Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.
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Speaker 1: Jim Zelter with us is just starting to walk out
Speaker 1: of the room. Called president of Paul Credit Card Management.
Speaker 2: He joins us now with decades of experience and fixed
Speaker 2: on John, why don't you bring in a gentleman with
Speaker 2: an overview of this crisis or non crisis that we're
Speaker 2: in right now?
Speaker 3: The co president at Apollo Asset Management joins us right now. Jim,
Speaker 3: good morning, Good morning, all great to catch up. I
Speaker 3: want to start here. Can we just start with the
Speaker 3: days after RECVB collapses. You've raised all this capital. This
Speaker 3: is like your moment to make things happen. How difficult
Speaker 3: was it to deploy it?
Speaker 1: Well?
Speaker 4: I think you had to differentiate between a deposit crisis
Speaker 4: over the first few days at Thursday and over the
Speaker 4: weekend when the government took its action, and then you
Speaker 4: really were talking to a lot of borrowers and a
Speaker 4: lot of institutions that needed help. So that week we
Speaker 4: did a very large transaction and helped out pack West.
Speaker 4: But I think what you're really talking about this morning
Speaker 4: here is a deposit crisis evolving into a business model question,
Speaker 4: and that's really where the overall evolution of the markets are.
Speaker 4: But certainly, you know, we've been very busy. We've been
Speaker 4: very busy on all sides of our business, and there's
Speaker 4: no doubt that this withdrawal of capital, it's not a
Speaker 4: credit crunch, it's not an embulent market, but there's a
Speaker 4: transition with a higher cost of capital in debt financing
Speaker 4: across all the markets.
Speaker 3: Let's stick deeper into that. Can you describe the spaces
Speaker 3: right now where you expect traditional banks to retrench from,
Speaker 3: to move away, to move back from, and where you
Speaker 3: think there's opportunities for you to step in even more.
Speaker 4: Sure, you know, as we've had this conversation about private
Speaker 4: credit over the last several years, last decade, it's really
Speaker 4: been for the headlines focused on sponsor finance, which is
Speaker 4: non investment grade. The real opportunity is the regional bank
Speaker 4: model really evolves and their cost of financing is up
Speaker 4: quite a bit higher. There's a variety of asset based strategies,
Speaker 4: whether it's in the commercial mortgage space, whether it's in
Speaker 4: the resume mortgage space, whether it's in solar finance, whether
Speaker 4: it's in aircraft finance, where the regional banks or traditional
Speaker 4: banking models, those were interesting businesses. The business that we
Speaker 4: bought out of Credit Swiss, the Atlas finance business, which
Speaker 4: is really an abs warehouse businesses. Those businesses typically the
Speaker 4: underlying risk is investment grade, and for the most part,
Speaker 4: because of either sovereignty two in Europe or other rules,
Speaker 4: those are just become much more capital intensive and capital
Speaker 4: consuming for the banks. And so there's a variety of
Speaker 4: those asset classes that I mentioned that's like forty trillion
Speaker 4: versus a ten trillion private credit opportunity in the US.
Speaker 5: But Jim, what I didn't hear you mentioned was just
Speaker 5: a pure unsecured, revolving loan of credit, which is basically
Speaker 5: what a lot of these smaller regional banks delivered to
Speaker 5: smaller companies. Is that a no go area at this point.
Speaker 4: No, I think listen those are smaller, idiosyncratic corporate loans
Speaker 4: and someone needs to fill the gap in that. And
Speaker 4: the reality is the cost of financing has gone up
Speaker 4: to to four hundred basis points in the last month,
Speaker 4: So those companies are getting that financing. You've not seen
Speaker 4: it yet in the earnings, but certainly that's where we
Speaker 4: believe this whole idea of tighter financial conditions. It's that
Speaker 4: exact company that you're talking about that's probably having a
Speaker 4: more challenging period of time right now securing that financing.
Speaker 5: How does that change the equation for you when you
Speaker 5: decide what size company you want to invest in. The bigger,
Speaker 5: more stable, better access to financing going to have and
Speaker 5: even better profile versus an even worse one for some
Speaker 5: of the smaller ones.
Speaker 4: Sure, typically at Apollo, if the capital is coming from
Speaker 4: our balance sheet, we're usually talking to companies with companies
Speaker 4: and having ebada less more than fifty million dollars. That
Speaker 4: being said, we have a portfolio of sixteen portfolio finance companies,
Speaker 4: of which the CS business now called Atlas is one
Speaker 4: of them, and they'll range in the companies that they
Speaker 4: financed that that's three thousand employees, about eighty billion of assets.
Speaker 4: Those companies will lend to companies anywhere from ten to
Speaker 4: fifteen million in revenue, so much smaller, much deeper and broader.
Speaker 6: Are they as attractive?
Speaker 4: Well, what you've seen really across the board, let's just
Speaker 4: talk about commercial real estate. A lot of conversations about that.
Speaker 4: Commercial real estate finance for the most part, like a
Speaker 4: single a CMBs piece of paper that was three point
Speaker 4: fifty when I came out here six months ago, that's
Speaker 4: six seventy five today. It's just math spread of widen
Speaker 4: from one seventy five to three fifty over.
Speaker 2: Yeah, I noticed in Washington to day Brookfield giving back
Speaker 2: two properties they can't make a go of. Well, I
Speaker 2: mean the commercial real estate thing is tangible. I want
Speaker 2: to look at the level of the word the D
Speaker 2: word distress that's out there right now, and I look
Speaker 2: at it just in a basic accounting standard. How blind
Speaker 2: are people like you right now off fasby one fifty
Speaker 2: seven and you can't mark the market depth that's out there? Now,
Speaker 2: what's the opacity that's out there in the system?
Speaker 4: Well, I think I think time If you look at
Speaker 4: the overall leverage finance market, it's a couple trillion dollar market.
Speaker 4: You've got to assume defaults next year, probably going up
Speaker 4: to the mid high forest of five percent, right, So
Speaker 4: that's about one hundred million of a challenge credit if
Speaker 4: you would. In the forward calendar, if you look at
Speaker 4: commercial real estate, you got a trillion and a quarter
Speaker 4: that needs to get financed in the next twelve to
Speaker 4: eighteen months. So there's no doubt that there's a portion
Speaker 4: of that will But you're not you're not seeing broad
Speaker 4: distressed yet. You're in this you're in the transition period.
Speaker 4: We had fourteen years of low interest rates and the
Speaker 4: real impact act on valuations. It takes a while to
Speaker 4: filter through. You're seeing some evidence in the secondary markets.
Speaker 4: In the pe secondary market, those names are trading between
Speaker 4: the high seventies and low eighties. Credit secondaries are in
Speaker 4: the high eighties, low nineties, VC secondaries in the fifties,
Speaker 4: So you're seeing it in some markets. But this idea
Speaker 4: of tighter financial conditions, this takes three, six, twelve months
Speaker 4: to really evolve. And as you talk later on today,
Speaker 4: you know you have your big banks reporting today. It
Speaker 4: will be very interesting to see, you know, on the
Speaker 4: regional banks, they went from a deposit crisis to a
Speaker 4: question of their economic business model, how do they make
Speaker 4: money long term? And you know the other side of
Speaker 4: that is, we feel that our business model has only
Speaker 4: gotten enhanced. We have long term liabilities and now those
Speaker 4: ten year liabilities in our business. It allows us to
Speaker 4: be a robust, stable lender in a period right now
Speaker 4: of flux and conversation.
Speaker 2: The heart of the math to me and the Brickfield
Speaker 2: article from Bloomberg today is just definitive. At the very
Speaker 2: bottom of it. In the last paragraph, year over year,
Speaker 2: the monthly payments on a blended piece of sub properties
Speaker 2: went from three hundred and thirty gazillion out to eight
Speaker 2: hundred and eighty. And the translation of this to me
Speaker 2: for all of our listeners and viewers is in the
Speaker 2: new math, somebody's got to put up cash to do
Speaker 2: the restructure. This is a whole new world for a
Speaker 2: lot of people.
Speaker 4: Jim, it's called cost of For a decade plus and
Speaker 4: I mentioned to you all before, equity was the great
Speaker 4: beneficiary of low cost that really subsidized the equery return exactly.
Speaker 4: Now we've had a complete paradigm shift and it's just math.
Speaker 4: You said it earlier. The funding cost. When you hear
Speaker 4: that there's a credit card out there you're making four
Speaker 4: percent on right now, or assuming not a credit card
Speaker 4: but a bank deposit program, that's just a cost of
Speaker 4: good sold and it's a higher cost for somebody, the
Speaker 4: consumers the great beneficiary. But back to our model, we
Speaker 4: are are looked at, you know, the the American economy.
Speaker 4: We've gone through a really tough quarter, but you know,
Speaker 4: four percent of the population, fifty percent of the financial
Speaker 4: assets in the world, we have the envy financial markets
Speaker 4: of the world. And this isn't This is we were
Speaker 4: evolving right now in a period of you know, three
Speaker 4: to nine months, but up with a higher cost of
Speaker 4: capital that's just flooting through the system.
Speaker 3: You in a great spot. That's what we're describe in
Speaker 3: Is that because of the way the cycle is evolving,
Speaker 3: or is it more structural in nature, because it sounds
Speaker 3: a little bit more like.
Speaker 7: The last secular it's secular.
Speaker 4: You know, if you take the last as we've talked before,
Speaker 4: if you take the last twenty five thirty years and
Speaker 4: the evolving role of financial services around the globe, really
Speaker 4: led in the US, but following on in Europe and
Speaker 4: a little bit in Asia as well. You know, there's
Speaker 4: no doubt that that folks that are able to be
Speaker 4: able to operate with the ability that we are to
Speaker 4: really bring the proper liabilities to the equation. You know,
Speaker 4: our investors are sovereigns, institutions, pension funds from around the globe.
Speaker 4: They're the ones that can make the five and ten
Speaker 4: year commitments along with retirement savers. Those are the folks
Speaker 4: that should be making these loans. I mean, the digital
Speaker 4: world has really changed the banking market and there's a
Speaker 4: lot of folks that are a lot more knowledgeable about
Speaker 4: the traditional banking system. But again, we just have a
Speaker 4: lot more tools in our toolbox were able to provide
Speaker 4: a lot more capital. As I mentioned the pac West
Speaker 4: solution that happened basically in three days, a billion four
Speaker 4: facility for them that really got them through a pretty
Speaker 4: tough liquidity situation, but was a high quality assets that
Speaker 4: were looked through investment grade. And if you do that,
Speaker 4: you know, having those solutions, your your doorbell is going
Speaker 4: to ring quite a bit these days.
Speaker 5: How much cash do you have in anticipation of the
Speaker 5: doorbell ringing?
Speaker 4: You know, I think our latest numbers as a last
Speaker 4: quarter probably an excess of fifty billion a dry powder.
Speaker 4: Oh well, you know, I'll leave it to you. I'll
Speaker 4: leave it to you guys to talk about that. But
Speaker 4: there's no doubt that investors from Ron on the globe.
Speaker 4: I was an agent last week, and the idea of
Speaker 4: really exporting yield around the globe. You know, they've had
Speaker 4: very low rates for a decade plus. Obviously a lot
Speaker 4: of conversations about what's going on in Japan right now
Speaker 4: with y CCO curve control and how do they transition
Speaker 4: off that. I mean, I think that's a really interesting
Speaker 4: story for the latter half of the year. But the
Speaker 4: reality is we're in an evolving market in the States.
Speaker 4: What was a deposit liquidity crisis is now a evolution
Speaker 4: of their business model, and really it's going to be
Speaker 4: a period of tougher financial conditions.
Speaker 3: Let's finish on this. You describe a process you're expecting
Speaker 3: tougher financial conditions. I just want to build on the
Speaker 3: question Lisa asked. I hate to ask the one question,
Speaker 3: when do you expect that doorball just to be NonStop ringing,
Speaker 3: because that's what it sounds like you're looking for.
Speaker 4: I don't I think by the time that actually happens
Speaker 4: all the activities occur. I think it's almost too late, Jonathan.
Speaker 4: I think you really need to be in the markets
Speaker 4: every single day. The reality is, you know, there was
Speaker 4: some headlines last week the private credit took a step
Speaker 4: back because of one financing. The reality is the m
Speaker 4: and A market's a little bit quieter right now, and
Speaker 4: you know LP firms want to do so.
Speaker 2: Am I going to make some news this morning? I'm
Speaker 2: looking for a Western Alliance transaction. Would you like to
Speaker 2: break that news here this morning?
Speaker 4: I'll let others talk about that one. I got my
Speaker 4: hands full.
Speaker 3: Jim, this was fun, sir, Thank you, Thank you very much.
Speaker 3: Jim's out to the of Apollo Asset Management with us
Speaker 3: around the table, and please to say Dan Greenhouse, chief
Speaker 3: strategist at Solace Alternative Asset Management. Dan, welcome to the show.
Speaker 8: Good morning, Thank you, sir.
Speaker 3: Are we learning that the bank stress of the last
Speaker 3: month or so is more idiosyncratic than systemic or is
Speaker 3: it still too early?
Speaker 8: I don't think there was really In my opinion, I
Speaker 8: don't think there was a debate from the beginning that
Speaker 8: this was not idiosyncratic. Clearly, there were specific factors to
Speaker 8: Silicon Valley specifically, but Signature as well that I never
Speaker 8: really found were sister wide, so to speak. That's not
Speaker 8: to say that the unrealized losses throughout the banking system
Speaker 8: isn't a real thing.
Speaker 7: It is.
Speaker 1: We know that it is.
Speaker 8: But the I mean to give you the best, the
Speaker 8: best that I could give you. Silicon Valley Bank has
Speaker 8: seventeen branches and somewhere around one hundred and fifty thousand
Speaker 8: checking accounts. Fifth Third, which is a comparably sized bank
Speaker 8: deposit wise, has eleven hundred branches and like a million accounts.
Speaker 8: It's a different base, it's a different thing entirely so,
Speaker 8: so we were never particularly concerned about there being a
Speaker 8: banking crisis, if you will. Certainly there's an issue that
Speaker 8: has to be dealt with, but I don't know that
Speaker 8: that hearing that said, I don't know that hearing from
Speaker 8: JP Morgan and Wells Fargo tells me what Western's going
Speaker 8: to tell me after the close. That's much more consequential.
Speaker 3: We're still trying to gauge to what extent we're going
Speaker 3: to see a turn and get lending standards and how
Speaker 3: contained macroeconomic spillovers will be. Have you drawn any conclusions
Speaker 3: on that just yet.
Speaker 7: Yeah.
Speaker 8: Listen, the short answer to any question like that is
Speaker 8: a few basis points off GDP, I mean everywhere. I
Speaker 8: don't have any particularly new news on this. We know
Speaker 8: lending standards have been tight and going into this, we
Speaker 8: assume lending standards will tighten further coming out of it.
Speaker 8: And we also know that, on balance, the level of
Speaker 8: tightening that we've seen is traditionally associated with worse economic
Speaker 8: outcomes than better economic outcomes. I don't think that narrative
Speaker 8: is likely to be changed at all from the large
Speaker 8: banks telling me on balance that loans are continuing to
Speaker 8: expand there's a lag, and ultimately I think it ends
Speaker 8: up weighing on GDP. By someone, we call it three
Speaker 8: tents or four tenths of GDP, something like that.
Speaker 2: Dan, you're strategist to a hedge fund, you're living the
Speaker 2: billion's dream. Do we overweight what we think are the
Speaker 2: bets of hedge funds If we're trying to establish a
Speaker 2: strategy that's longer than three hours, if we're trying to
Speaker 2: establish a nine months or a three year strategy, is
Speaker 2: there value in measuring the long short bets of your world?
Speaker 8: So We are not active traders. If you will, we've
Speaker 8: owned positions for ten.
Speaker 1: Years, say ten minutes.
Speaker 8: No, No, that's not the world in which we live.
Speaker 8: I think certainly actively trading hedge, actively trading hedge funds
Speaker 8: that flip position on a daily or is there value to.
Speaker 2: That information is transfixed by it?
Speaker 8: Well, yes, in the sense that momentum strategies are going
Speaker 8: to be derived from that trading activity and are going
Speaker 8: to be related to that activity. But we're, as I mentioned,
Speaker 8: a much more long term focused investor. When we take
Speaker 8: a position, oftentimes it's to control of the company. We
Speaker 8: are the second or third largest holder of several companies.
Speaker 8: Other times we'll get in and out if the thesis
Speaker 8: changes in let's say a month, but we are not
Speaker 8: actively participating in the market. Is there value in those
Speaker 8: types of strategies, Sure, but I think it's value for
Speaker 8: a certain specific type of investor, not our client or
Speaker 8: our investivation, so to speak.
Speaker 5: So just pushing against some of the bearishness out there
Speaker 5: has been the credit markets that you really focus on
Speaker 5: has been some of these longer term bets where people
Speaker 5: are looking more for opportunity than they're worried about losses.
Speaker 5: And you're seeing that under the hood pretty much across
Speaker 5: the board. Do you make of that that people still
Speaker 5: do have confidence that this is going to be some
Speaker 5: sort of shallow recession, that we're going to merge on
Speaker 5: the other side with higher rates that you want to capitalize.
Speaker 1: Now, you know, I know.
Speaker 8: Everyone says this is going to be a shallow recession,
Speaker 8: and I find that statement to be more a function
Speaker 8: of comfort than analysis. And what I mean by that
Speaker 8: is it's very easy to say this is going to
Speaker 8: be a shallow recession because they're forget career risk. The
Speaker 8: likelihood that you're wrong in saying, well, it's going to
Speaker 8: be something more than that is quite high. Now that said,
Speaker 8: we also, and I don't want to speak for you guys,
Speaker 8: I apologize if I'm saying this wrong, But how many
Speaker 8: times do we follow up and say, well, what do
Speaker 8: you mean by a software session? Well, I think we
Speaker 8: can define this in terms of basis points moves in
Speaker 8: the unemployment rate. If you think the unemployment rate's going
Speaker 8: up by one percent, yeah, that's probably something resembling a
Speaker 8: shallow recession. But as we all know, there's really no
Speaker 8: instance in which the unemployment rate goes up by one
Speaker 8: percent and then stops. It's quite often a much more
Speaker 8: accelerated move from there.
Speaker 6: It feels like we've been in this purgatory for a while.
Speaker 6: We're they're sort of on the one hand.
Speaker 5: On the other hand, and this lack of any clarity whatsoever.
Speaker 5: When do you get clarity of what we're heading into?
Speaker 8: Yeah, you and everyone else, I think that's obviously the
Speaker 8: top question of the day. I would have told you
Speaker 8: at the start of twenty twenty two that by the
Speaker 8: middle of twenty twenty three we will be in something
Speaker 8: or close to something resembling a recession. Now Here we
Speaker 8: are in the middle lish of twenty twenty three, and
Speaker 8: I don't think we're anywhere close to a recession. I
Speaker 8: have been in public bearish on risk assets over the
Speaker 8: course of that time. I more or less remain so now,
Speaker 8: although there's some cavegats to that. But it's remarkable the
Speaker 8: way that the economy has performed in the face of
Speaker 8: such rapid increases, Which brings up something that you guys
Speaker 8: were talking about yesterday. I think Tom mentioned the IMF
Speaker 8: report and the world economic outlook, and the discussion of
Speaker 8: the natural rate of interest. Excuse me and I think
Speaker 8: there is a lot that we don't know about the
Speaker 8: current environment. But with respect to the natural rate of interest,
Speaker 8: I think it's fair to say that whatever we thought
Speaker 8: the natural rate of interest was, or that the level
Speaker 8: of interest rates that balances supply and demand throughout the
Speaker 8: economy is higher than we previously thought, which means what
Speaker 8: we thought the economic damage, so to speak, would be
Speaker 8: from five hundred basis points of rate hikes is not
Speaker 8: quite what we thought it would have been. It might
Speaker 8: take six hundred or seven hundred.
Speaker 7: I'm rapp there.
Speaker 8: You go to do the same amount of damage that
Speaker 8: perhaps a year ago we thought five hundred.
Speaker 7: Big ye on.
Speaker 2: Bloomberg Financial Conditions Index, from a minus five standard deviation,
Speaker 2: we are out to a positive point one nine. That's
Speaker 2: called not doing what Jay Powell wants.
Speaker 3: I'm just tying everything together that you've said in the
Speaker 3: last ten minutes or so March eighth, pre SVB to
Speaker 3: your yield north of five percent? Is that where we're
Speaker 3: going back to given what you've just told us.
Speaker 8: Well, I will say, if you look at the three
Speaker 8: month and the six month bill yields, they're both now
Speaker 8: north of five percent. I was surprised at the level
Speaker 8: of decline in the two year. Let's say that to
Speaker 8: the extent that the two year is going to be
Speaker 8: anchored to the federal funds rate, ish a drop of
Speaker 8: that's move. And you see this E code in the
Speaker 8: Fed fund futures, in the ear dollars future market card
Speaker 8: wrest it's all, it's it's it's the level of pricing adjustment.
Speaker 8: Seemed accessive to me based on my original comment, which
Speaker 8: was I didn't think that SVB was anything other than idiosymprodity.
Speaker 1: I got bad news.
Speaker 2: Doug Cass is listening and he's got a Yankees question,
Speaker 2: but we're not going there. Doug Cass looks out and says, look,
Speaker 2: dividen SPX one point seven percent. Lisa's talking about five
Speaker 2: percent money. How does the stock market elevate off of
Speaker 2: that five percent yield?
Speaker 8: Yeah, listen, it's a tremendous head wind right now, and
Speaker 8: I don't think it's sufficient.
Speaker 7: First of all, high Doug.
Speaker 8: But it's not sufficient to look back historically and say, well,
Speaker 8: the market rally in nineteen eighty three and interest rates
Speaker 8: were much higher, which everyone meaningfully older than me likes
Speaker 8: to remind me of. I think there are challenges to
Speaker 8: the equity market right now from the fixed income space.
Speaker 8: That said, in the credit market, where we spend a
Speaker 8: good amount of time, the high yield market is still
Speaker 8: yielding somewhere around eight and a half percent, which isn't
Speaker 8: particularly high yield. Even triple c's, which is the lowest
Speaker 8: part of the market, which isn't really a market so
Speaker 8: much as a bunch of videosyncratic names to get lumped together,
Speaker 8: is yielding yet less than a thousand basis points. If
Speaker 8: you had anything resembling poor economic expectations priced into markets,
Speaker 8: they just simply wouldn't be.
Speaker 1: Treating their credit.
Speaker 3: SPIZ would be at four forty on high yield, we
Speaker 3: were three five hundred basis points for what five minutes PREMI.
Speaker 5: I mean, if credit is a leading indicator, it's not
Speaker 5: indicating much stress.
Speaker 9: That's not so.
Speaker 3: Hey, Dani, this was smart. It's great, Cat than you.
Speaker 3: Thank you. Dan Green has that of Solace Alternative Asset Management.
Speaker 2: Kufiy A bunch joins us now from nationwide really definitive
Speaker 2: and parsing GDP out and what it means for the nation, Kathy,
Speaker 2: the stock market is going up? Is that an indicator
Speaker 2: to you?
Speaker 10: Good morning, Tom and Lisa.
Speaker 11: Well, it is part of the leading economic indicators, So
Speaker 11: think about the conference Boards overall index. It's one of
Speaker 11: the subcomponents. However, that one seems to stand out from
Speaker 11: other leading economic indicators. It's it's been as resilient, or
Speaker 11: maybe more resilient than even.
Speaker 10: The labor market.
Speaker 11: So we have to see really how the earnings announcements
Speaker 11: and guidance play out. You know, if the equity market
Speaker 11: continues to kind of hold in there as you alluded to,
Speaker 11: the bond market's been pricing in recession for a long time.
Speaker 2: Now, what's the framework of the consumer right now? I
Speaker 2: mean nationwidse got a huge handle on this. To frame
Speaker 2: the consumer mood like now and into the next thirty days.
Speaker 1: Is it buoyant? Is it lethargic?
Speaker 2: What's the consumer mood that you perceive?
Speaker 11: So what we've seen is consumers still feel the weight
Speaker 11: of high inflation, even though the headline number has been
Speaker 11: slowing a bit. Is we know that the core particularly
Speaker 11: the core services number has.
Speaker 10: Been very sticky.
Speaker 11: And I think the fact that interest rates remain very
Speaker 11: high also ways on consumer sentiment. I think that the
Speaker 11: key though is the labor market and if you look
Speaker 11: at the Conference Boards measure where I used to work,
Speaker 11: three to five questions are focused.
Speaker 10: On theabor market.
Speaker 11: When the Michigan Sentiment Index does rely is influenced more
Speaker 11: by the equity market, and I would say even gasoline prices.
Speaker 11: So you have both, you get a different look at
Speaker 11: the consumer from both of those surveys. I would say overall,
Speaker 11: the consumers feeling it could very conservative at this point.
Speaker 11: You know, a lot of the pent up savings they
Speaker 11: had have been expended. They've been able to splurge a
Speaker 11: bit on the service spent side of things, but now
Speaker 11: have to kind of recalibrate, especially if we're right and
Speaker 11: that cracks start to develop.
Speaker 10: In the labor market.
Speaker 5: Katy, there are a number of things that you said
Speaker 5: that are actually quite controversial, starting with this idea that
Speaker 5: inflation is going to be too sticky, it's going to
Speaker 5: allow the Fed to hold rates where they are. The
Speaker 5: market completely disagrees and thinks that the Fed's going to
Speaker 5: go back down near four percent by the end of this.
Speaker 6: Year with rate cuts.
Speaker 5: How do you fight back or how do you argue
Speaker 5: against people who say, if you look at the disinflationary forces,
Speaker 5: they're actually stronger than the headline numbers. May figure may
Speaker 5: may account for including US rents posting their first drop
Speaker 5: since March twenty twenty.
Speaker 11: Yeah, and the rent prices should that inflation should accelerate
Speaker 11: at some point pretty meaningfully. As captured by the CPI
Speaker 11: and pc price in disease, real time rent increases.
Speaker 10: Have slowed quite a bit.
Speaker 11: Home prices overall have actually in many parts of the
Speaker 11: country fallen, So those both suggest that the rental inflation
Speaker 11: will slow.
Speaker 10: But even when you exclude that, as.
Speaker 11: Chairman Pal has suggested, you look at that super core
Speaker 11: service number, it's very sticky, and things like transportation services
Speaker 11: and for instance, car repairs are still running double digits
Speaker 11: year on year. Inflation and insurance premiums we know from
Speaker 11: what we do continue to rise as well to capture
Speaker 11: the highigher car repair costs. And it's even broader than that,
Speaker 11: that service prices overall still remains sticky.
Speaker 10: And I think you really need to see the.
Speaker 11: Labor markets slow before we start to see that correction,
Speaker 11: because with car repair, it's not that you can't get
Speaker 11: the parts, is that the labor is still so expensive.
Speaker 6: So if this is the case and you do have
Speaker 6: stick your inflation.
Speaker 5: You have a FED holding rates around five percent for
Speaker 5: a long time. What kind of shallow recession is this
Speaker 5: going to be? What are the contours of that?
Speaker 11: Yeah, so, and that worth just noting that, you know,
Speaker 11: typically the FED reserve slow in raising rates and fasting
Speaker 11: cutting rates when we go into recessions. So we're seeing
Speaker 11: the opposite dynamic in this business cycle. But the contours
Speaker 11: is that the consumer balance sheet overall is in good shape.
Speaker 10: Business balance sheet overall is in good shape.
Speaker 11: There are pockets of issues, just like in the financial market,
Speaker 11: in the banking system, there's pockets of stress, but overall
Speaker 11: in better shape.
Speaker 10: And we think that keeping the FED.
Speaker 11: Funds rate elevator for some period of time should allow
Speaker 11: to gradually slow and you avoid a really hard landing
Speaker 11: in that in that sense, and that's assuming though that
Speaker 11: inflation does you know, continue to gradually slow.
Speaker 1: Katy.
Speaker 2: One fun of question, do you do you have a
Speaker 2: run rate of American GDP real GDP of over two
Speaker 2: percent or do you have to model it below?
Speaker 10: Yeah?
Speaker 11: So first quarter does look like it's it's running around
Speaker 11: two percent, even it's been a bit about two percent.
Speaker 11: But as we go into the second quarter, looks slower
Speaker 11: to us. The retail sales data indicate the consumer spending
Speaker 11: is the momentum slowing going into the second quarter. And
Speaker 11: these housing numbers this morning, building permits a leading indicator.
Speaker 11: I think people are getting joyful that housing may be
Speaker 11: on an upswing. But keep in mind that you know,
Speaker 11: interest rates matter, supply matters, but employment and income is
Speaker 11: really the key indicator for the ability for people to
Speaker 11: buy homes.
Speaker 2: Kathleen Bush Jenzik, we have joy that you're with us
Speaker 2: with nationwide they're chief economists. This is a joy And
Speaker 2: for global Wall Street, in particularly American Wall Street, now's
Speaker 2: the time to stop and lean forward.
Speaker 1: David Conrad has not done one.
Speaker 2: But two tours of duty at Keith Briett and it
Speaker 2: Woods definitive on large cap banks. He works for the
Speaker 2: banking franchise of KDW. A Stiefel company. David thrilled to
Speaker 2: have you on today. What I know is I got
Speaker 2: forty eight thousand people at Gulben Sachs. I got two
Speaker 2: hundred x thousand people at Bank of America. It's over
Speaker 2: a quarter million bodies. I know when they're stress bodies
Speaker 2: go out the door. Will there be layoff announcements today.
Speaker 12: Probably not today. I mean, we've already seen a few.
Speaker 12: We think they will continue to be a trend throughout
Speaker 12: the year. But we are seeing, you know, much better
Speaker 12: trading than we thought coming into this quarter, which will help.
Speaker 12: But you know, there are longer term pressures on that
Speaker 12: interest income that will weigh on returns for the industry.
Speaker 2: What does it mean to see Apple Goldman generate a
Speaker 2: four point one five percent savings account?
Speaker 1: What does that mean for mister Solomon?
Speaker 12: I think from Goldman has an interesting standpoint where they've
Speaker 12: never had a funding advantage, right, so they've always borrowed wholesale.
Speaker 12: So the fact that they're borrowing an expensive savings account
Speaker 12: is actually a creative for Goldman. The interesting thing, though,
Speaker 12: is the pressure that it puts on the rest of
Speaker 12: the industry. You know, the savings account in north to
Speaker 12: four percent is a staggering premium to what banks are.
Speaker 9: Paying right now.
Speaker 6: Are we learning anything from the big bank earnings?
Speaker 5: David and I say this because we thought this would
Speaker 5: be the tea leaves we were looking for, and then
Speaker 5: we get guidance. It's kind of like, eh, we're not sure,
Speaker 5: but we're setting aside more loan losses.
Speaker 6: We're doing well.
Speaker 5: We don't want to celebrate too much because it's liability
Speaker 5: in Washington, DC. Are we learning anything more substantial from you?
Speaker 1: Well?
Speaker 9: I think yes and no.
Speaker 12: Right, So, JP Morgan was really a very positive result
Speaker 12: and I think is going to be an outlier through
Speaker 12: throughout their earning season. I think the other names that
Speaker 12: ever reported have been somewhat more in line with expectations,
Speaker 12: and they're really the key. There is declining overall deposits,
Speaker 12: but more importantly a negative deposit mixshift. And what I
Speaker 12: mean by that is checking account non interest garing deposits
Speaker 12: are down mid to high single digits quarter over quarter,
Speaker 12: and that's putting pressure on the cost of funds.
Speaker 6: So what are we going to know what the verdict
Speaker 6: is on this earning season.
Speaker 5: It's sort of been purgatory for a while and people
Speaker 5: are kind of using the data point to fit their narrative.
Speaker 6: We've been talking a lot about that.
Speaker 5: When will you be able to say decisively yes, this
Speaker 5: shows that there is a real lack of credit availability
Speaker 5: under the top tier of companies and banks.
Speaker 7: Yeah.
Speaker 12: I mean I think a couple points here. One, I
Speaker 12: think Bank of America will be interesting. Today Again we
Speaker 12: saw JP Morgan had relatively lower cost the funds relative
Speaker 12: to the group. So how much of the benefit from
Speaker 12: the flight from some of the stressed regional banks is
Speaker 12: really supporting this quarter?
Speaker 7: You know.
Speaker 12: The other thing though, is is we haven't seen any
Speaker 12: loan growth. The one aspect that we have seen is
Speaker 12: credit cards, so we have seen growth there, but be
Speaker 12: careful what you wish for. And so I think, you know,
Speaker 12: the trend that won't really be showing up this quarter,
Speaker 12: but going forward is the increased liquidity requirements we think
Speaker 12: will really damp in credit growth.
Speaker 2: David, you have such a perspective working with Tomas Schold.
Speaker 2: I think of KBW, I think of Sandler O'Neil, where
Speaker 2: you guys are doing banking twenty four to seven. Do
Speaker 2: you just assume a new round of consolidation and combination
Speaker 2: in the KBW world over the next three to five years.
Speaker 2: Is there a new acceleration to go from four thousand
Speaker 2: banks down to x thousand?
Speaker 12: Yeah, definitely, I think right now, you know, we're kind
Speaker 12: of jammed up. One it's tough to get deals approved,
Speaker 12: and two the marked mark or the balance sheets are
Speaker 12: really limiting right mergers. But we to your point, three
Speaker 12: to five years out, the regulations, the environment's getting more
Speaker 12: and more difficult.
Speaker 9: We expect a lot of consolidation.
Speaker 2: Let's go all nerd right now. What's the average blended
Speaker 2: marked to market marked down? Right now? On a par
Speaker 2: one hundred, it's trading, it's marked down. Is it a
Speaker 2: two point three point marked down? Or dare I say
Speaker 2: is it a twenty point marked down?
Speaker 9: I think it's it's more in the ten percent marked down.
Speaker 12: You know, I think we're really focused on the bond
Speaker 12: books right now, you know, and really it's really not
Speaker 12: really the markedown per ses little liquidity associated with that,
Speaker 12: right that's what you have to work the two in concert.
Speaker 12: But you know, we are seeing much better rebound in
Speaker 12: some of those marks this quarter, probably about thirty percent
Speaker 12: otter than what I thought in terms of the rebound
Speaker 12: of the negative marks we saw last quarter.
Speaker 3: Just a sign of the times that you get earnings releases,
Speaker 3: and we've just got bny Mellon crossing the bloomberg, and
Speaker 3: the focus seems to be on one thing. Deposits first
Speaker 3: quarter total deposits two hundred and eighty one point twenty
Speaker 3: nine billion, The estimate two seventy seven. So that's a
Speaker 3: touch better than expected. A bit of commentary from leadership
Speaker 3: at the bank, BNY Melon CEO saying we need to
Speaker 3: remain vigilant given the heightened uncertainty. Lisa goes on to say,
Speaker 3: we're pushing forward with the strategic agenda.
Speaker 5: So the deposits actually came in better than expected, but
Speaker 5: net loans came in below expectations. And this is what
Speaker 5: I think really speaks to how banks are managing the
Speaker 5: bottom line. This may not speak to a big deposit flight,
Speaker 5: but it is speaking john to this restriction and credit extension,
Speaker 5: and that perhaps could be the leading to leave for
Speaker 5: the market in the economy.
Speaker 3: APS bank in line TOM one twelve, the estimate one twelve.
Speaker 2: David Conrad with this is KBW. David, if you're still there.
Speaker 2: I look at BNY Mellon and it's just a MALDI
Speaker 2: seven eight return over the last ten years. What's the
Speaker 2: expectation of total return from a bank?
Speaker 1: Is that what I'm going to make you know?
Speaker 12: It's interesting, you know we've said that a lot about
Speaker 12: the universal since the Great Financial Crisis? Right are the
Speaker 12: utilities all this increased regulation? I don't really think that's
Speaker 12: really the case, right. I mean, JP Morgan just put
Speaker 12: up a high teens r ATCE, you know, with almost
Speaker 12: fourteen percent capital, right, and so I think it puts
Speaker 12: more stress on you on your strategy, on the management team.
Speaker 12: But we're really seeing, though, is the bigger banks with
Speaker 12: the diversified revenues and the scale are delivering I think
Speaker 12: better expectations.
Speaker 9: As we move forward.
Speaker 5: What's more interesting, too, David, the deposit growth or lack thereof,
Speaker 5: or the loan growth or lack therein.
Speaker 9: I think the.
Speaker 12: Loan growth is you know, more of an economic side.
Speaker 12: It's probably less impactful for our models, but it does
Speaker 12: concern us about you know, GDP growth for instance. Long
Speaker 12: you know, I think the deposits is really the uncertainty
Speaker 12: that creates a lot of deltas in our in our
Speaker 12: near term earnings expectations.
Speaker 9: You know, we've gone through a.
Speaker 12: Period of QE and government stimulus and people working from home,
Speaker 12: and we just have a lot of deposits at the
Speaker 12: bank that are going to be normalized here and I think,
Speaker 12: you know, this normalizes trend. We've been here before. You know,
Speaker 12: checking account balances are thirty five percent of to all
Speaker 12: deposits they probably should be twenty two to twenty five percent,
Speaker 12: And so.
Speaker 9: That trend has happened before.
Speaker 12: But what hasn't happened before is that trend reversing while
Speaker 12: we're having increased liquidity requirements from the regulations. And so
Speaker 12: you know, those two things working together, I think due
Speaker 12: to your point limit the credit extension.
Speaker 3: Hy David, wonderful to hear from you, as always, David
Speaker 3: comment there of KPW.
Speaker 2: Carl Weinberg joins his chief economists and managing director high
Speaker 2: Frequency Economics. I got five things to talk to Carl
Speaker 2: about and no time to do it because of China.
Speaker 1: Carl, you're writing a blistering.
Speaker 2: Note this morning, and what's fascinating as you say, there's
Speaker 2: a lot of noise in a four and a half
Speaker 2: percent China GDP data. Maybe it's not as good as
Speaker 2: it is, but you end by saying, this is a
Speaker 2: trajectory to six percent growth. Do you buy that right now,
Speaker 2: that they can get to six percent GDP growth?
Speaker 7: Oh? Sure, thank Tom, Good morning there.
Speaker 13: But they could be asleep at the switch and GDP
Speaker 13: could not grow at all from even where it was
Speaker 13: at the end of the fourth quarter, and they'd still
Speaker 13: get their year over year change in GDP at six
Speaker 13: percent at target. You know, there's a basis effect. Last
Speaker 13: year was a reasonable year, so growing from a low
Speaker 13: base is not a great accomplishment. Look at that four
Speaker 13: and a half percent GDP number, okay, pre COVID, we
Speaker 13: have never seen a GDP number as low as four
Speaker 13: and a half percent since the day to begin in
Speaker 13: nineteen ninety five. So you know, let's not be teenagers
Speaker 13: and talk about relative to expectations or relative to the
Speaker 13: last three quarters which were awful for China. This is
Speaker 13: a better than expected number and a better than previous number.
Speaker 7: Sure, but it's an awful number.
Speaker 2: But within your acclaim China, note they're going to do
Speaker 2: what they've always done, which is clear out the property market,
Speaker 2: get it back going as an incentive for the public.
Speaker 2: They're going to straighten out the SOEs and that what
Speaker 2: is your forward run rate for China GDP? If it's
Speaker 2: not seven percent, have long ago and far away.
Speaker 7: Two to three percent?
Speaker 13: Maybe Tom really well, China's economy has been driven by investment,
Speaker 13: and that investment in previous decades has had a huge
Speaker 13: rate of return on investment, but in recent years they're
Speaker 13: using public money not to invest in productive infrastructure, but
Speaker 13: to invest in real estate, and investing public money in
Speaker 13: owner occupied housing is a zero rate of return for
Speaker 13: GDP investment. So we're subtracting away all of the fill
Speaker 13: up from investment out of GDP growth that we saw
Speaker 13: in the past, and that's a strategy that leads to
Speaker 13: subpar economic growth in the very very low two to
Speaker 13: three percent range.
Speaker 5: Is this the reason why, Carl, the reaction of markets
Speaker 5: has been less than incredibly enthusiastic. We haven't necessarily seen
Speaker 5: an incredible cry of enthusiasm from Chinese equities and bonds,
Speaker 5: and we're seeing oil actually lower on the day. Is
Speaker 5: this the correct read that anything that China prints it
Speaker 5: might have a high number, but longer term it's going
Speaker 5: back to a much lower number. And this isn't necessarily
Speaker 5: screaming recovery.
Speaker 7: Lisa, you hit the nail right on the head.
Speaker 13: If only GDP would print a high number, we get
Speaker 13: a positive reaction to it. But four and a half
Speaker 13: percent year over year GDP for the first quarter is
Speaker 13: an abysmal result. The only good thing you can say
Speaker 13: about it is it's better than some people forecasted. And
Speaker 13: the only other thing good you can say about it
Speaker 13: is it's better than the three quarters before it. But again,
Speaker 13: to repeat, this is the worst quarter for GDP growth
Speaker 13: that we would have seen in the pre COVID period.
Speaker 7: We're nowhere back to normal in China.
Speaker 5: You also point out, Carl, that trade with Russia by
Speaker 5: China really was an incredible increase.
Speaker 6: That really got your attention.
Speaker 5: And what's your takeaway from we won one hundred and
Speaker 5: thirty six percent increase in terms of trade with Russia
Speaker 5: by China.
Speaker 7: Yeah.
Speaker 13: I nearly fell off my chair when I saw that result, Lisa,
Speaker 13: that's the real story this morning. If you dig into
Speaker 13: the trade numbers from last week, China's exports to Russia
Speaker 13: exploded one hundred and thirty six percent just in the
Speaker 13: days after Putin and g meet. The only other time
Speaker 13: we've seen a number for a year over year growth
Speaker 13: of exports that big was when Putin came to China
Speaker 13: for the Olympics two years ago and immediately we saw
Speaker 13: one hundred and forty percent growth of exports year over year.
Speaker 7: China is selling something to Russia.
Speaker 13: I don't know what it is, but as you might imagine,
Speaker 13: it could be problematic materials.
Speaker 2: Doctor Weinberger, I've was sitting on a stage at the
Speaker 2: IMF and I said, I can't wait to talk to
Speaker 2: Carl Weinberg about the unspeakable at the IMF meetings, which is,
Speaker 2: will China join Western restructuring methods and processes?
Speaker 1: You are true expert on this.
Speaker 2: Do you have a belief that China can restructure Ghana's
Speaker 2: debt along with West?
Speaker 13: Well, I think China can restructure China's death They own
Speaker 13: most of it, and I think though that they don't
Speaker 13: want to restructure it within the Western framework. And if anything,
Speaker 13: this is an opportunity for China to channel refinancing through
Speaker 13: its own institutions rather than through the existing Western institutions
Speaker 13: to promote their own. So restructured loans to the emerging
Speaker 13: world should be restructured through new credits at a China's institutions,
Speaker 13: and that way, China becomes more important geopolitically, more dominant
Speaker 13: in the world stage than it was before. I think
Speaker 13: that's what's going on in this restructuring business.
Speaker 2: Carl, What does global GDP look like? You know, the
Speaker 2: IMF news of a subpar five year view. The optimist
Speaker 2: kerl Weinberg. I just can't see you go on all
Speaker 2: IMFGDP growth.
Speaker 1: What do you think of it?
Speaker 13: Well, you know, they call it a rock recovery, but
Speaker 13: where's the recovery. GDP grows along, you know, at a
Speaker 13: three percent rate, a little bit lower than normal. That's
Speaker 13: not much of a recovery. But most important, Tom, your
Speaker 13: takeaway from the IMF forecast should be that they're flat
Speaker 13: is a board straight as a line for five years,
Speaker 13: and that ain't never happened before. If you read Larry
Speaker 13: Summer's review of the IMF's forecast, he says they're forecasting
Speaker 13: isn't that good. They've never called the recession before. But
Speaker 13: more importantly, if your economy is not in recession now
Speaker 13: and it hasn't been recessioned recently, it's got a twenty
Speaker 13: percent chance that it's going to have a recession in
Speaker 13: the next year.
Speaker 7: And that's what we want to look at.
Speaker 13: The variance that the IMF doesn't address in its forecasts.
Speaker 7: And there are risks ahead of US.
Speaker 13: I heard you talking with Marvin Lowe a few minutes
Speaker 13: ago about risks of US recession. There are risks to
Speaker 13: growth out there, and we have to keep an eye
Speaker 13: on those risks more than on the center of the channel.
Speaker 7: If you will.
Speaker 3: That's a really interesting point, a really interesting last point
Speaker 3: to wrap it up, Cal, Thank you, sir as always,
Speaker 3: Kin Wineberck, there a figh frequency Economics.
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