1 00:00:14,040 --> 00:00:17,079 Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast. 2 00:00:17,280 --> 00:00:19,240 Speaker 1: My name is Mike Reagan. I'm a senior editor at 3 00:00:19,239 --> 00:00:23,880 Speaker 1: Bloomberg led across asset reporter with Bloomberg. This week on 4 00:00:23,880 --> 00:00:27,240 Speaker 1: the show Well life comes out you fast, sometimes not 5 00:00:27,360 --> 00:00:29,760 Speaker 1: too long ago, this week's guests was one of the 6 00:00:29,800 --> 00:00:33,040 Speaker 1: economists arguing for a so called no landing in the economy. 7 00:00:33,479 --> 00:00:35,839 Speaker 1: In other words, the FED would be able to vanquish 8 00:00:35,920 --> 00:00:38,600 Speaker 1: the inflation problem and the economy would be able to 9 00:00:38,680 --> 00:00:41,520 Speaker 1: keep humming along. Then in the blink of an eye, 10 00:00:41,640 --> 00:00:46,199 Speaker 1: Silicon Valley Bank failed, becoming the second biggest bank failure 11 00:00:46,280 --> 00:00:49,920 Speaker 1: in US history, and the whole outlook changed. Now he's 12 00:00:49,920 --> 00:00:51,880 Speaker 1: in the camp that believes we'll see a hard landing. 13 00:00:51,920 --> 00:00:54,320 Speaker 1: In other words, the US economy won't be able to 14 00:00:54,360 --> 00:00:57,800 Speaker 1: avoid a recession. We'll get into exactly what this prominent 15 00:00:57,800 --> 00:01:01,480 Speaker 1: economist sees coming and why his look changed so quickly, 16 00:01:02,160 --> 00:01:04,720 Speaker 1: But they'll do first. I have to ask, are you 17 00:01:04,800 --> 00:01:07,800 Speaker 1: a fan of March madness? No? I only watch football. 18 00:01:07,959 --> 00:01:12,160 Speaker 1: You want so you're not doing the brackets? No, I 19 00:01:12,200 --> 00:01:14,800 Speaker 1: know we have a Bloomberg terminal brackets. I haven't even 20 00:01:14,840 --> 00:01:16,560 Speaker 1: looked at it. You're the best person to do the 21 00:01:16,560 --> 00:01:18,959 Speaker 1: brackets though then, because why because of all the tallies, 22 00:01:19,040 --> 00:01:24,039 Speaker 1: ton European ples, all that you could just take the 23 00:01:24,080 --> 00:01:26,959 Speaker 1: lower number in each one. People like me who've seen, 24 00:01:27,040 --> 00:01:30,080 Speaker 1: like you know, ten of these teams play are our 25 00:01:30,120 --> 00:01:32,920 Speaker 1: opinions are completely polluted by the ten games we saw 26 00:01:32,959 --> 00:01:36,320 Speaker 1: this year. I can't even name ten teams. Just pick 27 00:01:36,400 --> 00:01:38,680 Speaker 1: the lower number, Seed. I'm curious you do that all 28 00:01:38,720 --> 00:01:40,520 Speaker 1: the way time. Let's do it. Do I win anything, 29 00:01:40,640 --> 00:01:43,560 Speaker 1: I'll give you a dollar deal which is enough to 30 00:01:43,600 --> 00:01:47,319 Speaker 1: buy the UK operations of spdety Oh my god, no, 31 00:01:47,400 --> 00:01:51,360 Speaker 1: I would need like a dollar thirty years. I don't 32 00:01:51,400 --> 00:01:54,000 Speaker 1: know what it's trading. I made that up. But I 33 00:01:54,040 --> 00:01:56,120 Speaker 1: do want to bring our guest, and I'm so happy 34 00:01:56,120 --> 00:01:59,200 Speaker 1: to have him. It's Torsten Slock, chief economists at Apollo 35 00:01:59,320 --> 00:02:02,080 Speaker 1: Global Management. Torsten, thank you so much for coming in 36 00:02:02,320 --> 00:02:04,520 Speaker 1: and joining us on the podcast. Well, thanks for having me. 37 00:02:05,120 --> 00:02:07,440 Speaker 1: So maybe we can start with what Mike was just 38 00:02:07,600 --> 00:02:12,120 Speaker 1: talking about. Because you write daily notes, they're extremely prominent 39 00:02:12,200 --> 00:02:14,880 Speaker 1: on Wall Street, I would say, I know on Bloomberg 40 00:02:14,880 --> 00:02:17,760 Speaker 1: TV everybody was talking about your note from this week 41 00:02:17,800 --> 00:02:20,800 Speaker 1: where you were talking about when the facts change, my 42 00:02:20,919 --> 00:02:24,720 Speaker 1: view changes so can we just take this as can 43 00:02:24,760 --> 00:02:27,880 Speaker 1: you talk about that view changing as a way to 44 00:02:27,919 --> 00:02:31,119 Speaker 1: explain what exactly happened over the last couple of days 45 00:02:31,120 --> 00:02:33,440 Speaker 1: and why your view has changed. Yeah. So, as Mike 46 00:02:33,600 --> 00:02:37,600 Speaker 1: was saying, up until here this weekend, the situation was 47 00:02:37,680 --> 00:02:40,919 Speaker 1: very clear that the FED had been raising rates because 48 00:02:40,960 --> 00:02:43,600 Speaker 1: inflation was too high. As a result of that, the 49 00:02:43,680 --> 00:02:47,000 Speaker 1: interest rate sensitive components of GDP had responded, meaning housing 50 00:02:47,040 --> 00:02:49,600 Speaker 1: had started to slow down. The auto sector has started 51 00:02:49,680 --> 00:02:52,320 Speaker 1: to slowdown because they were sensitive and they are sensitive 52 00:02:52,360 --> 00:02:55,000 Speaker 1: to interest rates going up. And durable goods more broadly, 53 00:02:55,120 --> 00:02:58,880 Speaker 1: meaning everything you buy, furniture, washers, dry us, everything that 54 00:02:58,960 --> 00:03:03,720 Speaker 1: requires financing was responding by slowing down. And the problem 55 00:03:03,800 --> 00:03:06,120 Speaker 1: for the Fed was that those components of GDP that 56 00:03:06,120 --> 00:03:08,280 Speaker 1: are interest rates, sins it's only make up twenty percent 57 00:03:08,320 --> 00:03:10,679 Speaker 1: of the economy. The eighty percent of the economy that 58 00:03:10,800 --> 00:03:14,640 Speaker 1: services was actually still doing fine. So people were still 59 00:03:14,639 --> 00:03:18,160 Speaker 1: traveling on airplanes, still going to restaurants, still staying at hotels, 60 00:03:18,360 --> 00:03:21,640 Speaker 1: going to theme parks, concerts, spawning events across the board. 61 00:03:21,760 --> 00:03:24,360 Speaker 1: The consumer services sector was still doing really well. So 62 00:03:24,400 --> 00:03:28,480 Speaker 1: the debate up until recently was that, well, why is 63 00:03:28,480 --> 00:03:31,160 Speaker 1: the economy not slowing down When the Fed is raising rates, 64 00:03:31,200 --> 00:03:33,720 Speaker 1: why is it that the consumer is still doing so well? 65 00:03:33,720 --> 00:03:35,720 Speaker 1: And a very important answer that was that, well, there 66 00:03:35,720 --> 00:03:38,560 Speaker 1: was still a lot of savings left across the income distribution. 67 00:03:38,840 --> 00:03:41,840 Speaker 1: That households still had plenty of savings left after the pandemic, 68 00:03:41,920 --> 00:03:44,240 Speaker 1: either because they saved it because they didn't travel and 69 00:03:44,240 --> 00:03:47,240 Speaker 1: go to restaurants during the pandemic, or because they had 70 00:03:47,280 --> 00:03:50,960 Speaker 1: received transfers from the government, or simply because that they 71 00:03:51,000 --> 00:03:53,640 Speaker 1: didn't spend as much money as their income. Over the 72 00:03:53,680 --> 00:03:56,320 Speaker 1: last several quarters and up until recently, the debate was 73 00:03:56,800 --> 00:03:59,600 Speaker 1: why is this economy not slowing down? And that's what 74 00:03:59,680 --> 00:04:01,280 Speaker 1: we call that what you want, but that's what we 75 00:04:01,320 --> 00:04:03,520 Speaker 1: have called the no landing. The economy was just not 76 00:04:03,560 --> 00:04:06,600 Speaker 1: slowing down, and that was the reason why inflation continued 77 00:04:06,640 --> 00:04:08,520 Speaker 1: to be in the range of five six seven percent. 78 00:04:08,840 --> 00:04:10,600 Speaker 1: That's why the Fed had to raise rates. And if 79 00:04:10,600 --> 00:04:13,480 Speaker 1: I on my Bloomberg screen type t a YL and 80 00:04:13,480 --> 00:04:15,360 Speaker 1: look at the tailor rule, which would tell you what 81 00:04:15,440 --> 00:04:17,279 Speaker 1: should the FED funds rate be as a function of 82 00:04:17,400 --> 00:04:19,200 Speaker 1: on employment and inflation, it would say that the Fed 83 00:04:19,240 --> 00:04:21,520 Speaker 1: funds rate should be as high as nine or ten percent. 84 00:04:21,960 --> 00:04:25,480 Speaker 1: So up until recently, everything was fine. The economy was 85 00:04:25,520 --> 00:04:27,760 Speaker 1: doing well. The FIT was gradually trying to slow things down. 86 00:04:27,760 --> 00:04:29,880 Speaker 1: They weren't succeeding as much as they would like, but 87 00:04:29,960 --> 00:04:33,320 Speaker 1: it was just humming nicely forward. What happened, of course, 88 00:04:33,360 --> 00:04:36,640 Speaker 1: here with Silicon Valley Bank was that suddenly out of 89 00:04:36,680 --> 00:04:40,400 Speaker 1: the blue, at least for financial markets, really nobody and 90 00:04:40,560 --> 00:04:42,560 Speaker 1: I think that's safe to say at this point had 91 00:04:42,560 --> 00:04:45,520 Speaker 1: seen this coming. And as a result of that, suddenly 92 00:04:45,680 --> 00:04:48,159 Speaker 1: we all had to go back to our drawing boards 93 00:04:48,160 --> 00:04:50,599 Speaker 1: and think about, okay, but what is the importance of 94 00:04:50,640 --> 00:04:53,080 Speaker 1: the regional banks. What is the importance of the banking 95 00:04:53,080 --> 00:04:55,440 Speaker 1: sector in terms of credit extension? And we look at 96 00:04:55,440 --> 00:04:58,120 Speaker 1: the data from the FED, you will see that roughly 97 00:04:58,200 --> 00:05:01,040 Speaker 1: a third of assets in the US banking sector are 98 00:05:01,080 --> 00:05:03,039 Speaker 1: in the small banks. And here a small bank is 99 00:05:03,040 --> 00:05:06,720 Speaker 1: defined as bank number twenty six to eight thousand, at 100 00:05:06,800 --> 00:05:09,800 Speaker 1: large bank is number one to twenty five, ranked by assets. 101 00:05:10,000 --> 00:05:12,320 Speaker 1: So that means that there's a long tale of banks. 102 00:05:12,360 --> 00:05:14,520 Speaker 1: Some of them are fairly big, but the further you 103 00:05:14,600 --> 00:05:16,120 Speaker 1: get out, of course, the smaller they get. And the 104 00:05:16,200 --> 00:05:19,400 Speaker 1: key question for markets today is how important are the 105 00:05:19,520 --> 00:05:23,680 Speaker 1: small banks that are now facing issues with deposits, facing 106 00:05:23,680 --> 00:05:27,040 Speaker 1: issues with funding costs, facing issues with what that might 107 00:05:27,080 --> 00:05:29,359 Speaker 1: mean for their credit books, and also facing issues with 108 00:05:29,560 --> 00:05:31,000 Speaker 1: what does that mean if we now also have to 109 00:05:31,000 --> 00:05:32,960 Speaker 1: do stress test as some of these smaller banks. So 110 00:05:33,000 --> 00:05:36,480 Speaker 1: the short answer to your question is that this episode 111 00:05:36,600 --> 00:05:38,840 Speaker 1: with the Silicon Valley Bank that we have seen here 112 00:05:38,880 --> 00:05:42,760 Speaker 1: more recently, markets are doing what they're doing, and there's 113 00:05:42,760 --> 00:05:44,600 Speaker 1: a lot of things going on, But what is really 114 00:05:44,640 --> 00:05:47,200 Speaker 1: the major issue here in my view, is that we 115 00:05:47,320 --> 00:05:50,440 Speaker 1: just don't know now what is the behavioral change in 116 00:05:50,560 --> 00:05:53,600 Speaker 1: terms of lending willingness in the regional banks. And given 117 00:05:53,600 --> 00:05:56,160 Speaker 1: the regional banks make up thirty percent of assets and 118 00:05:56,279 --> 00:05:58,960 Speaker 1: roughly forty percent of all lending, that means that the 119 00:05:59,000 --> 00:06:02,000 Speaker 1: banking sector has such a significant share of banks that 120 00:06:02,040 --> 00:06:04,840 Speaker 1: are now really at the moment thinking about what's going on. 121 00:06:04,880 --> 00:06:07,120 Speaker 1: And the risk that is that the slowdown that was 122 00:06:07,200 --> 00:06:09,839 Speaker 1: already on the way because of the fit raising rates 123 00:06:10,120 --> 00:06:13,560 Speaker 1: might now come faster simply because of this banking situation. 124 00:06:13,600 --> 00:06:17,000 Speaker 1: So that's why I changed my view from saying no landing, 125 00:06:17,000 --> 00:06:19,760 Speaker 1: no landing, everything is fine, so now saying, well, wait 126 00:06:19,800 --> 00:06:21,720 Speaker 1: a minute, there is a risk now that things could 127 00:06:21,760 --> 00:06:24,280 Speaker 1: slow down faster because we just need to see over 128 00:06:24,320 --> 00:06:26,799 Speaker 1: the coming weeks and months ahead, what is the response 129 00:06:26,839 --> 00:06:28,679 Speaker 1: going to be in terms of lending from this fairly 130 00:06:28,680 --> 00:06:32,360 Speaker 1: significant part of the banking sector that is now going 131 00:06:32,400 --> 00:06:34,839 Speaker 1: through this to evidence we are seeing, Mike, is this 132 00:06:34,920 --> 00:06:39,159 Speaker 1: where I add my disclaimer? Yes, I have a mortgage 133 00:06:39,160 --> 00:06:42,880 Speaker 1: depending with First Republic, so I'm in the midst of this. 134 00:06:44,279 --> 00:06:46,880 Speaker 1: What a great timing on pecking a mortgage at the 135 00:06:47,000 --> 00:06:51,960 Speaker 1: top tech that pretty well? Huh the bank? Did you 136 00:06:52,040 --> 00:06:54,800 Speaker 1: lock in the interest rate? Yes? But you know they 137 00:06:55,120 --> 00:06:59,200 Speaker 1: answer every single time I call yeah to my banker, 138 00:06:59,279 --> 00:07:03,840 Speaker 1: Kyle Towrsted. You know, I think there's such a unique 139 00:07:03,839 --> 00:07:06,160 Speaker 1: element to this, if you want to call it a crisis, 140 00:07:06,240 --> 00:07:10,400 Speaker 1: in that typically when you're worried about the banking system 141 00:07:10,680 --> 00:07:13,880 Speaker 1: and the quality of their assets, you think about the 142 00:07:13,920 --> 00:07:17,440 Speaker 1: credit quality, you know, financial crisis. Yes, it was a 143 00:07:17,520 --> 00:07:20,120 Speaker 1: drop in the valuation of securities, but it was a 144 00:07:20,200 --> 00:07:24,760 Speaker 1: result of deteriorating credit quality among mortgage borrowers. This is 145 00:07:24,800 --> 00:07:27,040 Speaker 1: so different right now. I mean, we haven't really seen 146 00:07:27,120 --> 00:07:31,880 Speaker 1: any deterioration in credit worthiness yet, so will it play 147 00:07:31,880 --> 00:07:34,800 Speaker 1: out in a similar fashion as far as curtailing the 148 00:07:34,840 --> 00:07:36,960 Speaker 1: supply of credit or is there a reason to think 149 00:07:37,000 --> 00:07:39,920 Speaker 1: it'll be different, And you know, just to tag one 150 00:07:39,960 --> 00:07:42,520 Speaker 1: more question on the end of that, is it possible 151 00:07:42,920 --> 00:07:45,400 Speaker 1: we still have another shooter drop with the deterioration of 152 00:07:45,400 --> 00:07:49,880 Speaker 1: credit quality going forward. Absolutely. So. I started my career 153 00:07:50,000 --> 00:07:52,240 Speaker 1: the IMF in the nineteen nineties, and the first thing 154 00:07:52,240 --> 00:07:54,160 Speaker 1: you learned, literally in the first day it is that 155 00:07:54,200 --> 00:07:57,280 Speaker 1: a banking crisis and a banking run normally happens exactly 156 00:07:57,320 --> 00:08:00,600 Speaker 1: as you're saying, Mike, because the credit laws on the 157 00:08:00,640 --> 00:08:02,680 Speaker 1: banks books. We saw that in two thousand and eight 158 00:08:02,720 --> 00:08:06,320 Speaker 1: subprime mortgages created credit losses. We saw that for Northern Rock, 159 00:08:06,360 --> 00:08:08,440 Speaker 1: we saw there for even Brothers, we saw the Forbear Sturns. 160 00:08:08,560 --> 00:08:10,280 Speaker 1: If you go back to the nineteen nineties, you saw 161 00:08:10,280 --> 00:08:12,400 Speaker 1: that on the savings and loan crisis there were conversive 162 00:08:12,400 --> 00:08:15,600 Speaker 1: rely state losses and these were very liquid losses. This 163 00:08:15,720 --> 00:08:18,640 Speaker 1: couldn't just be sold very quickly. That is exactly as 164 00:08:18,640 --> 00:08:21,520 Speaker 1: you're pointing out, very very different. We have basically never 165 00:08:21,560 --> 00:08:24,880 Speaker 1: had a banking crisis in a strong economy. And the 166 00:08:24,960 --> 00:08:27,280 Speaker 1: irony of this situation is that it is actually the 167 00:08:27,320 --> 00:08:30,440 Speaker 1: most liquid acid Navy treasuries that turned out to be 168 00:08:30,520 --> 00:08:32,920 Speaker 1: the problem. So that's why if you do have now 169 00:08:32,960 --> 00:08:35,240 Speaker 1: that let's say ten year rates now they've been going 170 00:08:35,240 --> 00:08:37,240 Speaker 1: down quite a bit more recently, let's say that they 171 00:08:37,320 --> 00:08:39,240 Speaker 1: go down to say two and a half or even 172 00:08:39,280 --> 00:08:42,520 Speaker 1: two percent, that will be helping incredibly on the bank's 173 00:08:42,559 --> 00:08:44,400 Speaker 1: balance sheet because it is the liquid side of the 174 00:08:44,440 --> 00:08:48,480 Speaker 1: balance sheets that have at least in this episode, been 175 00:08:48,679 --> 00:08:51,079 Speaker 1: the main problem in terms of what the issues are. 176 00:08:51,120 --> 00:08:53,400 Speaker 1: So that's why to your last point, exactly, the fear 177 00:08:53,559 --> 00:08:55,280 Speaker 1: is that if we now have not only the lacked 178 00:08:55,280 --> 00:08:58,199 Speaker 1: effects of the fat hiking rates already slowing the economy, 179 00:08:58,280 --> 00:09:01,240 Speaker 1: We've already seen various indicators, as I mentioned in particularly 180 00:09:01,240 --> 00:09:03,560 Speaker 1: interest rates sensors, the indicators beginning to slow down. But 181 00:09:03,640 --> 00:09:05,679 Speaker 1: if you now have a magnified effect that the slowdown 182 00:09:05,800 --> 00:09:08,200 Speaker 1: might come a bit faster, then of course we do 183 00:09:08,360 --> 00:09:10,719 Speaker 1: ultimately also need to look at what does that mean 184 00:09:10,760 --> 00:09:14,320 Speaker 1: for credit lasses, for everything that banks have on their penancies. 185 00:09:14,840 --> 00:09:17,360 Speaker 1: It's such a unique phenomenon, it really is. You know, 186 00:09:17,400 --> 00:09:19,520 Speaker 1: who would have ever thought the treasuries would be the 187 00:09:19,600 --> 00:09:22,080 Speaker 1: riskiest thing. It is so unusual. Normally is the liquid 188 00:09:22,120 --> 00:09:25,000 Speaker 1: stuff that gets the attention, but it just shows the 189 00:09:25,000 --> 00:09:27,920 Speaker 1: complication of this issue here that in this situation now 190 00:09:27,920 --> 00:09:30,199 Speaker 1: where it is treasuries and all this health your maturity 191 00:09:30,240 --> 00:09:32,520 Speaker 1: and available for sale, there's a lot of fine details 192 00:09:32,520 --> 00:09:34,120 Speaker 1: on that, but the bottom line still is the same 193 00:09:34,400 --> 00:09:37,320 Speaker 1: that the bottom line was that because interest rates went up, 194 00:09:38,160 --> 00:09:41,040 Speaker 1: this created some problems for certain banks. Yeah, and so 195 00:09:41,080 --> 00:09:43,520 Speaker 1: what everybody in the market is saying, they were waiting 196 00:09:43,520 --> 00:09:46,520 Speaker 1: for the moment that the Fed broke something, and now 197 00:09:46,679 --> 00:09:50,959 Speaker 1: something has broken. So I'm wondering how you are recalculating 198 00:09:50,960 --> 00:09:53,559 Speaker 1: what you're expecting from the Fed. Everybody is talking about 199 00:09:53,559 --> 00:09:55,640 Speaker 1: this because obviously they're going to be meeting in a 200 00:09:55,679 --> 00:09:59,400 Speaker 1: couple of days. What are your expectations. Yeah, So I 201 00:09:59,400 --> 00:10:02,040 Speaker 1: would say very important consideration here, of course, is that 202 00:10:02,040 --> 00:10:04,320 Speaker 1: we've if you look back in the history books, it 203 00:10:04,440 --> 00:10:06,360 Speaker 1: is of course important to consider is this just like 204 00:10:06,440 --> 00:10:08,760 Speaker 1: Orange County in the early nineteen nineties. Is this like 205 00:10:08,920 --> 00:10:11,760 Speaker 1: LTCM in ninety eight. Is this essentially the same as 206 00:10:11,760 --> 00:10:14,520 Speaker 1: the LDI crisis in a just different form, where this 207 00:10:14,600 --> 00:10:16,360 Speaker 1: is something that will come and go and we'll basically 208 00:10:16,360 --> 00:10:19,559 Speaker 1: be back on track very quickly. The main problem with this, 209 00:10:19,720 --> 00:10:21,880 Speaker 1: and this was the main reason why I changed my view, 210 00:10:22,280 --> 00:10:25,440 Speaker 1: is that this is for the banking sector, and the 211 00:10:25,480 --> 00:10:28,200 Speaker 1: banking sector just happens to play a really really important 212 00:10:28,240 --> 00:10:31,520 Speaker 1: role in the Orange County LCCM. Even the LDI in 213 00:10:31,559 --> 00:10:34,000 Speaker 1: the UK it was still the case that this caused 214 00:10:34,000 --> 00:10:36,800 Speaker 1: some ripple effects, but it was not as essential for 215 00:10:36,880 --> 00:10:40,840 Speaker 1: economic growth as the banking sector is. So the challenge today, 216 00:10:41,120 --> 00:10:44,880 Speaker 1: of course, looking to the FIT meeting is that there 217 00:10:44,880 --> 00:10:47,599 Speaker 1: are some risks of course for the FIT to financial stapidity. 218 00:10:48,000 --> 00:10:49,920 Speaker 1: And it is very clear that up until if we 219 00:10:49,960 --> 00:10:52,400 Speaker 1: had spoken about this like a week ago, then I 220 00:10:52,400 --> 00:10:55,400 Speaker 1: would have said they're going to go fifty. Nothing to discuss, 221 00:10:55,600 --> 00:10:58,240 Speaker 1: no landing, everything full steam ahead. The FIT needs to 222 00:10:58,280 --> 00:11:01,200 Speaker 1: cool things down. But today it is certainly the case 223 00:11:01,240 --> 00:11:03,440 Speaker 1: that the top priority, which we thought until the reason 224 00:11:03,480 --> 00:11:06,320 Speaker 1: it was all inflation, has been replaced and put into 225 00:11:06,360 --> 00:11:08,319 Speaker 1: the backseat of the car. Now the top priority is 226 00:11:08,360 --> 00:11:11,520 Speaker 1: financial stability. And when the top priority is financial stability, 227 00:11:11,760 --> 00:11:14,200 Speaker 1: then of course the FIT needs to be absolutely sure 228 00:11:14,480 --> 00:11:17,440 Speaker 1: that the financial system is stable, when financial markets are calm, 229 00:11:17,760 --> 00:11:21,160 Speaker 1: and that therefore that credit is flowing to consumers, to corporates, 230 00:11:21,360 --> 00:11:24,280 Speaker 1: to residential rey state, commercial rey state, with the idea 231 00:11:24,360 --> 00:11:26,600 Speaker 1: that if that is not the case, then you are 232 00:11:26,600 --> 00:11:29,240 Speaker 1: at risk of having obviously a much harder landing. So 233 00:11:29,240 --> 00:11:32,400 Speaker 1: that's why financial stability being the top risk would lead 234 00:11:32,400 --> 00:11:34,520 Speaker 1: me to the conclusion that they can always raise rates 235 00:11:34,640 --> 00:11:36,880 Speaker 1: later if this does turn out to be like Orange 236 00:11:36,920 --> 00:11:40,080 Speaker 1: County and l TWCM. But at the moment, the biggest 237 00:11:40,160 --> 00:11:43,720 Speaker 1: risk going into this meeting is certainly that financial stability 238 00:11:43,840 --> 00:11:47,520 Speaker 1: needs to be a financial system needs to be stable 239 00:11:48,520 --> 00:11:52,080 Speaker 1: for them to feel comfortable before they can begin to 240 00:11:52,160 --> 00:11:55,040 Speaker 1: even think about raising rates. Again. It's interesting you keep 241 00:11:55,080 --> 00:11:57,120 Speaker 1: hearing hard landing. It sounds like me on the ski 242 00:11:57,160 --> 00:12:00,840 Speaker 1: slope in Vermont, you know, But I'd love to see that, 243 00:12:02,480 --> 00:12:04,800 Speaker 1: which is I will say it can be a painful thing. 244 00:12:04,880 --> 00:12:06,800 Speaker 1: Or maybe it's me when I'm playing Saga and PF 245 00:12:06,800 --> 00:12:09,480 Speaker 1: five out in Brooklyn rouge pot where the cement underneath. 246 00:12:11,000 --> 00:12:12,959 Speaker 1: But let's put some numbers on that, you know, because 247 00:12:13,000 --> 00:12:17,200 Speaker 1: we are starting from such an extremely low base in 248 00:12:17,240 --> 00:12:20,959 Speaker 1: the unemployment rate. The last jobs report was still very strong. 249 00:12:21,000 --> 00:12:23,079 Speaker 1: I forget, what three hundred thousand was a two hundred 250 00:12:23,080 --> 00:12:26,720 Speaker 1: fifty thousand jobs, three hundred eleven, three hundred eleven, good memory, 251 00:12:26,960 --> 00:12:29,199 Speaker 1: What does a hard landing look like as far as 252 00:12:29,280 --> 00:12:32,480 Speaker 1: unemployment in GDP. Yeah, this is really important because again, 253 00:12:32,520 --> 00:12:35,240 Speaker 1: if we already were set up for this situation where 254 00:12:35,280 --> 00:12:37,079 Speaker 1: they FIT trying to slow the economy down, and the 255 00:12:37,200 --> 00:12:39,600 Speaker 1: FIT would raise raised twenty five basis points, they would 256 00:12:39,600 --> 00:12:41,640 Speaker 1: look around and say, how is the data responding? They 257 00:12:41,679 --> 00:12:43,839 Speaker 1: would go another twenty five basis points. Of course, they 258 00:12:43,840 --> 00:12:46,040 Speaker 1: did a little bit more earlier, but they've been going 259 00:12:46,120 --> 00:12:48,120 Speaker 1: more slowly and they have been thinking about going more 260 00:12:48,160 --> 00:12:51,800 Speaker 1: slowly in that situation. It's a more controlled slowdown. Even 261 00:12:51,840 --> 00:12:54,600 Speaker 1: in that scenario, Remember, there was a big discussion can 262 00:12:54,600 --> 00:12:56,800 Speaker 1: they FIT actually achieve as off landing and a lot 263 00:12:56,840 --> 00:12:59,000 Speaker 1: of people are saying no, they cannot because you cannot 264 00:12:59,000 --> 00:13:01,720 Speaker 1: micromanaged the economy. So we already had that debate even 265 00:13:01,760 --> 00:13:04,600 Speaker 1: before this situation now in the banking sector. But now 266 00:13:04,679 --> 00:13:07,079 Speaker 1: think about if you add on to that, what's going 267 00:13:07,120 --> 00:13:09,079 Speaker 1: on in the banking sector. The risk in the banking 268 00:13:09,120 --> 00:13:11,840 Speaker 1: secttion now is that if banks now are beginning to 269 00:13:11,920 --> 00:13:15,400 Speaker 1: tighten credit conditions simply because the need to reorganize and 270 00:13:15,440 --> 00:13:18,080 Speaker 1: repair their balance sheets, then you can suddainly have the 271 00:13:18,160 --> 00:13:21,240 Speaker 1: consequence that if we go out to a bank and 272 00:13:21,280 --> 00:13:23,040 Speaker 1: say I would like to borrow some money for a car, 273 00:13:23,440 --> 00:13:25,760 Speaker 1: and it's a bank says no, you can't do that. 274 00:13:25,880 --> 00:13:27,280 Speaker 1: And if a lot of banks say that at the 275 00:13:27,320 --> 00:13:29,880 Speaker 1: same time, you are running the risk of what the 276 00:13:29,920 --> 00:13:31,880 Speaker 1: IMF where he always has been, that you will have 277 00:13:31,920 --> 00:13:34,480 Speaker 1: a sudden stop in the economy. So we have suddenly 278 00:13:34,480 --> 00:13:36,959 Speaker 1: gone from saying what you could say the sort of 279 00:13:37,000 --> 00:13:41,440 Speaker 1: the textbook computable equilibrium model in the fat world of saying, oh, 280 00:13:41,520 --> 00:13:43,920 Speaker 1: let's just gradually trying to slow things down, and now 281 00:13:43,960 --> 00:13:46,760 Speaker 1: we're suddenly facing a situation. Well, maybe it's not just 282 00:13:46,800 --> 00:13:50,240 Speaker 1: a gradual slow grind lower on GDP. Maybe the risk 283 00:13:50,280 --> 00:13:52,360 Speaker 1: now is that you suddenly will have a sudden stop 284 00:13:52,520 --> 00:13:55,840 Speaker 1: on people's ability to borrow for cars, to borrow, to 285 00:13:55,840 --> 00:13:58,880 Speaker 1: buy a house to borrow, to your credit card to borrow, 286 00:13:58,920 --> 00:14:01,199 Speaker 1: and consumer loans. Even operates who want to build a 287 00:14:01,240 --> 00:14:04,120 Speaker 1: new factory also might have challenges if the credit condition 288 00:14:04,160 --> 00:14:06,120 Speaker 1: is really tightened from one day to the other. So 289 00:14:06,160 --> 00:14:07,920 Speaker 1: what we need to wait for now, and what's really 290 00:14:07,960 --> 00:14:10,120 Speaker 1: important is that for the next weeks and months, we 291 00:14:10,120 --> 00:14:13,439 Speaker 1: need to find out how severe is the credit contraction 292 00:14:13,520 --> 00:14:15,840 Speaker 1: in the banking sector, because might to their question, that 293 00:14:15,880 --> 00:14:18,520 Speaker 1: will determine how quickly the on Incloyer rate can go 294 00:14:18,600 --> 00:14:21,680 Speaker 1: up under the old system, meaning a week ago, with 295 00:14:21,800 --> 00:14:24,360 Speaker 1: the FED basically stepping on the brakes, there were scenarios 296 00:14:24,360 --> 00:14:26,320 Speaker 1: where that could happen in a gradual and smooth way 297 00:14:26,320 --> 00:14:28,280 Speaker 1: and we could have a soft landing, even though there 298 00:14:28,280 --> 00:14:30,320 Speaker 1: was a lot of debate about that. But now if 299 00:14:30,320 --> 00:14:32,200 Speaker 1: you add on the layer here that the risk is 300 00:14:32,240 --> 00:14:35,040 Speaker 1: that the banks might at the same time all begin 301 00:14:35,120 --> 00:14:38,000 Speaker 1: to say we just need to slow down our lending. 302 00:14:38,200 --> 00:14:40,120 Speaker 1: Then that comes with the risk of a sudden stop 303 00:14:40,120 --> 00:14:42,680 Speaker 1: in consumption, in caps and in hiring, and therefore the 304 00:14:42,760 --> 00:14:45,240 Speaker 1: risk that the unecloyner rate in the worst case, could 305 00:14:45,280 --> 00:14:54,280 Speaker 1: start to move higher recye quickly. So what is with 306 00:14:54,360 --> 00:14:56,960 Speaker 1: hindsight in mind, what's the answer? Like did the FED 307 00:14:57,240 --> 00:15:00,320 Speaker 1: raise too much too fast? Or did the FED have 308 00:15:01,080 --> 00:15:03,760 Speaker 1: good oversight of SVB or the other banks? Like what 309 00:15:04,000 --> 00:15:06,880 Speaker 1: is the all the above? Maybe? So the challenge, of 310 00:15:06,880 --> 00:15:09,200 Speaker 1: course for the FAT is that they really only have 311 00:15:09,280 --> 00:15:11,080 Speaker 1: one two lamely interest rates. I mean, if you really 312 00:15:11,080 --> 00:15:13,080 Speaker 1: think about it more broadly, of course they have three tools. 313 00:15:13,080 --> 00:15:15,000 Speaker 1: They have interest rates, they have forward guidance, and they 314 00:15:15,040 --> 00:15:18,080 Speaker 1: have the balance sheet. But I view that from their chairs, 315 00:15:18,160 --> 00:15:20,160 Speaker 1: I mean, what else could they have done, there was 316 00:15:20,160 --> 00:15:22,680 Speaker 1: a pandemic they needed the economis you come back. Then 317 00:15:22,720 --> 00:15:24,440 Speaker 1: it came back much faster, and then we got a 318 00:15:24,440 --> 00:15:26,200 Speaker 1: lot of inflation, and then they said, okay, but then 319 00:15:26,240 --> 00:15:28,920 Speaker 1: we need to cool letdown. And then they've been basically 320 00:15:28,920 --> 00:15:31,760 Speaker 1: trying to cool inflasion down. And here we are now 321 00:15:31,800 --> 00:15:35,200 Speaker 1: we are at risk that that cooling inflation down something broke, 322 00:15:35,280 --> 00:15:38,200 Speaker 1: as you said, and that resulted then in the risk 323 00:15:38,240 --> 00:15:40,440 Speaker 1: that we might now have a fastest slowdown. So it 324 00:15:40,480 --> 00:15:43,080 Speaker 1: gets to the old saying that Milton Friedman said that 325 00:15:43,120 --> 00:15:44,720 Speaker 1: you go into your shower and you turn it on, 326 00:15:44,760 --> 00:15:46,600 Speaker 1: and it doesn't get hard immediately, and you wait, and 327 00:15:46,600 --> 00:15:48,520 Speaker 1: then suddenly it gets really hard, and then you turn 328 00:15:48,560 --> 00:15:49,920 Speaker 1: it down, and then you wait and then it gets 329 00:15:49,920 --> 00:15:52,320 Speaker 1: really cooled. So for the fat the risk really here 330 00:15:52,440 --> 00:15:55,280 Speaker 1: is that they have just been really trying to manage 331 00:15:55,320 --> 00:15:58,880 Speaker 1: as good as they can, but they are I mean, 332 00:15:59,400 --> 00:16:01,280 Speaker 1: it has been really, of course a challenge for them 333 00:16:01,280 --> 00:16:03,560 Speaker 1: to figure out exactly how much and how little. And 334 00:16:03,920 --> 00:16:06,240 Speaker 1: this new situation that has just appeared with the banking 335 00:16:06,280 --> 00:16:08,520 Speaker 1: stake and the risk again because the regional banks are 336 00:16:08,640 --> 00:16:12,480 Speaker 1: so important in the US economy that suddenly now if 337 00:16:12,480 --> 00:16:15,200 Speaker 1: they are beginning to hold back on credit, then it 338 00:16:15,280 --> 00:16:19,320 Speaker 1: could just have very severe consequences. Proud Rutgers grad By 339 00:16:19,360 --> 00:16:22,920 Speaker 1: the way, did you know that. I just realized that 340 00:16:23,280 --> 00:16:25,760 Speaker 1: a couple of weeks ago reading Alan Blunder's book. Yeah, 341 00:16:25,880 --> 00:16:29,440 Speaker 1: you don't hear of many Rutgers economists, but he's probatics 342 00:16:29,680 --> 00:16:33,920 Speaker 1: the most prominent. But you know twurst In famously, and 343 00:16:34,000 --> 00:16:36,800 Speaker 1: you hear this all the time from Chair Pow and 344 00:16:36,880 --> 00:16:42,560 Speaker 1: other FED officials. Is the long and variable lag in 345 00:16:43,160 --> 00:16:45,600 Speaker 1: the effect of monetary policy. In other words, you know 346 00:16:45,680 --> 00:16:48,520 Speaker 1: where they raising rates for more than a year there 347 00:16:48,600 --> 00:16:50,800 Speaker 1: and everything seemed fine and then bam, we get we 348 00:16:50,840 --> 00:16:53,760 Speaker 1: get hit by this. You know, surprise problem with with 349 00:16:53,800 --> 00:16:56,280 Speaker 1: the banks? Does it? Do you think that works on 350 00:16:56,320 --> 00:16:58,840 Speaker 1: the way down with rates too? In other words, even 351 00:16:58,880 --> 00:17:02,080 Speaker 1: if the FED word to pivot immediately and either pause 352 00:17:02,320 --> 00:17:06,639 Speaker 1: or start cutting rates, is it sort of that's not 353 00:17:06,680 --> 00:17:08,520 Speaker 1: going to stop what's coming? You know what I mean? Yeah? 354 00:17:08,560 --> 00:17:10,840 Speaker 1: The problem with that, of course is that now funding 355 00:17:10,840 --> 00:17:13,120 Speaker 1: costs have also gone up. The FRIA, yes spread has 356 00:17:13,119 --> 00:17:15,400 Speaker 1: been widening. You have also seen the i G bank 357 00:17:15,480 --> 00:17:17,720 Speaker 1: spread also starting to widen. I mean that the funding 358 00:17:17,720 --> 00:17:20,119 Speaker 1: cost of banks have increased, not only because of the 359 00:17:20,119 --> 00:17:22,480 Speaker 1: FIT fund rate going up, but simply because the spread 360 00:17:22,480 --> 00:17:24,359 Speaker 1: on top of that has also been going up. So 361 00:17:24,440 --> 00:17:25,960 Speaker 1: that means that if it's that spread is now so 362 00:17:26,040 --> 00:17:28,040 Speaker 1: high that it has become very expensive for banks to 363 00:17:28,040 --> 00:17:31,200 Speaker 1: fund themselves. If the FIT did cut rates tomorrow, then 364 00:17:31,240 --> 00:17:33,679 Speaker 1: that would be helpful in terms of lowering the funding 365 00:17:33,720 --> 00:17:36,359 Speaker 1: cost for banks. But the answer to your question is 366 00:17:36,359 --> 00:17:39,320 Speaker 1: that when you suddenly have a significant increase in the 367 00:17:39,400 --> 00:17:42,880 Speaker 1: cost of capital at the viry highest level across the economy, 368 00:17:43,200 --> 00:17:45,720 Speaker 1: then the real answer to do that for the FIT 369 00:17:45,800 --> 00:17:47,960 Speaker 1: to solve that problem is just to lower interest rates. 370 00:17:48,200 --> 00:17:50,520 Speaker 1: But the problem is, as you know that, you put 371 00:17:50,520 --> 00:17:52,359 Speaker 1: that up on the scale. On the one hand, hey 372 00:17:52,359 --> 00:17:54,960 Speaker 1: wait a minute, inflation is six percent. They can't blower, 373 00:17:55,040 --> 00:17:57,240 Speaker 1: we should actually raise interest rates. On the other side 374 00:17:57,280 --> 00:17:59,200 Speaker 1: of the scale, you have an apple ower here and 375 00:17:59,200 --> 00:18:00,800 Speaker 1: an orange o here. You say, well, we put the 376 00:18:00,840 --> 00:18:03,600 Speaker 1: orange over here because now we should be actually lowering 377 00:18:03,640 --> 00:18:07,919 Speaker 1: interest rates to improve financial stability. And it really becomes 378 00:18:07,920 --> 00:18:10,560 Speaker 1: a real challenge for them to suddenly change their views 379 00:18:10,600 --> 00:18:13,000 Speaker 1: from saying now it was all inflation, inflation, inflation for 380 00:18:13,040 --> 00:18:15,280 Speaker 1: so long, so now suddenly say, well, now it's financial 381 00:18:15,280 --> 00:18:17,920 Speaker 1: stability and now it's not too much inflation. And that's 382 00:18:17,960 --> 00:18:21,600 Speaker 1: really the challenge in terms of the decision for their 383 00:18:21,680 --> 00:18:24,560 Speaker 1: FOEMC that they have ahead of them, name need, what 384 00:18:24,560 --> 00:18:26,400 Speaker 1: are they going to do in response to this when 385 00:18:26,440 --> 00:18:29,520 Speaker 1: inflation is still so high. Yeah, I've heard described as 386 00:18:29,560 --> 00:18:31,320 Speaker 1: you know, the FED has two fires to put out 387 00:18:31,359 --> 00:18:35,040 Speaker 1: in one bucket of water, and presumably great description. They're 388 00:18:35,080 --> 00:18:38,160 Speaker 1: going to be focused on that inflation fire primarily so 389 00:18:38,280 --> 00:18:40,199 Speaker 1: they but the problem, of course is that if they 390 00:18:40,240 --> 00:18:43,439 Speaker 1: start ignoring their financial stability fire, then the risk of 391 00:18:43,440 --> 00:18:45,879 Speaker 1: course could also the flames could come up quite substantially 392 00:18:45,920 --> 00:18:48,199 Speaker 1: on that front. So so it is really a challenge. 393 00:18:48,440 --> 00:18:51,159 Speaker 1: But let's see where the financial system is in a 394 00:18:51,160 --> 00:18:54,280 Speaker 1: few weeks. But for now, I would go into this 395 00:18:54,440 --> 00:18:56,840 Speaker 1: FMC meeting if I were in the FMC and say, okay, 396 00:18:56,880 --> 00:18:59,720 Speaker 1: you know what, it is absolutely okay to take a 397 00:18:59,760 --> 00:19:01,800 Speaker 1: pall and we can always just high rates, and we 398 00:19:01,840 --> 00:19:04,520 Speaker 1: can even high rates fifty if things reduce stabilize. But 399 00:19:04,600 --> 00:19:07,720 Speaker 1: let's now watch and see how the economy, most importantly, 400 00:19:07,920 --> 00:19:11,480 Speaker 1: how regional bank credit is doing over the coming weeks 401 00:19:11,480 --> 00:19:14,040 Speaker 1: and months ahead. The other thing I've heard quite a 402 00:19:14,040 --> 00:19:16,520 Speaker 1: bit from people I talked to is that the FED 403 00:19:16,600 --> 00:19:20,040 Speaker 1: had wanted to tighten financial conditions for the past year, 404 00:19:20,600 --> 00:19:24,560 Speaker 1: and that this period what's happening now with the banking 405 00:19:24,600 --> 00:19:27,680 Speaker 1: sector has tightened them almost more than a twenty five 406 00:19:27,720 --> 00:19:31,040 Speaker 1: basis point high. I'm wondering if you've been thinking, Yeah, 407 00:19:31,280 --> 00:19:33,560 Speaker 1: if I into my Bloomberg screen look at the Bloomberg 408 00:19:33,560 --> 00:19:37,159 Speaker 1: Financial Conditions Index as a power user, I didn't know 409 00:19:37,200 --> 00:19:42,760 Speaker 1: about the tail one for listeners for around where the 410 00:19:42,760 --> 00:19:45,320 Speaker 1: Taylor role is simply trying to figure out what the 411 00:19:45,320 --> 00:19:47,800 Speaker 1: FED funds rates should be based on inflation and the 412 00:19:47,880 --> 00:19:50,600 Speaker 1: unemployment rate and only that and nothing else and so 413 00:19:50,720 --> 00:19:54,240 Speaker 1: and of course financial conditions to your great question, if 414 00:19:54,280 --> 00:19:56,040 Speaker 1: you look at where they are ever is ways, the 415 00:19:56,080 --> 00:19:58,240 Speaker 1: FED also has Saint Louis FED has a measure, Chicago 416 00:19:58,240 --> 00:20:01,399 Speaker 1: Feed has a measure, so as Kansas it also has 417 00:20:01,440 --> 00:20:04,760 Speaker 1: a measure. Everyone has a measure of financial coditions. But 418 00:20:04,760 --> 00:20:06,399 Speaker 1: the bloom Bag one, which is real time. Which is 419 00:20:06,400 --> 00:20:08,560 Speaker 1: why I like that the most, is that throughout the 420 00:20:08,600 --> 00:20:11,480 Speaker 1: day you can actually see where a financial coditions. Right now, 421 00:20:11,680 --> 00:20:14,920 Speaker 1: it has certainly tightened, but we are nowhere remotely close 422 00:20:14,960 --> 00:20:17,160 Speaker 1: to where we were in twenty twenty, and we are 423 00:20:17,200 --> 00:20:19,360 Speaker 1: definitely far far away from where we were in two 424 00:20:19,359 --> 00:20:22,280 Speaker 1: thousand and eight. So yes, it's good that financial conditions 425 00:20:22,280 --> 00:20:25,000 Speaker 1: have tightened in terms of slowing inflasion down, but it's 426 00:20:25,040 --> 00:20:28,280 Speaker 1: happening in some sense too quickly, because it's beginning to 427 00:20:28,359 --> 00:20:31,320 Speaker 1: raise the risk of financial stapidity. So yes, financial conditions, 428 00:20:31,440 --> 00:20:33,800 Speaker 1: you want to tighten that to slow inflasion down. But 429 00:20:33,840 --> 00:20:35,679 Speaker 1: the problem is if that comes with the risk of 430 00:20:35,720 --> 00:20:39,600 Speaker 1: financial stapidity, then of course it becomes a quite different matter. 431 00:20:40,160 --> 00:20:42,600 Speaker 1: You know, you mentioned the spreads as far as bank 432 00:20:42,760 --> 00:20:46,640 Speaker 1: funding costs go, and I think the sort of center 433 00:20:46,760 --> 00:20:49,600 Speaker 1: of that story right now is obviously Credit Swiss. They've 434 00:20:49,600 --> 00:20:51,119 Speaker 1: had a bad week. I mean, this has been a 435 00:20:51,119 --> 00:20:55,399 Speaker 1: bank that's surely been the focus of a lot of 436 00:20:55,400 --> 00:20:58,600 Speaker 1: concern for a while now, but this week, first, you know, 437 00:20:58,640 --> 00:21:01,560 Speaker 1: they came out and said, look, we had material weakness 438 00:21:01,560 --> 00:21:04,600 Speaker 1: and our reporting for the last couple of years. Their auditor, 439 00:21:04,680 --> 00:21:09,960 Speaker 1: PwC gave an adverse opinion. They delay their their annual 440 00:21:10,040 --> 00:21:12,720 Speaker 1: report because of back and forth with the SEC. But 441 00:21:12,760 --> 00:21:15,960 Speaker 1: really what is causing the acute problem is the chair 442 00:21:16,000 --> 00:21:18,919 Speaker 1: of the Saudi National Bank, their biggest shareholder, came out 443 00:21:18,960 --> 00:21:22,520 Speaker 1: and said we can't buy any more stock for various reasons, 444 00:21:22,840 --> 00:21:25,960 Speaker 1: but really spooking the market. So how do you see 445 00:21:26,000 --> 00:21:28,520 Speaker 1: the credit swist playing out? No, and and and the 446 00:21:28,680 --> 00:21:31,320 Speaker 1: situation is evolving as we speak here. I view this 447 00:21:31,400 --> 00:21:33,360 Speaker 1: in the broader context of that there's just a lot 448 00:21:33,359 --> 00:21:36,480 Speaker 1: of uncertainty and instability in the system. And if you 449 00:21:36,480 --> 00:21:38,399 Speaker 1: are both the easyp and you fed, and you look 450 00:21:38,440 --> 00:21:40,919 Speaker 1: at this, the conclusion would be to say, okay, but 451 00:21:41,040 --> 00:21:43,879 Speaker 1: we got to have some resolution and some stability to 452 00:21:44,600 --> 00:21:48,240 Speaker 1: whatever these challenges are at the moment. So I absolutely 453 00:21:48,280 --> 00:21:51,360 Speaker 1: agree that there are certainly a lot of challenges for markets, 454 00:21:51,400 --> 00:21:54,679 Speaker 1: and we I mean as as as we move forward, 455 00:21:54,680 --> 00:21:57,160 Speaker 1: we will see how it's resolved. But it is clear 456 00:21:57,240 --> 00:22:00,280 Speaker 1: that this continues to be a broader risk to the 457 00:22:00,359 --> 00:22:04,520 Speaker 1: macroeconomic outlook. If you have financial stability with the intensity 458 00:22:04,560 --> 00:22:06,400 Speaker 1: that we have at the moment, why does it matter 459 00:22:06,440 --> 00:22:09,880 Speaker 1: for US investors if it's happening in Europe. Yeah. So 460 00:22:10,720 --> 00:22:12,639 Speaker 1: the very important answers that, of course, is that the 461 00:22:12,680 --> 00:22:16,080 Speaker 1: global financial system is just highly integrated. There's some final 462 00:22:16,160 --> 00:22:20,000 Speaker 1: nuances that the Chinese banks and Russian banks are somewhat 463 00:22:20,040 --> 00:22:24,760 Speaker 1: separated from the European and US banks, but across US 464 00:22:24,800 --> 00:22:27,360 Speaker 1: and Europe. You have so many big US banks operating 465 00:22:27,359 --> 00:22:29,520 Speaker 1: in Europe, you have so many big European banks operating 466 00:22:29,560 --> 00:22:34,240 Speaker 1: in the US, that the counterparty issues issues about everything 467 00:22:34,280 --> 00:22:36,879 Speaker 1: that has to do with lending and borrowing, and ultimately 468 00:22:36,920 --> 00:22:40,920 Speaker 1: trust will be very important in this regard. So that's 469 00:22:40,960 --> 00:22:44,240 Speaker 1: why the global financial system is just so integrated and 470 00:22:44,320 --> 00:22:47,639 Speaker 1: so interlinked in so many different ways that the trust 471 00:22:47,680 --> 00:23:06,120 Speaker 1: and confidence in each other is just absolutely critical. So Twurston, 472 00:23:06,200 --> 00:23:09,359 Speaker 1: you know, we obviously have a lot of individual investors 473 00:23:09,160 --> 00:23:12,919 Speaker 1: and some professional money managers I hope anyway listening to 474 00:23:12,960 --> 00:23:16,040 Speaker 1: the show, what share sort of two minute advice to 475 00:23:16,080 --> 00:23:18,680 Speaker 1: them on how to approach the rest of the year. 476 00:23:19,080 --> 00:23:21,479 Speaker 1: So one short answer to the current situation is due 477 00:23:21,480 --> 00:23:25,119 Speaker 1: buy duration. In other words, if you think that short 478 00:23:25,240 --> 00:23:27,800 Speaker 1: rates have peaked, and you think that the fate is 479 00:23:27,800 --> 00:23:30,560 Speaker 1: not going to raise rates more, and if you worried 480 00:23:30,560 --> 00:23:34,280 Speaker 1: about some slowdown potentially coming, the first answer to that 481 00:23:34,440 --> 00:23:37,360 Speaker 1: is that you should then begin to worry about well, 482 00:23:37,400 --> 00:23:40,199 Speaker 1: maybe long rates are going to go down. So that 483 00:23:40,280 --> 00:23:43,399 Speaker 1: means that make sure that you are protected with your 484 00:23:43,480 --> 00:23:45,480 Speaker 1: risky ass to say this and P. Five hundred, you 485 00:23:45,680 --> 00:23:49,119 Speaker 1: high yield your loans and lower rate of credit against 486 00:23:49,160 --> 00:23:52,239 Speaker 1: the potentiality risk of a slowdown. Investment great credit and 487 00:23:52,400 --> 00:23:56,840 Speaker 1: high safe credit assets will still do well if there 488 00:23:56,920 --> 00:23:59,760 Speaker 1: is a recession. Have historically done that. So that's another 489 00:23:59,800 --> 00:24:02,920 Speaker 1: way to quote unquote hide if there is a slowdown. 490 00:24:02,960 --> 00:24:04,879 Speaker 1: But the textbook would tell you that if there is 491 00:24:04,920 --> 00:24:08,120 Speaker 1: a risk of a slowdown coming, then you should be 492 00:24:08,520 --> 00:24:11,080 Speaker 1: in the safest places, which in this situation would be 493 00:24:11,600 --> 00:24:14,600 Speaker 1: up in quality and long in duration, so ig and 494 00:24:14,680 --> 00:24:18,359 Speaker 1: treasuries ten years, five years, thirty years, thirty years, any 495 00:24:18,560 --> 00:24:20,680 Speaker 1: depending on. As long as you can get well and 496 00:24:20,920 --> 00:24:22,720 Speaker 1: as long as it's liquid, and you want to make 497 00:24:22,720 --> 00:24:25,040 Speaker 1: sure that you're ready for if there is any quick 498 00:24:25,040 --> 00:24:27,760 Speaker 1: resolution to any of these things, then you could be 499 00:24:27,920 --> 00:24:30,639 Speaker 1: prepared then to jump into this and p. Five hundred 500 00:24:30,680 --> 00:24:34,760 Speaker 1: and nastag again. But the issue here is that nobody 501 00:24:34,800 --> 00:24:38,240 Speaker 1: really knows the duration of how long time this turbulence 502 00:24:38,320 --> 00:24:40,320 Speaker 1: is going to persist. I feel very strongly that it 503 00:24:40,320 --> 00:24:42,760 Speaker 1: will not be forever. It may be over even in 504 00:24:42,800 --> 00:24:44,560 Speaker 1: a few weeks. In the best case, it could be 505 00:24:44,560 --> 00:24:47,320 Speaker 1: oh in a few days. But given that this uncertainty 506 00:24:47,359 --> 00:24:50,199 Speaker 1: is still here and we still need some resolution to 507 00:24:50,240 --> 00:24:51,959 Speaker 1: a number of the things that we have spoken about here, 508 00:24:52,440 --> 00:24:54,800 Speaker 1: then for now, it will probably take some time. It's 509 00:24:54,840 --> 00:24:57,560 Speaker 1: like the VIX and thinking about the memory of a 510 00:24:57,600 --> 00:25:00,640 Speaker 1: lot of the things in financial markets is like thirty days. 511 00:25:00,680 --> 00:25:03,320 Speaker 1: So you probably need I would say three four weeks 512 00:25:03,320 --> 00:25:06,360 Speaker 1: at least where things are ratively come before you can 513 00:25:06,359 --> 00:25:08,880 Speaker 1: get come out of the bushes and see what's going 514 00:25:08,920 --> 00:25:13,359 Speaker 1: on again. Yeah, Well, and the whiplash in rates this 515 00:25:13,440 --> 00:25:15,800 Speaker 1: year on the shirt and this week on the shirt, 516 00:25:15,880 --> 00:25:17,960 Speaker 1: and that two year yield up I don't know what 517 00:25:18,880 --> 00:25:23,760 Speaker 1: down fifty sixty basis points one day just last week 518 00:25:23,800 --> 00:25:26,280 Speaker 1: that Powell was saying, we'll be hiking a lot more. Yeah, 519 00:25:26,480 --> 00:25:29,479 Speaker 1: I've lost track of how many sigma events that I know. 520 00:25:29,560 --> 00:25:32,280 Speaker 1: But that's the volatility is just the stomach joining here. 521 00:25:32,400 --> 00:25:34,600 Speaker 1: I mean, it's eye popping what we're seeing. The moving 522 00:25:34,680 --> 00:25:37,200 Speaker 1: decks relative to VIX. VIX has also gone up, but 523 00:25:37,240 --> 00:25:40,080 Speaker 1: the moving decks, which is implied VALL for rates has 524 00:25:40,080 --> 00:25:42,840 Speaker 1: also gone up quite significantly because there's just a lot 525 00:25:42,880 --> 00:25:44,520 Speaker 1: of and this is of course from options, so this 526 00:25:44,640 --> 00:25:47,200 Speaker 1: is real money that people are betting on saying either 527 00:25:47,280 --> 00:25:48,840 Speaker 1: rates are going to go up, people are willing to 528 00:25:48,880 --> 00:25:50,919 Speaker 1: pay for that and other people are willing to say no, no, 529 00:25:51,000 --> 00:25:53,359 Speaker 1: rates are actually going to go down. So that dispersion 530 00:25:53,400 --> 00:25:55,600 Speaker 1: of use, which is basically what implied all is the 531 00:25:55,640 --> 00:25:58,679 Speaker 1: dispersion of use is really really wide when you have 532 00:25:58,720 --> 00:26:01,840 Speaker 1: these elevated levels of and that makes complete sense. Different 533 00:26:01,840 --> 00:26:04,760 Speaker 1: people are doing different things and buying protection against different 534 00:26:04,760 --> 00:26:07,719 Speaker 1: scenarios because the outcome and the outlook is just so foggy. 535 00:26:08,080 --> 00:26:11,359 Speaker 1: But I feel like a big chunk of the macro 536 00:26:11,440 --> 00:26:14,359 Speaker 1: hedge fund community must have been caught on the wrong foot, 537 00:26:14,920 --> 00:26:19,240 Speaker 1: you know, very much a short position in the short end, 538 00:26:19,600 --> 00:26:23,400 Speaker 1: according to the CFTC data. A painful week. I mean, 539 00:26:23,560 --> 00:26:28,720 Speaker 1: is how do you see this week affecting the hedge 540 00:26:28,720 --> 00:26:31,879 Speaker 1: fund world? Is it? Does it add to the worries 541 00:26:31,880 --> 00:26:34,440 Speaker 1: about risk aversion going forward? Yeah, because the hits fund 542 00:26:34,440 --> 00:26:38,800 Speaker 1: macro trade going into this weekend was no landing. Everything 543 00:26:38,880 --> 00:26:41,040 Speaker 1: is fine. Inflation is high, we got a high rates. 544 00:26:41,080 --> 00:26:43,800 Speaker 1: It's slow and gradual. If it will go maybe twenty five, 545 00:26:43,840 --> 00:26:47,119 Speaker 1: maybe fifty, and then twenty five and then ultimately the 546 00:26:47,119 --> 00:26:50,160 Speaker 1: economy will begin to slow down. But most people were 547 00:26:50,200 --> 00:26:53,199 Speaker 1: probably thinking in the macro hits fund community, well, you 548 00:26:53,240 --> 00:26:55,360 Speaker 1: know what, we probably have another three to six months 549 00:26:55,400 --> 00:26:57,000 Speaker 1: before I need to worry about that. So for now 550 00:26:57,240 --> 00:26:59,840 Speaker 1: I'm still bidding on rates higher and boom out of 551 00:26:59,840 --> 00:27:01,960 Speaker 1: the loo this weekend. We now have, of course, a 552 00:27:02,040 --> 00:27:04,760 Speaker 1: very significant decline in rates over the last few trading 553 00:27:04,800 --> 00:27:07,199 Speaker 1: sessions here, and the consequence of that, of course, is 554 00:27:07,240 --> 00:27:10,200 Speaker 1: that a lot of people were just squeezed out of 555 00:27:10,240 --> 00:27:13,360 Speaker 1: the short positions that they had in fixed income. So 556 00:27:13,400 --> 00:27:16,199 Speaker 1: back to what you were just talking about with the 557 00:27:16,240 --> 00:27:20,120 Speaker 1: move and the VIX, Katie Greifeld and I actually were 558 00:27:20,160 --> 00:27:23,320 Speaker 1: looking at this this week. The spread between the move 559 00:27:23,359 --> 00:27:27,080 Speaker 1: index and the VIX on Tuesday was the widest since 560 00:27:27,119 --> 00:27:31,439 Speaker 1: two nine, And what we were thinking about is just 561 00:27:31,480 --> 00:27:35,240 Speaker 1: the pessimism that's been inherent to the bond market for 562 00:27:35,560 --> 00:27:38,879 Speaker 1: weeks now, whereas maybe on the stock market side you 563 00:27:38,960 --> 00:27:41,920 Speaker 1: had even on Monday, I think we were down point 564 00:27:41,960 --> 00:27:45,719 Speaker 1: one five percent, which considering what we're talking about, is 565 00:27:45,720 --> 00:27:49,679 Speaker 1: sort of it's impressive, I would say, But then we 566 00:27:49,760 --> 00:27:52,320 Speaker 1: had that spread actually narrow a bit, where it does 567 00:27:52,400 --> 00:27:56,040 Speaker 1: feel like the stock market side is also starting to 568 00:27:56,080 --> 00:27:59,240 Speaker 1: take things much more seriously. I'm just wondering what is 569 00:27:59,240 --> 00:28:04,639 Speaker 1: it the like, what was it that Because in the 570 00:28:04,680 --> 00:28:07,680 Speaker 1: stock market, people are known to be optimists, right, Yeah, 571 00:28:07,760 --> 00:28:09,560 Speaker 1: and you have been told for the last fifteen years 572 00:28:09,560 --> 00:28:11,680 Speaker 1: to buy on dips. Yes, exactly so. And you're seeing 573 00:28:11,680 --> 00:28:13,879 Speaker 1: in the retail flows. We've also seen him in the 574 00:28:13,960 --> 00:28:16,160 Speaker 1: last several training sessions that a lot of the buyers 575 00:28:16,160 --> 00:28:19,400 Speaker 1: are just easyf buyers, many retail because hey, stocks went down, 576 00:28:19,400 --> 00:28:21,520 Speaker 1: that's always a good opportunity to go up. But but 577 00:28:21,560 --> 00:28:23,600 Speaker 1: you're absolutely right, a very there was some very important 578 00:28:23,640 --> 00:28:26,680 Speaker 1: things going on inside the SNP five hundred, A rotation 579 00:28:26,720 --> 00:28:30,680 Speaker 1: of course, away from regional banks and up towards other 580 00:28:30,720 --> 00:28:33,280 Speaker 1: sectors that of course have been particularly cyclicals and financials 581 00:28:33,320 --> 00:28:35,320 Speaker 1: that have been doing better, a meaning at at the 582 00:28:35,600 --> 00:28:38,080 Speaker 1: bigger financial names. But but the short answer to what 583 00:28:38,120 --> 00:28:40,640 Speaker 1: you're saying is absolutely if you think about the VIX 584 00:28:40,760 --> 00:28:43,440 Speaker 1: and the moving the meaning implied volatility in fixed income 585 00:28:43,600 --> 00:28:46,480 Speaker 1: and implied volatility in equities, you would think that the 586 00:28:46,600 --> 00:28:48,880 Speaker 1: story that's being told in the stock market is the 587 00:28:48,920 --> 00:28:51,160 Speaker 1: same as the story that's being told in the race market. 588 00:28:51,200 --> 00:28:53,840 Speaker 1: So you would think that a shark hits the economy, 589 00:28:53,880 --> 00:28:56,360 Speaker 1: in this case inflation, and certainly out of the blue. 590 00:28:56,600 --> 00:28:58,800 Speaker 1: This is only something that's a worry for race markets. 591 00:28:59,120 --> 00:29:01,400 Speaker 1: It's not a worry the stock market. I mean, why 592 00:29:01,520 --> 00:29:03,600 Speaker 1: was it that the movie index has been so elevated 593 00:29:03,640 --> 00:29:07,480 Speaker 1: now for actually several years relative to the VIX just saying, oh, inflation, 594 00:29:07,560 --> 00:29:09,520 Speaker 1: that's not for us, that's just for those people over 595 00:29:09,520 --> 00:29:14,480 Speaker 1: then bonds. So this divergence and inconsistency, you can't tell 596 00:29:14,920 --> 00:29:17,960 Speaker 1: different stories and different markets. We're living in the same economy, 597 00:29:18,000 --> 00:29:20,640 Speaker 1: the same financial market. So either the stock market is 598 00:29:20,640 --> 00:29:22,960 Speaker 1: wrong and needs to be a lot lower, and bond 599 00:29:22,960 --> 00:29:25,320 Speaker 1: markets are right that things are actually pretty bad and 600 00:29:25,320 --> 00:29:27,560 Speaker 1: there should be a lot more valency, is your vice versa. 601 00:29:27,840 --> 00:29:30,720 Speaker 1: Maybe the bond market is wrong and maybe inflation will 602 00:29:30,760 --> 00:29:32,640 Speaker 1: be coming down quickly and maybe we will have a 603 00:29:32,680 --> 00:29:35,640 Speaker 1: soft landing. That's absolutely not my baseline scenario at this point, 604 00:29:35,800 --> 00:29:38,160 Speaker 1: and in that case, stocks should be higher. So that's 605 00:29:38,160 --> 00:29:40,640 Speaker 1: another way of saying that, yes, it's absolutely the case, 606 00:29:40,640 --> 00:29:42,920 Speaker 1: and I totally agree with what you're saying that equities 607 00:29:43,160 --> 00:29:46,760 Speaker 1: have been surprisingly resilient in the phase of this inflation shock. 608 00:29:46,840 --> 00:29:49,040 Speaker 1: Because remember, if we just step back and say, what 609 00:29:49,280 --> 00:29:51,040 Speaker 1: was it upon, So the reason that the FETE was 610 00:29:51,040 --> 00:29:54,000 Speaker 1: trying to achieve, the FETE was trying to slow down growth. 611 00:29:54,200 --> 00:29:57,240 Speaker 1: The FETE was trying to slow down consumer spending, slowdown hiring, 612 00:29:57,400 --> 00:29:59,920 Speaker 1: slowdown capex spending. In other words, the fate was trying 613 00:30:00,080 --> 00:30:02,400 Speaker 1: slow down earnings. And if I'm told that the Fed 614 00:30:02,480 --> 00:30:04,720 Speaker 1: is trying to slow down the e in the PE ratio, 615 00:30:05,040 --> 00:30:07,120 Speaker 1: I should also worry about that. Maybe that probably means 616 00:30:07,120 --> 00:30:09,680 Speaker 1: that equities should be going down. But equities have remained 617 00:30:09,720 --> 00:30:13,240 Speaker 1: incredibly resilient, and the VIX has just been basically saying, oh, 618 00:30:13,280 --> 00:30:16,800 Speaker 1: this whole issue about slowdown coming. That's probably because equity 619 00:30:16,840 --> 00:30:20,040 Speaker 1: investors probably mainly care about the last earning season and 620 00:30:20,080 --> 00:30:22,160 Speaker 1: the next earning season. But if I'm a bund investor, 621 00:30:22,320 --> 00:30:23,960 Speaker 1: I don't have the luxury of only caring about the 622 00:30:24,000 --> 00:30:25,560 Speaker 1: last earning season and the next earning seas iused to 623 00:30:25,600 --> 00:30:27,480 Speaker 1: think about what will happen in two years, five years, 624 00:30:27,480 --> 00:30:29,680 Speaker 1: and even ten years. So that means the bund investors 625 00:30:29,680 --> 00:30:32,280 Speaker 1: have said, well, where they fed racist rates, earnings will 626 00:30:32,320 --> 00:30:34,920 Speaker 1: slow down, But equity investors have looked at the latest 627 00:30:34,960 --> 00:30:37,000 Speaker 1: earning season is it But it's not slowing down, So 628 00:30:37,040 --> 00:30:39,000 Speaker 1: why are you so worried? So that's why it was 629 00:30:39,040 --> 00:30:41,040 Speaker 1: the case of that we were waiting for the lack 630 00:30:41,080 --> 00:30:44,520 Speaker 1: of monetary policy to eventually slow things down, an equity 631 00:30:44,560 --> 00:30:46,560 Speaker 1: investors said, but it's not happening, So why I use 632 00:30:46,640 --> 00:30:49,040 Speaker 1: a word in bund markets? So that's why there was indeed, 633 00:30:49,160 --> 00:30:51,560 Speaker 1: as you pointed out in your story with Katie, that 634 00:30:51,640 --> 00:30:54,880 Speaker 1: there is indeed a very inconsistency between what the bond 635 00:30:54,920 --> 00:30:57,160 Speaker 1: market on the moving deck side and broadly speaking on 636 00:30:57,160 --> 00:30:59,400 Speaker 1: the level of rates was saying relative to what we 637 00:30:59,400 --> 00:31:03,800 Speaker 1: were seeing in markets. Well, you know, the other big 638 00:31:04,280 --> 00:31:07,240 Speaker 1: major story of last year was that that traditional inverse 639 00:31:07,320 --> 00:31:12,280 Speaker 1: bond stock correlation broke down, and you know, both fell 640 00:31:12,320 --> 00:31:16,680 Speaker 1: together and worst year for sixty forty and absolutely anyone's lifetime, 641 00:31:16,800 --> 00:31:20,400 Speaker 1: I mean is and you also pointed out, well, you know, 642 00:31:20,440 --> 00:31:22,840 Speaker 1: if we do have this risk off rallying bonds, that 643 00:31:23,320 --> 00:31:25,360 Speaker 1: does take some of the pressure off of the banks 644 00:31:25,480 --> 00:31:29,880 Speaker 1: who are long duration. Are we stuck with that correlation 645 00:31:29,960 --> 00:31:32,000 Speaker 1: stock bond correlation that we've seen over the last year. 646 00:31:32,040 --> 00:31:34,800 Speaker 1: Where is there a chance that you know, this risk 647 00:31:34,840 --> 00:31:38,280 Speaker 1: off could get so extreme that it kind of returns 648 00:31:38,560 --> 00:31:41,360 Speaker 1: to the normal correlation. Yeah, that's really important. So absolutely 649 00:31:41,520 --> 00:31:44,960 Speaker 1: sixty forty didn't do will. Obviously when you both had that, 650 00:31:45,080 --> 00:31:48,640 Speaker 1: bond prices went down and stock prices went down, so 651 00:31:48,880 --> 00:31:51,080 Speaker 1: now today. Of course, up to a week ago, I 652 00:31:51,080 --> 00:31:53,360 Speaker 1: would also have said sixty forty will continue or not 653 00:31:53,400 --> 00:31:56,120 Speaker 1: do well. The problem for sixty forty today is that 654 00:31:56,160 --> 00:31:59,560 Speaker 1: now we have a fairly significant issue about will maybe 655 00:31:59,600 --> 00:32:02,440 Speaker 1: stocks at risk of really going down because they haven't 656 00:32:02,440 --> 00:32:04,840 Speaker 1: adjusted to what we just spoke about, named that there 657 00:32:04,920 --> 00:32:06,760 Speaker 1: might actually be a snowdown coming, not only because of 658 00:32:06,880 --> 00:32:08,840 Speaker 1: the FED hiking rates, but there might also be a 659 00:32:08,840 --> 00:32:12,480 Speaker 1: snowdown coming because of credit conditions tightening. So the risk 660 00:32:12,480 --> 00:32:15,000 Speaker 1: to the sixty fourty portfolio is that you may be 661 00:32:15,080 --> 00:32:17,760 Speaker 1: winning something maybe if rates go lower, but the stock 662 00:32:17,800 --> 00:32:20,240 Speaker 1: part of your portfolio is just going again hammered if 663 00:32:20,280 --> 00:32:22,440 Speaker 1: we do have a recession. So that's another way of 664 00:32:22,480 --> 00:32:25,240 Speaker 1: saying that at this point, as much as sixty forty 665 00:32:25,360 --> 00:32:27,400 Speaker 1: is the easy thing to do, and then go and 666 00:32:27,440 --> 00:32:29,400 Speaker 1: play golf or batmanton or whatever you do for two 667 00:32:29,440 --> 00:32:30,840 Speaker 1: years and you come back and say, hey, how is 668 00:32:30,840 --> 00:32:32,959 Speaker 1: it going. The risk of course now is that if 669 00:32:33,000 --> 00:32:36,600 Speaker 1: you are too overweight in some of those more risky 670 00:32:36,640 --> 00:32:38,959 Speaker 1: assets that tend to underperform when there's a recession, so 671 00:32:39,000 --> 00:32:41,800 Speaker 1: that's again lower ready credit, and that's of course equities, 672 00:32:42,040 --> 00:32:44,320 Speaker 1: then you run the risk of course, ultimately that your 673 00:32:44,320 --> 00:32:46,160 Speaker 1: portfolio will take a hit. So why not just step 674 00:32:46,160 --> 00:32:48,400 Speaker 1: away from the sixty fourty and say I can actually 675 00:32:48,480 --> 00:32:51,160 Speaker 1: do some stock picking and credit selection with the idea 676 00:32:51,200 --> 00:32:53,080 Speaker 1: of it there is a risk of a recession coming. 677 00:32:53,240 --> 00:32:55,680 Speaker 1: Maybe I should just not be in the stock market. 678 00:32:55,800 --> 00:32:58,200 Speaker 1: Maybe I should just think more about upping quality and 679 00:32:58,240 --> 00:33:01,760 Speaker 1: credit and maybe of course also in duration in bonds. Yeah, 680 00:33:02,120 --> 00:33:05,440 Speaker 1: Twursten slock of Apollo. Such a treat to get your 681 00:33:06,120 --> 00:33:09,680 Speaker 1: your views at this crazy time in markets. We really 682 00:33:09,720 --> 00:33:13,520 Speaker 1: appreciate it. We can't quite let you go just yet, Vildonna, 683 00:33:13,640 --> 00:33:16,200 Speaker 1: because we're gonna play craziest thing I saw in markets 684 00:33:16,200 --> 00:33:18,520 Speaker 1: this week, and there's there's a lot to choose from 685 00:33:18,880 --> 00:33:20,680 Speaker 1: so many. If you had done this last week, I 686 00:33:20,760 --> 00:33:24,960 Speaker 1: had nothing to say last week. I struggled last week, 687 00:33:25,000 --> 00:33:28,320 Speaker 1: and then this week I have the first Republic chart 688 00:33:28,440 --> 00:33:32,400 Speaker 1: up the two year yield, the ten year yield that 689 00:33:32,520 --> 00:33:36,440 Speaker 1: the like crazy charts. The financial conditions chart is like 690 00:33:37,040 --> 00:33:39,480 Speaker 1: when VLA is looking at yields, you know it's things 691 00:33:39,480 --> 00:33:43,120 Speaker 1: are something's going so yeah, but he shout out to 692 00:33:43,560 --> 00:33:48,960 Speaker 1: Mario D'Angelo for putting out that HSBC buying Silicon Valley Bank, 693 00:33:49,040 --> 00:33:51,720 Speaker 1: for one pound, one pound. I think that is I 694 00:33:51,760 --> 00:33:54,200 Speaker 1: think he wins the week for craziest thing. But let's 695 00:33:54,200 --> 00:33:57,440 Speaker 1: hear what you get. So I am really trying to 696 00:33:58,080 --> 00:34:01,600 Speaker 1: not think about the Bankings actor as much, which has 697 00:34:02,000 --> 00:34:05,160 Speaker 1: been impossible. But there's a Bloomberg story which also actually 698 00:34:05,160 --> 00:34:07,520 Speaker 1: is very sad. It says, if you make one hundred 699 00:34:07,560 --> 00:34:10,439 Speaker 1: thousand dollars living in New York City, it feels like 700 00:34:11,040 --> 00:34:14,640 Speaker 1: you're making thirty six thousand dollars because of taxes and 701 00:34:14,680 --> 00:34:18,239 Speaker 1: the high cost of living thirty six thousand. So it's 702 00:34:18,239 --> 00:34:22,719 Speaker 1: the worst for any major city, thirty six thousand from 703 00:34:22,760 --> 00:34:24,600 Speaker 1: one hundred thousand. And you still want to buy in 704 00:34:24,640 --> 00:34:28,600 Speaker 1: New York City. Oh my gosh, don't make me feel worse. 705 00:34:30,120 --> 00:34:32,640 Speaker 1: That sounds about right. Thirty six thousand for one hundred 706 00:34:32,640 --> 00:34:36,040 Speaker 1: thousand in New York. It's you know, well, it's funny, 707 00:34:36,080 --> 00:34:40,000 Speaker 1: you know, with the federal tax rate being uniform across 708 00:34:40,040 --> 00:34:41,759 Speaker 1: the country, when you have an issue like that, you 709 00:34:41,800 --> 00:34:43,520 Speaker 1: know it is it is a different standard of living. 710 00:34:43,560 --> 00:34:45,759 Speaker 1: But I'll tell you the craziest thing I saw this 711 00:34:45,840 --> 00:34:49,160 Speaker 1: is a Wall Street Journal story I believe is there 712 00:34:49,239 --> 00:34:51,239 Speaker 1: ahead you know, the kind of fun story they put 713 00:34:51,280 --> 00:34:55,759 Speaker 1: on the front page. Speb's collapse brought a niche industry 714 00:34:56,040 --> 00:35:01,279 Speaker 1: back into focus. Financial disaster swag sellers have cashed in 715 00:35:01,560 --> 00:35:03,920 Speaker 1: on svb's infamy to make money on all sorts of 716 00:35:03,960 --> 00:35:07,440 Speaker 1: company merchandise that they may have once neglected. So you 717 00:35:07,480 --> 00:35:08,960 Speaker 1: know the stuff when you go to a conference and 718 00:35:09,000 --> 00:35:12,040 Speaker 1: you get like the freebe handouts, it's all that stuff. 719 00:35:12,040 --> 00:35:15,920 Speaker 1: So on eBay there was listenings for an SVB branded 720 00:35:15,920 --> 00:35:19,920 Speaker 1: blanket for twenty six dollars, a purse hook for twelve 721 00:35:19,920 --> 00:35:22,040 Speaker 1: to fifty. I don't know what a purse a purse 722 00:35:22,040 --> 00:35:27,160 Speaker 1: hook that's a weird charge, and a cheeseboard for two 723 00:35:27,280 --> 00:35:29,319 Speaker 1: hundred dollars. I don't know why the cheeseboard is the 724 00:35:29,320 --> 00:35:32,200 Speaker 1: most expensive. You're not going to make us guess prices. No, 725 00:35:32,640 --> 00:35:35,080 Speaker 1: I feel like they're up for sale on eBay, so 726 00:35:35,120 --> 00:35:37,279 Speaker 1: we don't really have the proper price discovery. But I 727 00:35:37,280 --> 00:35:40,279 Speaker 1: will say, uh, it's a pretty good story. You read 728 00:35:40,280 --> 00:35:43,000 Speaker 1: it if you haven't yet. Um. And it's also inspired 729 00:35:43,120 --> 00:35:47,120 Speaker 1: sort of fake schwag from the banks, like Silicon Valley 730 00:35:47,160 --> 00:35:51,439 Speaker 1: Bank Risk Management Department T shirts or selling very well. Well, 731 00:35:51,560 --> 00:35:53,960 Speaker 1: remember they were all those FTX t shirts that had 732 00:35:54,000 --> 00:35:56,960 Speaker 1: to be thrown out in the garbage. Well, right, and 733 00:35:57,080 --> 00:35:59,279 Speaker 1: they while they they might have November, they might have, 734 00:35:59,440 --> 00:36:03,000 Speaker 1: you know, their bankruptcy administer maybe should have kept on 735 00:36:03,080 --> 00:36:06,160 Speaker 1: to them because they probably saw pretty well. They quote 736 00:36:06,200 --> 00:36:09,320 Speaker 1: one woman who bought in ugly Christmas sweater that read 737 00:36:09,960 --> 00:36:14,640 Speaker 1: FTX Risk Management Department twenty How much paper? They don't say, 738 00:36:14,719 --> 00:36:17,759 Speaker 1: I don't know ugly Christmas sweater though, but that's pretty good. 739 00:36:17,880 --> 00:36:19,919 Speaker 1: I like that one. Firstal Now about you, what's what's 740 00:36:19,920 --> 00:36:21,279 Speaker 1: the craziest thing you saw this? Well, I would just 741 00:36:21,280 --> 00:36:23,000 Speaker 1: follow up on what we just talked about. I mean, 742 00:36:23,040 --> 00:36:25,440 Speaker 1: the incredible thing is that we have inflation at six 743 00:36:25,480 --> 00:36:28,440 Speaker 1: percent and we're sitting talking about how shop will the 744 00:36:28,480 --> 00:36:31,520 Speaker 1: slowdown be. The fact that we have high inflation and 745 00:36:31,560 --> 00:36:34,399 Speaker 1: we're debating will this be a hard landing or if 746 00:36:34,400 --> 00:36:36,560 Speaker 1: we're really lucky, will it be a soft landing. It's 747 00:36:36,600 --> 00:36:40,520 Speaker 1: just incredible. I mean, normally we have had for a long, 748 00:36:40,600 --> 00:36:42,960 Speaker 1: long long time inflation just at two percent. So the 749 00:36:43,000 --> 00:36:47,239 Speaker 1: fact that we have this incredibly complicated macro backdrop of 750 00:36:47,560 --> 00:36:50,040 Speaker 1: inflation being high while the economy is now poised to 751 00:36:50,080 --> 00:36:52,920 Speaker 1: slow down, I think that's pretty crazy. It really is. 752 00:36:53,080 --> 00:36:55,680 Speaker 1: I think unlike any other set up by any of 753 00:36:55,719 --> 00:36:57,759 Speaker 1: us have ever experienced. Well, and that's why they, as 754 00:36:57,800 --> 00:36:59,759 Speaker 1: we just spoke about the if I'm see meeting here 755 00:37:00,120 --> 00:37:02,560 Speaker 1: of us is just a real challenge, I mean, because 756 00:37:02,560 --> 00:37:04,799 Speaker 1: how do you deal in an environment where inflation is 757 00:37:05,120 --> 00:37:06,719 Speaker 1: normally something that you would worr about. It is the 758 00:37:06,800 --> 00:37:08,200 Speaker 1: number one thing, and that's what you said for the 759 00:37:08,239 --> 00:37:10,920 Speaker 1: last eighteen months, this is our top priority. And now 760 00:37:10,920 --> 00:37:12,719 Speaker 1: suddenly you're having a meeting where you're saying, well, by 761 00:37:12,760 --> 00:37:14,640 Speaker 1: the way, now there's something else that's our top priority 762 00:37:14,640 --> 00:37:17,839 Speaker 1: in financial stability. So for us in markets, it's about 763 00:37:17,880 --> 00:37:20,400 Speaker 1: figuring out how long time is this financial stability issue 764 00:37:20,480 --> 00:37:23,320 Speaker 1: going to be such an issue that's at such a 765 00:37:23,440 --> 00:37:25,720 Speaker 1: level that the FIT will worry about and the DCB 766 00:37:25,760 --> 00:37:28,359 Speaker 1: will worry about it. Is this just again a few 767 00:37:28,400 --> 00:37:31,280 Speaker 1: days a week or maybe two, or is this something 768 00:37:31,280 --> 00:37:33,440 Speaker 1: that's going to be long and lasting? At some point 769 00:37:33,680 --> 00:37:36,440 Speaker 1: we will go back to more calm and quite frankly, 770 00:37:36,440 --> 00:37:39,399 Speaker 1: more boring environment. And we can can't wait to get 771 00:37:39,440 --> 00:37:42,920 Speaker 1: to that. I can't wait, yea. And the timing for 772 00:37:43,120 --> 00:37:45,319 Speaker 1: us to happen in the nobit that's quiet period before 773 00:37:45,360 --> 00:37:48,640 Speaker 1: the meeting is so they can communicate about it, and 774 00:37:48,680 --> 00:37:50,959 Speaker 1: that's of course also the challenge. But it is really, 775 00:37:51,360 --> 00:37:54,360 Speaker 1: it is really, it's it's really difficult for them because 776 00:37:54,400 --> 00:37:56,959 Speaker 1: these challenges are really significant when you have things moving. 777 00:37:57,000 --> 00:37:59,160 Speaker 1: That's back to your story, Lanna, hear about that the 778 00:37:59,480 --> 00:38:01,640 Speaker 1: moving dick telling us balet cities is just pretty high 779 00:38:01,840 --> 00:38:03,919 Speaker 1: in so many different ways, and that's what, of course 780 00:38:04,040 --> 00:38:07,439 Speaker 1: is creating this complicated environment. It really is a credit 781 00:38:07,480 --> 00:38:09,719 Speaker 1: selects sent a stock bigger's environment where you need to say, 782 00:38:09,719 --> 00:38:11,600 Speaker 1: I can't just buy the index and needs will be 783 00:38:11,680 --> 00:38:14,200 Speaker 1: much more careful with what I do given the risks 784 00:38:14,239 --> 00:38:17,160 Speaker 1: that I'm seeing right right, I think I vis j Pal, 785 00:38:17,400 --> 00:38:19,440 Speaker 1: maybe i'd call out sick next week. You think, yeah, 786 00:38:19,760 --> 00:38:22,439 Speaker 1: you can get away with that. That That would probably cause 787 00:38:22,480 --> 00:38:26,120 Speaker 1: a bigger problem. Anyway. I think that is all the 788 00:38:26,160 --> 00:38:28,520 Speaker 1: time we're able to steal from you today. Torsten Slock, 789 00:38:28,600 --> 00:38:32,280 Speaker 1: Chief Economists of Apollo Global Management. So great to catch 790 00:38:32,800 --> 00:38:34,520 Speaker 1: up with you and hear your thoughts. Thank you for 791 00:38:34,560 --> 00:38:36,880 Speaker 1: your time and hope we can talk again soon. Oh absolutely, 792 00:38:37,000 --> 00:38:47,560 Speaker 1: thanks for having me, Thank you, thank you. Well, goes up. 793 00:38:47,640 --> 00:38:50,600 Speaker 1: We'll be back next week. Until then, you can find 794 00:38:50,640 --> 00:38:54,320 Speaker 1: us on the Bloomberg terminal website and app, or wherever 795 00:38:54,480 --> 00:38:57,040 Speaker 1: you get your podcasts. We'd love it if you took 796 00:38:57,040 --> 00:38:59,120 Speaker 1: the time to rate and review the show so more 797 00:38:59,120 --> 00:39:01,880 Speaker 1: listeners can find us. And you can find us on 798 00:39:01,920 --> 00:39:07,680 Speaker 1: Twitter follow me at Baldonna Hirich. Mike Reagan is at Reaganonymous. 799 00:39:08,280 --> 00:39:12,600 Speaker 1: You can also follow Bloomer Podcasts at podcasts. What Goes 800 00:39:12,680 --> 00:39:15,239 Speaker 1: Up is produced by Stacy Wong and our head of 801 00:39:15,280 --> 00:39:18,600 Speaker 1: podcasts is Sage Bowman. Thanks for listening and we'll see 802 00:39:18,640 --> 00:39:19,239 Speaker 1: you next week.