Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyd's
Speaker 1: along with Tom Keane and Jonathan Farrell, join us each
Speaker 1: day for insight from the best in economics, geopolitics, finance
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Speaker 1: We get lucky. We get to catch up with Bob
Speaker 1: Michael twice in a week, once on a Sunday evening.
Speaker 1: And this is more normal Bob, Good Morningtier from JP
Speaker 1: Morgan Asset Management. Bob Mike McKee messaged me earlier and
Speaker 1: he wanted to know one's Bob Michael on today? And
Speaker 1: two what does Bob want me to ask in a
Speaker 1: news conference? What is it today? Bob? Well, I think
Speaker 1: he's got to ask that the FED was set up
Speaker 1: the Federal Reserve Act of nineteen thirteen was designed to
Speaker 1: prevent a run on banks. So they must have seen this.
Speaker 1: They must have seen the deposit or outclothes. Are they
Speaker 1: seeing anything else that wearies them? And what is that?
Speaker 1: And I think there are things in the commercial property market.
Speaker 1: There are things in the bank loan market where the
Speaker 1: resets have doubled and tripled what borrowers are paying, So
Speaker 1: there's still a lot out there. So, Bob, how did
Speaker 1: they parse a message that goes from we want credit
Speaker 1: conditions to tighten to oh, my goodness, it's not a
Speaker 1: financial crisis, but things are tightening too quickly. How do
Speaker 1: they parse that line to a market that doesn't like nuance?
Speaker 1: They don't need to, Lisa, They've told us they're data dependent.
Speaker 1: Look at the data they've won. They don't need to
Speaker 1: pile on. Look at inflation. If you look at month
Speaker 1: to date ten year tips, they're down thirty basis points
Speaker 1: to two point one percent. Inflation expectations are coming down.
Speaker 1: Look at the University of Michigan consumer sentiment one year
Speaker 1: inflation expectations, they're down the most in two years. That's
Speaker 1: pre when they started high grades. They're at three point
Speaker 1: eight percent. And then if you go back to the charter,
Speaker 1: they were set up to prevent a run on banks, Well,
Speaker 1: they pushed it to the point where they had to
Speaker 1: step in and stop a run on banks. So they've
Speaker 1: achieved the maximum pressure they needed to to bring inflation down.
Speaker 1: It's happening, it's in the data. You pause any weight,
Speaker 1: then how do you make sense, Bob? If they probably
Speaker 1: saw the outflows from depositors from some of these banks
Speaker 1: before that speech, that testimony from j Power where he
Speaker 1: opened the door to a fifty basis point rate hike,
Speaker 1: how do they signal that the scenario has changed so
Speaker 1: dramatically in two weeks, given that a lot of what
Speaker 1: you're talking about, the winning of their war would have
Speaker 1: been won before what we saw with Silicon Valley Bank. Honestly,
Speaker 1: it really doesn't matter. These are the long and variable impacts.
Speaker 1: They're already catching up to the economy. We're seeing it.
Speaker 1: They're starting to bite hard. What's going to happen over
Speaker 1: the next three to six months. Let's wait and see
Speaker 1: what happens. For sure, We've looked at every time the
Speaker 1: FED has piking rates. On average, it's been about thirteen
Speaker 1: months to recession. So they could stop here and then
Speaker 1: let's see what happens over the next year. We think
Speaker 1: with quantitative tightening it actually pulls that forward into the
Speaker 1: end of this year. So, Bob, at the start of
Speaker 1: the year, when credit was ripping, high yield was doing
Speaker 1: really well. You resisted the urge to parliament as well,
Speaker 1: So I'd be interested to know what you've actually been
Speaker 1: doing over the last couple of weeks as things have
Speaker 1: started to go the other way and you weren't on
Speaker 1: the wrong side of the trade, so to speed. But
Speaker 1: what did you do. I'm holding on to our conservative
Speaker 1: position where we've had hedges in the CDX market. You're
Speaker 1: going to have to pry them out of my dying hands.
Speaker 1: This is the start, this is not the end. So
Speaker 1: let's talk about spread levels. So spread right now is
Speaker 1: at four eighty was as tight as about three ninety
Speaker 1: a number of weeks ago. You just talked me through,
Speaker 1: Bob levels. You and I've talked about this before, but
Speaker 1: the basic argument goes something like this, it's a high
Speaker 1: quality index. It won't get wider in the way it
Speaker 1: has done in recessions previously. Bob, you've pushed back against
Speaker 1: that notion. Why yes, because I've lived through every other
Speaker 1: cycle in the high yield market. People forget, this market
Speaker 1: isn't one hundred years old. It's just over thirty years old.
Speaker 1: And you hear that same story all the time. This
Speaker 1: time it's different. But the problem is that fear always
Speaker 1: replaces greed. People are scrambling for up in quality. We've
Speaker 1: seen in the last week. You don't know where the
Speaker 1: problems are going to happen, so you just try to
Speaker 1: de risk every single time high Yield goes to a
Speaker 1: minimum credit spread of eight hundred basis points over. I
Speaker 1: think we're easily on track for that. I know last
Speaker 1: time on Sunday, I think it was the evening we
Speaker 1: talked a little bit about non bank lenders, which are
Speaker 1: us in the market. So we're already starting to hear
Speaker 1: from our clients that they want to know what we
Speaker 1: hold in their portfolios. They're asking all their managers. So
Speaker 1: we're going to start tight credit conditions ourselves, just because
Speaker 1: our clients don't want us to take the kinds of
Speaker 1: risks that they were comfortable a year or so ago.
Speaker 1: That's not just us, it's every manager. It's in the
Speaker 1: public markets, and it's for sure in the private markets. So, Bob,
Speaker 1: how much has that accelerated over the past two weeks?
Speaker 1: And John asked me earlier, even if this issue with
Speaker 1: some of the medium sized businesses, medium sized banks rather
Speaker 1: is resolved and we do get some sort of backstop
Speaker 1: that staves off some sort of contagion risk or any
Speaker 1: of these concerns. How much have credit conditions tightened over
Speaker 1: the past two weeks anyway that will be persistent. Well,
Speaker 1: they've tightened everywhere. We've talked about the central banks waiting
Speaker 1: for those cumulative long variable lags to catch up. So
Speaker 1: they're going to catch up. So unless they start cutting
Speaker 1: rates or ending QT, that's going to be progressive. So
Speaker 1: central banks are still tightening credit conditions when you look
Speaker 1: at senior loan officers surveys, banks for sure have been
Speaker 1: tightening credit conditions, and I think with what's happened over
Speaker 1: the last couple of weeks, there's no going back on that.
Speaker 1: And then I talked about non bank lenders. We're all
Speaker 1: doing the work for the FED anyway they can hit
Speaker 1: the pause button. The banks are still tightening credit conditions,
Speaker 1: and as I said, non bank lenders are as well.
Speaker 1: I hate these analogies, Bob, but you mentioned commercial real estate.
Speaker 1: A lot of people are pointing at it. And if
Speaker 1: you could say where we are in terms of the
Speaker 1: devaluation in commercial real estate, are we at the beginning,
Speaker 1: are we at the middle? How much further does it
Speaker 1: have to go. Well, it depends where you are in
Speaker 1: the snake. I think for sure that property companies are
Speaker 1: already having problems with offices in central business districts, right,
Speaker 1: and you're just now starting to see that in some
Speaker 1: commercial mortgage backed securitizations. But there's the whole reap market,
Speaker 1: there's the CMBs market, there's the whole regional bank market
Speaker 1: where a lot of their loans are into the commercial
Speaker 1: property market. And then there's the g setbacks. So these
Speaker 1: things don't just tend to happen and go away. They
Speaker 1: tend to build, and they're with us for a while. So, Bob,
Speaker 1: just a final question from me. Number of weeks ago,
Speaker 1: you said to me the whole curve three handle, two's
Speaker 1: out to thirties. We've seen that. Are you saying right
Speaker 1: the way down to three percent? Yes, I didn't say
Speaker 1: three handle, I've said three percent. There we go, there's
Speaker 1: the three point zo minimum. Wow. JP Morgan, the thirties
Speaker 1: asset management, the brilliant Alicia Levine is alongside us today
Speaker 1: here in New York. She's got a line poll has
Speaker 1: no good choices today. There are no good choices today.
Speaker 1: I'm just going to wit through the price action, and
Speaker 1: then we'll get Alicia's thoughts on it. Equity futures right
Speaker 1: now unchanged on the SMP five hundred yields up by
Speaker 1: a single basis point on a ten year three sixty two.
Speaker 1: We've talked about the journey of the two year since
Speaker 1: the FED last met, from four point one sent all
Speaker 1: the way to four point two percent, with a lot
Speaker 1: of ziggin and zagging in between. Lisa, I feel bad
Speaker 1: for the two years. It's gonna be tired. Its journey
Speaker 1: has been long, it's been tumultuous, and we've been all
Speaker 1: who slept either you feel bad for it for the
Speaker 1: front end of the yield curve. Look, you got to
Speaker 1: bear with us because we've all been up since for
Speaker 1: you know, the past week and examining all of this, well,
Speaker 1: it never ended, and we're dealing with head spinning realities right,
Speaker 1: all of the complications you're just talking about passing through.
Speaker 1: Then try to give a market response to that, which
Speaker 1: always is wrong initially anyway, and it's always exactly what
Speaker 1: you don't think. So it's sort of you know, what's
Speaker 1: the point, Let's go back to bed. Alicia Evan joins
Speaker 1: us right now, the head of Equities and Capital Markets
Speaker 1: advisor at Bmy melon Mouth Management, Alicia, want to fool
Speaker 1: to catch out with you. Great to be here today.
Speaker 1: No good choices today, No good choices today. Twenty five.
Speaker 1: We do twenty five because the market is giving the
Speaker 1: FED twenty five in the pricing and so in a
Speaker 1: sense it's the easier decision. I'm not sure they should
Speaker 1: do twenty five here because I think what happened in
Speaker 1: the last couple of weeks was possibly the beginning of
Speaker 1: a credit issue as smaller and medium banks start to
Speaker 1: withdraw on credit provision. But the FED will go twenty five.
Speaker 1: And as you said, it's all in the messaging, and
Speaker 1: as we've seen sometimes the messaging can be really complicated.
Speaker 1: I would look to Christine Laguard, and I'd look to
Speaker 1: the inflation number in the UK this morning, as you
Speaker 1: were talking about earlier, as to signals of why we're
Speaker 1: going to do twenty five today, and as to the
Speaker 1: dat plots, I think the dat plots pretty much stay
Speaker 1: on track here for those reasons. If the Christine Laguard
Speaker 1: managed to message very well that they're keeping the two
Speaker 1: separate and can keep it separate, and I think that's
Speaker 1: what the FED ultimately is going to do today as well.
Speaker 1: Let's take the headlines from the Guard earlier. There's no
Speaker 1: trade off between price and financial stability. We will not
Speaker 1: entertain trade offs from the primary objective. What does that
Speaker 1: look like If Chairman Pound repeats exactly those saying words
Speaker 1: later in the news conference, so I think you keep
Speaker 1: ongoing increases in the statement. If he keeps to that
Speaker 1: kind of we're going to keep the two separate, and
Speaker 1: in your mind you need to keep this thing separate,
Speaker 1: then I think you keep the ongoing increases with the
Speaker 1: open endedness. I don't think the dots change, but you
Speaker 1: do keep the ongoing increases. But being open to that,
Speaker 1: the FED has the tools necessary to deal with the
Speaker 1: financial stability issue and those two things will be separate
Speaker 1: in the end. As we've seen all over, inflation on
Speaker 1: the way down has not been linear, and I think
Speaker 1: opening up the devishness that the market may want to
Speaker 1: see risks that other piece of it. And it's I
Speaker 1: think Laguard really showed the way to how to capture
Speaker 1: this right here, So I would suspect that he's going
Speaker 1: to separate it as well. Now, did something actually happen
Speaker 1: in the real world two weeks ago with the banks,
Speaker 1: and I think the answer is yes, right in the
Speaker 1: real world, credit contraction has likely accelerated. So let's take
Speaker 1: a step back and talk game theory, because that seems
Speaker 1: to be what we're all doing right now, to try
Speaker 1: to game out what they're signaling versus what they're going
Speaker 1: to do, versus what they know, versus what you believe.
Speaker 1: And I wonder if, as a market participant, you think
Speaker 1: that ja Pell has less credibility not only in having
Speaker 1: the authority on what they're going to do, but having
Speaker 1: any extra visibility into the path of a market that
Speaker 1: has been highly, highly in determined. So I think Japell's
Speaker 1: credibility is intact here. He's been very single minded on
Speaker 1: the inflation issue. There was some talk earlier in the
Speaker 1: other press conferences and talking about this inflation eleven times,
Speaker 1: but I think ultimately that the pivot was real, and
Speaker 1: I think the pivot is still there. And I think
Speaker 1: the thought that the FED actually does have the tools
Speaker 1: to understand the financial stability issue and what's happening with
Speaker 1: the banks is a very real and true thing. And
Speaker 1: if they hike today, it is a signal that they
Speaker 1: think they ring front fenced this and can prevent further deterioration.
Speaker 1: So if you say that there really has been something
Speaker 1: material that has happened in the economy, what's your investing
Speaker 1: change as a result? Right, So that's the big question. Right.
Speaker 1: We talk about the economy, but in the end, we
Speaker 1: have to invest our clients money. So our thinking on
Speaker 1: this originally was that the recession seemed to be pushed
Speaker 1: out and maybe the end of twenty twenty three into
Speaker 1: twenty twenty four, two weeks ago, when that inflation, all
Speaker 1: those inflation reads came in really hot and the economy
Speaker 1: seemed to be on fire. What we've said today is
Speaker 1: that this event actually changes, that the recession comes back
Speaker 1: into twenty twenty three, earnings likely go lower. We're pretty low,
Speaker 1: and earnings this year anyway, we're neutrally weighted on equities.
Speaker 1: We never really went for the full you know, disinflation
Speaker 1: is here, climb back in hand over fist, get greedy,
Speaker 1: because we simply didn't think that this was going to
Speaker 1: be so easy to get out of in the end.
Speaker 1: In the end, this is going to be a hike cycle.
Speaker 1: The fastest in forty years four hundred and fifty basis
Speaker 1: points today four hundred and seventy five basis points in
Speaker 1: twelve months. How do you get out of this without
Speaker 1: a recession or without something cracking. Well, in fact, something
Speaker 1: did crack yep so, and that tends to be not
Speaker 1: just one thing. So when there's an issue in the
Speaker 1: regional banks, they pull back on lending, and that's what happens.
Speaker 1: And as you know, more than fifty percent of the
Speaker 1: lending to various sectors of the economy comes from these
Speaker 1: banks with two hundred and fifty billion or under in assets.
Speaker 1: So let's work through the second sinc bank liquidity issues,
Speaker 1: credit issues because a tighter lending recession gets brought forward.
Speaker 1: We can agree on the date when they really kicked
Speaker 1: off February eighth, the Wednesday evening overnight into Thursday Wednesday,
Speaker 1: the eighth of March thirty nine, ninety two on the SMP.
Speaker 1: We're above that now, right Why because the market is
Speaker 1: pricing in that the regulatory authorities have ring fenced this,
Speaker 1: that they've prevented further deterioration in the system, in the
Speaker 1: banking system. Had there been doubt, you would have seen
Speaker 1: more of a deterioration, but it simply hasn't happened. So
Speaker 1: the equity market is saying, look, you know, the FED
Speaker 1: and the FDIC and the regulatory authorities have done the
Speaker 1: right thing, and they've done it well, and the stragglers
Speaker 1: left will be dealt with all things being equal, then
Speaker 1: is a slower pace of rate hikes and potentially fewer
Speaker 1: of them, which is what people have been expecting and
Speaker 1: pricing in stimulative for risk assets. It will be taken
Speaker 1: as such. It shouldn't be, but it will be taken
Speaker 1: as such. The market is on a hair trigger waiting
Speaker 1: for the pivot, right, I mean, if you think about
Speaker 1: starting less July, it was the pivot, then we pivoted
Speaker 1: from the pivot, then we went back to the pivot,
Speaker 1: then we pivoted from the pivot. It's nuts, It's really nuts.
Speaker 1: I don't understand why that with the six percent inflation,
Speaker 1: the market is not understanding that, actually the FED is
Speaker 1: going to keep on hiking as long as they ring
Speaker 1: fence the stability issue and they it will keep on hiking.
Speaker 1: We're missing a point, aren't We were just kind of
Speaker 1: not trade in the recession. We want to trade the recovery.
Speaker 1: To the recession we haven't had yet. We want the
Speaker 1: trade after the trade, totally right. There's been a different
Speaker 1: trade in the last couple of weeks, and the market
Speaker 1: wants the trade after the trade because it's all happened
Speaker 1: so fast. Think of how quickly those deposits left the bank, right,
Speaker 1: it was people on apps, So the systems moved quicker.
Speaker 1: Trading has moved, quicker. Regimes seem to move quicker, and
Speaker 1: the market wants to price it in before we get
Speaker 1: through the recession. No joke. I think we've had three
Speaker 1: different regimes in the first quarter alone. Just take a
Speaker 1: look a bit two year yield. I mean, we came
Speaker 1: into this year and it was all right, cuts recession.
Speaker 1: Then it was boom, no landing, more hikes maybe six
Speaker 1: and now it's financial instability pause. The hiking cycle is
Speaker 1: over and it's March twenty second. We haven't finished key one, right,
Speaker 1: So the market keeps on pricing in the pivot. That's
Speaker 1: the key thing. We keep on coming back to it.
Speaker 1: We hold thirty eight hundred, we call that level. I
Speaker 1: suspect we keep on bouncing around in this range between
Speaker 1: thirty eight yo hundred. It's going to be a very
Speaker 1: unsatisfying year, because they will be signs that there's some
Speaker 1: credit content contraction along the way. Earns will come down.
Speaker 1: Our portfolios are prepared for that. We thought this six
Speaker 1: months ago. We never believe that there was no landing.
Speaker 1: How do you have no landing when you're hiking like
Speaker 1: this and you start from a nine percent inflation rate?
Speaker 1: Just real quick here, Then what do you tell clients? Look,
Speaker 1: we went we went. We were underweight bonds last year,
Speaker 1: as we should have been. We went neutral umbonds. So
Speaker 1: we increase our waiting to bonds. We are conservative. We
Speaker 1: are telling clients it's going to be very volatile. We
Speaker 1: do think you actually end the year higher than you
Speaker 1: ended twenty twenty two. It's just not going to feel
Speaker 1: very good. So with our higher rating on bonds and
Speaker 1: our neutral unequities, we can pivot around there. But in
Speaker 1: the end, we don't hold cash in our portfolios and
Speaker 1: so we do relative relative trades and we think we're
Speaker 1: well positioned for this. In the end, the call and
Speaker 1: the real economy has been fairly fairly accurate. I'll say
Speaker 1: that it's what the market does with that, which is
Speaker 1: which is always the hot bit, which is always the
Speaker 1: hard bit. But I think that the table pounding on
Speaker 1: bonds is the right call. I'd always prefer to be
Speaker 1: wrong about the economy and just right accidentally about the market,
Speaker 1: that's correct, you know, Yeah, better to be lucky than right, right, Alicia,
Speaker 1: this was great as always, Alicia fbny manon he yields
Speaker 1: climbing just to touch higher. But the round trips that
Speaker 1: we have seen again and again really a head spinning
Speaker 1: for people trying to get their head around where we
Speaker 1: are in terms of a disinflationary course or not. Jonathan
Speaker 1: Pingle among them. He is chief US economist at UBS.
Speaker 1: Joins us. Now, Jonathan, can you give us a sense
Speaker 1: of how much has changed for you over the past
Speaker 1: two weeks? Well, I mean getting the magnitude exactly right
Speaker 1: right now is going to be just about impossible. And
Speaker 1: I know I was listening to some of your earlier
Speaker 1: conversation with Jonathan. I mean, this is one of those
Speaker 1: things where we can definitely sort of sign the effect.
Speaker 1: I mean, if you thought about the First National Bank
Speaker 1: of Pharaoh, maybe they're double checking their liquidity capital levels.
Speaker 1: You know they're gonna you know, they're they're gonna be
Speaker 1: wondering what the bank examiners are looking for next. You know,
Speaker 1: on the margin, this does go This is pretty likely
Speaker 1: to imply tighter credit going forward, when credit was already
Speaker 1: tightening in the US. So you know, we'll be watching
Speaker 1: the same things you all are watching with the H
Speaker 1: eight data, lending data for the provision of credit. But
Speaker 1: certainly it's a net negative in our expectation for the
Speaker 1: US economy. I've heard that the Bank of Faro has
Speaker 1: an unlimited credit line out to ac Milan, but I'm
Speaker 1: not going to confirm that, and that is just according
Speaker 1: to sources. I'm curious though, from your vantage point. We
Speaker 1: heard from a former FED governor this morning that all
Speaker 1: things being equal, this is not a credit problem, that
Speaker 1: there's not necessarily the same degree of credit tightening that
Speaker 1: people are ascribing the recent turmoil to the market, that
Speaker 1: in fact, there still is a very big inflation problem
Speaker 1: on the ground. What data are you looking at for
Speaker 1: your compass amid the noise, Well, you know, we are
Speaker 1: still getting you know, real time weekly data on everything
Speaker 1: from lending, mortgage applications, initial claims. We are getting regular
Speaker 1: you know, price signals from you know, big data sources,
Speaker 1: whether it's air fares used cars, right, So there's still
Speaker 1: a lot of data that's coming in every day that's
Speaker 1: going to allow us to assess, you know, what's unfolding
Speaker 1: and pretty close to real times these days. I mean,
Speaker 1: that was one of the things we really learned during
Speaker 1: the pandemic was you know, the availability of a lot
Speaker 1: of these new data sources. So you know, we are
Speaker 1: watching all of that, um you know, in particular the
Speaker 1: price data. But I think on net you know, we
Speaker 1: were already starting to get bearish or were bearish about
Speaker 1: the US economic outlook considering you know, there were some
Speaker 1: tentative signs that the rebound and data we saw in
Speaker 1: January really wasn't much of a re bound. And I
Speaker 1: think if you really put yourself in the position of
Speaker 1: a bank officer these days, you know, the guests are right.
Speaker 1: I mean, we don't look at this as a giant
Speaker 1: capital hole. It doesn't look like a sudden stop. But
Speaker 1: on the margin, this does seem more likely to imply
Speaker 1: less provision of credit than more, and less credit impulse
Speaker 1: for the economy usually isn't very good for growth, which
Speaker 1: raises also the issue of whether the VENT chair J.
Speaker 1: Powell recognizes us today in the press conference we heard
Speaker 1: from Betsy duca Is referencing her earlier and she said this,
Speaker 1: Chairman Powell was clear he expected the projections to come
Speaker 1: out in the SEP, the Summary of Economic Projections to
Speaker 1: be higher, and I don't see any way that doesn't happen.
Speaker 1: And she thinks that's going to be the big surprise
Speaker 1: of today's press conference. Can you give us a sense
Speaker 1: of how much you agree with that and what that
Speaker 1: would mean for your estimates of how quickly recession would
Speaker 1: take hold. Well, we do think that a they're going
Speaker 1: to raise raise twenty five basis points at today's meeting,
Speaker 1: and we do think that, you know, the median the
Speaker 1: median DOT is going to revise up for twenty twenty
Speaker 1: three by twenty five basis points compared to the December SEP.
Speaker 1: So that might sound hawkish and it might be a surprise,
Speaker 1: but we also think this comes with very data dependent language.
Speaker 1: I mean, we think they are going to put right
Speaker 1: in the statement something along the lines of at any
Speaker 1: additional or any further increases in the target range will
Speaker 1: be dependent upon economic data and implications for the outlook.
Speaker 1: So I think when cher Powell frames the sep he
Speaker 1: is going to frame it as and he's done this
Speaker 1: in the past. He doesn't you know, it's not a
Speaker 1: commitment device in his view, and he's been quite frank
Speaker 1: about that. So we are expecting him to acknowledge that
Speaker 1: base case for the committee. You know, they do need
Speaker 1: to fight inflation, but we do expect him to admit
Speaker 1: that this does depend upon, you know, how events on
Speaker 1: fold going forward. Now going to the credit impulse, though,
Speaker 1: we also do think he is going to make a
Speaker 1: strong has that the banking system is resilient, safe, sound,
Speaker 1: and well capitalized. So while he is going to deliver
Speaker 1: this message of monitoring considering credit conditions, he is going
Speaker 1: to I think, you know, on equivocally sound a confident
Speaker 1: tone about the banks, which comes in tandem his conversation,
Speaker 1: in tandem with what we're going to be hearing from
Speaker 1: Treasury Secretary Jennet Yellen, and she testifies in front of
Speaker 1: its Senate panel, so they have to be on the
Speaker 1: same page as we were talking about earlier, and they're
Speaker 1: probably going to speak to that same issue. Though we
Speaker 1: are looking right now at a market that has repriced
Speaker 1: in rate hikes and then repriced in rate cuts. And
Speaker 1: it's been this sort of ping pong match, as we've
Speaker 1: been talking about for a while between that right now
Speaker 1: still pricing in cuts before the end of this year.
Speaker 1: Do you think that that's premature based on the rhetoric
Speaker 1: and based on the economic data that you're seeing come out, Well,
Speaker 1: the economic data would not on its surface imply the
Speaker 1: Fed should be cutting later this year. I mean, you know,
Speaker 1: our forecast for corep see inflation for you know, a
Speaker 1: week from now, is that it's still going to be
Speaker 1: hung up at about four point seven percent. But you know,
Speaker 1: we are forecasting that the FED is going to be
Speaker 1: cutting rates later this year because you know, we do
Speaker 1: expect a certain amount of disinflation to be setting in
Speaker 1: as we roll through the middle of the year, and
Speaker 1: we expect to see a much weaker economy in the
Speaker 1: second half than the first half. So you know, so,
Speaker 1: I mean, if you're looking at you know, you know
Speaker 1: we have low claims, yes, we have you know, elevated
Speaker 1: inflation right now, but our expectation is, you know, what's
Speaker 1: been put in train with the rate hikes already, what
Speaker 1: we're seeing in credit conditions is going to lead to
Speaker 1: a meaningful slowdown later this year, Jonathan, how many times
Speaker 1: this year have you changed your forecasts? Now? We haven't
Speaker 1: changed it a whole lot since last November. Um. I
Speaker 1: mean the main thing we've changed in our forecast was
Speaker 1: taking on board the upside surprise in the January employment report,
Speaker 1: and we did have to nudge up our inflation projections
Speaker 1: in a report this week as the incoming January February data.
Speaker 1: But you know, the broad contour of GDP and the
Speaker 1: slowdown expect in the second half of the years really
Speaker 1: been pretty much the same since we've made a pretty
Speaker 1: big overhaul in the projections back in November where we
Speaker 1: switched from expecting a soft landing to expecting a hard landing.
Speaker 1: So how many times have you thrown up your hands
Speaker 1: in frustration at the narrative changes that you've heard on
Speaker 1: Wall Street that have really informed what you're seeing in
Speaker 1: market pricing? Well, I mean throwing up my hands as
Speaker 1: opposed to you know, you go from times where you
Speaker 1: look like you're doing well to you know, the heaps
Speaker 1: of criticism being layered upon you. But you know, but
Speaker 1: the data is not going to go in a linear direction.
Speaker 1: I mean, I think for me, the big surprise was
Speaker 1: forecasting a two hundred and ninety thousand gain in the
Speaker 1: January employment report and then seeing five seventeen and falling
Speaker 1: out of my chair. But you know, you know, we've
Speaker 1: been doing this a long time. You know, high frequency
Speaker 1: forecasting is difficult. There are surprises along the way. But
Speaker 1: I do think if we think now the starting point
Speaker 1: of the US economy, where the level of activity has
Speaker 1: been pushed up very high by the fiscal stimulus, that's faded.
Speaker 1: We have undergone a very rapid monetary policy tightening cycle,
Speaker 1: and you know, we're getting to a point now in
Speaker 1: the labor market where there's sort of more and more
Speaker 1: signs that hiring is kind of caught up with activity.
Speaker 1: You know, I think you're at a point now where,
Speaker 1: you know, further fiscal drag and some head wins for
Speaker 1: households this year, the ongoing impact of the monetary policy tightening,
Speaker 1: I think all points to a week or second half.
Speaker 1: Jonathan Pingle, thank you so much for being with us.
Speaker 1: Jonathan Pingle of UBS. Imagine turning up to the Federal
Speaker 1: Reserve in August two thousand, A night that was Betsy Joe,
Speaker 1: the former Fed governor, Betsy Joints, right, now, Betsy, can
Speaker 1: we start there? Can you describe what that was like
Speaker 1: starting on the Federal Reserve in August two thousand a night,
Speaker 1: So it was August two thousand and eight. I was
Speaker 1: sworn in about thirty minutes before my first FOMC meeting,
Speaker 1: which was the last normal FOMC meeting there ever was.
Speaker 1: And after my second f OMC meeting, we went into
Speaker 1: the Chairman's office and voted to lend eighty five billion
Speaker 1: dollars to AIG. So that's how I started my FED career. Well, Bessie,
Speaker 1: can you tell me how different this moment is relative
Speaker 1: to what you went through or those years ago? You know,
Speaker 1: it's different, but it's it's the same. You know, the
Speaker 1: Fed's job stays the Fed's job, regardless of what the
Speaker 1: current events are, whatever the crisis of the day, the
Speaker 1: FED has to keep its eye on what its job
Speaker 1: actually is. Well, let's talk about what its job actually is.
Speaker 1: There are dual mandates. One of them is inflation. That
Speaker 1: is the first and foremost one, but it's also oversight.
Speaker 1: How much has a lack of supervision over certain banks
Speaker 1: complicated their role right now? I think supervision has been
Speaker 1: a complicated factor and I think it's supervision, not regulation.
Speaker 1: Those terms are off and used interchangeably, but regulation applies
Speaker 1: to the rules of the road, if you were Supervision
Speaker 1: is being in the banks, paying attention to what's happening
Speaker 1: at each individual banks, not to banks as a whole.
Speaker 1: And that's where it seems to me that the problem lies.
Speaker 1: And this raises a question about how much signal there
Speaker 1: is from a federal Reserve where the chair went before
Speaker 1: Congress and really opened the door to a fifty basis
Speaker 1: point rate hike just days before collapse of one of
Speaker 1: the biggest banks, going back to the financial crisis. I'm
Speaker 1: curious what you make of that and how much signal
Speaker 1: there will be in terms of their visibility and other
Speaker 1: problems in the banking sector today. So the role of
Speaker 1: monetary policy is not to protect the balance sheet of
Speaker 1: the banks, and the tools that the FED has to
Speaker 1: deal with the financial system are very different than the
Speaker 1: tools that the FED uses in monetary policy. So the
Speaker 1: primary tool in the financial system is the fedsibility to lend.
Speaker 1: That's why the FED was established to lend in liquidity crises,
Speaker 1: which which at its core is so the facility that
Speaker 1: they established the weekend after SVB failed is right in
Speaker 1: their wheelhouse. That is their primary tool for dealing with
Speaker 1: financial stability. A lot of people I think they'll separate
Speaker 1: it from from the monetary policy decision. A lot of
Speaker 1: people argue that it's not quantitative easing, that this is
Speaker 1: not a reversal of quantitative tightening. That yes, the balance
Speaker 1: sheet rowse by three hundred billion dollars, but it's a
Speaker 1: different mechanism. It's not buying, it's lending. It's a different
Speaker 1: type of stimulative effect. Do you draw the same distinction
Speaker 1: or do you think that this is basically the end
Speaker 1: of quantitative tightening. Actually, they would have to offset the
Speaker 1: increase coming from the loans with a further sale of
Speaker 1: the securities on the balance sheet to offset the quantitative
Speaker 1: easing if you will, that's going to result from the
Speaker 1: balance sheet growing because of of the loans that they're making.
Speaker 1: If you go back to again two thousand and eight,
Speaker 1: the whole quwe one was not actually did not change
Speaker 1: the size of the FATS balance sheet at all. It
Speaker 1: simply replaced the lending that the bank had done during
Speaker 1: the crisis with security, so it kept the FATS balance
Speaker 1: sheet from contracting but it didn't expand the FATS balance sheet.
Speaker 1: It wasn't until QUE two and three that the FATZ
Speaker 1: balance sheets started to expand, Betsie. A lot of the
Speaker 1: post crisis apparatus that the Federal Reserve came up with
Speaker 1: was designed to communicate low for longer. The dot plot
Speaker 1: was an effective tool to do that. You could just
Speaker 1: show going out years that we weren't looking to raise
Speaker 1: hikes hike rates for a long long time. Betsy, how
Speaker 1: do you think that dots will be used today for signaling?
Speaker 1: So at his last press conference, Chairman Powell was very
Speaker 1: very clear that he expected the projections to come out
Speaker 1: in the SEP, the Summary of Economic Projections. He expected
Speaker 1: those dots to be higher with the new projections. And
Speaker 1: I don't see any way that that doesn't happen. So
Speaker 1: the decision in the room needs to for FED credibility,
Speaker 1: I think needs to match what its projections are. So
Speaker 1: I would focus not just on what the decision is today,
Speaker 1: but what are those projections say about what the terminal
Speaker 1: rate is? And I think that's going to be the
Speaker 1: big surprise, Betsy. You think that they're going to increase
Speaker 1: those dots, They're going to increase the projection of where
Speaker 1: Fed funds rates will ultimately end up despite some of
Speaker 1: the turmoil recently. What's going to be the justification for that?
Speaker 1: Are they going to double down on this idea of
Speaker 1: inflation and that where we still haven't gotten restrictive enough
Speaker 1: despite signs of credit tightening that has been accelerated over
Speaker 1: the past few weeks. Well, the way I interpreted the
Speaker 1: comments was that the expectation was that that inflation would
Speaker 1: come down more slowly than they had expected, and the
Speaker 1: dots come from expectations of inflation. If you remember, there
Speaker 1: was a lot of discussion in that press conference, and
Speaker 1: at one point Chairman Pals said, you know, my forecast
Speaker 1: is different than yours. If your forecast is right, your
Speaker 1: rate projection will be right. But if my forecast is right,
Speaker 1: then your rate forecast is going to be wrong. And
Speaker 1: I think it would be a mistake to not remember
Speaker 1: that and not pay attention to it. But see, just
Speaker 1: one final thing. One thing we've talked about over the
Speaker 1: last couple of weeks is whether the FED knows things
Speaker 1: that we don't know when it comes to financial stability.
Speaker 1: When you watch the news conference later, are we watching
Speaker 1: a chairman that knows things that we don't know about
Speaker 1: a financial system. I think you will find that he
Speaker 1: probably he certainly knows things that we don't know. But
Speaker 1: whether they are things he's trying to hide, I don't
Speaker 1: think that's necessarily true. Again, his credibility is his most
Speaker 1: important asset, and so he's not going to be trying
Speaker 1: to hide anything. But when they talk about the strength
Speaker 1: of the banking industry right now, the banks are strong,
Speaker 1: capital strong, asset quality is extremely good. This is this
Speaker 1: is an interest rate risk issue, a liquidity issue, and
Speaker 1: you know it goes back to the basics of banking.
Speaker 1: This is more like the S and L crisis than
Speaker 1: it is like two thousand and eight. What are the
Speaker 1: flows of information that the FED has access to in
Speaker 1: real time that we don't see bet Sea, I don't
Speaker 1: know how much it's really that different. I mean, they
Speaker 1: get a lot of information, and you have a staff
Speaker 1: that compiles that information and reports it out on a
Speaker 1: regular basis. The banking information is going to be coming
Speaker 1: through the supervisory activities in the reserve banks, and my
Speaker 1: guess is right now that the supervisors are in every
Speaker 1: bank looking to see what the liquidity risk management looks like,
Speaker 1: what does the interest rate risk management look like? And
Speaker 1: what does the capital look like? Because you can plug
Speaker 1: a temporary liquidity hall with borrowing that the Fed's doing,
Speaker 1: and that will keep banks from having to sell the
Speaker 1: securities that they own. But if those deposits are gone forever,
Speaker 1: if there's a shift in the industry from the smaller
Speaker 1: banks to the larger banks and it remains permanent, then
Speaker 1: that's a problem for the smaller bank portion of the industry. Basie,
Speaker 1: this was wonderful. I'd love to do this again ahead
Speaker 1: of the next FET decision. Thank you, all right, Bessie
Speaker 1: to thank you the former fat governor. The next guest
Speaker 1: is really someone with tremendous experience both from the Treasure Department,
Speaker 1: World Bank and also in the banking industry extensively. David Malpass,
Speaker 1: who is World Bank Press, joining us here in our studios.
Speaker 1: I want to start because a lot of people who
Speaker 1: draw parallels to two thousand and eight, and given your
Speaker 1: experience there, you were chief economists, top rated economist at
Speaker 1: bear Stearns. Are there parallels to that moment and the
Speaker 1: one we're in now. I think there are parallels and differences.
Speaker 1: The parallels are there was really a maturity mismatch at
Speaker 1: some institutions, and the FET had been raising rates, remember
Speaker 1: a long period of rate hiking leading into oh eight.
Speaker 1: But then some big differences. One is this time the
Speaker 1: discount windows available to the major institutions. That wasn't the
Speaker 1: case then, and so that gives some backstop and you're
Speaker 1: seeing it really play out now. And another big difference
Speaker 1: is the FET itself is buying a huge amounts of
Speaker 1: duration and other central banks are as well, ECB and
Speaker 1: Bank of Japan are holders of giant amounts of duration,
Speaker 1: which wasn't the case in two thousand and eight. They
Speaker 1: at that time, remember, central banks only only owned treasury bills.
Speaker 1: So that creates a different complexion to the market and
Speaker 1: a different set of tools that the regulators have to intervene.
Speaker 1: So today I think the biggest shoe is where is
Speaker 1: growth going to come from into the future. Before we
Speaker 1: get to that point, I know you want to bleed
Speaker 1: that over into the rest of the world, which is
Speaker 1: an important point. I want to talk about the similarities.
Speaker 1: You talk about a liquidity mismatch. A lot of people
Speaker 1: draw the distinction a liquidity mismatch is not a credit
Speaker 1: crisis is not a credit crunch. But back in two
Speaker 1: thousand and eight, and actually I would argue earlier, the
Speaker 1: liquidity mismatch led to a credit crunch. How close is
Speaker 1: that sort of direct parallel? This sort of direct bleed
Speaker 1: over into credit conditions. As interest rates are held down,
Speaker 1: which was the case in oh four, oh five, oh six,
Speaker 1: and now in this current or over the last ten years,
Speaker 1: then that causes asset prices to go up. So there's
Speaker 1: a workout period after that. So I think that's what
Speaker 1: we're in now. How do you adjust asset prices if
Speaker 1: yields are going to be much higher than what you
Speaker 1: thought two years ago or one year ago. And that's
Speaker 1: the challenge facing the market. How do you allocate the losses?
Speaker 1: I'm hoping that they don't go to the poor, to
Speaker 1: developing countries and to average taxpayers. That an issue is
Speaker 1: if you've created all that asset price boom, can the
Speaker 1: losses be allocated back into the same markets? And that's
Speaker 1: a big challenge. So could you elaborate a little bit
Speaker 1: on the disproportionate holding of the burden that you see
Speaker 1: in some of the developing nations that may affect the
Speaker 1: growth profile of the world. Over the last ten years
Speaker 1: or so, there was this big concentration of wealth in
Speaker 1: and narrow group in the advanced economies that was fueled
Speaker 1: by both the fiscal deficits, the huge run up in
Speaker 1: the debts across the advanced economies, and also the central
Speaker 1: banks themselves buying duration that supports asset prices. Long term
Speaker 1: assets go up when there is a giant buyer constant
Speaker 1: buyer of those assets, and so that leaves not enough
Speaker 1: capital elsewhere in the world. We've seen the slow growth
Speaker 1: in developing countries in part because there's not good access
Speaker 1: to global capital markets. And now going forward the challenges.
Speaker 1: A lot of the world's capital is going to be
Speaker 1: used by the advanced economies to keep rolling over the debt.
Speaker 1: So a big challenge for billions of people around the
Speaker 1: world is where is there going to be available capital.
Speaker 1: They have this big population growth in many countries, and
Speaker 1: yet the capital goes to countries that have declining populations.
Speaker 1: So how much does that lowerer projection for global growth
Speaker 1: and how much has that lowered it? Even over the
Speaker 1: past couple of months, we had lowered it substantially a
Speaker 1: year or a year and a half ago, recognizing that
Speaker 1: there was inflation really was a challenge that the central
Speaker 1: banks were going to be raising. Cost of capital goes up,
Speaker 1: so growth forecasts go down. So in the latest what
Speaker 1: we've seen is advanced economy growth expectations had gone up
Speaker 1: some late last year. That's the US and in particular
Speaker 1: as China lifted the embargo, the lockdown, and so as
Speaker 1: we're looking at it now, the growth is slow but
Speaker 1: positive in advanced economies, but in developing countries not much
Speaker 1: investment taking place. That I think is the big challenge.
Speaker 1: I'll be giving a big speech tomorrow at CSIS in Washington,
Speaker 1: DC on the importance of private private capital enabling How
Speaker 1: what are the tools and techniques and the world banks
Speaker 1: in the middle of it trying to get countries to
Speaker 1: be more attractive to capital investment. In the meantime, would
Speaker 1: you get this FED decision later today? How does that
Speaker 1: connect to the stripping out of capital from some of
Speaker 1: the developing world. If the FED does go ahead and
Speaker 1: high rates by twenty five basis points and increase their
Speaker 1: forecast for where the terminal rate ends up, what kind
Speaker 1: of magnified effect could that have? I heard you talking
Speaker 1: before they'll be sending signals of the What the prospect is.
Speaker 1: I think import is for the US and the advanced
Speaker 1: economies to think about how do we encourage more supply
Speaker 1: and that brings down the inflation rate, So central banks
Speaker 1: can be more involved or recognized they are affecting the
Speaker 1: lending that goes to small businesses, and so are the
Speaker 1: ways with regulatory policy or with the bond with this
Speaker 1: duration purchasing that the central banks do. So my view
Speaker 1: is that when central banks by duration, that actually ends
Speaker 1: up slowing growth on average. You know, if you look
Speaker 1: back over the last ten years, there's been this anomaly
Speaker 1: that they're buying huge amounts of bonds and yet you're
Speaker 1: not getting the growth rate that you expected from that.
Speaker 1: So going forward, I think there has to be a
Speaker 1: really deep dive into how do we get more growth
Speaker 1: and capital allocation worldwide? Until then, given that all things
Speaker 1: being equal, a lot of central banks are turned to
Speaker 1: the same playbook and you're actually the balance sheet we
Speaker 1: expand in the US, how slow could global growth get? Yeah,
Speaker 1: I think it can be even a recession, and that's
Speaker 1: not off the table. The last recession. You could have
Speaker 1: a global recession. We define that as when the growth
Speaker 1: rate isn't equivalent to the population growth rate, so you
Speaker 1: have people moving backward on average um. That depends a
Speaker 1: lot on the big on the advanced economies. The US
Speaker 1: is the is the by far the biggest economy, and
Speaker 1: so it's growth rate matters, and so you people are
Speaker 1: watching exactly what's going on in the in the Loan
Speaker 1: Officer survey, for example, there was just a reference to
Speaker 1: that on your show. That's that's an important one our
Speaker 1: banks lending given that they see this, uh, these difficulties.
Speaker 1: So all things being equal, are the chances of a
Speaker 1: global recession much greater today than they were two weeks ago? No,
Speaker 1: I would not say that there was. There was a
Speaker 1: recognition of individual bank problems. They were strongly dealt with
Speaker 1: by regulators. So the bigger issue rather than looking at
Speaker 1: the near term impact, I think we have to just
Speaker 1: stay with the idea of what's going to be done
Speaker 1: for the next three year growth rate of the world.
Speaker 1: How do you get out of this kind of trap
Speaker 1: of higher and higher interest rates? And I think the
Speaker 1: solution has to be more output. How do you how
Speaker 1: do you how do you get more services, more goods
Speaker 1: into the global markets in order to stop the inflation trend.
Speaker 1: Given that, what do you hope j Powell does today?
Speaker 1: Huh No, he's the policy makers to send very strong signals. Well,
Speaker 1: I'm sure, and I'm sure people will read into them.
Speaker 1: And why are you in New York? There's a big
Speaker 1: UN conference today on water. Water is really important, clean
Speaker 1: water for people, it helps children grow to their full height,
Speaker 1: and it helps agriculture be able to produce. So big
Speaker 1: conference on that, and I'm also doing other other Vince
Speaker 1: in New York. David Malpass, thank you so much for
Speaker 1: being with us. We really appreciate it. David Malpass, the
Speaker 1: President of the World Bank. Subscribe to the Bloomberg Surveillance
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Speaker 1: Listen live every weekday starting at seven am Eastern on
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Speaker 1: Television and always on the Bloomberg terminal. Thanks for listening.
Speaker 1: I'm Lisa Abramowitz and this is Bloomberg