WEBVTT - Dimon Wants Regulators to End Banking Crisis, JD.com CEO Leaves 0:00:02.520 --> 0:00:05.840 This is Bloomberg Daybreak Asia for this Friday, May twelfth 0:00:05.880 --> 0:00:09.240 in Hong Kong, Thursday May eleventh in New York and 0:00:09.400 --> 0:00:10.200 coming up today. 0:00:10.520 --> 0:00:14.440 US inflation data suggests the FEDS tightening campaign may be 0:00:14.560 --> 0:00:15.920 finally having an effect. 0:00:16.079 --> 0:00:19.520 The FDIIC says larger banks will face billions of extra 0:00:19.640 --> 0:00:23.200 fees to replenish the agency's insurance fund. 0:00:22.920 --> 0:00:26.920 And JD dot Com CEO exits after the Chinese internet 0:00:26.960 --> 0:00:30.240 retailer reports its slowest pace of growth on record. 0:00:30.600 --> 0:00:33.600 Big five debt ceiling summit moved the next week. Both 0:00:33.640 --> 0:00:36.560 sides say a good sign. Top officials from China and 0:00:36.600 --> 0:00:40.600 the US have met in Vienna Immigration Goodbye, Title forty two, 0:00:40.680 --> 0:00:47.880 Hello Title eight. I'm at Baxter with Global News. That's 0:00:47.920 --> 0:00:51.640 all straight ahead on Bloomberg Daybreak Asia. The business news 0:00:51.640 --> 0:00:54.360 you need to start your day in just one fifteen 0:00:54.400 --> 0:00:58.840 minute podcast available on Apples, Spotify, the Bloomberg Business app 0:00:58.880 --> 0:01:00.800 and everywhere you get your podcasts. 0:01:03.560 --> 0:01:06.720 Good morning, I'm Doug Krisner and I'm Brian Curtiz. Here 0:01:06.760 --> 0:01:09.679 are the stories we're following today. The shares of big 0:01:09.720 --> 0:01:12.959 banks were weak today and the FDIC said that larger 0:01:13.080 --> 0:01:16.280 lenders will face billions of extra fees to replenish the 0:01:16.319 --> 0:01:20.120 agency's insurance fund. The agency said that the institutions with 0:01:20.160 --> 0:01:22.959 more than fifty billion in assets would pay ninety five 0:01:23.000 --> 0:01:25.559 percent of the fees, and those with less than five 0:01:25.640 --> 0:01:28.800 billion wouldn't have to pay at all. This comes after 0:01:28.840 --> 0:01:32.120 the FDIC made the decision back in March to backstop 0:01:32.200 --> 0:01:36.240 uninsured depositors at the failed Silicon Valley Bank and Signature 0:01:36.280 --> 0:01:40.000 Bank JP Morgan Chase CEO Jamie Diamond says it's time 0:01:40.040 --> 0:01:42.000 for the regulators to help put an end to the 0:01:42.040 --> 0:01:43.560 turmoil in the banking industry. 0:01:43.840 --> 0:01:45.720 We've had uncertain policy on mergers. 0:01:45.840 --> 0:01:46.920 Is first horizon deal. 0:01:47.319 --> 0:01:48.800 I think we have to assume they'll be a little 0:01:48.840 --> 0:01:51.520 bit more so, you know, whatever the FDIC, the occ 0:01:51.720 --> 0:01:58.280 the Fellow Reserve, you know, whatever they need to do to. 0:01:56.200 --> 0:01:57.280 Make it better, they should do. 0:01:57.720 --> 0:02:02.040 Be thoughtful, be very forward looking, surprised constantly because some 0:02:02.040 --> 0:02:03.840 of these things have been known about for quite a while. 0:02:03.960 --> 0:02:07.360 Diamond said that regulators are likely to overreact in their 0:02:07.360 --> 0:02:10.560 response to the regional bank turmoil with more rules and 0:02:10.680 --> 0:02:14.040 more requirements, but he also advocated for a probe into 0:02:14.080 --> 0:02:17.080 the short selling of bank stocks. Diamond said that those 0:02:17.080 --> 0:02:20.120 involved should be punished to the fullest extent of the law. 0:02:20.360 --> 0:02:23.000 Well, in the US, today's economic news was a bit 0:02:23.040 --> 0:02:25.720 on the soft side. We begin with first time jobless 0:02:25.760 --> 0:02:29.519 claims reaching the highest level since October twenty twenty one, 0:02:29.639 --> 0:02:32.880 and at the same time today producer prices in the 0:02:32.919 --> 0:02:35.680 month of March dropping by the most since the beginning 0:02:35.720 --> 0:02:38.920 of the pandemic. Now, these data points suggest the Fed's 0:02:39.080 --> 0:02:43.000 policy tightening campaign may be having an effect on inflation. 0:02:43.200 --> 0:02:45.840 Even so, the head of the Minneapolis Fed, Neil Kashkari, 0:02:46.000 --> 0:02:50.640 is saying price pressures remain too hot. Inflation has come down, 0:02:50.840 --> 0:02:53.040 but it's still well above our two percent target. 0:02:53.200 --> 0:02:56.720 We have seen some softening in wage growth nationally, but 0:02:56.800 --> 0:02:57.400 it's very. 0:02:57.280 --> 0:02:59.760 Mixed, that is Neil Cashkari. He went on to say 0:02:59.800 --> 0:03:03.520 he sees no evidence yet of slowing on the services 0:03:03.560 --> 0:03:06.480 side of the American economy, and he thinks that tight 0:03:06.560 --> 0:03:09.880 monetary policy may be needed for an extended time. 0:03:10.000 --> 0:03:12.640 Brian and Doug we talked earlier about the rebound in 0:03:12.720 --> 0:03:16.040 Chinese shares listed in New York. The National Golden Dragon 0:03:16.120 --> 0:03:18.960 China Index is up three point eight percent, and part 0:03:19.000 --> 0:03:21.680 of the reason was this one JD dot Com CEO 0:03:21.919 --> 0:03:24.720 is leaving the company after only about a year in 0:03:24.760 --> 0:03:28.120 the post. Bloomberg's Bonnie Ao has the story from Hong Kong. 0:03:28.400 --> 0:03:31.760 CEO Schule will hand over the rings to CFO Sandy 0:03:31.760 --> 0:03:34.200 Shou next month. Schule had been at the company for 0:03:34.280 --> 0:03:36.760 more than a decade, but only took over the CEO 0:03:36.880 --> 0:03:40.080 job in April of last year. The management reshuffle was 0:03:40.080 --> 0:03:43.480 announced after JD reported its latest results. Revenue grew one 0:03:43.480 --> 0:03:47.360 point four percent to thirty five billion dollars that beat projections, 0:03:47.400 --> 0:03:49.920 but it was the slowest ever pace of expansion. The 0:03:49.960 --> 0:03:53.360 firm has been struggling with competition from Pindordor and byte Dance. 0:03:53.640 --> 0:03:56.600 Analysts say the personnel change suggests a shift and focus 0:03:56.640 --> 0:04:00.640 towards profitability. Jd'sadrs in New York row seven two percent. 0:04:00.880 --> 0:04:03.560 In Hong Kong, I'm Bonny out Bloomberg day Break Asia. 0:04:03.400 --> 0:04:06.120 And today in the States, the Nasdaq Golden Dragon China 0:04:06.200 --> 0:04:10.040 Index was up about three point eight percent on the day. 0:04:10.360 --> 0:04:12.920 We move next to soft Bank, the company has lost 0:04:13.040 --> 0:04:16.599 money in its vision fund again, despite that rebound that 0:04:16.640 --> 0:04:19.800 we've been seeing lately in tech stocks. Bloomberg's Joan Wong 0:04:19.880 --> 0:04:21.040 has more from Hong Kong. 0:04:21.400 --> 0:04:23.960 The Vision Fund unit lost two hundred and ninety seven 0:04:24.000 --> 0:04:26.919 and a half billion yen or two billion dollars in 0:04:26.960 --> 0:04:29.640 the three months ending March. A year ago, it suffered 0:04:29.680 --> 0:04:32.839 an even bigger loss of two point two trillion yen. 0:04:33.120 --> 0:04:36.080 The Investment Fund lost the record four point three trillion 0:04:36.160 --> 0:04:39.159 yen for the full fiscal year. To many, the results 0:04:39.200 --> 0:04:43.200 may seem surprising. That's because technology evaluations around the world 0:04:43.320 --> 0:04:48.160 have largely rebounded this year. CFO Yoshimihsugoto acknowledged the past 0:04:48.240 --> 0:04:51.440 year has been rough, reflecting that SoftBank was forced to 0:04:51.480 --> 0:04:54.840 mark down the valuations of almost three hundred and fifty 0:04:54.920 --> 0:04:57.960 companies in Hong Kong. I'm Joanne one Bloomberg Day brig Asia. 0:04:58.680 --> 0:05:01.520 The Bank of England raised benchmark lending rate to the 0:05:01.600 --> 0:05:04.800 highest level since two thousand and eight. Governor Andrew Bailey 0:05:04.839 --> 0:05:08.040 said further increases may be needed to stay the course 0:05:08.200 --> 0:05:10.279 in the fight to slow inflation. 0:05:10.160 --> 0:05:11.560 And it's our job to get it all the way 0:05:11.600 --> 0:05:14.040 down to the two percent target and have it stay there. 0:05:14.200 --> 0:05:16.320 And this is why today we've increased bank rate by 0:05:16.360 --> 0:05:18.440 zero point twenty five percentage points to four and a 0:05:18.480 --> 0:05:21.400 half percent. Low and stable inflation is the foundation of 0:05:21.440 --> 0:05:24.480 a healthy economy, and we have to stay the course 0:05:24.520 --> 0:05:27.039 to make sure inflation falls all the way back to 0:05:27.080 --> 0:05:28.200 the two percent target. 0:05:29.360 --> 0:05:32.359 Officials led by Bailey, also delivered the biggest upgrade to 0:05:32.400 --> 0:05:36.000 growth projection since the BOE gained independence back in nineteen 0:05:36.080 --> 0:05:39.120 ninety seven. The BOE said that the real economy will 0:05:39.120 --> 0:05:42.039 be two point twenty five percent bigger by the middle 0:05:42.120 --> 0:05:46.320 of twenty twenty six. The Central Bank also no longer 0:05:46.360 --> 0:05:51.360 sees a recession in the forecast. I'm Brian Curtis along 0:05:51.360 --> 0:05:54.440 with Doug Christner and Rashad Salamat. He will join us 0:05:54.440 --> 0:05:57.200 in a few moments, So, Doug, I'll tell you from 0:05:57.240 --> 0:06:00.839 the bear standpoint, some might think that the jumps market 0:06:00.920 --> 0:06:05.000 has finally begun to crack. It's probably too early to 0:06:05.680 --> 0:06:08.160 really make that call, but it did appear to dent 0:06:08.240 --> 0:06:11.599 optimism from the slight drop in inflation that we had earlier. 0:06:11.880 --> 0:06:15.040 Yes, you're absolutely right about that, and Bloomberg Economics was 0:06:15.080 --> 0:06:18.719 analyzing those warn notices. They've done so going back to 0:06:18.880 --> 0:06:21.440 the early part of the year, and now we're beginning 0:06:21.480 --> 0:06:24.839 to see a correlation with where the large number of 0:06:24.920 --> 0:06:28.800 layoffs occurred and the rise in the first time jobless claim. 0:06:28.880 --> 0:06:31.280 So I think you're right, Brian, we may be finally 0:06:31.440 --> 0:06:34.279 seeing some kind of softening in the labor market. And 0:06:34.320 --> 0:06:37.240 to the point about FED policy, maybe it would give 0:06:37.360 --> 0:06:40.359 a little bit more flexibility in terms of pausing and 0:06:40.440 --> 0:06:43.000 just kind of holding steady for a while longer. 0:06:43.760 --> 0:06:43.960 Yeah. 0:06:44.000 --> 0:06:46.640 And from the bears standpoint, you know, they see this 0:06:46.800 --> 0:06:50.040 market leadership as really narrow. And another example today the 0:06:50.120 --> 0:06:52.960 Nasdaq was up and just about everything else was down, 0:06:53.800 --> 0:06:55.479 and the bears would say, if you strip out the 0:06:55.520 --> 0:06:57.840 top ten company as well, the performance, you know, has 0:06:57.880 --> 0:07:00.240 been weak. But of course the bulls would say, if 0:07:00.240 --> 0:07:03.040 you strip out the banks all the performance would look 0:07:03.120 --> 0:07:06.479 much better. But the reality is you can't strip things out. 0:07:06.880 --> 0:07:07.120 Yeah. 0:07:07.120 --> 0:07:09.680 And Jamie Diamond, the head of JP Morgan Chase, was 0:07:09.720 --> 0:07:13.360 telling us today that it's time really to get this 0:07:13.440 --> 0:07:17.280 banking problem solved, and he does expect that we could 0:07:17.280 --> 0:07:19.400 see a little bit more stress building in some of 0:07:19.440 --> 0:07:22.680 these regionals. He pointed to the problem in the commercial 0:07:22.720 --> 0:07:26.280 real estate market and basically speculated that we could see 0:07:26.520 --> 0:07:27.840 a couple of more failures. 0:07:28.840 --> 0:07:31.880 Yeah, and it was a tough day actually for regional banks. 0:07:32.080 --> 0:07:36.600 You mentioned PacWest and the basic general performance. The Regional 0:07:36.680 --> 0:07:40.160 Bank ETFKRE was down two and a half percent on 0:07:40.240 --> 0:07:42.280 a day when you know the tape wasn't all that bad. 0:07:42.400 --> 0:07:44.560 The S and P five hundred, there's only down two 0:07:44.600 --> 0:07:50.280 tenths of one percent. Now it's time for global news. Well, 0:07:50.280 --> 0:07:54.040 the US debt ceiling summit set for tomorrow has been 0:07:54.120 --> 0:07:57.560 moved to next week. So is that good news or 0:07:57.600 --> 0:07:59.880 bad news? Well, let's turn to Ed Baxter, who's in 0:07:59.880 --> 0:08:01.880 the nine to sixty newsmen in San Francisco. 0:08:02.040 --> 0:08:04.680 D Yeah, so that is the question. You're right, Brian, 0:08:04.920 --> 0:08:08.560 actually being seen as a positive sign. Bloomberg's Kaylee Lyons 0:08:08.600 --> 0:08:11.040 saying the first statement seem to align early. 0:08:10.840 --> 0:08:13.480 Next week for the Big Five, the President and these 0:08:13.480 --> 0:08:15.680 four congressional leaders. They're not going to sit down in 0:08:15.680 --> 0:08:18.120 a room together again for several days. That is what 0:08:18.160 --> 0:08:20.840 has been delayed. However, their staffs are going to continue 0:08:21.000 --> 0:08:23.560 to talk as they have been over the last two days. 0:08:23.560 --> 0:08:26.040 And Speaker McCarthy saying that postponing does not mean that 0:08:26.080 --> 0:08:28.200 these talks have fallen apart. In fact, he said that 0:08:28.240 --> 0:08:29.840 they all agreed it would be more productive. 0:08:30.000 --> 0:08:32.080 Yeah. Senate majority of Leader Chuck Schumer is saying that 0:08:32.120 --> 0:08:36.079 some progress has been made, and Bloomberg's Wendy Benjaminson says 0:08:36.120 --> 0:08:38.920 the staffs can work through issues without what the Big 0:08:38.960 --> 0:08:40.679 Five feel they need to spin the. 0:08:40.640 --> 0:08:43.439 Most promising thing we've seen today. And you were referring 0:08:43.480 --> 0:08:45.880 to spin earlier. But if all sides agree on the 0:08:45.880 --> 0:08:48.600 spin that it actually might be true, you know we 0:08:48.760 --> 0:08:51.360 might be able to hold our breath just a little 0:08:51.440 --> 0:08:54.640 less tight and know that this might be coming. 0:08:54.400 --> 0:08:55.439 To an end now. 0:08:55.480 --> 0:08:58.280 Both sides also agree that there will be no temporary 0:08:58.320 --> 0:09:01.520 fix so early now next week for the Big Five. 0:09:01.720 --> 0:09:05.040 By the way, Donald Trump was asked about the ceiling 0:09:05.559 --> 0:09:09.760 debate last night on CNN. Their congressman Senators, if they 0:09:09.760 --> 0:09:12.360 don't give you massive cuts, you're going to. 0:09:12.400 --> 0:09:13.240 Have to do a default. 0:09:13.760 --> 0:09:16.600 Democrats are responding to the interview last night, saying Trump 0:09:16.679 --> 0:09:20.160 is not even a serious candidate. Senator Josh Holly has 0:09:20.160 --> 0:09:22.600 thrown China into the mix and the debt ceiling debate, 0:09:22.880 --> 0:09:26.040 saying China's a main driver in the US debt. 0:09:26.160 --> 0:09:28.959 We ought to impose tariffs on China until we get 0:09:28.960 --> 0:09:32.640 our trade into balance and we give our manufacturers and 0:09:32.760 --> 0:09:34.520 our workers and even plaving field. 0:09:34.720 --> 0:09:38.320 He says it's time to get serious. China cheats on trade, 0:09:38.320 --> 0:09:41.000 he says without end, says they shouldn't be allowed to 0:09:41.080 --> 0:09:44.319 do that. Top officials from China and the US have 0:09:44.440 --> 0:09:47.280 met in Vienna over the past two days, Foreign Minister 0:09:47.360 --> 0:09:51.120 Wange and US National Security Advisor Jake Sullivan with what 0:09:51.160 --> 0:09:55.600 the White House calls substinative and constructive meetings in what 0:09:55.720 --> 0:09:58.040 could be a sign that the sides are working to 0:09:58.160 --> 0:10:02.840 ease some strain. US Homeland Security a secretary says that 0:10:03.400 --> 0:10:05.720 it is prepared for the end of Title forty two 0:10:05.840 --> 0:10:10.000 immigration controls at the end of the day, Secretary Alejandro 0:10:10.080 --> 0:10:14.000 Majorca saying there'll be new policy. It is called Title eight. 0:10:14.040 --> 0:10:18.280 The new rule, finalized yesterday, presumes that those who do 0:10:18.360 --> 0:10:22.040 not use lawful pathways to enter the United States are 0:10:22.120 --> 0:10:26.640 ineligible for asylum. It allows US the United States to 0:10:26.720 --> 0:10:31.880 remove individuals who do not establish a reasonable fear of persecution. 0:10:32.160 --> 0:10:35.000 Maorca says even a bit tougher than Title forty two, 0:10:35.080 --> 0:10:38.240 but House Speaker Kevin McCarthy says damage has already been done. 0:10:38.280 --> 0:10:41.400 Eleven thousand people came across yesterday, set a new record. 0:10:42.080 --> 0:10:45.480 Four point five million have come across since President Biden 0:10:45.520 --> 0:10:48.280 has taken office when he's lifted the actions of the 0:10:48.360 --> 0:10:51.200 last administration, an administration before that. 0:10:51.480 --> 0:10:54.679 Now, Homeland Security says that issue will be enforced and 0:10:54.800 --> 0:10:57.959 taken care of Global News powered by more than twenty 0:10:57.960 --> 0:11:00.439 seven hundred journalist and analysts and one one hundred and 0:11:00.440 --> 0:11:03.760 twenty countries. In San Francisco, I'm Ed Baxter, and this 0:11:04.360 --> 0:11:05.199 is Bloomberg. 0:11:05.800 --> 0:11:08.439 This is Bloomberg Daybreak Asia. I'm Brian Curtis in Hong 0:11:08.520 --> 0:11:11.480 Kong along with Rashad Salamad, and we say good morning 0:11:11.520 --> 0:11:14.840 to our guest, Francis Stacey, director of strategy at Optimal 0:11:14.880 --> 0:11:19.400 Capital Advisors with us in our New York studios. So, Francis, 0:11:19.400 --> 0:11:22.520 is this is this a sign that the job market 0:11:22.559 --> 0:11:23.440 is about to crack? 0:11:23.720 --> 0:11:25.240 Wait, ask me that question again. 0:11:26.040 --> 0:11:28.760 Yeah, okay, is the job market cracking? Yes? 0:11:28.840 --> 0:11:31.000 I think the job market is cracking. I think the 0:11:31.000 --> 0:11:34.079 internals would point to that. And you know, sometimes when 0:11:34.080 --> 0:11:36.840 we're seeing a lot of these guy these jobs added, 0:11:37.360 --> 0:11:40.760 and of course we had those revisions lower it's because 0:11:40.800 --> 0:11:43.280 some of the gig economy has to be added now 0:11:43.320 --> 0:11:46.200 as employees, and there's some internal things like that. But no, 0:11:46.320 --> 0:11:49.080 I do see it cracking, and you know, even the 0:11:49.160 --> 0:11:53.560 continuing claims, although they haven't skyrocketed yet, they are you know, 0:11:53.640 --> 0:11:57.319 forty five percent off of the low absolutely frosts. 0:11:57.360 --> 0:11:59.000 And what we did see in the jobs were pool 0:11:59.200 --> 0:12:03.960 was the main beneficiaries of job creation were healthcare and education. 0:12:04.040 --> 0:12:06.839 Now these are not cyclical, so one should really look 0:12:06.880 --> 0:12:09.040 at the rest of the jobs market, and you could 0:12:09.040 --> 0:12:11.360 see it sewing and also of course added to the 0:12:11.480 --> 0:12:12.600 revisions you just mentioned. 0:12:13.400 --> 0:12:17.040 Yeah, I mean, it's slowing very very slowly, but you're 0:12:17.040 --> 0:12:21.679 seeing people take on secondary jobs. You're seeing you know, 0:12:22.040 --> 0:12:25.400 people start to have to take on you know, the 0:12:25.440 --> 0:12:28.480 temporary jobs are sort of falling apart in the background 0:12:28.480 --> 0:12:30.360 and things like that. So you're starting to see these 0:12:30.440 --> 0:12:33.599 very very early indicators that it is actually softening. 0:12:34.559 --> 0:12:37.560 Yeah. I said earlier when I was chatting with Doug that, well, 0:12:37.760 --> 0:12:39.760 you know, you don't get to strip things out, but 0:12:39.800 --> 0:12:41.720 of course you do when you're in the stock market. 0:12:41.760 --> 0:12:45.000 You can make your targets and make your picks. So 0:12:45.120 --> 0:12:48.160 if you were long tech for the first part of 0:12:48.160 --> 0:12:50.480 this year and short at the banking sector, you'd be 0:12:50.520 --> 0:12:51.720 smiling all the way to the bank. 0:12:52.120 --> 0:12:56.120 Yes, Indeed, it's really interesting because with the Fed conversation. 0:12:56.800 --> 0:13:00.959 You know, tech has Tech was hit very heavily because 0:13:01.000 --> 0:13:04.160 it was the rates and it was the tightening cycle conversation. 0:13:04.240 --> 0:13:06.960 And obviously that doesn't help TECH. And now it's rolling 0:13:07.000 --> 0:13:10.400 over into an economic situation. And what's fascinating is to 0:13:10.440 --> 0:13:12.320 look at tech as sort of a flight to safety 0:13:12.360 --> 0:13:15.719 because of balance sheet strength. I don't think it's going to, 0:13:15.880 --> 0:13:18.480 you know, continue to be elevated because I think there's 0:13:18.480 --> 0:13:20.760 a lot of demand destruction going on in the background 0:13:20.760 --> 0:13:25.120 that is not yet visible, and I think that that's 0:13:25.160 --> 0:13:27.320 going to be a tendant to the credit cycle, which 0:13:27.360 --> 0:13:31.080 is going to affect demand drastically, and we don't see 0:13:31.080 --> 0:13:32.920 that in the background yet. But it is just really 0:13:32.920 --> 0:13:35.400 interesting that now that we've had a lot of tightening 0:13:35.400 --> 0:13:38.800 with interest rates, we now see tightening in consumer credit 0:13:38.920 --> 0:13:42.079 and really credit across the board, and we haven't had 0:13:42.120 --> 0:13:44.240 that next shoe drop, so we just see these strong 0:13:44.320 --> 0:13:45.000 balance sheets. 0:13:46.320 --> 0:13:49.600 So where do you see that demand destruction if not 0:13:49.760 --> 0:13:53.200 in retail sales or some of the obvious places. 0:13:53.880 --> 0:13:56.960 Well, what I see is that this is mechanically what 0:13:57.040 --> 0:14:00.400 occurs with every one of these credit events. And you 0:14:00.800 --> 0:14:03.440 take the yield curve inversion and that always with the 0:14:03.480 --> 0:14:07.280 exception of once leads to recession. And the reason is 0:14:07.280 --> 0:14:10.760 is because it preempts this credit situation. Because what happens 0:14:10.800 --> 0:14:12.960 is when you have an expansionary period, and of course 0:14:13.040 --> 0:14:17.040 historically expansionary like what occurred with both fiscal and monetary 0:14:17.040 --> 0:14:20.920 policy during COVID, and then you start to drain liquidity 0:14:20.960 --> 0:14:23.040 out of the system, which the FED is very committed 0:14:23.040 --> 0:14:26.160 to doing. You can you can get rid of the liquidity, 0:14:26.160 --> 0:14:28.600 but you cannot get rid of the debt. And what 0:14:28.760 --> 0:14:31.520 happens is then the yield curve starts to resteep in. 0:14:32.440 --> 0:14:34.520 At the time that it starts to re steep in 0:14:34.640 --> 0:14:37.320 is when you have credit spreads widen, and then of 0:14:37.360 --> 0:14:41.800 course you have an attendant credit situation, and you know, 0:14:42.480 --> 0:14:46.720 it's anyone's guess. We're overlevered so in so many areas. 0:14:46.760 --> 0:14:49.000 But commercial real estate is going to be a big problem, 0:14:49.280 --> 0:14:51.920 Corporate debt's going to be a big problem, and so 0:14:52.000 --> 0:14:53.880 we're just sort of in this calm before the storm. 0:14:54.480 --> 0:14:58.000 Labor is such a lagging indicator, but of course that's 0:14:58.040 --> 0:15:01.720 going to be affected too by this absolutely. 0:15:01.320 --> 0:15:03.720 And you know, regional banks would be hit by that. 0:15:06.120 --> 0:15:08.920 Moved down for commercial real estate but the FED keeps 0:15:08.920 --> 0:15:12.160 telling markets to take it's tough talk seriously. And you know, 0:15:12.800 --> 0:15:16.000 but we've got many investors and pricing stocks as if 0:15:16.040 --> 0:15:18.120 it returned to the good old days of easy money 0:15:18.240 --> 0:15:19.400 just around around the corner. 0:15:19.440 --> 0:15:19.600 Now. 0:15:19.800 --> 0:15:21.600 They seem to be convinced that there's going to be 0:15:21.680 --> 0:15:24.680 a pivot by the US economy very soon. In other words, 0:15:24.800 --> 0:15:27.120 investors just what their bubble back. 0:15:27.760 --> 0:15:28.560 Yes, of course. 0:15:28.760 --> 0:15:31.720 And the funny thing is is that I think, you know, 0:15:31.720 --> 0:15:34.800 when you just look at the history of Powell, when 0:15:35.040 --> 0:15:38.520 Yellen started the previous iteration of tightening, and they carried 0:15:38.560 --> 0:15:40.920 on until you know, the markets sold off at Christmas 0:15:40.920 --> 0:15:42.680 time and the money market funds had a bit of 0:15:42.720 --> 0:15:45.760 a crunch. You know, he stopped raising rates at that point. 0:15:45.800 --> 0:15:48.480 He continued to drain the balance sheet through nineteen until 0:15:48.520 --> 0:15:50.720 the third quarter when you had the spike in the 0:15:50.760 --> 0:15:54.760 overnight markets in rates because you know, I'm assuming that 0:15:55.000 --> 0:15:58.360 corporate uh you know, stocks were not stock trates were 0:15:58.360 --> 0:16:00.720 not being settled for corporate tax paid. But there was 0:16:00.720 --> 0:16:04.560 some issue where the liquidity in the system was not enough, 0:16:04.600 --> 0:16:06.800 and he quickly threw half a trillion dollars of q 0:16:07.160 --> 0:16:10.760 back into the system even before COVID, and so that's 0:16:10.840 --> 0:16:14.400 the Powell history. So I think markets it's funny because 0:16:14.400 --> 0:16:16.920 you say, just don't fight the Fed, But I think 0:16:17.000 --> 0:16:20.800 markets are expecting that if too many things break all 0:16:20.840 --> 0:16:22.640 at once, that he is going to pivot, and he's 0:16:22.680 --> 0:16:24.400 going to pivot hard remains to be seen. 0:16:25.160 --> 0:16:28.400 Well, that's right, because investors are perhaps looking at their 0:16:28.520 --> 0:16:33.920 previous call and they underestimated essentially inflation. The question is 0:16:34.280 --> 0:16:36.000 are they underestimating a recession? 0:16:36.880 --> 0:16:41.040 Yes, yes, you know, we have a bifurcated economy. The 0:16:41.120 --> 0:16:44.400 upper forty percent that owns assets, the lower sixty percent 0:16:44.480 --> 0:16:47.480 can't grab five hundred dollars in savings. They're living paycheck 0:16:47.520 --> 0:16:50.160 to paycheck. Even if they have big paychecks, they're living 0:16:50.160 --> 0:16:53.320 paycheck to paycheck. There's a record amount of leverage in 0:16:53.400 --> 0:16:56.880 credit cards. Every time we you know, high creates that 0:16:57.160 --> 0:16:59.920 debt service becomes more onerous, and you've got a try 0:17:00.000 --> 0:17:03.240 effecta of things coming. You've got one point eight trillion 0:17:03.280 --> 0:17:06.600 in real estate, those loans rolling over, and those loans 0:17:06.600 --> 0:17:09.400 were issued I don't know, three and a half four percent, 0:17:09.560 --> 0:17:11.760 and now they're going to be reissued at six and 0:17:11.800 --> 0:17:14.960 a half or seven percent. And then you've got the 0:17:15.000 --> 0:17:19.080 debt sealing discussion coming, and then I don't know if 0:17:19.119 --> 0:17:20.960 the student loan forgiveness thing is going to make it 0:17:21.000 --> 0:17:24.320 through the Supreme Court. And if it doesn't, then you've 0:17:24.359 --> 0:17:27.440 got a huge portion of the population that now adds 0:17:27.480 --> 0:17:30.959 a quote unquote three hundred dollars payment per month onto 0:17:31.000 --> 0:17:34.800 that with cumulative interest, right, And what happens is that 0:17:34.880 --> 0:17:37.399 lower sixty percent when they're pushed to the threshold and 0:17:37.440 --> 0:17:40.040 they can't get credit anymore and they can no longer 0:17:40.119 --> 0:17:43.240 paper over their own personal situations. You're starting to see it. 0:17:43.359 --> 0:17:45.600 You're starting to see it in the one month delinquencies, 0:17:45.640 --> 0:17:49.080 well one month delinquencies. We don't know what percentage end 0:17:49.160 --> 0:17:52.199 up being defaults eventually, but they start with that. 0:17:52.800 --> 0:17:55.879 It's quite a bearish mosaic that you have, friends, So 0:17:55.960 --> 0:17:59.719 let's talk. Let's talk about how do we make that 0:17:59.760 --> 0:18:03.120 work in portfolios? So what are the couple of steps 0:18:03.119 --> 0:18:05.440 that you would take or that you know you could 0:18:05.480 --> 0:18:08.320 advise people to take to sort of hunker down here. 0:18:08.800 --> 0:18:11.560 Yeah, So quint Essentially, when you have growth and inflation 0:18:11.720 --> 0:18:15.040 decelerating at the same time, you go back to sort 0:18:15.080 --> 0:18:17.680 of some of these old faithfuls and gold works very 0:18:17.720 --> 0:18:21.560 well in that environment. You've got relatively speaking, staples that 0:18:21.640 --> 0:18:26.160 work very well. Utilities work very well. Looking watching defense 0:18:26.240 --> 0:18:30.360 obviously with what's happening geopolitically, and also healthcare works very 0:18:30.359 --> 0:18:33.240 well as defensives. But it's it's kind of more of 0:18:33.280 --> 0:18:36.280 a bonds and gold conversation, bonds and gold bonds and 0:18:36.320 --> 0:18:38.520 gold bonds and gold. And I do think that the 0:18:38.520 --> 0:18:43.160 FED is taken investors by surprise because I think myself included, 0:18:43.280 --> 0:18:44.840 we didn't think he was going to be able to 0:18:44.880 --> 0:18:48.239 tighten this far this fast. About more than you know, 0:18:48.280 --> 0:18:51.560 the bank's breaking down, okay, And I think that that's 0:18:51.640 --> 0:18:55.640 because the upper forty percent is so flush and they're 0:18:55.640 --> 0:18:59.160 now getting these ERC payments and they're getting these refunds, 0:18:59.160 --> 0:19:01.240 and so we went from stimulating the lower half of 0:19:01.280 --> 0:19:04.240 the economy to now stimulating the upper half of the economy, 0:19:04.600 --> 0:19:06.640 and these people are still buying. 0:19:06.600 --> 0:19:09.320 And you're also likely to get some stimulus from AI. 0:19:09.440 --> 0:19:09.640 Now. 0:19:09.680 --> 0:19:12.280 I know this is probably red meat to you, but 0:19:13.040 --> 0:19:15.359 in terms of turning back the argument, but some in 0:19:15.400 --> 0:19:19.359 the market think that AI has the potential to really 0:19:19.440 --> 0:19:20.480 reduce the markets. 0:19:21.200 --> 0:19:24.560 I think if it really has that potential stably, it's 0:19:24.600 --> 0:19:27.000 going to happen over a very long period of time. 0:19:27.480 --> 0:19:30.680 Just funnily enough, I happened through an AI conference yesterday 0:19:31.320 --> 0:19:33.880 and they were just talking about how some of the 0:19:33.880 --> 0:19:36.879 answers that pop out of these things are incredibly intelligent, 0:19:36.880 --> 0:19:39.560 and some of them are incredibly stupid. So you still 0:19:39.600 --> 0:19:42.600 have to have a human that's kind of driving that bus. 0:19:42.600 --> 0:19:45.800 And the best analogy I heard was the Captain Sully 0:19:45.840 --> 0:19:47.480 analogy when you had to land the plane in the 0:19:47.560 --> 0:19:50.160 Hudson because they used to have five people in the cockpit. 0:19:50.240 --> 0:19:52.240 They now only have two people in the cockpit because 0:19:52.240 --> 0:19:55.760 they have computers, but you still need somebody running those computers. 0:19:56.200 --> 0:19:58.959 That's a very nice image to draw. Francis, Thank you. 0:19:59.040 --> 0:20:04.960 Francis Stacy, Director's Strategy at Optimal Capital Advisors. 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