Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoid's along
Speaker 1: with Tom Keane and Jonathan Ferrell. Join us each day
Speaker 1: for insight from the best in economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance undemand on Apple, Spotify and anywhere
Speaker 1: you get your podcasts, and always on Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal and the Bloomberg Business app. Luis Is
Speaker 1: and Galas of the University of Chicago Booth School calling
Speaker 1: for an independent commission to look into the FED rights
Speaker 1: in the following In the last two years, the FED
Speaker 1: has failed twice. It is failed to see inflation coming,
Speaker 1: and it has failed to see the banking crisis coming
Speaker 1: to the nation needs to trustworthy FED to combat inflation.
Speaker 1: The only way to recover this trust is through a transparent,
Speaker 1: independent and authoritative commission whose findings are believable. President Biden
Speaker 1: should appoint such a commission without delay. Luigian please to
Speaker 1: say joins us right now, Luigika Mornic. Is it the
Speaker 1: FED chair fault or is this an institutional problem? I
Speaker 1: think that that's what we need to find out. I
Speaker 1: think I fear that it's an institutional problem or the
Speaker 1: just a German problem. Is easier to replace the German
Speaker 1: than to sort of rethink an institution. But I think
Speaker 1: that is a very consensus institution. So I think the
Speaker 1: failures were shared and something has gone wrong. Is that
Speaker 1: a polite website that's too much group think at the fat?
Speaker 1: I think that definitely is the case. But I think
Speaker 1: maybe maybe there is more. Maybe they're not inough economists.
Speaker 1: This is this is I think a low point on
Speaker 1: the board. I think only half of the PhD so
Speaker 1: in economics. Now you don't need to have a PhD
Speaker 1: in economics, but helps in understanding situation like the one
Speaker 1: where now, what are they getting wrong right now? I
Speaker 1: think that they're getting wrong how unstable the banking system is.
Speaker 1: I think that they have this idea that deposits are sticky,
Speaker 1: and I think that first of all, we have never
Speaker 1: experienced in recent time spread of four under business points
Speaker 1: between what you get on the money market and what
Speaker 1: you get on your deposit. And second, the WAD has changed.
Speaker 1: The posits are mobile, they are really Google say, a
Speaker 1: click away, and so I think that if the posits
Speaker 1: move in search of better eels then banks have to
Speaker 1: realize their losses. The idea of losses automaturity that can
Speaker 1: stay there and not have any impact, I think is
Speaker 1: sort of a fantasy. Well, what do you think the
Speaker 1: FAD should be doing? I mean, at a certain point,
Speaker 1: this is really the consequence of banks not managing their
Speaker 1: assets well enough, isn't it. Or do you really think
Speaker 1: this really lies with the FED? No? I think that
Speaker 1: the FED is a huge responsibility of the fact that
Speaker 1: they should have understood then they couldn't raise rates so fast,
Speaker 1: because when you raise rates so fast, you're going to
Speaker 1: impose losses in the bond market. And who's going to
Speaker 1: bear those losses? Insurance companies then you have to bail
Speaker 1: them out. Banks then you have to them out. So
Speaker 1: unless all the losses are among us investors individual investors,
Speaker 1: then something happens, and so there was an extra reason
Speaker 1: to intervene early on inflation said they were very complacent.
Speaker 1: They said, oh, we have the tools, we're going to
Speaker 1: do it. We let it go a little bit, but
Speaker 1: no worry, because we have the tools. I think that
Speaker 1: their tools were not very sharp, and they should have
Speaker 1: recognized that. How much do you think that the banking
Speaker 1: crisis that people talked about three weeks ago has abated,
Speaker 1: has really sort of moved from some sort of acute
Speaker 1: phase into perhaps a chronic question around flows and with
Speaker 1: respect to credit creation, but not necessarily a crisis. I
Speaker 1: think it's possible and hopefully that this is not going
Speaker 1: to be an open crisis like we've seen in the past. However,
Speaker 1: clearly put a lot of softness in the banking sect,
Speaker 1: particularly regional banks, which we need to remember those are
Speaker 1: the ones who land to small and medium enter prices.
Speaker 1: The large banks tend to do syndicated loans or big firms,
Speaker 1: but the brand and bottom of the economy is with
Speaker 1: the original banks, and they're very soft, and they see
Speaker 1: deposits flowing out, and they are not going to make
Speaker 1: loans because if they make loans and then the posits
Speaker 1: flow out, they have to solve securities and have to
Speaker 1: make losses. So I think that the first thing they
Speaker 1: do for sure is not make new loans, and then
Speaker 1: probably they're going to try to slowly divest their securities
Speaker 1: when they can. We saw there was an article on
Speaker 1: the ft showing that at the beginning of the year,
Speaker 1: cash over assets in banks were particularly law and they
Speaker 1: say this is the cause of the current crisis, and no, no,
Speaker 1: this is an effect or the fact that we have
Speaker 1: a withdrawal of the posits, and so banks don't want
Speaker 1: to divest the securities at the loss. So what they
Speaker 1: do is they reduce the cash they have the deposits.
Speaker 1: Let's touch on them. You've been highly critical at the
Speaker 1: Federal Reserve. I'll be the last in line to defend
Speaker 1: the Federal Reserve, so let me be clear about that.
Speaker 1: But we need to talk about the role of the
Speaker 1: banks and all of this. You could only credit the
Speaker 1: and for the way the banks have been run. Look,
Speaker 1: I think that if you don't expect some bankers to
Speaker 1: be stupid, you have not learned the lesson. It's just
Speaker 1: green Span were surprised. Yeah, we're surprised how little people
Speaker 1: were trying to do the right thing, even if they
Speaker 1: had the writing centers. So we learn that people make mistakes.
Speaker 1: A resilient system is a system that can bear the
Speaker 1: mistakes of individual bankers, especially when these bankers are not
Speaker 1: the CEO of JP Morgan. If I go and open
Speaker 1: an account this morning, if we went out at least
Speaker 1: for a night and I open a joint account. It's
Speaker 1: a valance account without Tom's name on it, because we
Speaker 1: know what would happen to the cash. But that's another story.
Speaker 1: They'd probably offer a zero percent one of the big names. Still,
Speaker 1: we've got Barclays out in the last twenty four hours
Speaker 1: saying that money market funds could go up another one
Speaker 1: point five trillion. Do you think they concern right now
Speaker 1: at the banks is return off capital or return on capital?
Speaker 1: And can they prevent deposit flight by quite simply just
Speaker 1: putting up interest rates on deposits. No, they can't. They
Speaker 1: don't have the return to do that. If you look
Speaker 1: at the Silicon Valley Bank, if they had increased their
Speaker 1: return on their deposits by I think seventy five business points,
Speaker 1: they would have wiped out all the profits last year.
Speaker 1: So I don't think that they have a return on
Speaker 1: assets to justify a higher deposits. That's the conundrum. If
Speaker 1: the problem was solved simply by increasing rates would be easy,
Speaker 1: but they cannot afford to. So you're saying this banking
Speaker 1: system does not work with rates of four percent plus?
Speaker 1: Is that basically what you're saying? Yes? So does the
Speaker 1: fat have to cut interest rates and then we just
Speaker 1: have that tolerate inflation. That first of all, I think
Speaker 1: the inflation might not be as big of a problem
Speaker 1: if we get into a recession. I think the recession
Speaker 1: would do the job. Now, that was not the plan
Speaker 1: of the FAT was a soft landing, not crashing the
Speaker 1: banking sector. But that's the part that they should have seen.
Speaker 1: But so let's just put this in a perspective in
Speaker 1: terms of bad news being bad news, which seems to
Speaker 1: be the you seem in markets right now. How much
Speaker 1: is what you're talking about underpinning that that there is
Speaker 1: an imminent tension that's going to perhaps accelerate some sort
Speaker 1: of economic downturn because the banking system just is not
Speaker 1: going to function at these rates. I think that that
Speaker 1: is the underlying bad news. Now, this is tempered by
Speaker 1: the fact that this will come with a reduction in
Speaker 1: interest rates, and as we know, that compensates some of
Speaker 1: the problems. So I think that the real tension is
Speaker 1: the FED will not raise interest rate modes, will probably
Speaker 1: at some point count them, and that is there going
Speaker 1: to be enough to transform what is likely to be
Speaker 1: a hard lending into a more soft lending. That's the
Speaker 1: question I think that we are softening up and there
Speaker 1: will be a lending At this point in my way,
Speaker 1: there is little doubt. The question is how hard let's
Speaker 1: finish where we started. The changes you want to say,
Speaker 1: the changes you want to see over time, But I
Speaker 1: want to talk about the changes you want to say
Speaker 1: in the nice couple of months. What would you like
Speaker 1: to see announced. From the point of view of the
Speaker 1: fat of the government for the Federal Reserve, I think
Speaker 1: that a serious analysis of what are the softness in
Speaker 1: the banking sector. I think that was a regulatory failure
Speaker 1: and the FAD needs to own it and change. And two,
Speaker 1: I think that be honest about the fact that probably
Speaker 1: we need to soften up into at rates because the
Speaker 1: banking crisis is coming, and trying to find way to
Speaker 1: soften up this banking crisis, especially I think for landing
Speaker 1: of the mill a small and medium businesses because those
Speaker 1: are the one affected the most. You said, be honest.
Speaker 1: It implies that they know, but they're not saying it
Speaker 1: to truly believe that I don't know what you know.
Speaker 1: You can be honest and being wrong, And I think
Speaker 1: sometimes people believe their own view of the world. I
Speaker 1: think that I honestly did not understand the twenty five
Speaker 1: business points increase last meeting. I thought that was just
Speaker 1: a signal to say, I want to reassure the things
Speaker 1: are not as bad as they might be. Was not
Speaker 1: determined by the objective situation. Again, but I've been wrong before,
Speaker 1: I can be wrong now. I just wonder whether there's
Speaker 1: a role of regional banks anymore, which are such a
Speaker 1: mainstay of lending. I mean, basically under your paradigm. Not really, No,
Speaker 1: there is a very important role of regional banks because
Speaker 1: we know that small businesses don't borrow the large distance.
Speaker 1: They depend on local banks, and particularly also minorities depend
Speaker 1: dramatically on, for example, minority banks. I had the students
Speaker 1: who went on the market this year showing how important
Speaker 1: is bank ownership in determining who gets the loans. So
Speaker 1: I think we cannot say we only go with a
Speaker 1: few large banks, because that means a complete change in
Speaker 1: the US economy. This was so good. You can promote
Speaker 1: your podcast what's the code? Capital isn't? What is working
Speaker 1: in capitalism? And what isn't nice? Where do I find
Speaker 1: that anywhere? You get your podcast? From there we go.
Speaker 1: That's perfect. You were that good that. He basically was like,
Speaker 1: you know, go for it. You have won yourself an
Speaker 1: advertising second promo. You'll get in trouble with care for
Speaker 1: a now given that away, Luigi. Thank you. This was fantastic.
Speaker 1: Thank you, Luis. She's in Ghanas there of the university.
Speaker 1: If she can't go to school of business, Wiseman regret
Speaker 1: my currency strategistic aquarium already, Terry, thanks for VIM, sir,
Speaker 1: I'm going to see you. This from Towson Slot literally
Speaker 1: just moments ago in my inbox, he said. The credit
Speaker 1: crunch has started. He said, a survey of seventy one
Speaker 1: banks in the Dallas FED District, done after SVB went
Speaker 1: under shows of dramatic reversal and nine volumes. The FED
Speaker 1: survey was carried out from March twenty one to twenty nine.
Speaker 1: Do you agree with that statement the credit crunch has started. Yes, absolutely.
Speaker 1: I want to call it a credit crunch. You might
Speaker 1: want to credit call it a credit crumble, but the
Speaker 1: direction I think is un ambiguous. And I would add
Speaker 1: here that it's not just about the part of leaving
Speaker 1: the system right deposits can you come out of the
Speaker 1: small banks and they can find their way into the
Speaker 1: large banks, they can find their way into money market funds.
Speaker 1: In fact, the system has a way of recycling those
Speaker 1: deposits and potentially bringing them back to the small banks,
Speaker 1: especially if the government leans on the large banks to
Speaker 1: recycle those deposits, as we saw with the First Republic situation.
Speaker 1: I'm not so much concerned about the flight of deposits
Speaker 1: as the origin ideology of a credit crunch or credit
Speaker 1: carbal I'm much more concerned with the regulatory overhang. I'm
Speaker 1: concerned with the fact that Congress is going to be
Speaker 1: doing compensation call backs, at least considering that for bank
Speaker 1: CEOs that get themselves or their or their balance sheets
Speaker 1: into trouble. I'm worried about the more variegated stress tests
Speaker 1: stressing the banks for duration mismatches. I'm worried about the
Speaker 1: banks going back into their balance sheets looking at very
Speaker 1: and scrutinizing them. I'm worried about the regulators doing the
Speaker 1: same for the banks. I think that is going to
Speaker 1: cause an overhang of concern, of worry, of less risk
Speaker 1: taking in the banking community. That's what's going to drive
Speaker 1: the credit crunch or credit crumbled, not the flight of
Speaker 1: the posits necessarily if there is a flight of deposits,
Speaker 1: all right, then we're talking about not just a credit crumble,
Speaker 1: but a real credit crunch. Okay, two questions. One policy consequences,
Speaker 1: well the Fed does ultimately in the coming months. And
Speaker 1: to market outcomes, How are you thinking about those two
Speaker 1: things now? So the good thing with regard to market
Speaker 1: outcomes is we've gotten ten year yields coming down, right,
Speaker 1: and I think to some extent that's supporting multiples. But
Speaker 1: I'm afraid about the market because if you have a
Speaker 1: credit slowdown and you have an economic slowdown that follows
Speaker 1: from it, you're going to have an earning slowdown. You're
Speaker 1: going to have a revenue slowdown, effectively an operating slowdown.
Speaker 1: In the corporate world, we're already seeing that with what
Speaker 1: happened with the Manufacturing Ism survey and the high Headline Index.
Speaker 1: When it falls to the levels it fell in the
Speaker 1: March report, it's typically historically associated with a big declining
Speaker 1: growth in corporate revenues, with a big declining growth in
Speaker 1: corporate earnings. It's also associated with negative revisions from bottom
Speaker 1: up analysts who cover companies in the five hundred and
Speaker 1: the broader indexes so that's what's in front of us
Speaker 1: right now. Now there could be multiple elevation or because
Speaker 1: of the low yields, which you can't expect the market
Speaker 1: to do well in the context of downward revisions and earrings,
Speaker 1: and I think we're just on the verge of seeing
Speaker 1: that start. Just to sort of underscore your point, do
Speaker 1: you agree with professors in Galis that this banking system
Speaker 1: cannot handle rates where they are? No, and I'm going
Speaker 1: to qualify it. I would have said something different. I
Speaker 1: would have said, the banking system cannot handle a very speedy,
Speaker 1: aggressive and abrupt increase it interest rates to four percent.
Speaker 1: If any economic agent, not just banks, any borrowers, any creditors,
Speaker 1: get accustomed to very low interest rates and expect those
Speaker 1: to continue, that their behavior is going to accommodate to
Speaker 1: those low interest rates, and when interest rates rise by
Speaker 1: a lot, that behavior is going to suddenly be forced
Speaker 1: to shift, maybe because of what happens in their balance sheets.
Speaker 1: Duration mismatch with the banks is a good example. So
Speaker 1: it's not the level of interest rate that matters. We've
Speaker 1: had percent interest rates in the past. We've glided through
Speaker 1: that pretty comfortably, not necessarily associated with a lot of
Speaker 1: inflation or low inflation. What has troubled me and I
Speaker 1: think what is troubling the economy right now, and certainly
Speaker 1: the credit economy, is the rapidity which interest rates ever risen.
Speaker 1: That is what is unprecedented, not the fact that interest
Speaker 1: rates at four percent. Translate this into the global market.
Speaker 1: A lot of people are looking at signs that perhaps
Speaker 1: things are cracking a bit more in the US than
Speaker 1: in Europe, and that things are slowing down as a
Speaker 1: sign that Europe is strong and go into European assets.
Speaker 1: Do you disagreed? Do you think that they're just six
Speaker 1: months behind the US and that they're going to see
Speaker 1: the sort of tensions emerge in the economy at the
Speaker 1: same kind of pace based on some of their outside
Speaker 1: rate high There something to be said for the synchronicity
Speaker 1: of business cycles around the world. If the US slows down,
Speaker 1: it's almost impossible that Europe will completely escape the impact
Speaker 1: of a US slowdown. But Europe's got a good things
Speaker 1: happening as well. First, we'll keep in mind that it
Speaker 1: was in its duldrums and it was in its slump
Speaker 1: in the fourth and third quarters of last year. So
Speaker 1: it's coming off a low base, and when you come
Speaker 1: off a low, you know, you can't imagine that it's
Speaker 1: going to be hit hard unless there's another shock. And
Speaker 1: I have to imagine it's going to have to be
Speaker 1: more than a credit crumble in the US. China's recovering,
Speaker 1: that's going to help Europe. Right, there's the prospect that
Speaker 1: the initial shock of the war through the energy price
Speaker 1: mechanism has faded. Certainly, natural gas prices globally are low,
Speaker 1: oil prices relatively low. The things that hurt Europe in
Speaker 1: the third quarter, in the fourth quarter of last year
Speaker 1: are no longer there. At the same time, the things
Speaker 1: that are about to start hurting the US specifically this
Speaker 1: credit crunch credit crumble are on the verge of starting
Speaker 1: that doll a positive or negative. It's dollar, it's dollar negative.
Speaker 1: There's something to be said for the idea that a
Speaker 1: global recession helps the dollar. I think that's an old
Speaker 1: way of thinking. I think I think astolato caters have
Speaker 1: gotten more sophisticated over time. They can make distinctions between
Speaker 1: growth rates and the first order you know, second order
Speaker 1: growth rates around the world, and comparisons between them relative
Speaker 1: growth rates. I mean, and when you know We're going
Speaker 1: to start to see this divergence, indicated by the fact
Speaker 1: that the surprise index in the US is heading down
Speaker 1: and the surprising decks and Europe is still going up.
Speaker 1: I imagine we're going to start to see a weaker dollar.
Speaker 1: We've already seen it right in March. We've already seen
Speaker 1: a weaker dollar. But I think there's room here for
Speaker 1: the euro to get even higher than break above the
Speaker 1: one ten level. We're already seen with Sterling. It got above.
Speaker 1: It's it's um, it's twenty twenty three highs already, right,
Speaker 1: and the next September and the next and the next,
Speaker 1: the next shoe to drop maybe dollar yen right. Um.
Speaker 1: We'll hear more from presently from the boj once the
Speaker 1: new government takes over. But these are these are the
Speaker 1: consequences of effectively of of of the weaker US situation
Speaker 1: compared to the rest of the world's studing right now,
Speaker 1: very close to one twenty five. Terry, this was great,
Speaker 1: Thank you, Terry Weisman there of mcquarie. Jenny Norman joins
Speaker 1: us now the kind of director at the UCR Center
Speaker 1: on US Politics. Jenny, can we start there just the
Speaker 1: difference of approach between the Europeans and the US to
Speaker 1: tension with China at the moment. Sure, So there's a
Speaker 1: couple of things to note here. First, even though the
Speaker 1: writer reckon US and many policies are very tough on
Speaker 1: China from both parties, you know, our trade relationship is
Speaker 1: still the highest ever been with China as well, So
Speaker 1: it's not just Europe that's keeping that economic back and
Speaker 1: forth going. That's very true for the US right now
Speaker 1: as well. And i'd say even Europe is not a
Speaker 1: fully unified block on this. Macrone is extending much more
Speaker 1: open hand than his co traveler or slave underlying, who
Speaker 1: has been a bit more tough on China and her talk,
Speaker 1: especially on China's approach to Ukraine. So I would say
Speaker 1: a lot of diversity between kind of both sides of
Speaker 1: the Atlantic. But for the US, you know, I would
Speaker 1: say the fact that Europe is perhaps being a bit
Speaker 1: more open handed with China, especially through Macrone, could actually
Speaker 1: be an advantage. I mean, the Biden administration has had
Speaker 1: a sort of three prong approach to China like cooperate
Speaker 1: when we can, compete when we should, and confront when
Speaker 1: we must. And the cooperation piece has obviously been the
Speaker 1: trickiest of late, and if you can have Europe keeping
Speaker 1: that door open, I do think that's somewhat important for
Speaker 1: preventing what could be again this increasing alliance really between
Speaker 1: China and Russia. What we don't want to see is
Speaker 1: a cold war that's built on a sense of grievance
Speaker 1: towards the West and towards the US, And so France
Speaker 1: might be kind of the good cop keeping that door
Speaker 1: open for the time being, What does that do to
Speaker 1: US European relations Because at a certain point I understand
Speaker 1: the good cop bad cop kind of dichotomy here, but
Speaker 1: this isn't something that US multinational companies can really depend on.
Speaker 1: And we've already seen reports that Apple is quietly trying
Speaker 1: to shift its supply chains. How much does this create
Speaker 1: a liability for the US and frankly create a real
Speaker 1: fissure in that alliance. Well it could, But I think again,
Speaker 1: what we're seeing both the US and Europe trying to
Speaker 1: do is on couple, as we're saying, in these key sectors,
Speaker 1: but also just very pragmatically knowing that you can't just
Speaker 1: completely cut off this economic relationship with China. So I
Speaker 1: think we'll see this pressure sectorally, but at the same
Speaker 1: time recognizing that some trade relations are going to keep
Speaker 1: going through. So again we see France, you know, probably
Speaker 1: moving forward on the airbus production on that kind of deal,
Speaker 1: at the same time scaling back on other kinds of
Speaker 1: technology where there is more concern around security or surveillance.
Speaker 1: So I think some of that will be on par
Speaker 1: between the two countries. But again, as this essentially you know,
Speaker 1: deepening a riff between the US and China continues, I
Speaker 1: do that becoming a bigger sticking point, but I don't
Speaker 1: think we're quite there yet. John asked me a really
Speaker 1: good question that I gave a pretty bad answer to
Speaker 1: just a couple of minutes ago, where he said, did
Speaker 1: China truly show restraint with the Kevin McCarthy meeting with
Speaker 1: Taiwanese president? Is that really what we saw or is
Speaker 1: there potentially more to come and potentially a bigger and
Speaker 1: broader consequence. Well, I think you were right LEAs in
Speaker 1: saying we heard a lot of right direct from China,
Speaker 1: a lot of pushback in in terms of verbal comments
Speaker 1: to this, and there was some movement, you know, one
Speaker 1: Chinese naval vessel going through the straight yesterday, some Coast
Speaker 1: Guard activities, but nothing like the war games and military
Speaker 1: movements that we saw back in August when Pelosi went
Speaker 1: and you I think, as you note, it's partly because
Speaker 1: the meeting was on US soil, it wasn't taking place
Speaker 1: in Taiwan. The fact that you are having a head
Speaker 1: of state visit with McCrone having a massive military build
Speaker 1: but at the same time is not really the best look.
Speaker 1: And moreover, this is really a long game for China,
Speaker 1: and I think Taiwanese presidents say was very clear about
Speaker 1: that when she was making her comments in the US
Speaker 1: that China is seeing this as a ongoing effort and
Speaker 1: they're working through all different kinds of tactics to put
Speaker 1: pressure on Taiwan, not just military. And so this is
Speaker 1: something that I think is just gonna be very drawn out,
Speaker 1: and not just through these big headline grabbing movements that
Speaker 1: China did back in August. So, Judy, you don't see
Speaker 1: anything big happening anytime soon from China towards Taiwan. Well,
Speaker 1: I would say I'm not overly alarmoust about it at
Speaker 1: this point. I mean, right now, I think China has
Speaker 1: a certain interest in not completely upsetting things, especially as
Speaker 1: they are trying to kind of regain their position in
Speaker 1: the markets, regain themselves. Econ coming out of COVID to
Speaker 1: completely upset everything with something very provocative on Taiwan, I
Speaker 1: don't see right away. But again, all this is I
Speaker 1: think is much faster moving than many of us thought
Speaker 1: it would be even several months or a year ago.
Speaker 1: So you know, I don't think any of us predicted
Speaker 1: what would be happening in Ukraine at this point either.
Speaker 1: So Julie, do you think that banning TikTok or some
Speaker 1: sort of more extreme measure in the US changes the game.
Speaker 1: It's definitely putting the pressure on I would say, I
Speaker 1: think the middle road of banning TikTok on government devices
Speaker 1: and that kind of thing, it is probably where the
Speaker 1: US is best suited to sit right now. I think
Speaker 1: a blanket ban does get into very tricky waters. One,
Speaker 1: you just get into a situation of whackamole with any
Speaker 1: kind of Chinese product that might have these kinds of
Speaker 1: capabilities over here. And furthermore, it is a bit of
Speaker 1: a slippery slope for the US to get into to
Speaker 1: banning to banning platforms, just as China ban some of
Speaker 1: our platform, so I would say it's a bit of pressure,
Speaker 1: but I think the US is right to be taking
Speaker 1: this somewhat cautiously and not moving too quickly on a
Speaker 1: get ban. Jenny, thanks for this as OWI said brilliant
Speaker 1: Jenny Norman at the University College London. I am so
Speaker 1: glad to help me break this all down. Carra Kadana
Speaker 1: Marcus three sixty, chief US economist at BNP Paraba. Carl,
Speaker 1: wonderful to see you in studio. Your first take on
Speaker 1: the importance of some of this just drumbeat of data
Speaker 1: pointing to a softer labor market. Well, as I was
Speaker 1: thinking about the data dropping before I walked on set,
Speaker 1: I thought, well, you know, the rule of thumb is
Speaker 1: claims move up by about ten percent over the prior
Speaker 1: quarter average. That's often kind of an alarming signal that
Speaker 1: you're heading towards recessions. So as I was guessing in
Speaker 1: my mind, well what would that be, I was thinking
Speaker 1: about two hundred and thirty thousand, So we're pretty much
Speaker 1: right there at the kind of level that gets outside
Speaker 1: of any kind of noise and starts to be more
Speaker 1: of a meaningful signal. Of some problems. Now that big
Speaker 1: debate is whether it's a slowdown or a hard stop.
Speaker 1: I don't think this is hard stop evidence just yet. Also,
Speaker 1: I'm just extra sensitive around the interpreting jobless claims in
Speaker 1: the week weeks around the Easter holiday, basically because that's
Speaker 1: when school spring breaks happen, and often we see these
Speaker 1: kind of one off spikes or dips and claims that
Speaker 1: get ironed out in the subsequent weeks. So if we're
Speaker 1: holding at these kinds of levels for a couple of
Speaker 1: weeks and there's not a retracement, then that would be
Speaker 1: more alarming to me that we are starting to see
Speaker 1: the real deterioration in labor conditions that could be pushing
Speaker 1: us to a much weaker pace of economic activity. Is
Speaker 1: that enough for the Federal Reserve to really perhaps cut rates,
Speaker 1: considering that they've been targeting inflation and this doesn't speak
Speaker 1: necessarily to progress in the inflation fight. Well, there's some
Speaker 1: progress in the inflation fight, but it depends where you look,
Speaker 1: and if you look at the part of the inflation
Speaker 1: basket that really matters to the Feds, so core inflation,
Speaker 1: and then let's narrow it even further and look at
Speaker 1: core services. You're not seeing improvement to any material degree
Speaker 1: on that front yet, and that is what is haunting
Speaker 1: FED policymakers in the backs of their minds, as they
Speaker 1: realize that is what has to break to really be
Speaker 1: back on a path towards US sustainable path towards two percent.
Speaker 1: We are not seeing that in the data now. If
Speaker 1: the labor market is slowing, that is a key factor
Speaker 1: that we need to see to move in that direction.
Speaker 1: But again, one week in jobless claims is not there.
Speaker 1: We saw some cracks in the facade in the last
Speaker 1: jobs report. You saw finance actually looking pretty weak. You
Speaker 1: saw manufacturing starting to look up a week as well,
Speaker 1: and so I think those trends will continue. It's not
Speaker 1: necessarily that tomorrow's jobs report is going to be the
Speaker 1: key one. Right. The survey week was actually the same
Speaker 1: week that we had all the stresses in the in
Speaker 1: mid March in the banking sector. I think it'll take
Speaker 1: a month or two for that fallout to really start
Speaker 1: to show up in economic data. But the direction of
Speaker 1: travel is pretty clear here. When we talk about what
Speaker 1: we got in terms of the past week, I want
Speaker 1: also talk about revisions we just got those as well.
Speaker 1: They just populated one hundred and forty six thousand. It
Speaker 1: was revised upward from one hundred and ninety eight thousand.
Speaker 1: The total number of continuing claims also revised upward from
Speaker 1: last week from one point is six to eight million
Speaker 1: to one point eight million. So this is a couple
Speaker 1: weeks in a row now that there is an elevated
Speaker 1: number of initial jobless claims. Is that significant for you
Speaker 1: that the upward revisions are now the wrong side that
Speaker 1: we're seeing in my second highlighted the economic data surprise
Speaker 1: Index earlier on the show, and I think that does
Speaker 1: tell us something about how what's happening to the data
Speaker 1: and how forecasters are thinking about the data. Right, So,
Speaker 1: you know, there is a moment. We've had this extended
Speaker 1: stretch where non farm payrolls continually surprise relative to consensus expectations,
Speaker 1: and it's been going on for many, many months now.
Speaker 1: Eventually it's going to have to go in the other direction,
Speaker 1: and I think we're getting close to that point. Again.
Speaker 1: I think things were too fast moving in March for
Speaker 1: this to really show up in tomorrow's payroll print, but
Speaker 1: I think we will see it much more evident in
Speaker 1: the second quarter. Okay, you say, well, and actually, before
Speaker 1: we move on, if we can stick with the theme
Speaker 1: of data and revisions, something that I think slipped under
Speaker 1: the radar screen last Thursday was the third print on
Speaker 1: Q four GDP, which everyone says, it's a third print,
Speaker 1: why pay attention to it? But in Q four that's
Speaker 1: our first look at economy wide corporate profits and it's
Speaker 1: a pretty uncomfortable trend that we see in the economy
Speaker 1: wide corporate profits data. A year ago, it was growing
Speaker 1: something like twenty percent, twenty two percent year on year.
Speaker 1: In the last quarter, it contracted by about two percent
Speaker 1: in the fourth quarter, so it's only growing two percent
Speaker 1: year on year, so a big deceleration. And that profit
Speaker 1: trend drives hiring, it drives investment, it drives business decision making.
Speaker 1: Right now, you can see equity futures lower after that data,
Speaker 1: just marginally lower for the SMP, but futures on the
Speaker 1: NASDAC you can see lower by about four tenths of
Speaker 1: a percent. From your perspective, you said March, the events
Speaker 1: that we saw last month, I imagine you're talking about
Speaker 1: Silicon Valley Bank and some of the bank fissures that
Speaker 1: we saw. How much do you think that that really
Speaker 1: did change the land escape and accelerate the potential downturn
Speaker 1: that this economy could see. Well, we know it's creating
Speaker 1: some tightening of financial conditions or credit conditions in the economy,
Speaker 1: and that's going to take some time for that to
Speaker 1: actually show up in the real macro data. So all
Speaker 1: eyes are on the Q one Senior Lending Officer Opinion Survey,
Speaker 1: the SLUICE. Unfortunately, we don't get that until after the
Speaker 1: FED meeting unless they decided to publish it early, but
Speaker 1: we'll get little glimpses of what the sluice could look like.
Speaker 1: There was some survey data out of the Dallas Fed
Speaker 1: earlier this morning. Also, we have bank earning seasons basically
Speaker 1: starting next Friday and then the week after that continuing
Speaker 1: with a lot of the regional banks reporting, and so
Speaker 1: probably from those earnings calls in the tone of the discussions,
Speaker 1: we might get little glimpses of what that sluice will
Speaker 1: ultimately look like in early May. How much are you
Speaker 1: looking at those types of surveys and official data, and
Speaker 1: how much are you looking at corporate earnings in a
Speaker 1: way that you hadn't before, not just the numbers, but
Speaker 1: also the guidance that you're getting from corporate executives seeing
Speaker 1: things moving in real time and confidence deteriorating pretty quickly
Speaker 1: in a fast moving, fluid environment. Often the macro data
Speaker 1: is slow to catch up, and so you have to
Speaker 1: pay attention on what is the what is the driver
Speaker 1: of the narrative at the moment, And at the moment,
Speaker 1: it is that stress and kind of mid tier and
Speaker 1: smaller regional banks that really is a primary focus. And
Speaker 1: so that kind of anecdotal data, whether it's the Beige Book,
Speaker 1: whether it's bank earnings calls, or just simply reporting in
Speaker 1: the newspaper and on the Bloomberg terminal about what's happening
Speaker 1: in those sectors really becomes that much more important. And
Speaker 1: that's true for FED officials, it's true for FED watchers,
Speaker 1: it's true for market participants. Given some of the shifts
Speaker 1: that we've seen over the past few weeks, how much
Speaker 1: have you changed your view for this year? So in
Speaker 1: light of the banking stresses we had, you know, I
Speaker 1: agree with Chair pale general assessment that now banked credit
Speaker 1: tightening will do some of the work for the FED.
Speaker 1: And so as we modeled that out. Basically we came
Speaker 1: to the conclusion it was equivalent to about fifty basis
Speaker 1: points of tightening. So we had a terminal funds call
Speaker 1: of five seventy five. We dialed that back to five
Speaker 1: twenty five in light of that kind of you know,
Speaker 1: looking at through it a couple of different modeling exercises,
Speaker 1: but one simple way is to look at financial conditions
Speaker 1: and kind of what has happened in the fallout of SVB.
Speaker 1: And what's interesting to note here is that a lot
Speaker 1: of that tightening has backtracked. Right, About half of the
Speaker 1: tightening of financial conditions has unwound in the weeks afterwards,
Speaker 1: where we saw this is not a giant systemic problem
Speaker 1: that is really you echoing the scary tones of two
Speaker 1: thousand and eight, but rather it could prove to be
Speaker 1: an isolated or a relatively isolated incident, So there are
Speaker 1: long term consequences. Banks are acting more cautiously. I think
Speaker 1: we'll see that as a key theme during earning season,
Speaker 1: but we have to be careful not to over interpret
Speaker 1: what's happening. So what's the read through in terms of
Speaker 1: the real economy and what kind of downturn the economy
Speaker 1: could enter later this Well, let's go back to the
Speaker 1: beginning of our discussion, which was that core service inflation
Speaker 1: is not showing improvement, and we shouldn't expect it to
Speaker 1: show improvement until we see some softening in labor conditions.
Speaker 1: It's very unlikely that we can walk the tight wire,
Speaker 1: the very narrow path to get to a soft landing
Speaker 1: in this environment, especially now that we're saying, oh, banks
Speaker 1: are doing some of the tightening for the FED. It
Speaker 1: was hard enough to understand the long and variable leg
Speaker 1: from the FED let alone, now when we have this
Speaker 1: kind of phantom factor, which is this tightening of bank
Speaker 1: credit conditions. So our view is that really to get
Speaker 1: inflation from the levels they're at down towards a two
Speaker 1: percent path really will take a recession in the economy
Speaker 1: to loosen those labor conditions. You see hints of that today.
Speaker 1: I'm not saying we're there yet. Our view is more
Speaker 1: that recession would be a second half of the year
Speaker 1: story that said Q two, we're looking for GDP growth
Speaker 1: of about one percent, so it's a growth recession ahead
Speaker 1: of a recession. It will start to feel increasingly recessionary.
Speaker 1: We see it in this week's claims data. You saw
Speaker 1: it in the IM, you saw it in the manufacturing ism.
Speaker 1: It's just going to, I think, continue to snowball, and
Speaker 1: just if you're just joining it, just to reiterate, we
Speaker 1: did see an upside surprise in initial jobless claims for
Speaker 1: the past week of two hundred and twenty eight thousand.
Speaker 1: The interesting thing is we also saw an upside revision
Speaker 1: to the prior week. And I keep going back to
Speaker 1: this because it's substantial. We're talking almost fifty thousand jobs
Speaker 1: that were not accounted for in terms of initial jobless
Speaker 1: claims last week that was revised and put into the data.
Speaker 1: So just a sense of ongoing softening. You talked a
Speaker 1: little bit, Carl about how it's going to feel painful,
Speaker 1: and the soft landing concept is really not in the
Speaker 1: cards right now. What is a historical analog in terms
Speaker 1: of periods of time that we can look to for
Speaker 1: some sort of template of what this downturn will look like. Well,
Speaker 1: that's actually very interesting point that I was hoping you'd
Speaker 1: bring up. And I think the maybe interesting parallel is
Speaker 1: continental Illinois. And you're saying what you're wrinkling your brow,
Speaker 1: and for good reason, right Continental Illinois was a bank
Speaker 1: failure in nineteen eighty four. It was the biggest bank
Speaker 1: failure in US history up to Washington Mutual in two
Speaker 1: thousand and eight. And of course, as you know, there
Speaker 1: was no great recession in nineteen eighty five or eighty six, right,
Speaker 1: we went on till nineteen ninety one before there was
Speaker 1: a recession. So John yesterday on the show was talking
Speaker 1: about the long and variable lag of banking crises or
Speaker 1: banking stresses as opposed to monetary policy, and I think
Speaker 1: that's very important. People don't remember Continental Illinois. The FED
Speaker 1: continued tightening, raising the interest rate after the fact, and
Speaker 1: the economy did not succumb into recession. So when everyone
Speaker 1: is just universally saying we're heading into recession because of
Speaker 1: the banking stresses, you know, then we have to put
Speaker 1: on our contrarian hat and just think a little bit
Speaker 1: more creatively. But that episode tells you it's not fate
Speaker 1: to complete that we're heading into recession. That being said,
Speaker 1: even before the bank stresses, our view was the FED
Speaker 1: is whether it's the banks doing it or the Fed,
Speaker 1: we have to tighten policy to a point where we
Speaker 1: start to break the labor market, and that is recession.
Speaker 1: Calcadana wonderful as always, Thank you so much, it's been
Speaker 1: too long. Carl Cardono VNP Pariba. We always appreciate us insights.
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