial shock of the war through the energy price

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Speaker 1: mechanism has faded. Certainly, natural gas prices globally are low,

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Speaker 1: oil prices relatively low. The things that hurt Europe in

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Speaker 1: the third quarter, in the fourth quarter of last year

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Speaker 1: are no longer there. At the same time, the things

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Speaker 1: that are about to start hurting the US specifically this

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Speaker 1: credit crunch credit crumble are on the verge of starting

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Speaker 1: that doll a positive or negative. It's dollar, it's dollar negative.

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Speaker 1: There's something to be said for the idea that a

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Speaker 1: global recession helps the dollar. I think that's an old

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Speaker 1: way of thinking. I think I think astolato caters have

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Speaker 1: gotten more sophisticated over time. They can make distinctions between

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Speaker 1: growth rates and the first order you know, second order

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Speaker 1: growth rates around the world, and comparisons between them relative

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Speaker 1: growth rates. I mean, and when you know We're going

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Speaker 1: to start to see this divergence, indicated by the fact

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Speaker 1: that the surprise index in the US is heading down

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Speaker 1: and the surprising decks and Europe is still going up.

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Speaker 1: I imagine we're going to start to see a weaker dollar.

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Speaker 1: We've already seen it right in March. We've already seen

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Speaker 1: a weaker dollar. But I think there's room here for

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Speaker 1: the euro to get even higher than break above the

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Speaker 1: one ten level. We're already seen with Sterling. It got above.

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Speaker 1: It's it's um, it's twenty twenty three highs already, right,

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Speaker 1: and the next September and the next and the next,

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Speaker 1: the next shoe to drop maybe dollar yen right. Um.

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Speaker 1: We'll hear more from presently from the boj once the

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Speaker 1: new government takes over. But these are these are the

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Speaker 1: consequences of effectively of of of the weaker US situation

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Speaker 1: compared to the rest of the world's studing right now,

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Speaker 1: very close to one twenty five. Terry, this was great,

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Speaker 1: Thank you, Terry Weisman there of mcquarie. Jenny Norman joins

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Speaker 1: us now the kind of director at the UCR Center

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Speaker 1: on US Politics. Jenny, can we start there just the

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Speaker 1: difference of approach between the Europeans and the US to

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Speaker 1: tension with China at the moment. Sure, So there's a

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Speaker 1: couple of things to note here. First, even though the

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Speaker 1: writer reckon US and many policies are very tough on

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Speaker 1: China from both parties, you know, our trade relationship is

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Speaker 1: still the highest ever been with China as well, So

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Speaker 1: it's not just Europe that's keeping that economic back and

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Speaker 1: forth going. That's very true for the US right now

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Speaker 1: as well. And i'd say even Europe is not a

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Speaker 1: fully unified block on this. Macrone is extending much more

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Speaker 1: open hand than his co traveler or slave underlying, who

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Speaker 1: has been a bit more tough on China and her talk,

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Speaker 1: especially on China's approach to Ukraine. So I would say

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Speaker 1: a lot of diversity between kind of both sides of

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Speaker 1: the Atlantic. But for the US, you know, I would

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Speaker 1: say the fact that Europe is perhaps being a bit

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Speaker 1: more open handed with China, especially through Macrone, could actually

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Speaker 1: be an advantage. I mean, the Biden administration has had

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Speaker 1: a sort of three prong approach to China like cooperate

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Speaker 1: when we can, compete when we should, and confront when

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Speaker 1: we must. And the cooperation piece has obviously been the

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Speaker 1: trickiest of late, and if you can have Europe keeping

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Speaker 1: that door open, I do think that's somewhat important for

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Speaker 1: preventing what could be again this increasing alliance really between

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Speaker 1: China and Russia. What we don't want to see is

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Speaker 1: a cold war that's built on a sense of grievance

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Speaker 1: towards the West and towards the US, And so France

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Speaker 1: might be kind of the good cop keeping that door

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Speaker 1: open for the time being, What does that do to

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Speaker 1: US European relations Because at a certain point I understand

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Speaker 1: the good cop bad cop kind of dichotomy here, but

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Speaker 1: this isn't something that US multinational companies can really depend on.

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Speaker 1: And we've already seen reports that Apple is quietly trying

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Speaker 1: to shift its supply chains. How much does this create

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Speaker 1: a liability for the US and frankly create a real

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Speaker 1: fissure in that alliance. Well it could, But I think again,

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Speaker 1: what we're seeing both the US and Europe trying to

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Speaker 1: do is on couple, as we're saying, in these key sectors,

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Speaker 1: but also just very pragmatically knowing that you can't just

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Speaker 1: completely cut off this economic relationship with China. So I

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Speaker 1: think we'll see this pressure sectorally, but at the same

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Speaker 1: time recognizing that some trade relations are going to keep

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Speaker 1: going through. So again we see France, you know, probably

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Speaker 1: moving forward on the airbus production on that kind of deal,

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Speaker 1: at the same time scaling back on other kinds of

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Speaker 1: technology where there is more concern around security or surveillance.

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Speaker 1: So I think some of that will be on par

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Speaker 1: between the two countries. But again, as this essentially you know,

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Speaker 1: deepening a riff between the US and China continues, I

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Speaker 1: do that becoming a bigger sticking point, but I don't

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Speaker 1: think we're quite there yet. John asked me a really

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Speaker 1: good question that I gave a pretty bad answer to

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Speaker 1: just a couple of minutes ago, where he said, did

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Speaker 1: China truly show restraint with the Kevin McCarthy meeting with

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Speaker 1: Taiwanese president? Is that really what we saw or is

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Speaker 1: there potentially more to come and potentially a bigger and

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Speaker 1: broader consequence. Well, I think you were right LEAs in

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Speaker 1: saying we heard a lot of right direct from China,

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Speaker 1: a lot of pushback in in terms of verbal comments

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Speaker 1: to this, and there was some movement, you know, one

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Speaker 1: Chinese naval vessel going through the straight yesterday, some Coast

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Speaker 1: Guard activities, but nothing like the war games and military

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Speaker 1: movements that we saw back in August when Pelosi went

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Speaker 1: and you I think, as you note, it's partly because

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Speaker 1: the meeting was on US soil, it wasn't taking place

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Speaker 1: in Taiwan. The fact that you are having a head

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Speaker 1: of state visit with McCrone having a massive military build

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Speaker 1: but at the same time is not really the best look.

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Speaker 1: And moreover, this is really a long game for China,

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Speaker 1: and I think Taiwanese presidents say was very clear about

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Speaker 1: that when she was making her comments in the US

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Speaker 1: that China is seeing this as a ongoing effort and

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Speaker 1: they're working through all different kinds of tactics to put

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Speaker 1: pressure on Taiwan, not just military. And so this is

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Speaker 1: something that I think is just gonna be very drawn out,

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Speaker 1: and not just through these big headline grabbing movements that

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Speaker 1: China did back in August. So, Judy, you don't see

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Speaker 1: anything big happening anytime soon from China towards Taiwan. Well,

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Speaker 1: I would say I'm not overly alarmoust about it at

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Speaker 1: this point. I mean, right now, I think China has

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Speaker 1: a certain interest in not completely upsetting things, especially as

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Speaker 1: they are trying to kind of regain their position in

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Speaker 1: the markets, regain themselves. Econ coming out of COVID to

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Speaker 1: completely upset everything with something very provocative on Taiwan, I

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Speaker 1: don't see right away. But again, all this is I

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Speaker 1: think is much faster moving than many of us thought

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Speaker 1: it would be even several months or a year ago.

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Speaker 1: So you know, I don't think any of us predicted

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Speaker 1: what would be happening in Ukraine at this point either.

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Speaker 1: So Julie, do you think that banning TikTok or some

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Speaker 1: sort of more extreme measure in the US changes the game.

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Speaker 1: It's definitely putting the pressure on I would say, I

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Speaker 1: think the middle road of banning TikTok on government devices

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Speaker 1: and that kind of thing, it is probably where the

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Speaker 1: US is best suited to sit right now. I think

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Speaker 1: a blanket ban does get into very tricky waters. One,

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Speaker 1: you just get into a situation of whackamole with any

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Speaker 1: kind of Chinese product that might have these kinds of

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Speaker 1: capabilities over here. And furthermore, it is a bit of

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Speaker 1: a slippery slope for the US to get into to

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Speaker 1: banning to banning platforms, just as China ban some of

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Speaker 1: our platform, so I would say it's a bit of pressure,

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Speaker 1: but I think the US is right to be taking

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Speaker 1: this somewhat cautiously and not moving too quickly on a

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Speaker 1: get ban. Jenny, thanks for this as OWI said brilliant

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Speaker 1: Jenny Norman at the University College London. I am so

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00:22:15,640 --> 00:22:17,919
Speaker 1: glad to help me break this all down. Carra Kadana

433
00:22:18,040 --> 00:22:21,840
Speaker 1: Marcus three sixty, chief US economist at BNP Paraba. Carl,

434
00:22:21,880 --> 00:22:24,720
Speaker 1: wonderful to see you in studio. Your first take on

435
00:22:24,800 --> 00:22:28,200
Speaker 1: the importance of some of this just drumbeat of data

436
00:22:28,280 --> 00:22:30,520
Speaker 1: pointing to a softer labor market. Well, as I was

437
00:22:30,600 --> 00:22:34,000
Speaker 1: thinking about the data dropping before I walked on set,

438
00:22:34,040 --> 00:22:35,919
Speaker 1: I thought, well, you know, the rule of thumb is

439
00:22:36,320 --> 00:22:39,000
Speaker 1: claims move up by about ten percent over the prior

440
00:22:39,080 --> 00:22:42,520
Speaker 1: quarter average. That's often kind of an alarming signal that

441
00:22:42,520 --> 00:22:44,520
Speaker 1: you're heading towards recessions. So as I was guessing in

442
00:22:44,600 --> 00:22:46,200
Speaker 1: my mind, well what would that be, I was thinking

443
00:22:46,240 --> 00:22:48,760
Speaker 1: about two hundred and thirty thousand, So we're pretty much

444
00:22:49,320 --> 00:22:52,200
Speaker 1: right there at the kind of level that gets outside

445
00:22:52,200 --> 00:22:54,680
Speaker 1: of any kind of noise and starts to be more

446
00:22:54,680 --> 00:22:57,840
Speaker 1: of a meaningful signal. Of some problems. Now that big

447
00:22:57,840 --> 00:22:59,919
Speaker 1: debate is whether it's a slowdown or a hard stop.

448
00:23:00,400 --> 00:23:03,600
Speaker 1: I don't think this is hard stop evidence just yet. Also,

449
00:23:03,840 --> 00:23:08,040
Speaker 1: I'm just extra sensitive around the interpreting jobless claims in

450
00:23:08,080 --> 00:23:11,600
Speaker 1: the week weeks around the Easter holiday, basically because that's

451
00:23:11,600 --> 00:23:14,720
Speaker 1: when school spring breaks happen, and often we see these

452
00:23:14,800 --> 00:23:17,280
Speaker 1: kind of one off spikes or dips and claims that

453
00:23:17,400 --> 00:23:19,840
Speaker 1: get ironed out in the subsequent weeks. So if we're

454
00:23:19,920 --> 00:23:22,720
Speaker 1: holding at these kinds of levels for a couple of

455
00:23:22,720 --> 00:23:24,800
Speaker 1: weeks and there's not a retracement, then that would be

456
00:23:24,840 --> 00:23:26,840
Speaker 1: more alarming to me that we are starting to see

457
00:23:26,880 --> 00:23:30,359
Speaker 1: the real deterioration in labor conditions that could be pushing

458
00:23:30,400 --> 00:23:33,600
Speaker 1: us to a much weaker pace of economic activity. Is

459
00:23:33,600 --> 00:23:37,360
Speaker 1: that enough for the Federal Reserve to really perhaps cut rates,

460
00:23:37,400 --> 00:23:40,879
Speaker 1: considering that they've been targeting inflation and this doesn't speak

461
00:23:40,960 --> 00:23:45,640
Speaker 1: necessarily to progress in the inflation fight. Well, there's some

462
00:23:45,720 --> 00:23:48,360
Speaker 1: progress in the inflation fight, but it depends where you look,

463
00:23:48,359 --> 00:23:50,160
Speaker 1: and if you look at the part of the inflation

464
00:23:50,200 --> 00:23:53,600
Speaker 1: basket that really matters to the Feds, so core inflation,

465
00:23:53,680 --> 00:23:55,439
Speaker 1: and then let's narrow it even further and look at

466
00:23:55,480 --> 00:23:59,800
Speaker 1: core services. You're not seeing improvement to any material degree

467
00:24:00,240 --> 00:24:02,880
Speaker 1: on that front yet, and that is what is haunting

468
00:24:02,960 --> 00:24:05,960
Speaker 1: FED policymakers in the backs of their minds, as they

469
00:24:06,040 --> 00:24:08,480
Speaker 1: realize that is what has to break to really be

470
00:24:08,560 --> 00:24:12,240
Speaker 1: back on a path towards US sustainable path towards two percent.

471
00:24:12,800 --> 00:24:14,560
Speaker 1: We are not seeing that in the data now. If

472
00:24:14,600 --> 00:24:18,119
Speaker 1: the labor market is slowing, that is a key factor

473
00:24:18,119 --> 00:24:20,120
Speaker 1: that we need to see to move in that direction.

474
00:24:20,200 --> 00:24:22,840
Speaker 1: But again, one week in jobless claims is not there.

475
00:24:23,640 --> 00:24:25,760
Speaker 1: We saw some cracks in the facade in the last

476
00:24:25,840 --> 00:24:29,320
Speaker 1: jobs report. You saw finance actually looking pretty weak. You

477
00:24:29,359 --> 00:24:32,639
Speaker 1: saw manufacturing starting to look up a week as well,

478
00:24:32,680 --> 00:24:35,360
Speaker 1: and so I think those trends will continue. It's not

479
00:24:35,400 --> 00:24:37,760
Speaker 1: necessarily that tomorrow's jobs report is going to be the

480
00:24:37,880 --> 00:24:40,320
Speaker 1: key one. Right. The survey week was actually the same

481
00:24:40,359 --> 00:24:42,560
Speaker 1: week that we had all the stresses in the in

482
00:24:42,640 --> 00:24:45,840
Speaker 1: mid March in the banking sector. I think it'll take

483
00:24:45,840 --> 00:24:49,240
Speaker 1: a month or two for that fallout to really start

484
00:24:49,240 --> 00:24:51,520
Speaker 1: to show up in economic data. But the direction of

485
00:24:51,520 --> 00:24:54,240
Speaker 1: travel is pretty clear here. When we talk about what

486
00:24:54,320 --> 00:24:56,160
Speaker 1: we got in terms of the past week, I want

487
00:24:56,200 --> 00:24:58,800
Speaker 1: also talk about revisions we just got those as well.

488
00:24:59,040 --> 00:25:01,719
Speaker 1: They just populated one hundred and forty six thousand. It

489
00:25:01,760 --> 00:25:04,320
Speaker 1: was revised upward from one hundred and ninety eight thousand.

490
00:25:04,560 --> 00:25:07,560
Speaker 1: The total number of continuing claims also revised upward from

491
00:25:07,640 --> 00:25:10,720
Speaker 1: last week from one point is six to eight million

492
00:25:10,840 --> 00:25:13,960
Speaker 1: to one point eight million. So this is a couple

493
00:25:14,000 --> 00:25:16,120
Speaker 1: weeks in a row now that there is an elevated

494
00:25:16,200 --> 00:25:20,439
Speaker 1: number of initial jobless claims. Is that significant for you

495
00:25:20,520 --> 00:25:23,879
Speaker 1: that the upward revisions are now the wrong side that

496
00:25:23,880 --> 00:25:26,600
Speaker 1: we're seeing in my second highlighted the economic data surprise

497
00:25:26,680 --> 00:25:29,080
Speaker 1: Index earlier on the show, and I think that does

498
00:25:29,119 --> 00:25:32,399
Speaker 1: tell us something about how what's happening to the data

499
00:25:32,520 --> 00:25:35,600
Speaker 1: and how forecasters are thinking about the data. Right, So,

500
00:25:35,760 --> 00:25:37,600
Speaker 1: you know, there is a moment. We've had this extended

501
00:25:37,640 --> 00:25:43,800
Speaker 1: stretch where non farm payrolls continually surprise relative to consensus expectations,

502
00:25:43,800 --> 00:25:45,680
Speaker 1: and it's been going on for many, many months now.

503
00:25:46,119 --> 00:25:48,360
Speaker 1: Eventually it's going to have to go in the other direction,

504
00:25:48,400 --> 00:25:50,720
Speaker 1: and I think we're getting close to that point. Again.

505
00:25:51,320 --> 00:25:53,560
Speaker 1: I think things were too fast moving in March for

506
00:25:53,600 --> 00:25:56,240
Speaker 1: this to really show up in tomorrow's payroll print, but

507
00:25:56,280 --> 00:25:58,240
Speaker 1: I think we will see it much more evident in

508
00:25:58,320 --> 00:26:01,359
Speaker 1: the second quarter. Okay, you say, well, and actually, before

509
00:26:01,400 --> 00:26:03,200
Speaker 1: we move on, if we can stick with the theme

510
00:26:03,240 --> 00:26:06,400
Speaker 1: of data and revisions, something that I think slipped under

511
00:26:06,400 --> 00:26:10,240
Speaker 1: the radar screen last Thursday was the third print on

512
00:26:10,320 --> 00:26:12,600
Speaker 1: Q four GDP, which everyone says, it's a third print,

513
00:26:12,640 --> 00:26:15,520
Speaker 1: why pay attention to it? But in Q four that's

514
00:26:15,520 --> 00:26:19,320
Speaker 1: our first look at economy wide corporate profits and it's

515
00:26:19,320 --> 00:26:23,280
Speaker 1: a pretty uncomfortable trend that we see in the economy

516
00:26:23,280 --> 00:26:26,560
Speaker 1: wide corporate profits data. A year ago, it was growing

517
00:26:26,600 --> 00:26:29,160
Speaker 1: something like twenty percent, twenty two percent year on year.

518
00:26:29,800 --> 00:26:32,880
Speaker 1: In the last quarter, it contracted by about two percent

519
00:26:33,560 --> 00:26:35,760
Speaker 1: in the fourth quarter, so it's only growing two percent

520
00:26:35,880 --> 00:26:38,719
Speaker 1: year on year, so a big deceleration. And that profit

521
00:26:38,760 --> 00:26:43,040
Speaker 1: trend drives hiring, it drives investment, it drives business decision making.

522
00:26:43,119 --> 00:26:45,680
Speaker 1: Right now, you can see equity futures lower after that data,

523
00:26:45,760 --> 00:26:48,399
Speaker 1: just marginally lower for the SMP, but futures on the

524
00:26:48,480 --> 00:26:50,760
Speaker 1: NASDAC you can see lower by about four tenths of

525
00:26:50,760 --> 00:26:53,879
Speaker 1: a percent. From your perspective, you said March, the events

526
00:26:53,880 --> 00:26:56,440
Speaker 1: that we saw last month, I imagine you're talking about

527
00:26:56,440 --> 00:26:59,840
Speaker 1: Silicon Valley Bank and some of the bank fissures that

528
00:27:00,040 --> 00:27:02,760
Speaker 1: we saw. How much do you think that that really

529
00:27:02,800 --> 00:27:06,520
Speaker 1: did change the land escape and accelerate the potential downturn

530
00:27:06,720 --> 00:27:09,360
Speaker 1: that this economy could see. Well, we know it's creating

531
00:27:09,480 --> 00:27:13,320
Speaker 1: some tightening of financial conditions or credit conditions in the economy,

532
00:27:13,359 --> 00:27:15,920
Speaker 1: and that's going to take some time for that to

533
00:27:15,960 --> 00:27:18,520
Speaker 1: actually show up in the real macro data. So all

534
00:27:18,560 --> 00:27:22,639
Speaker 1: eyes are on the Q one Senior Lending Officer Opinion Survey,

535
00:27:22,720 --> 00:27:25,679
Speaker 1: the SLUICE. Unfortunately, we don't get that until after the

536
00:27:25,720 --> 00:27:28,560
Speaker 1: FED meeting unless they decided to publish it early, but

537
00:27:28,640 --> 00:27:31,679
Speaker 1: we'll get little glimpses of what the sluice could look like.

538
00:27:31,720 --> 00:27:34,320
Speaker 1: There was some survey data out of the Dallas Fed

539
00:27:34,359 --> 00:27:38,640
Speaker 1: earlier this morning. Also, we have bank earning seasons basically

540
00:27:38,680 --> 00:27:42,080
Speaker 1: starting next Friday and then the week after that continuing

541
00:27:42,080 --> 00:27:44,400
Speaker 1: with a lot of the regional banks reporting, and so

542
00:27:44,680 --> 00:27:48,000
Speaker 1: probably from those earnings calls in the tone of the discussions,

543
00:27:48,520 --> 00:27:51,240
Speaker 1: we might get little glimpses of what that sluice will

544
00:27:51,320 --> 00:27:53,280
Speaker 1: ultimately look like in early May. How much are you

545
00:27:53,320 --> 00:27:56,359
Speaker 1: looking at those types of surveys and official data, and

546
00:27:56,440 --> 00:27:58,760
Speaker 1: how much are you looking at corporate earnings in a

547
00:27:58,760 --> 00:28:01,399
Speaker 1: way that you hadn't before, not just the numbers, but

548
00:28:01,520 --> 00:28:04,240
Speaker 1: also the guidance that you're getting from corporate executives seeing

549
00:28:04,280 --> 00:28:07,919
Speaker 1: things moving in real time and confidence deteriorating pretty quickly

550
00:28:08,040 --> 00:28:11,440
Speaker 1: in a fast moving, fluid environment. Often the macro data

551
00:28:11,560 --> 00:28:13,360
Speaker 1: is slow to catch up, and so you have to

552
00:28:13,400 --> 00:28:16,040
Speaker 1: pay attention on what is the what is the driver

553
00:28:16,119 --> 00:28:17,879
Speaker 1: of the narrative at the moment, And at the moment,

554
00:28:17,880 --> 00:28:20,240
Speaker 1: it is that stress and kind of mid tier and

555
00:28:20,320 --> 00:28:23,679
Speaker 1: smaller regional banks that really is a primary focus. And

556
00:28:23,720 --> 00:28:26,480
Speaker 1: so that kind of anecdotal data, whether it's the Beige Book,

557
00:28:26,520 --> 00:28:30,320
Speaker 1: whether it's bank earnings calls, or just simply reporting in

558
00:28:30,320 --> 00:28:32,840
Speaker 1: the newspaper and on the Bloomberg terminal about what's happening

559
00:28:32,840 --> 00:28:35,479
Speaker 1: in those sectors really becomes that much more important. And

560
00:28:35,520 --> 00:28:38,000
Speaker 1: that's true for FED officials, it's true for FED watchers,

561
00:28:38,000 --> 00:28:40,720
Speaker 1: it's true for market participants. Given some of the shifts

562
00:28:40,720 --> 00:28:42,800
Speaker 1: that we've seen over the past few weeks, how much

563
00:28:42,840 --> 00:28:45,640
Speaker 1: have you changed your view for this year? So in

564
00:28:45,760 --> 00:28:47,720
Speaker 1: light of the banking stresses we had, you know, I

565
00:28:48,000 --> 00:28:52,760
Speaker 1: agree with Chair pale general assessment that now banked credit

566
00:28:53,000 --> 00:28:55,040
Speaker 1: tightening will do some of the work for the FED.

567
00:28:55,080 --> 00:28:58,280
Speaker 1: And so as we modeled that out. Basically we came

568
00:28:58,280 --> 00:29:00,520
Speaker 1: to the conclusion it was equivalent to about fifty basis

569
00:29:00,560 --> 00:29:03,440
Speaker 1: points of tightening. So we had a terminal funds call

570
00:29:03,480 --> 00:29:06,480
Speaker 1: of five seventy five. We dialed that back to five

571
00:29:06,640 --> 00:29:08,960
Speaker 1: twenty five in light of that kind of you know,

572
00:29:09,000 --> 00:29:12,000
Speaker 1: looking at through it a couple of different modeling exercises,

573
00:29:12,000 --> 00:29:14,320
Speaker 1: but one simple way is to look at financial conditions

574
00:29:14,360 --> 00:29:17,640
Speaker 1: and kind of what has happened in the fallout of SVB.

575
00:29:18,000 --> 00:29:20,920
Speaker 1: And what's interesting to note here is that a lot

576
00:29:20,960 --> 00:29:23,959
Speaker 1: of that tightening has backtracked. Right, About half of the

577
00:29:23,960 --> 00:29:28,240
Speaker 1: tightening of financial conditions has unwound in the weeks afterwards,

578
00:29:28,240 --> 00:29:30,880
Speaker 1: where we saw this is not a giant systemic problem

579
00:29:30,920 --> 00:29:34,680
Speaker 1: that is really you echoing the scary tones of two

580
00:29:34,720 --> 00:29:38,080
Speaker 1: thousand and eight, but rather it could prove to be

581
00:29:38,120 --> 00:29:41,800
Speaker 1: an isolated or a relatively isolated incident, So there are

582
00:29:41,840 --> 00:29:44,920
Speaker 1: long term consequences. Banks are acting more cautiously. I think

583
00:29:44,920 --> 00:29:47,680
Speaker 1: we'll see that as a key theme during earning season,

584
00:29:48,440 --> 00:29:52,880
Speaker 1: but we have to be careful not to over interpret

585
00:29:53,080 --> 00:29:55,080
Speaker 1: what's happening. So what's the read through in terms of

586
00:29:55,120 --> 00:29:58,520
Speaker 1: the real economy and what kind of downturn the economy

587
00:29:58,560 --> 00:30:01,240
Speaker 1: could enter later this Well, let's go back to the

588
00:30:01,320 --> 00:30:05,200
Speaker 1: beginning of our discussion, which was that core service inflation

589
00:30:05,480 --> 00:30:08,600
Speaker 1: is not showing improvement, and we shouldn't expect it to

590
00:30:08,600 --> 00:30:11,720
Speaker 1: show improvement until we see some softening in labor conditions.

591
00:30:12,160 --> 00:30:16,840
Speaker 1: It's very unlikely that we can walk the tight wire,

592
00:30:17,440 --> 00:30:19,840
Speaker 1: the very narrow path to get to a soft landing

593
00:30:19,840 --> 00:30:22,160
Speaker 1: in this environment, especially now that we're saying, oh, banks

594
00:30:22,160 --> 00:30:23,840
Speaker 1: are doing some of the tightening for the FED. It

595
00:30:23,880 --> 00:30:25,920
Speaker 1: was hard enough to understand the long and variable leg

596
00:30:25,960 --> 00:30:27,920
Speaker 1: from the FED let alone, now when we have this

597
00:30:28,000 --> 00:30:31,000
Speaker 1: kind of phantom factor, which is this tightening of bank

598
00:30:31,480 --> 00:30:34,840
Speaker 1: credit conditions. So our view is that really to get

599
00:30:34,840 --> 00:30:38,240
Speaker 1: inflation from the levels they're at down towards a two

600
00:30:38,240 --> 00:30:41,480
Speaker 1: percent path really will take a recession in the economy

601
00:30:41,480 --> 00:30:44,160
Speaker 1: to loosen those labor conditions. You see hints of that today.

602
00:30:44,240 --> 00:30:46,320
Speaker 1: I'm not saying we're there yet. Our view is more

603
00:30:46,360 --> 00:30:48,400
Speaker 1: that recession would be a second half of the year

604
00:30:48,480 --> 00:30:51,800
Speaker 1: story that said Q two, we're looking for GDP growth

605
00:30:51,800 --> 00:30:54,320
Speaker 1: of about one percent, so it's a growth recession ahead

606
00:30:54,360 --> 00:30:58,160
Speaker 1: of a recession. It will start to feel increasingly recessionary.

607
00:30:58,280 --> 00:31:00,400
Speaker 1: We see it in this week's claims data. You saw

608
00:31:00,400 --> 00:31:02,960
Speaker 1: it in the IM, you saw it in the manufacturing ism.

609
00:31:03,120 --> 00:31:05,560
Speaker 1: It's just going to, I think, continue to snowball, and

610
00:31:05,600 --> 00:31:07,520
Speaker 1: just if you're just joining it, just to reiterate, we

611
00:31:07,560 --> 00:31:10,520
Speaker 1: did see an upside surprise in initial jobless claims for

612
00:31:10,520 --> 00:31:12,520
Speaker 1: the past week of two hundred and twenty eight thousand.

613
00:31:12,920 --> 00:31:15,480
Speaker 1: The interesting thing is we also saw an upside revision

614
00:31:15,600 --> 00:31:17,600
Speaker 1: to the prior week. And I keep going back to

615
00:31:17,600 --> 00:31:21,720
Speaker 1: this because it's substantial. We're talking almost fifty thousand jobs

616
00:31:21,920 --> 00:31:24,440
Speaker 1: that were not accounted for in terms of initial jobless

617
00:31:24,440 --> 00:31:27,200
Speaker 1: claims last week that was revised and put into the data.

618
00:31:27,280 --> 00:31:30,000
Speaker 1: So just a sense of ongoing softening. You talked a

619
00:31:30,000 --> 00:31:32,560
Speaker 1: little bit, Carl about how it's going to feel painful,

620
00:31:32,600 --> 00:31:35,400
Speaker 1: and the soft landing concept is really not in the

621
00:31:35,440 --> 00:31:39,040
Speaker 1: cards right now. What is a historical analog in terms

622
00:31:39,040 --> 00:31:41,360
Speaker 1: of periods of time that we can look to for

623
00:31:41,440 --> 00:31:44,520
Speaker 1: some sort of template of what this downturn will look like. Well,

624
00:31:44,760 --> 00:31:48,240
Speaker 1: that's actually very interesting point that I was hoping you'd

625
00:31:48,240 --> 00:31:52,120
Speaker 1: bring up. And I think the maybe interesting parallel is

626
00:31:52,240 --> 00:31:55,880
Speaker 1: continental Illinois. And you're saying what you're wrinkling your brow,

627
00:31:56,480 --> 00:32:00,360
Speaker 1: and for good reason, right Continental Illinois was a bank

628
00:32:00,400 --> 00:32:03,040
Speaker 1: failure in nineteen eighty four. It was the biggest bank

629
00:32:03,080 --> 00:32:06,360
Speaker 1: failure in US history up to Washington Mutual in two

630
00:32:06,360 --> 00:32:08,800
Speaker 1: thousand and eight. And of course, as you know, there

631
00:32:08,880 --> 00:32:12,040
Speaker 1: was no great recession in nineteen eighty five or eighty six, right,

632
00:32:12,080 --> 00:32:14,560
Speaker 1: we went on till nineteen ninety one before there was

633
00:32:14,600 --> 00:32:16,880
Speaker 1: a recession. So John yesterday on the show was talking

634
00:32:16,920 --> 00:32:20,360
Speaker 1: about the long and variable lag of banking crises or

635
00:32:20,440 --> 00:32:23,880
Speaker 1: banking stresses as opposed to monetary policy, and I think

636
00:32:23,880 --> 00:32:27,640
Speaker 1: that's very important. People don't remember Continental Illinois. The FED

637
00:32:27,720 --> 00:32:31,200
Speaker 1: continued tightening, raising the interest rate after the fact, and

638
00:32:31,240 --> 00:32:34,080
Speaker 1: the economy did not succumb into recession. So when everyone

639
00:32:34,240 --> 00:32:36,960
Speaker 1: is just universally saying we're heading into recession because of

640
00:32:36,960 --> 00:32:39,560
Speaker 1: the banking stresses, you know, then we have to put

641
00:32:39,560 --> 00:32:41,479
Speaker 1: on our contrarian hat and just think a little bit

642
00:32:41,520 --> 00:32:44,640
Speaker 1: more creatively. But that episode tells you it's not fate

643
00:32:44,720 --> 00:32:47,560
Speaker 1: to complete that we're heading into recession. That being said,

644
00:32:47,640 --> 00:32:50,520
Speaker 1: even before the bank stresses, our view was the FED

645
00:32:50,640 --> 00:32:52,680
Speaker 1: is whether it's the banks doing it or the Fed,

646
00:32:52,960 --> 00:32:54,720
Speaker 1: we have to tighten policy to a point where we

647
00:32:54,760 --> 00:32:57,040
Speaker 1: start to break the labor market, and that is recession.

648
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Speaker 1: Calcadana wonderful as always, Thank you so much, it's been

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Speaker 1: too long. Carl Cardono VNP Pariba. We always appreciate us insights.

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