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Speaker 1: This is the Bloomberg Surveillance Podcast.

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Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.

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Speaker 2: Join us each day for insight from the best and economics, geopolitics,

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Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,

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Speaker 2: Spotify and anywhere you get your podcasts, and always on

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Speaker 2: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.

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Speaker 1: Jim Zelter with us is just starting to walk out

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Speaker 1: of the room. Called president of Paul Credit Card Management.

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Speaker 2: He joins us now with decades of experience and fixed

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Speaker 2: on John, why don't you bring in a gentleman with

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Speaker 2: an overview of this crisis or non crisis that we're

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Speaker 2: in right now?

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Speaker 3: The co president at Apollo Asset Management joins us right now. Jim,

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Speaker 3: good morning, Good morning, all great to catch up. I

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Speaker 3: want to start here. Can we just start with the

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Speaker 3: days after RECVB collapses. You've raised all this capital. This

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Speaker 3: is like your moment to make things happen. How difficult

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Speaker 3: was it to deploy it?

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Speaker 1: Well?

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Speaker 4: I think you had to differentiate between a deposit crisis

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Speaker 4: over the first few days at Thursday and over the

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Speaker 4: weekend when the government took its action, and then you

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Speaker 4: really were talking to a lot of borrowers and a

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Speaker 4: lot of institutions that needed help. So that week we

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Speaker 4: did a very large transaction and helped out pack West.

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Speaker 4: But I think what you're really talking about this morning

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Speaker 4: here is a deposit crisis evolving into a business model question,

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Speaker 4: and that's really where the overall evolution of the markets are.

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Speaker 4: But certainly, you know, we've been very busy. We've been

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Speaker 4: very busy on all sides of our business, and there's

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Speaker 4: no doubt that this withdrawal of capital, it's not a

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Speaker 4: credit crunch, it's not an embulent market, but there's a

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Speaker 4: transition with a higher cost of capital in debt financing

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Speaker 4: across all the markets.

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Speaker 3: Let's stick deeper into that. Can you describe the spaces

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Speaker 3: right now where you expect traditional banks to retrench from,

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Speaker 3: to move away, to move back from, and where you

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Speaker 3: think there's opportunities for you to step in even more.

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Speaker 4: Sure, you know, as we've had this conversation about private

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Speaker 4: credit over the last several years, last decade, it's really

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Speaker 4: been for the headlines focused on sponsor finance, which is

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Speaker 4: non investment grade. The real opportunity is the regional bank

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Speaker 4: model really evolves and their cost of financing is up

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Speaker 4: quite a bit higher. There's a variety of asset based strategies,

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Speaker 4: whether it's in the commercial mortgage space, whether it's in

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Speaker 4: the resume mortgage space, whether it's in solar finance, whether

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Speaker 4: it's in aircraft finance, where the regional banks or traditional

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Speaker 4: banking models, those were interesting businesses. The business that we

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Speaker 4: bought out of Credit Swiss, the Atlas finance business, which

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Speaker 4: is really an abs warehouse businesses. Those businesses typically the

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Speaker 4: underlying risk is investment grade, and for the most part,

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Speaker 4: because of either sovereignty two in Europe or other rules,

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Speaker 4: those are just become much more capital intensive and capital

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Speaker 4: consuming for the banks. And so there's a variety of

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Speaker 4: those asset classes that I mentioned that's like forty trillion

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Speaker 4: versus a ten trillion private credit opportunity in the US.

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Speaker 5: But Jim, what I didn't hear you mentioned was just

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Speaker 5: a pure unsecured, revolving loan of credit, which is basically

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Speaker 5: what a lot of these smaller regional banks delivered to

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Speaker 5: smaller companies. Is that a no go area at this point.

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Speaker 4: No, I think listen those are smaller, idiosyncratic corporate loans

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Speaker 4: and someone needs to fill the gap in that. And

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Speaker 4: the reality is the cost of financing has gone up

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Speaker 4: to to four hundred basis points in the last month,

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Speaker 4: So those companies are getting that financing. You've not seen

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Speaker 4: it yet in the earnings, but certainly that's where we

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Speaker 4: believe this whole idea of tighter financial conditions. It's that

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Speaker 4: exact company that you're talking about that's probably having a

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Speaker 4: more challenging period of time right now securing that financing.

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Speaker 5: How does that change the equation for you when you

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Speaker 5: decide what size company you want to invest in. The bigger,

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Speaker 5: more stable, better access to financing going to have and

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Speaker 5: even better profile versus an even worse one for some

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Speaker 5: of the smaller ones.

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Speaker 4: Sure, typically at Apollo, if the capital is coming from

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Speaker 4: our balance sheet, we're usually talking to companies with companies

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Speaker 4: and having ebada less more than fifty million dollars. That

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Speaker 4: being said, we have a portfolio of sixteen portfolio finance companies,

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Speaker 4: of which the CS business now called Atlas is one

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Speaker 4: of them, and they'll range in the companies that they

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Speaker 4: financed that that's three thousand employees, about eighty billion of assets.

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Speaker 4: Those companies will lend to companies anywhere from ten to

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Speaker 4: fifteen million in revenue, so much smaller, much deeper and broader.

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Speaker 6: Are they as attractive?

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Speaker 4: Well, what you've seen really across the board, let's just

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Speaker 4: talk about commercial real estate. A lot of conversations about that.

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Speaker 4: Commercial real estate finance for the most part, like a

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Speaker 4: single a CMBs piece of paper that was three point

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Speaker 4: fifty when I came out here six months ago, that's

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Speaker 4: six seventy five today. It's just math spread of widen

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Speaker 4: from one seventy five to three fifty over.

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Speaker 2: Yeah, I noticed in Washington to day Brookfield giving back

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Speaker 2: two properties they can't make a go of. Well, I

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Speaker 2: mean the commercial real estate thing is tangible. I want

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Speaker 2: to look at the level of the word the D

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Speaker 2: word distress that's out there right now, and I look

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Speaker 2: at it just in a basic accounting standard. How blind

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Speaker 2: are people like you right now off fasby one fifty

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Speaker 2: seven and you can't mark the market depth that's out there? Now,

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Speaker 2: what's the opacity that's out there in the system?

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Speaker 4: Well, I think I think time If you look at

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Speaker 4: the overall leverage finance market, it's a couple trillion dollar market.

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Speaker 4: You've got to assume defaults next year, probably going up

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Speaker 4: to the mid high forest of five percent, right, So

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Speaker 4: that's about one hundred million of a challenge credit if

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Speaker 4: you would. In the forward calendar, if you look at

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Speaker 4: commercial real estate, you got a trillion and a quarter

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Speaker 4: that needs to get financed in the next twelve to

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Speaker 4: eighteen months. So there's no doubt that there's a portion

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Speaker 4: of that will But you're not you're not seeing broad

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Speaker 4: distressed yet. You're in this you're in the transition period.

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Speaker 4: We had fourteen years of low interest rates and the

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Speaker 4: real impact act on valuations. It takes a while to

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Speaker 4: filter through. You're seeing some evidence in the secondary markets.

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Speaker 4: In the pe secondary market, those names are trading between

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Speaker 4: the high seventies and low eighties. Credit secondaries are in

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Speaker 4: the high eighties, low nineties, VC secondaries in the fifties,

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Speaker 4: So you're seeing it in some markets. But this idea

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Speaker 4: of tighter financial conditions, this takes three, six, twelve months

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Speaker 4: to really evolve. And as you talk later on today,

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Speaker 4: you know you have your big banks reporting today. It

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Speaker 4: will be very interesting to see, you know, on the

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Speaker 4: regional banks, they went from a deposit crisis to a

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Speaker 4: question of their economic business model, how do they make

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Speaker 4: money long term? And you know the other side of

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Speaker 4: that is, we feel that our business model has only

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Speaker 4: gotten enhanced. We have long term liabilities and now those

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Speaker 4: ten year liabilities in our business. It allows us to

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Speaker 4: be a robust, stable lender in a period right now

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Speaker 4: of flux and conversation.

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Speaker 2: The heart of the math to me and the Brickfield

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Speaker 2: article from Bloomberg today is just definitive. At the very

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Speaker 2: bottom of it. In the last paragraph, year over year,

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Speaker 2: the monthly payments on a blended piece of sub properties

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Speaker 2: went from three hundred and thirty gazillion out to eight

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Speaker 2: hundred and eighty. And the translation of this to me

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Speaker 2: for all of our listeners and viewers is in the

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Speaker 2: new math, somebody's got to put up cash to do

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Speaker 2: the restructure. This is a whole new world for a

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Speaker 2: lot of people.

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Speaker 4: Jim, it's called cost of For a decade plus and

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Speaker 4: I mentioned to you all before, equity was the great

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Speaker 4: beneficiary of low cost that really subsidized the equery return exactly.

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Speaker 4: Now we've had a complete paradigm shift and it's just math.

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Speaker 4: You said it earlier. The funding cost. When you hear

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Speaker 4: that there's a credit card out there you're making four

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Speaker 4: percent on right now, or assuming not a credit card

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Speaker 4: but a bank deposit program, that's just a cost of

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Speaker 4: good sold and it's a higher cost for somebody, the

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Speaker 4: consumers the great beneficiary. But back to our model, we

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Speaker 4: are are looked at, you know, the the American economy.

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Speaker 4: We've gone through a really tough quarter, but you know,

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Speaker 4: four percent of the population, fifty percent of the financial

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Speaker 4: assets in the world, we have the envy financial markets

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Speaker 4: of the world. And this isn't This is we were

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Speaker 4: evolving right now in a period of you know, three

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Speaker 4: to nine months, but up with a higher cost of

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Speaker 4: capital that's just flooting through the system.

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Speaker 3: You in a great spot. That's what we're describe in

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Speaker 3: Is that because of the way the cycle is evolving,

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Speaker 3: or is it more structural in nature, because it sounds

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Speaker 3: a little bit more like.

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Speaker 7: The last secular it's secular.

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Speaker 4: You know, if you take the last as we've talked before,

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Speaker 4: if you take the last twenty five thirty years and

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Speaker 4: the evolving role of financial services around the globe, really

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Speaker 4: led in the US, but following on in Europe and

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Speaker 4: a little bit in Asia as well. You know, there's

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Speaker 4: no doubt that that folks that are able to be

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Speaker 4: able to operate with the ability that we are to

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Speaker 4: really bring the proper liabilities to the equation. You know,

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Speaker 4: our investors are sovereigns, institutions, pension funds from around the globe.

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Speaker 4: They're the ones that can make the five and ten

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Speaker 4: year commitments along with retirement savers. Those are the folks

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Speaker 4: that should be making these loans. I mean, the digital

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Speaker 4: world has really changed the banking market and there's a

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Speaker 4: lot of folks that are a lot more knowledgeable about

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Speaker 4: the traditional banking system. But again, we just have a

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Speaker 4: lot more tools in our toolbox were able to provide

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Speaker 4: a lot more capital. As I mentioned the pac West

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Speaker 4: solution that happened basically in three days, a billion four

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Speaker 4: facility for them that really got them through a pretty

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Speaker 4: tough liquidity situation, but was a high quality assets that

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Speaker 4: were looked through investment grade. And if you do that,

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Speaker 4: you know, having those solutions, your your doorbell is going

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Speaker 4: to ring quite a bit these days.

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Speaker 5: How much cash do you have in anticipation of the

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Speaker 5: doorbell ringing?

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Speaker 4: You know, I think our latest numbers as a last

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Speaker 4: quarter probably an excess of fifty billion a dry powder.

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Speaker 4: Oh well, you know, I'll leave it to you. I'll

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Speaker 4: leave it to you guys to talk about that. But

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Speaker 4: there's no doubt that investors from Ron on the globe.

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Speaker 4: I was an agent last week, and the idea of

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Speaker 4: really exporting yield around the globe. You know, they've had

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Speaker 4: very low rates for a decade plus. Obviously a lot

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Speaker 4: of conversations about what's going on in Japan right now

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Speaker 4: with y CCO curve control and how do they transition

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Speaker 4: off that. I mean, I think that's a really interesting

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Speaker 4: story for the latter half of the year. But the

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Speaker 4: reality is we're in an evolving market in the States.

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Speaker 4: What was a deposit liquidity crisis is now a evolution

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Speaker 4: of their business model, and really it's going to be

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Speaker 4: a period of tougher financial conditions.

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Speaker 3: Let's finish on this. You describe a process you're expecting

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Speaker 3: tougher financial conditions. I just want to build on the

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Speaker 3: question Lisa asked. I hate to ask the one question,

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Speaker 3: when do you expect that doorball just to be NonStop ringing,

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Speaker 3: because that's what it sounds like you're looking for.

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Speaker 4: I don't I think by the time that actually happens

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Speaker 4: all the activities occur. I think it's almost too late, Jonathan.

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Speaker 4: I think you really need to be in the markets

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Speaker 4: every single day. The reality is, you know, there was

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Speaker 4: some headlines last week the private credit took a step

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Speaker 4: back because of one financing. The reality is the m

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Speaker 4: and A market's a little bit quieter right now, and

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Speaker 4: you know LP firms want to do so.

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Speaker 2: Am I going to make some news this morning? I'm

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Speaker 2: looking for a Western Alliance transaction. Would you like to

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Speaker 2: break that news here this morning?

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Speaker 4: I'll let others talk about that one. I got my

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Speaker 4: hands full.

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Speaker 3: Jim, this was fun, sir, Thank you, Thank you very much.

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Speaker 3: Jim's out to the of Apollo Asset Management with us

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Speaker 3: around the table, and please to say Dan Greenhouse, chief

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Speaker 3: strategist at Solace Alternative Asset Management. Dan, welcome to the show.

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Speaker 8: Good morning, Thank you, sir.

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Speaker 3: Are we learning that the bank stress of the last

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Speaker 3: month or so is more idiosyncratic than systemic or is

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Speaker 3: it still too early?

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Speaker 8: I don't think there was really In my opinion, I

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Speaker 8: don't think there was a debate from the beginning that

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Speaker 8: this was not idiosyncratic. Clearly, there were specific factors to

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Speaker 8: Silicon Valley specifically, but Signature as well that I never

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Speaker 8: really found were sister wide, so to speak. That's not

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Speaker 8: to say that the unrealized losses throughout the banking system

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Speaker 8: isn't a real thing.

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Speaker 7: It is.

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Speaker 1: We know that it is.

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Speaker 8: But the I mean to give you the best, the

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Speaker 8: best that I could give you. Silicon Valley Bank has

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Speaker 8: seventeen branches and somewhere around one hundred and fifty thousand

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Speaker 8: checking accounts. Fifth Third, which is a comparably sized bank

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Speaker 8: deposit wise, has eleven hundred branches and like a million accounts.

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Speaker 8: It's a different base, it's a different thing entirely so,

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Speaker 8: so we were never particularly concerned about there being a

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Speaker 8: banking crisis, if you will. Certainly there's an issue that

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Speaker 8: has to be dealt with, but I don't know that

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Speaker 8: that hearing that said, I don't know that hearing from

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Speaker 8: JP Morgan and Wells Fargo tells me what Western's going

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Speaker 8: to tell me after the close. That's much more consequential.

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Speaker 3: We're still trying to gauge to what extent we're going

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Speaker 3: to see a turn and get lending standards and how

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Speaker 3: contained macroeconomic spillovers will be. Have you drawn any conclusions

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Speaker 3: on that just yet.

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Speaker 7: Yeah.

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Speaker 8: Listen, the short answer to any question like that is

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Speaker 8: a few basis points off GDP, I mean everywhere. I

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Speaker 8: don't have any particularly new news on this. We know

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Speaker 8: lending standards have been tight and going into this, we

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Speaker 8: assume lending standards will tighten further coming out of it.

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Speaker 8: And we also know that, on balance, the level of

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Speaker 8: tightening that we've seen is traditionally associated with worse economic

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Speaker 8: outcomes than better economic outcomes. I don't think that narrative

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Speaker 8: is likely to be changed at all from the large

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Speaker 8: banks telling me on balance that loans are continuing to

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Speaker 8: expand there's a lag, and ultimately I think it ends

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Speaker 8: up weighing on GDP. By someone, we call it three

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Speaker 8: tents or four tenths of GDP, something like that.

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Speaker 2: Dan, you're strategist to a hedge fund, you're living the

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Speaker 2: billion's dream. Do we overweight what we think are the

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Speaker 2: bets of hedge funds If we're trying to establish a

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Speaker 2: strategy that's longer than three hours, if we're trying to

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Speaker 2: establish a nine months or a three year strategy, is

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Speaker 2: there value in measuring the long short bets of your world?

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Speaker 8: So We are not active traders. If you will, we've

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Speaker 8: owned positions for ten.

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Speaker 1: Years, say ten minutes.

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Speaker 8: No, No, that's not the world in which we live.

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Speaker 8: I think certainly actively trading hedge, actively trading hedge funds

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Speaker 8: that flip position on a daily or is there value to.

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Speaker 2: That information is transfixed by it?

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Speaker 8: Well, yes, in the sense that momentum strategies are going

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Speaker 8: to be derived from that trading activity and are going

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Speaker 8: to be related to that activity. But we're, as I mentioned,

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Speaker 8: a much more long term focused investor. When we take

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Speaker 8: a position, oftentimes it's to control of the company. We

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Speaker 8: are the second or third largest holder of several companies.

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Speaker 8: Other times we'll get in and out if the thesis

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Speaker 8: changes in let's say a month, but we are not

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Speaker 8: actively participating in the market. Is there value in those

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Speaker 8: types of strategies, Sure, but I think it's value for

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Speaker 8: a certain specific type of investor, not our client or

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Speaker 8: our investivation, so to speak.

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Speaker 5: So just pushing against some of the bearishness out there

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Speaker 5: has been the credit markets that you really focus on

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Speaker 5: has been some of these longer term bets where people

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Speaker 5: are looking more for opportunity than they're worried about losses.

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Speaker 5: And you're seeing that under the hood pretty much across

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Speaker 5: the board. Do you make of that that people still

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Speaker 5: do have confidence that this is going to be some

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Speaker 5: sort of shallow recession, that we're going to merge on

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Speaker 5: the other side with higher rates that you want to capitalize.

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Speaker 1: Now, you know, I know.

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Speaker 8: Everyone says this is going to be a shallow recession,

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Speaker 8: and I find that statement to be more a function

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Speaker 8: of comfort than analysis. And what I mean by that

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Speaker 8: is it's very easy to say this is going to

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Speaker 8: be a shallow recession because they're forget career risk. The

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Speaker 8: likelihood that you're wrong in saying, well, it's going to

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Speaker 8: be something more than that is quite high. Now that said,

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Speaker 8: we also, and I don't want to speak for you guys,

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Speaker 8: I apologize if I'm saying this wrong, But how many

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Speaker 8: times do we follow up and say, well, what do

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Speaker 8: you mean by a software session? Well, I think we

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Speaker 8: can define this in terms of basis points moves in

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Speaker 8: the unemployment rate. If you think the unemployment rate's going

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Speaker 8: up by one percent, yeah, that's probably something resembling a

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Speaker 8: shallow recession. But as we all know, there's really no

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Speaker 8: instance in which the unemployment rate goes up by one

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Speaker 8: percent and then stops. It's quite often a much more

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Speaker 8: accelerated move from there.

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Speaker 6: It feels like we've been in this purgatory for a while.

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Speaker 6: We're they're sort of on the one hand.

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Speaker 5: On the other hand, and this lack of any clarity whatsoever.

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Speaker 5: When do you get clarity of what we're heading into?

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Speaker 8: Yeah, you and everyone else, I think that's obviously the

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Speaker 8: top question of the day. I would have told you

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Speaker 8: at the start of twenty twenty two that by the

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Speaker 8: middle of twenty twenty three we will be in something

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Speaker 8: or close to something resembling a recession. Now Here we

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Speaker 8: are in the middle lish of twenty twenty three, and

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Speaker 8: I don't think we're anywhere close to a recession. I

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Speaker 8: have been in public bearish on risk assets over the

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Speaker 8: course of that time. I more or less remain so now,

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Speaker 8: although there's some cavegats to that. But it's remarkable the

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Speaker 8: way that the economy has performed in the face of

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Speaker 8: such rapid increases, Which brings up something that you guys

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Speaker 8: were talking about yesterday. I think Tom mentioned the IMF

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Speaker 8: report and the world economic outlook, and the discussion of

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Speaker 8: the natural rate of interest. Excuse me and I think

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Speaker 8: there is a lot that we don't know about the

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Speaker 8: current environment. But with respect to the natural rate of interest,

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Speaker 8: I think it's fair to say that whatever we thought

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Speaker 8: the natural rate of interest was, or that the level

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Speaker 8: of interest rates that balances supply and demand throughout the

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Speaker 8: economy is higher than we previously thought, which means what

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Speaker 8: we thought the economic damage, so to speak, would be

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Speaker 8: from five hundred basis points of rate hikes is not

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Speaker 8: quite what we thought it would have been. It might

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Speaker 8: take six hundred or seven hundred.

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Speaker 7: I'm rapp there.

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Speaker 8: You go to do the same amount of damage that

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Speaker 8: perhaps a year ago we thought five hundred.

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Speaker 7: Big ye on.

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Speaker 2: Bloomberg Financial Conditions Index, from a minus five standard deviation,

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Speaker 2: we are out to a positive point one nine. That's

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Speaker 2: called not doing what Jay Powell wants.

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Speaker 3: I'm just tying everything together that you've said in the

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Speaker 3: last ten minutes or so March eighth, pre SVB to

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Speaker 3: your yield north of five percent? Is that where we're

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Speaker 3: going back to given what you've just told us.

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Speaker 8: Well, I will say, if you look at the three

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Speaker 8: month and the six month bill yields, they're both now

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Speaker 8: north of five percent. I was surprised at the level

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Speaker 8: of decline in the two year. Let's say that to

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Speaker 8: the extent that the two year is going to be

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Speaker 8: anchored to the federal funds rate, ish a drop of

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Speaker 8: that's move. And you see this E code in the

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Speaker 8: Fed fund futures, in the ear dollars future market card

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Speaker 8: wrest it's all, it's it's it's the level of pricing adjustment.

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Speaker 8: Seemed accessive to me based on my original comment, which

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Speaker 8: was I didn't think that SVB was anything other than idiosymprodity.

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Speaker 1: I got bad news.

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Speaker 2: Doug Cass is listening and he's got a Yankees question,

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Speaker 2: but we're not going there. Doug Cass looks out and says, look,

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Speaker 2: dividen SPX one point seven percent. Lisa's talking about five

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Speaker 2: percent money. How does the stock market elevate off of

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Speaker 2: that five percent yield?

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Speaker 8: Yeah, listen, it's a tremendous head wind right now, and

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Speaker 8: I don't think it's sufficient.

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Speaker 7: First of all, high Doug.

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Speaker 8: But it's not sufficient to look back historically and say, well,

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Speaker 8: the market rally in nineteen eighty three and interest rates

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Speaker 8: were much higher, which everyone meaningfully older than me likes

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Speaker 8: to remind me of. I think there are challenges to

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Speaker 8: the equity market right now from the fixed income space.

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Speaker 8: That said, in the credit market, where we spend a

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Speaker 8: good amount of time, the high yield market is still

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Speaker 8: yielding somewhere around eight and a half percent, which isn't

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Speaker 8: particularly high yield. Even triple c's, which is the lowest

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Speaker 8: part of the market, which isn't really a market so

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Speaker 8: much as a bunch of videosyncratic names to get lumped together,

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Speaker 8: is yielding yet less than a thousand basis points. If

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Speaker 8: you had anything resembling poor economic expectations priced into markets,

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Speaker 8: they just simply wouldn't be.

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Speaker 1: Treating their credit.

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Speaker 3: SPIZ would be at four forty on high yield, we

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Speaker 3: were three five hundred basis points for what five minutes PREMI.

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Speaker 5: I mean, if credit is a leading indicator, it's not

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Speaker 5: indicating much stress.

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Speaker 9: That's not so.

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Speaker 3: Hey, Dani, this was smart. It's great, Cat than you.

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Speaker 3: Thank you. Dan Green has that of Solace Alternative Asset Management.

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Speaker 2: Kufiy A bunch joins us now from nationwide really definitive

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Speaker 2: and parsing GDP out and what it means for the nation, Kathy,

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Speaker 2: the stock market is going up? Is that an indicator

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Speaker 2: to you?

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Speaker 10: Good morning, Tom and Lisa.

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Speaker 11: Well, it is part of the leading economic indicators, So

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Speaker 11: think about the conference Boards overall index. It's one of

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Speaker 11: the subcomponents. However, that one seems to stand out from

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Speaker 11: other leading economic indicators. It's it's been as resilient, or

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Speaker 11: maybe more resilient than even.

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Speaker 10: The labor market.

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Speaker 11: So we have to see really how the earnings announcements

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Speaker 11: and guidance play out. You know, if the equity market

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Speaker 11: continues to kind of hold in there as you alluded to,

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Speaker 11: the bond market's been pricing in recession for a long time.

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Speaker 2: Now, what's the framework of the consumer right now? I

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Speaker 2: mean nationwidse got a huge handle on this. To frame

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Speaker 2: the consumer mood like now and into the next thirty days.

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Speaker 1: Is it buoyant? Is it lethargic?

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Speaker 2: What's the consumer mood that you perceive?

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Speaker 11: So what we've seen is consumers still feel the weight

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Speaker 11: of high inflation, even though the headline number has been

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Speaker 11: slowing a bit. Is we know that the core particularly

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Speaker 11: the core services number has.

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Speaker 10: Been very sticky.

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Speaker 11: And I think the fact that interest rates remain very

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Speaker 11: high also ways on consumer sentiment. I think that the

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Speaker 11: key though is the labor market and if you look

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Speaker 11: at the Conference Boards measure where I used to work,

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Speaker 11: three to five questions are focused.

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Speaker 10: On theabor market.

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Speaker 11: When the Michigan Sentiment Index does rely is influenced more

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Speaker 11: by the equity market, and I would say even gasoline prices.

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Speaker 11: So you have both, you get a different look at

439
00:21:12,640 --> 00:21:15,359
Speaker 11: the consumer from both of those surveys. I would say overall,

440
00:21:15,400 --> 00:21:20,240
Speaker 11: the consumers feeling it could very conservative at this point.

441
00:21:20,920 --> 00:21:22,840
Speaker 11: You know, a lot of the pent up savings they

442
00:21:22,880 --> 00:21:27,040
Speaker 11: had have been expended. They've been able to splurge a

443
00:21:27,040 --> 00:21:30,440
Speaker 11: bit on the service spent side of things, but now

444
00:21:30,520 --> 00:21:33,280
Speaker 11: have to kind of recalibrate, especially if we're right and

445
00:21:33,320 --> 00:21:34,960
Speaker 11: that cracks start to develop.

446
00:21:34,600 --> 00:21:35,480
Speaker 10: In the labor market.

447
00:21:35,920 --> 00:21:37,680
Speaker 5: Katy, there are a number of things that you said

448
00:21:37,760 --> 00:21:41,240
Speaker 5: that are actually quite controversial, starting with this idea that

449
00:21:41,320 --> 00:21:43,440
Speaker 5: inflation is going to be too sticky, it's going to

450
00:21:43,480 --> 00:21:45,359
Speaker 5: allow the Fed to hold rates where they are. The

451
00:21:45,400 --> 00:21:47,600
Speaker 5: market completely disagrees and thinks that the Fed's going to

452
00:21:47,640 --> 00:21:50,680
Speaker 5: go back down near four percent by the end of this.

453
00:21:50,720 --> 00:21:51,760
Speaker 6: Year with rate cuts.

454
00:21:52,240 --> 00:21:54,280
Speaker 5: How do you fight back or how do you argue

455
00:21:54,280 --> 00:21:57,000
Speaker 5: against people who say, if you look at the disinflationary forces,

456
00:21:57,040 --> 00:21:59,919
Speaker 5: they're actually stronger than the headline numbers. May figure may

457
00:22:00,160 --> 00:22:03,760
Speaker 5: may account for including US rents posting their first drop

458
00:22:03,960 --> 00:22:06,720
Speaker 5: since March twenty twenty.

459
00:22:06,880 --> 00:22:14,040
Speaker 11: Yeah, and the rent prices should that inflation should accelerate

460
00:22:14,520 --> 00:22:18,080
Speaker 11: at some point pretty meaningfully. As captured by the CPI

461
00:22:18,160 --> 00:22:23,280
Speaker 11: and pc price in disease, real time rent increases.

462
00:22:22,760 --> 00:22:23,920
Speaker 10: Have slowed quite a bit.

463
00:22:24,320 --> 00:22:27,480
Speaker 11: Home prices overall have actually in many parts of the

464
00:22:27,520 --> 00:22:31,840
Speaker 11: country fallen, So those both suggest that the rental inflation

465
00:22:31,920 --> 00:22:32,399
Speaker 11: will slow.

466
00:22:32,440 --> 00:22:34,800
Speaker 10: But even when you exclude that, as.

467
00:22:34,680 --> 00:22:39,320
Speaker 11: Chairman Pal has suggested, you look at that super core

468
00:22:39,440 --> 00:22:44,600
Speaker 11: service number, it's very sticky, and things like transportation services

469
00:22:44,920 --> 00:22:50,440
Speaker 11: and for instance, car repairs are still running double digits

470
00:22:50,520 --> 00:22:55,720
Speaker 11: year on year. Inflation and insurance premiums we know from

471
00:22:55,800 --> 00:22:59,680
Speaker 11: what we do continue to rise as well to capture

472
00:22:59,720 --> 00:23:03,520
Speaker 11: the highigher car repair costs. And it's even broader than that,

473
00:23:03,520 --> 00:23:06,200
Speaker 11: that service prices overall still remains sticky.

474
00:23:06,440 --> 00:23:07,800
Speaker 10: And I think you really need to see the.

475
00:23:07,840 --> 00:23:11,159
Speaker 11: Labor markets slow before we start to see that correction,

476
00:23:11,280 --> 00:23:13,680
Speaker 11: because with car repair, it's not that you can't get

477
00:23:13,680 --> 00:23:16,480
Speaker 11: the parts, is that the labor is still so expensive.

478
00:23:16,760 --> 00:23:18,520
Speaker 6: So if this is the case and you do have

479
00:23:18,560 --> 00:23:19,400
Speaker 6: stick your inflation.

480
00:23:19,520 --> 00:23:22,199
Speaker 5: You have a FED holding rates around five percent for

481
00:23:22,240 --> 00:23:25,439
Speaker 5: a long time. What kind of shallow recession is this

482
00:23:25,520 --> 00:23:27,560
Speaker 5: going to be? What are the contours of that?

483
00:23:29,320 --> 00:23:33,280
Speaker 11: Yeah, so, and that worth just noting that, you know,

484
00:23:33,320 --> 00:23:36,800
Speaker 11: typically the FED reserve slow in raising rates and fasting

485
00:23:36,800 --> 00:23:39,639
Speaker 11: cutting rates when we go into recessions. So we're seeing

486
00:23:40,160 --> 00:23:44,639
Speaker 11: the opposite dynamic in this business cycle. But the contours

487
00:23:44,680 --> 00:23:47,360
Speaker 11: is that the consumer balance sheet overall is in good shape.

488
00:23:47,640 --> 00:23:50,160
Speaker 10: Business balance sheet overall is in good shape.

489
00:23:50,160 --> 00:23:53,639
Speaker 11: There are pockets of issues, just like in the financial market,

490
00:23:53,680 --> 00:23:56,720
Speaker 11: in the banking system, there's pockets of stress, but overall

491
00:23:57,040 --> 00:23:57,879
Speaker 11: in better shape.

492
00:23:57,920 --> 00:24:01,200
Speaker 10: And we think that keeping the FED.

493
00:24:00,920 --> 00:24:03,480
Speaker 11: Funds rate elevator for some period of time should allow

494
00:24:03,960 --> 00:24:08,040
Speaker 11: to gradually slow and you avoid a really hard landing

495
00:24:08,080 --> 00:24:11,960
Speaker 11: in that in that sense, and that's assuming though that

496
00:24:12,000 --> 00:24:14,480
Speaker 11: inflation does you know, continue to gradually slow.

497
00:24:14,720 --> 00:24:15,040
Speaker 1: Katy.

498
00:24:15,119 --> 00:24:16,760
Speaker 2: One fun of question, do you do you have a

499
00:24:16,840 --> 00:24:20,920
Speaker 2: run rate of American GDP real GDP of over two

500
00:24:20,960 --> 00:24:23,320
Speaker 2: percent or do you have to model it below?

501
00:24:24,320 --> 00:24:24,560
Speaker 10: Yeah?

502
00:24:24,600 --> 00:24:27,560
Speaker 11: So first quarter does look like it's it's running around

503
00:24:27,560 --> 00:24:30,159
Speaker 11: two percent, even it's been a bit about two percent.

504
00:24:31,040 --> 00:24:33,679
Speaker 11: But as we go into the second quarter, looks slower

505
00:24:33,720 --> 00:24:37,800
Speaker 11: to us. The retail sales data indicate the consumer spending

506
00:24:37,960 --> 00:24:41,480
Speaker 11: is the momentum slowing going into the second quarter. And

507
00:24:41,520 --> 00:24:45,560
Speaker 11: these housing numbers this morning, building permits a leading indicator.

508
00:24:45,840 --> 00:24:48,359
Speaker 11: I think people are getting joyful that housing may be

509
00:24:48,560 --> 00:24:52,280
Speaker 11: on an upswing. But keep in mind that you know,

510
00:24:52,760 --> 00:24:56,440
Speaker 11: interest rates matter, supply matters, but employment and income is

511
00:24:56,480 --> 00:24:59,800
Speaker 11: really the key indicator for the ability for people to

512
00:24:59,800 --> 00:25:00,640
Speaker 11: buy homes.

513
00:25:00,840 --> 00:25:03,239
Speaker 2: Kathleen Bush Jenzik, we have joy that you're with us

514
00:25:03,280 --> 00:25:16,879
Speaker 2: with nationwide they're chief economists. This is a joy And

515
00:25:16,960 --> 00:25:20,320
Speaker 2: for global Wall Street, in particularly American Wall Street, now's

516
00:25:20,320 --> 00:25:22,200
Speaker 2: the time to stop and lean forward.

517
00:25:22,560 --> 00:25:24,480
Speaker 1: David Conrad has not done one.

518
00:25:24,320 --> 00:25:26,919
Speaker 2: But two tours of duty at Keith Briett and it

519
00:25:26,960 --> 00:25:29,760
Speaker 2: Woods definitive on large cap banks. He works for the

520
00:25:29,800 --> 00:25:35,159
Speaker 2: banking franchise of KDW. A Stiefel company. David thrilled to

521
00:25:35,200 --> 00:25:37,440
Speaker 2: have you on today. What I know is I got

522
00:25:37,480 --> 00:25:40,000
Speaker 2: forty eight thousand people at Gulben Sachs. I got two

523
00:25:40,080 --> 00:25:43,160
Speaker 2: hundred x thousand people at Bank of America. It's over

524
00:25:43,160 --> 00:25:46,800
Speaker 2: a quarter million bodies. I know when they're stress bodies

525
00:25:46,840 --> 00:25:51,440
Speaker 2: go out the door. Will there be layoff announcements today.

526
00:25:52,160 --> 00:25:54,359
Speaker 12: Probably not today. I mean, we've already seen a few.

527
00:25:54,880 --> 00:25:56,760
Speaker 12: We think they will continue to be a trend throughout

528
00:25:56,800 --> 00:26:00,400
Speaker 12: the year. But we are seeing, you know, much better

529
00:26:00,520 --> 00:26:04,720
Speaker 12: trading than we thought coming into this quarter, which will help.

530
00:26:04,760 --> 00:26:07,159
Speaker 12: But you know, there are longer term pressures on that

531
00:26:07,280 --> 00:26:10,760
Speaker 12: interest income that will weigh on returns for the industry.

532
00:26:10,880 --> 00:26:14,920
Speaker 2: What does it mean to see Apple Goldman generate a

533
00:26:15,000 --> 00:26:17,760
Speaker 2: four point one five percent savings account?

534
00:26:17,800 --> 00:26:19,480
Speaker 1: What does that mean for mister Solomon?

535
00:26:20,720 --> 00:26:23,760
Speaker 12: I think from Goldman has an interesting standpoint where they've

536
00:26:23,760 --> 00:26:27,520
Speaker 12: never had a funding advantage, right, so they've always borrowed wholesale.

537
00:26:27,760 --> 00:26:30,439
Speaker 12: So the fact that they're borrowing an expensive savings account

538
00:26:30,760 --> 00:26:33,919
Speaker 12: is actually a creative for Goldman. The interesting thing, though,

539
00:26:33,960 --> 00:26:35,480
Speaker 12: is the pressure that it puts on the rest of

540
00:26:35,520 --> 00:26:38,159
Speaker 12: the industry. You know, the savings account in north to

541
00:26:38,240 --> 00:26:41,560
Speaker 12: four percent is a staggering premium to what banks are.

542
00:26:41,440 --> 00:26:42,200
Speaker 9: Paying right now.

543
00:26:42,359 --> 00:26:44,480
Speaker 6: Are we learning anything from the big bank earnings?

544
00:26:44,520 --> 00:26:46,880
Speaker 5: David and I say this because we thought this would

545
00:26:46,880 --> 00:26:48,560
Speaker 5: be the tea leaves we were looking for, and then

546
00:26:48,600 --> 00:26:51,120
Speaker 5: we get guidance. It's kind of like, eh, we're not sure,

547
00:26:51,280 --> 00:26:53,040
Speaker 5: but we're setting aside more loan losses.

548
00:26:53,119 --> 00:26:53,760
Speaker 6: We're doing well.

549
00:26:53,800 --> 00:26:56,280
Speaker 5: We don't want to celebrate too much because it's liability

550
00:26:56,280 --> 00:27:00,000
Speaker 5: in Washington, DC. Are we learning anything more substantial from you?

551
00:27:00,960 --> 00:27:01,240
Speaker 1: Well?

552
00:27:01,520 --> 00:27:03,240
Speaker 9: I think yes and no.

553
00:27:03,440 --> 00:27:08,160
Speaker 12: Right, So, JP Morgan was really a very positive result

554
00:27:08,160 --> 00:27:10,160
Speaker 12: and I think is going to be an outlier through

555
00:27:11,040 --> 00:27:13,480
Speaker 12: throughout their earning season. I think the other names that

556
00:27:13,480 --> 00:27:16,879
Speaker 12: ever reported have been somewhat more in line with expectations,

557
00:27:16,920 --> 00:27:21,199
Speaker 12: and they're really the key. There is declining overall deposits,

558
00:27:21,240 --> 00:27:24,399
Speaker 12: but more importantly a negative deposit mixshift. And what I

559
00:27:24,480 --> 00:27:28,000
Speaker 12: mean by that is checking account non interest garing deposits

560
00:27:28,320 --> 00:27:31,160
Speaker 12: are down mid to high single digits quarter over quarter,

561
00:27:31,520 --> 00:27:33,720
Speaker 12: and that's putting pressure on the cost of funds.

562
00:27:34,000 --> 00:27:36,040
Speaker 6: So what are we going to know what the verdict

563
00:27:36,119 --> 00:27:37,240
Speaker 6: is on this earning season.

564
00:27:37,440 --> 00:27:39,560
Speaker 5: It's sort of been purgatory for a while and people

565
00:27:39,600 --> 00:27:41,639
Speaker 5: are kind of using the data point to fit their narrative.

566
00:27:41,680 --> 00:27:42,880
Speaker 6: We've been talking a lot about that.

567
00:27:43,200 --> 00:27:45,920
Speaker 5: When will you be able to say decisively yes, this

568
00:27:46,040 --> 00:27:49,080
Speaker 5: shows that there is a real lack of credit availability

569
00:27:49,440 --> 00:27:51,919
Speaker 5: under the top tier of companies and banks.

570
00:27:53,160 --> 00:27:53,360
Speaker 7: Yeah.

571
00:27:53,400 --> 00:27:56,960
Speaker 12: I mean I think a couple points here. One, I

572
00:27:56,960 --> 00:28:01,440
Speaker 12: think Bank of America will be interesting. Today Again we

573
00:28:01,840 --> 00:28:05,720
Speaker 12: saw JP Morgan had relatively lower cost the funds relative

574
00:28:05,760 --> 00:28:08,200
Speaker 12: to the group. So how much of the benefit from

575
00:28:08,240 --> 00:28:11,000
Speaker 12: the flight from some of the stressed regional banks is

576
00:28:11,040 --> 00:28:12,879
Speaker 12: really supporting this quarter?

577
00:28:13,400 --> 00:28:13,560
Speaker 7: You know.

578
00:28:13,640 --> 00:28:16,840
Speaker 12: The other thing though, is is we haven't seen any

579
00:28:16,880 --> 00:28:19,600
Speaker 12: loan growth. The one aspect that we have seen is

580
00:28:19,720 --> 00:28:22,399
Speaker 12: credit cards, so we have seen growth there, but be

581
00:28:22,440 --> 00:28:25,359
Speaker 12: careful what you wish for. And so I think, you know,

582
00:28:25,400 --> 00:28:28,080
Speaker 12: the trend that won't really be showing up this quarter,

583
00:28:28,119 --> 00:28:32,240
Speaker 12: but going forward is the increased liquidity requirements we think

584
00:28:32,280 --> 00:28:34,000
Speaker 12: will really damp in credit growth.

585
00:28:34,400 --> 00:28:37,960
Speaker 2: David, you have such a perspective working with Tomas Schold.

586
00:28:38,000 --> 00:28:40,560
Speaker 2: I think of KBW, I think of Sandler O'Neil, where

587
00:28:40,560 --> 00:28:44,080
Speaker 2: you guys are doing banking twenty four to seven. Do

588
00:28:44,160 --> 00:28:49,840
Speaker 2: you just assume a new round of consolidation and combination

589
00:28:50,840 --> 00:28:54,320
Speaker 2: in the KBW world over the next three to five years.

590
00:28:54,400 --> 00:28:58,360
Speaker 2: Is there a new acceleration to go from four thousand

591
00:28:58,400 --> 00:28:59,719
Speaker 2: banks down to x thousand?

592
00:29:00,520 --> 00:29:03,480
Speaker 12: Yeah, definitely, I think right now, you know, we're kind

593
00:29:03,520 --> 00:29:06,360
Speaker 12: of jammed up. One it's tough to get deals approved,

594
00:29:06,400 --> 00:29:08,960
Speaker 12: and two the marked mark or the balance sheets are

595
00:29:09,000 --> 00:29:13,600
Speaker 12: really limiting right mergers. But we to your point, three

596
00:29:13,640 --> 00:29:17,200
Speaker 12: to five years out, the regulations, the environment's getting more

597
00:29:17,200 --> 00:29:17,880
Speaker 12: and more difficult.

598
00:29:17,960 --> 00:29:19,480
Speaker 9: We expect a lot of consolidation.

599
00:29:19,880 --> 00:29:23,080
Speaker 2: Let's go all nerd right now. What's the average blended

600
00:29:23,360 --> 00:29:26,920
Speaker 2: marked to market marked down? Right now? On a par

601
00:29:27,280 --> 00:29:30,600
Speaker 2: one hundred, it's trading, it's marked down. Is it a

602
00:29:30,640 --> 00:29:33,600
Speaker 2: two point three point marked down? Or dare I say

603
00:29:33,680 --> 00:29:35,320
Speaker 2: is it a twenty point marked down?

604
00:29:36,600 --> 00:29:39,600
Speaker 9: I think it's it's more in the ten percent marked down.

605
00:29:39,720 --> 00:29:42,040
Speaker 12: You know, I think we're really focused on the bond

606
00:29:42,080 --> 00:29:46,560
Speaker 12: books right now, you know, and really it's really not

607
00:29:46,760 --> 00:29:50,000
Speaker 12: really the markedown per ses little liquidity associated with that,

608
00:29:50,120 --> 00:29:52,520
Speaker 12: right that's what you have to work the two in concert.

609
00:29:53,440 --> 00:29:56,400
Speaker 12: But you know, we are seeing much better rebound in

610
00:29:56,440 --> 00:29:59,800
Speaker 12: some of those marks this quarter, probably about thirty percent

611
00:30:00,040 --> 00:30:02,600
Speaker 12: otter than what I thought in terms of the rebound

612
00:30:02,640 --> 00:30:04,560
Speaker 12: of the negative marks we saw last quarter.

613
00:30:04,920 --> 00:30:07,120
Speaker 3: Just a sign of the times that you get earnings releases,

614
00:30:07,160 --> 00:30:09,920
Speaker 3: and we've just got bny Mellon crossing the bloomberg, and

615
00:30:09,920 --> 00:30:13,240
Speaker 3: the focus seems to be on one thing. Deposits first

616
00:30:13,320 --> 00:30:16,000
Speaker 3: quarter total deposits two hundred and eighty one point twenty

617
00:30:16,080 --> 00:30:19,360
Speaker 3: nine billion, The estimate two seventy seven. So that's a

618
00:30:19,400 --> 00:30:22,320
Speaker 3: touch better than expected. A bit of commentary from leadership

619
00:30:22,360 --> 00:30:25,320
Speaker 3: at the bank, BNY Melon CEO saying we need to

620
00:30:25,320 --> 00:30:28,360
Speaker 3: remain vigilant given the heightened uncertainty. Lisa goes on to say,

621
00:30:28,360 --> 00:30:30,800
Speaker 3: we're pushing forward with the strategic agenda.

622
00:30:30,960 --> 00:30:34,000
Speaker 5: So the deposits actually came in better than expected, but

623
00:30:34,080 --> 00:30:36,800
Speaker 5: net loans came in below expectations. And this is what

624
00:30:36,840 --> 00:30:39,480
Speaker 5: I think really speaks to how banks are managing the

625
00:30:39,480 --> 00:30:42,240
Speaker 5: bottom line. This may not speak to a big deposit flight,

626
00:30:42,400 --> 00:30:46,240
Speaker 5: but it is speaking john to this restriction and credit extension,

627
00:30:46,520 --> 00:30:48,720
Speaker 5: and that perhaps could be the leading to leave for

628
00:30:48,760 --> 00:30:49,800
Speaker 5: the market in the economy.

629
00:30:49,880 --> 00:30:53,200
Speaker 3: APS bank in line TOM one twelve, the estimate one twelve.

630
00:30:53,320 --> 00:30:57,280
Speaker 2: David Conrad with this is KBW. David, if you're still there.

631
00:30:57,720 --> 00:30:59,920
Speaker 2: I look at BNY Mellon and it's just a MALDI

632
00:31:00,120 --> 00:31:03,840
Speaker 2: seven eight return over the last ten years. What's the

633
00:31:04,000 --> 00:31:06,640
Speaker 2: expectation of total return from a bank?

634
00:31:06,920 --> 00:31:09,360
Speaker 1: Is that what I'm going to make you know?

635
00:31:09,440 --> 00:31:12,640
Speaker 12: It's interesting, you know we've said that a lot about

636
00:31:12,640 --> 00:31:15,640
Speaker 12: the universal since the Great Financial Crisis? Right are the

637
00:31:15,760 --> 00:31:20,840
Speaker 12: utilities all this increased regulation? I don't really think that's

638
00:31:20,880 --> 00:31:23,520
Speaker 12: really the case, right. I mean, JP Morgan just put

639
00:31:23,600 --> 00:31:26,520
Speaker 12: up a high teens r ATCE, you know, with almost

640
00:31:26,520 --> 00:31:30,280
Speaker 12: fourteen percent capital, right, and so I think it puts

641
00:31:30,320 --> 00:31:33,440
Speaker 12: more stress on you on your strategy, on the management team.

642
00:31:33,800 --> 00:31:36,200
Speaker 12: But we're really seeing, though, is the bigger banks with

643
00:31:36,280 --> 00:31:40,440
Speaker 12: the diversified revenues and the scale are delivering I think

644
00:31:40,480 --> 00:31:42,160
Speaker 12: better expectations.

645
00:31:41,480 --> 00:31:42,320
Speaker 9: As we move forward.

646
00:31:42,400 --> 00:31:45,640
Speaker 5: What's more interesting, too, David, the deposit growth or lack thereof,

647
00:31:45,960 --> 00:31:48,000
Speaker 5: or the loan growth or lack therein.

648
00:31:49,640 --> 00:31:50,200
Speaker 9: I think the.

649
00:31:50,120 --> 00:31:53,880
Speaker 12: Loan growth is you know, more of an economic side.

650
00:31:53,960 --> 00:31:57,240
Speaker 12: It's probably less impactful for our models, but it does

651
00:31:57,320 --> 00:32:00,000
Speaker 12: concern us about you know, GDP growth for instance. Long

652
00:32:00,840 --> 00:32:03,400
Speaker 12: you know, I think the deposits is really the uncertainty

653
00:32:03,480 --> 00:32:06,320
Speaker 12: that creates a lot of deltas in our in our

654
00:32:06,360 --> 00:32:08,080
Speaker 12: near term earnings expectations.

655
00:32:08,360 --> 00:32:09,440
Speaker 9: You know, we've gone through a.

656
00:32:09,320 --> 00:32:14,000
Speaker 12: Period of QE and government stimulus and people working from home,

657
00:32:14,440 --> 00:32:16,600
Speaker 12: and we just have a lot of deposits at the

658
00:32:16,640 --> 00:32:19,760
Speaker 12: bank that are going to be normalized here and I think,

659
00:32:19,880 --> 00:32:22,960
Speaker 12: you know, this normalizes trend. We've been here before. You know,

660
00:32:23,080 --> 00:32:25,600
Speaker 12: checking account balances are thirty five percent of to all

661
00:32:25,680 --> 00:32:28,920
Speaker 12: deposits they probably should be twenty two to twenty five percent,

662
00:32:29,400 --> 00:32:29,720
Speaker 12: And so.

663
00:32:29,760 --> 00:32:30,960
Speaker 9: That trend has happened before.

664
00:32:31,000 --> 00:32:35,000
Speaker 12: But what hasn't happened before is that trend reversing while

665
00:32:35,000 --> 00:32:38,760
Speaker 12: we're having increased liquidity requirements from the regulations. And so

666
00:32:39,280 --> 00:32:41,600
Speaker 12: you know, those two things working together, I think due

667
00:32:41,920 --> 00:32:44,640
Speaker 12: to your point limit the credit extension.

668
00:32:44,320 --> 00:32:46,800
Speaker 3: Hy David, wonderful to hear from you, as always, David

669
00:32:46,840 --> 00:32:53,680
Speaker 3: comment there of KPW.

670
00:32:52,240 --> 00:32:55,480
Speaker 2: Carl Weinberg joins his chief economists and managing director high

671
00:32:55,480 --> 00:32:58,280
Speaker 2: Frequency Economics. I got five things to talk to Carl

672
00:32:58,360 --> 00:33:00,840
Speaker 2: about and no time to do it because of China.

673
00:33:01,120 --> 00:33:03,160
Speaker 1: Carl, you're writing a blistering.

674
00:33:02,640 --> 00:33:05,640
Speaker 2: Note this morning, and what's fascinating as you say, there's

675
00:33:05,680 --> 00:33:07,280
Speaker 2: a lot of noise in a four and a half

676
00:33:07,280 --> 00:33:10,040
Speaker 2: percent China GDP data. Maybe it's not as good as

677
00:33:10,080 --> 00:33:13,120
Speaker 2: it is, but you end by saying, this is a

678
00:33:13,200 --> 00:33:18,120
Speaker 2: trajectory to six percent growth. Do you buy that right now,

679
00:33:18,120 --> 00:33:20,960
Speaker 2: that they can get to six percent GDP growth?

680
00:33:21,520 --> 00:33:23,600
Speaker 7: Oh? Sure, thank Tom, Good morning there.

681
00:33:23,680 --> 00:33:25,640
Speaker 13: But they could be asleep at the switch and GDP

682
00:33:25,720 --> 00:33:27,960
Speaker 13: could not grow at all from even where it was

683
00:33:27,960 --> 00:33:29,800
Speaker 13: at the end of the fourth quarter, and they'd still

684
00:33:29,800 --> 00:33:33,360
Speaker 13: get their year over year change in GDP at six

685
00:33:33,400 --> 00:33:36,240
Speaker 13: percent at target. You know, there's a basis effect. Last

686
00:33:36,320 --> 00:33:39,000
Speaker 13: year was a reasonable year, so growing from a low

687
00:33:39,080 --> 00:33:42,160
Speaker 13: base is not a great accomplishment. Look at that four

688
00:33:42,160 --> 00:33:45,840
Speaker 13: and a half percent GDP number, okay, pre COVID, we

689
00:33:45,880 --> 00:33:48,560
Speaker 13: have never seen a GDP number as low as four

690
00:33:48,560 --> 00:33:50,680
Speaker 13: and a half percent since the day to begin in

691
00:33:50,760 --> 00:33:54,400
Speaker 13: nineteen ninety five. So you know, let's not be teenagers

692
00:33:54,400 --> 00:33:57,280
Speaker 13: and talk about relative to expectations or relative to the

693
00:33:57,360 --> 00:34:00,240
Speaker 13: last three quarters which were awful for China. This is

694
00:34:00,280 --> 00:34:03,240
Speaker 13: a better than expected number and a better than previous number.

695
00:34:03,280 --> 00:34:04,680
Speaker 7: Sure, but it's an awful number.

696
00:34:04,720 --> 00:34:07,280
Speaker 2: But within your acclaim China, note they're going to do

697
00:34:07,320 --> 00:34:10,080
Speaker 2: what they've always done, which is clear out the property market,

698
00:34:10,160 --> 00:34:12,440
Speaker 2: get it back going as an incentive for the public.

699
00:34:12,719 --> 00:34:15,319
Speaker 2: They're going to straighten out the SOEs and that what

700
00:34:15,480 --> 00:34:18,759
Speaker 2: is your forward run rate for China GDP? If it's

701
00:34:18,800 --> 00:34:22,000
Speaker 2: not seven percent, have long ago and far away.

702
00:34:22,719 --> 00:34:23,680
Speaker 7: Two to three percent?

703
00:34:23,760 --> 00:34:29,360
Speaker 13: Maybe Tom really well, China's economy has been driven by investment,

704
00:34:29,480 --> 00:34:33,120
Speaker 13: and that investment in previous decades has had a huge

705
00:34:33,200 --> 00:34:36,439
Speaker 13: rate of return on investment, but in recent years they're

706
00:34:36,520 --> 00:34:40,319
Speaker 13: using public money not to invest in productive infrastructure, but

707
00:34:40,400 --> 00:34:44,680
Speaker 13: to invest in real estate, and investing public money in

708
00:34:45,040 --> 00:34:48,319
Speaker 13: owner occupied housing is a zero rate of return for

709
00:34:48,400 --> 00:34:51,640
Speaker 13: GDP investment. So we're subtracting away all of the fill

710
00:34:51,680 --> 00:34:54,480
Speaker 13: up from investment out of GDP growth that we saw

711
00:34:54,520 --> 00:34:57,200
Speaker 13: in the past, and that's a strategy that leads to

712
00:34:57,320 --> 00:35:00,520
Speaker 13: subpar economic growth in the very very low two to

713
00:35:00,560 --> 00:35:01,600
Speaker 13: three percent range.

714
00:35:01,719 --> 00:35:03,680
Speaker 5: Is this the reason why, Carl, the reaction of markets

715
00:35:03,719 --> 00:35:07,040
Speaker 5: has been less than incredibly enthusiastic. We haven't necessarily seen

716
00:35:07,360 --> 00:35:10,960
Speaker 5: an incredible cry of enthusiasm from Chinese equities and bonds,

717
00:35:11,000 --> 00:35:13,799
Speaker 5: and we're seeing oil actually lower on the day. Is

718
00:35:13,840 --> 00:35:16,400
Speaker 5: this the correct read that anything that China prints it

719
00:35:16,480 --> 00:35:19,040
Speaker 5: might have a high number, but longer term it's going

720
00:35:19,080 --> 00:35:21,680
Speaker 5: back to a much lower number. And this isn't necessarily

721
00:35:21,760 --> 00:35:22,719
Speaker 5: screaming recovery.

722
00:35:23,400 --> 00:35:25,040
Speaker 7: Lisa, you hit the nail right on the head.

723
00:35:25,080 --> 00:35:27,480
Speaker 13: If only GDP would print a high number, we get

724
00:35:27,520 --> 00:35:29,879
Speaker 13: a positive reaction to it. But four and a half

725
00:35:29,960 --> 00:35:32,680
Speaker 13: percent year over year GDP for the first quarter is

726
00:35:32,680 --> 00:35:35,359
Speaker 13: an abysmal result. The only good thing you can say

727
00:35:35,400 --> 00:35:38,319
Speaker 13: about it is it's better than some people forecasted. And

728
00:35:38,360 --> 00:35:40,440
Speaker 13: the only other thing good you can say about it

729
00:35:40,480 --> 00:35:43,200
Speaker 13: is it's better than the three quarters before it. But again,

730
00:35:43,520 --> 00:35:46,640
Speaker 13: to repeat, this is the worst quarter for GDP growth

731
00:35:47,280 --> 00:35:49,960
Speaker 13: that we would have seen in the pre COVID period.

732
00:35:50,080 --> 00:35:52,000
Speaker 7: We're nowhere back to normal in China.

733
00:35:52,160 --> 00:35:55,600
Speaker 5: You also point out, Carl, that trade with Russia by

734
00:35:55,719 --> 00:35:58,560
Speaker 5: China really was an incredible increase.

735
00:35:58,680 --> 00:35:59,840
Speaker 6: That really got your attention.

736
00:36:00,000 --> 00:36:02,440
Speaker 5: And what's your takeaway from we won one hundred and

737
00:36:02,520 --> 00:36:07,480
Speaker 5: thirty six percent increase in terms of trade with Russia

738
00:36:07,680 --> 00:36:08,320
Speaker 5: by China.

739
00:36:09,160 --> 00:36:09,359
Speaker 7: Yeah.

740
00:36:09,400 --> 00:36:12,120
Speaker 13: I nearly fell off my chair when I saw that result, Lisa,

741
00:36:12,160 --> 00:36:14,600
Speaker 13: that's the real story this morning. If you dig into

742
00:36:14,640 --> 00:36:18,440
Speaker 13: the trade numbers from last week, China's exports to Russia

743
00:36:18,520 --> 00:36:21,360
Speaker 13: exploded one hundred and thirty six percent just in the

744
00:36:21,480 --> 00:36:25,080
Speaker 13: days after Putin and g meet. The only other time

745
00:36:25,120 --> 00:36:27,319
Speaker 13: we've seen a number for a year over year growth

746
00:36:27,360 --> 00:36:30,400
Speaker 13: of exports that big was when Putin came to China

747
00:36:30,480 --> 00:36:34,520
Speaker 13: for the Olympics two years ago and immediately we saw

748
00:36:34,520 --> 00:36:37,680
Speaker 13: one hundred and forty percent growth of exports year over year.

749
00:36:38,120 --> 00:36:40,040
Speaker 7: China is selling something to Russia.

750
00:36:40,239 --> 00:36:43,080
Speaker 13: I don't know what it is, but as you might imagine,

751
00:36:43,120 --> 00:36:45,040
Speaker 13: it could be problematic materials.

752
00:36:45,360 --> 00:36:47,520
Speaker 2: Doctor Weinberger, I've was sitting on a stage at the

753
00:36:47,560 --> 00:36:49,360
Speaker 2: IMF and I said, I can't wait to talk to

754
00:36:49,400 --> 00:36:54,080
Speaker 2: Carl Weinberg about the unspeakable at the IMF meetings, which is,

755
00:36:54,120 --> 00:36:59,280
Speaker 2: will China join Western restructuring methods and processes?

756
00:36:59,400 --> 00:37:01,560
Speaker 1: You are true expert on this.

757
00:37:02,040 --> 00:37:06,560
Speaker 2: Do you have a belief that China can restructure Ghana's

758
00:37:06,680 --> 00:37:08,280
Speaker 2: debt along with West?

759
00:37:09,440 --> 00:37:12,680
Speaker 13: Well, I think China can restructure China's death They own

760
00:37:12,840 --> 00:37:15,120
Speaker 13: most of it, and I think though that they don't

761
00:37:15,160 --> 00:37:18,440
Speaker 13: want to restructure it within the Western framework. And if anything,

762
00:37:18,760 --> 00:37:23,000
Speaker 13: this is an opportunity for China to channel refinancing through

763
00:37:23,040 --> 00:37:28,040
Speaker 13: its own institutions rather than through the existing Western institutions

764
00:37:28,080 --> 00:37:31,400
Speaker 13: to promote their own. So restructured loans to the emerging

765
00:37:31,440 --> 00:37:35,440
Speaker 13: world should be restructured through new credits at a China's institutions,

766
00:37:35,680 --> 00:37:39,880
Speaker 13: and that way, China becomes more important geopolitically, more dominant

767
00:37:39,920 --> 00:37:43,439
Speaker 13: in the world stage than it was before. I think

768
00:37:43,480 --> 00:37:46,160
Speaker 13: that's what's going on in this restructuring business.

769
00:37:46,320 --> 00:37:49,160
Speaker 2: Carl, What does global GDP look like? You know, the

770
00:37:49,200 --> 00:37:53,600
Speaker 2: IMF news of a subpar five year view. The optimist

771
00:37:53,640 --> 00:37:55,839
Speaker 2: kerl Weinberg. I just can't see you go on all

772
00:37:55,880 --> 00:37:57,400
Speaker 2: IMFGDP growth.

773
00:37:57,440 --> 00:37:58,200
Speaker 1: What do you think of it?

774
00:37:58,800 --> 00:38:00,880
Speaker 13: Well, you know, they call it a rock recovery, but

775
00:38:00,920 --> 00:38:04,400
Speaker 13: where's the recovery. GDP grows along, you know, at a

776
00:38:04,400 --> 00:38:07,200
Speaker 13: three percent rate, a little bit lower than normal. That's

777
00:38:07,200 --> 00:38:09,960
Speaker 13: not much of a recovery. But most important, Tom, your

778
00:38:10,000 --> 00:38:12,840
Speaker 13: takeaway from the IMF forecast should be that they're flat

779
00:38:12,960 --> 00:38:15,160
Speaker 13: is a board straight as a line for five years,

780
00:38:15,360 --> 00:38:18,080
Speaker 13: and that ain't never happened before. If you read Larry

781
00:38:18,120 --> 00:38:21,719
Speaker 13: Summer's review of the IMF's forecast, he says they're forecasting

782
00:38:21,760 --> 00:38:24,520
Speaker 13: isn't that good. They've never called the recession before. But

783
00:38:24,560 --> 00:38:27,880
Speaker 13: more importantly, if your economy is not in recession now

784
00:38:28,239 --> 00:38:31,200
Speaker 13: and it hasn't been recessioned recently, it's got a twenty

785
00:38:31,239 --> 00:38:33,680
Speaker 13: percent chance that it's going to have a recession in

786
00:38:33,719 --> 00:38:34,359
Speaker 13: the next year.

787
00:38:34,560 --> 00:38:35,799
Speaker 7: And that's what we want to look at.

788
00:38:35,840 --> 00:38:39,000
Speaker 13: The variance that the IMF doesn't address in its forecasts.

789
00:38:39,200 --> 00:38:40,880
Speaker 7: And there are risks ahead of US.

790
00:38:40,920 --> 00:38:43,080
Speaker 13: I heard you talking with Marvin Lowe a few minutes

791
00:38:43,120 --> 00:38:46,200
Speaker 13: ago about risks of US recession. There are risks to

792
00:38:46,239 --> 00:38:49,040
Speaker 13: growth out there, and we have to keep an eye

793
00:38:49,120 --> 00:38:52,960
Speaker 13: on those risks more than on the center of the channel.

794
00:38:52,640 --> 00:38:53,080
Speaker 7: If you will.

795
00:38:53,160 --> 00:38:55,879
Speaker 3: That's a really interesting point, a really interesting last point

796
00:38:55,920 --> 00:38:58,040
Speaker 3: to wrap it up, Cal, Thank you, sir as always,

797
00:38:58,080 --> 00:39:00,680
Speaker 3: Kin Wineberck, there a figh frequency Economics.

798
00:39:00,880 --> 00:39:04,719
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799
00:39:04,840 --> 00:39:09,040
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800
00:39:09,320 --> 00:39:12,799
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801
00:39:12,920 --> 00:39:17,440
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802
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803
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804
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg