Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Claudia som
Speaker 1: She has been front and center with this mystery of
Speaker 1: a non recession. Her work on a recession at Michigan
Speaker 1: was just extraordinary years ago. She is with Sound Consulting
Speaker 1: on this fed day. Claudia Claudiasm. I want you to
Speaker 1: talk about what you got from Claudia Golden.
Speaker 2: The idea here that it wasn't gonna be nice.
Speaker 1: We're gonna play hardball, We're gonna do first order at
Speaker 1: research like you did at Michigan. Tell me what Claudia
Speaker 1: Golden meant to you.
Speaker 3: Kadia Goldin's an absolute leader in the field of economics.
Speaker 3: She's a scholar. She's a hero to a lot of
Speaker 3: women and frankly men in the profession and it comes
Speaker 3: into the real world. She's one economist that really said, hey,
Speaker 3: we got to think about women in the workforce, and
Speaker 3: we saw this year women's employment rate for primge women
Speaker 3: hidden all time high. Right, So it's not just about
Speaker 3: the theory and the scholarship. It's about let's make this
Speaker 3: happen in the real world.
Speaker 1: This goes to the American mystery of a non recession.
Speaker 1: You've provided a leadership on this this year. Do we
Speaker 1: misjudge women in the economy? Do we misjudge technology in
Speaker 1: the economy? Which means we have to have a humility
Speaker 1: about the Psalm rule in twenty twenty four.
Speaker 3: So we absolutely, like I love that this is FED Day,
Speaker 3: but we have overplayed what the FED means to this economy.
Speaker 3: We need workers back, not fewer customers. The FED can
Speaker 3: only do the latter. We have seen workers come back.
Speaker 3: We have women, we have black men, have people with disabilities.
Speaker 3: And to your point, productivity, I mean, this is the
Speaker 3: holy grail of prosperity. We've had some pretty good productivity
Speaker 3: numbers recently, and frankly, there are technologies in place like
Speaker 3: work from Home did a lot to help women who
Speaker 3: were on the sidelines, were those with disabilities. I mean,
Speaker 3: we really have some great stuff going. We just got
Speaker 3: to keep pushing.
Speaker 4: Kludy, you were saying that the FED is not the
Speaker 4: end all be all, So then why are you so
Speaker 4: excited for today?
Speaker 5: What are you hoping to hear from the press conference?
Speaker 2: Oh?
Speaker 3: I love the FED, so I FED Day is always
Speaker 3: a fun day for me. So I feel like the
Speaker 3: soft landings in the bag for next year. Two percent inflation,
Speaker 3: unemployment day is below around four percent and that. But
Speaker 3: my biggest risk factor outside of politics in the economic
Speaker 3: space is the FED. And frankly, what I worry about
Speaker 3: is them confusing markets and like, I really not fully
Speaker 3: emotionally prepared for the Summary of Economic Projections this afternoon
Speaker 3: because I don't think it's going to markets clarity. They're
Speaker 3: all over the map on their cuts, like there's no
Speaker 3: way we're getting first border cuts from the FED. And
Speaker 3: I worried that they're going to create enough uncertainty that
Speaker 3: something breaks. We've been lucky so far, nothing's broken, and
Speaker 3: I could come back and put the soft landing in
Speaker 3: some danger.
Speaker 5: What would break?
Speaker 4: I mean, what we've seen is market's becoming more accommodative,
Speaker 4: A stabilization in a benchmark bond yields. Where is this
Speaker 4: potential for breaking coming from on the heels of FED communication?
Speaker 3: Right, So if I could predict a financial breakage, I
Speaker 3: could make a lot of money. Right, Like, these don't
Speaker 3: come in an expected way. I think Silicon Valley Bank
Speaker 3: was kind of there was a scary moment, right, the
Speaker 3: FED set up an environment with interest rate risk, and
Speaker 3: then you had a bank that had made incredibly bad decisions.
Speaker 3: So that kind of came out of nowhere in a
Speaker 3: big picture sense. And yet market we got it under control.
Speaker 3: The FED stepped in, regulators stepped in, So you know,
Speaker 3: I have a lot of faith. Again, this is a
Speaker 3: risk that I see, and it's a pretty low risk.
Speaker 3: But we've had a pretty good run of the FED
Speaker 3: like not things breaking in financial markets, and frankly, I'm
Speaker 3: a little surprised. I'm thankful, and I think we're on
Speaker 3: the right path. But they the FED needs to stop
Speaker 3: injecting uncertainty. They've got to get the message straight.
Speaker 4: Although it's unclear to create certainty of time that's deeply uncertain.
Speaker 4: This is sort of the conundrum for FED officials and
Speaker 4: for economists and even for people in the market. You
Speaker 4: are saying that next year. The soft landing seems to
Speaker 4: be in the bag. But the biggest risk factor is
Speaker 4: the FED. What is the bigger policy error that you
Speaker 4: see them committing. Would it be cutting too soon or
Speaker 4: cutting too late?
Speaker 3: I honestly don't think the FED matters much next year.
Speaker 3: This disinflation has not been about the FED. Jape is
Speaker 3: not landing this plane right, This is not about the FED.
Speaker 2: Now.
Speaker 3: One thing I would really like to see today is
Speaker 3: that j Palell articulate that they're going to go slowly
Speaker 3: and really get people off this first order call, like
Speaker 3: they're just not going to have enough data buy mar
Speaker 3: and they're going to be a little sea conservative and
Speaker 3: cutting because they don't want to have to raise again.
Speaker 3: They don't want to make it look like politics. Right,
Speaker 3: it's a collection year. So I just but there's been
Speaker 3: a lot of communication issues that you've got so many
Speaker 3: FOMC officials out. Frankly, I think they should limit their airtime. Sorry,
Speaker 3: but you know, I think there's where there's been some confusion.
Speaker 3: But when I listen to them, I'm like, they're going
Speaker 3: to wait. So, yeah, you get to listen to a lot,
Speaker 3: but I think they're going to get it together. They
Speaker 3: know what they're doing.
Speaker 1: Claudia out on LinkedIn today, you allude back to the
Speaker 1: Voker fantasy, the idea of Powell being like Voker, and
Speaker 1: you even take it back to the emotion that no
Speaker 1: one wants to be Arthur Burns. He had the Smike
Speaker 1: pipe smoking and what was a cloud of smoke telling
Speaker 1: us in the meeting, tell us what we want to
Speaker 1: avoid that Arthur Burns did decades ago.
Speaker 3: There were two things that Arthur Burns did that are
Speaker 3: at least seen as a mistake among monetary policy officials.
Speaker 3: One was, whenever unemployment started to drift up, he cut
Speaker 3: and then inflation came back even stronger. And there were
Speaker 3: a few episodes of this, and that meant when Bulker
Speaker 3: came in, there's real mass to cause of severe recession.
Speaker 3: J Powell has said on record that Bulker is his hero, right.
Speaker 3: And the second thing that Burns did that actually lines
Speaker 3: up with next year is Nixon really pushed on Burns
Speaker 3: to cut those rates. There is no way they want
Speaker 3: to do that this time.
Speaker 1: Let me channel from John Farrell this morning. Is Chair
Speaker 1: Yellen and Vice Chair Biden, are they pushing Powell to
Speaker 1: cut rates?
Speaker 3: No, this White House I mean, this is not the
Speaker 3: Nixon White House, right.
Speaker 6: They know better than that.
Speaker 3: I mean the former vice chair of the FED running
Speaker 3: any See, you've got the Chair of the FED running
Speaker 3: the treasury. There's a visual way, right, they know better.
Speaker 1: Claudia, congratulations on your impact this year. May a non
Speaker 1: recession trail you into two twenty four Doctor Somers and
Speaker 1: the SIME consulting in a absolute metric of original research
Speaker 1: to some rule front and center for so.
Speaker 2: Many in academic and market and economic.
Speaker 7: One of Wall Street's biggest balls.
Speaker 8: He's calling for the SMP to rise nearly thirteen percent
Speaker 8: next year to fifty two hundred. John Stolfis of Oppenheimer,
Speaker 8: writing this, we look for twenty twenty four to be
Speaker 8: a year of transition as markets navigate what we expect
Speaker 8: will be the Fed's pivot from a restrictive monetary policy
Speaker 8: setting to an easier stance. John Stelfer, some please to say, John,
Speaker 8: just right now, John, I actually think you call is
Speaker 8: original in the sense that I don't think it's too
Speaker 8: dependent on rate cuts next year in quite the same
Speaker 8: way as it is elsewhere. John, Can you just go
Speaker 8: through your framework the path to fifty two hundred on
Speaker 8: the SMP.
Speaker 6: Great to be on surveillance as always.
Speaker 2: John.
Speaker 9: You know the thing about this is how when we
Speaker 9: look at it, we think the traders right now are
Speaker 9: pushing this dream of four rate cuts next year. We
Speaker 9: think the economy is showing significant resilience in the face
Speaker 9: of what is at eleven hikes and three pauses thus far,
Speaker 9: or skips as the Fed prefers to call it. The
Speaker 9: FED has shown remarkable sensitivity as it practices its mandate
Speaker 9: to keep untoward levels of inflation in check. And so
Speaker 9: all in all, we think it's this looks good as
Speaker 9: it cuts likely to happen in the second half of
Speaker 9: the year and probably maintained mostly if it's going to happen,
Speaker 9: probably in the fourth quarter, and then only once or twice.
Speaker 2: John, there is a shift going on.
Speaker 1: I saw it from our Gina Martin Adams of Bloomberg Intelligence.
Speaker 2: It's obviously Stolefus.
Speaker 1: One on one, and also the great Urie and timor
Speaker 1: chart guy at Fidelity. There is a shift to earnings analysis.
Speaker 1: We're moving away from Fed naval gazing to OMG, look
Speaker 1: at revenues, OMG, look at earnings.
Speaker 2: We've seen this before. How does the market react we.
Speaker 9: Think that the market is actually well positioned to react
Speaker 9: positively to it. It's not only about traders, you know,
Speaker 9: it's intermediate, longer term investors and traders that create the environment.
Speaker 9: I mean, the markets are like music. It's math and emotion.
Speaker 9: It's fear, greed, and need. So some people invest for need,
Speaker 9: others invest for the short term the fear and greed aspect,
Speaker 9: and we think it creates I don't want to call
Speaker 9: it a cocktail because that sounds a little bit too volatile,
Speaker 9: but it creates an opportunity where if we focus on
Speaker 9: earnings in an environment where it's the end of free money,
Speaker 9: where bond issuers have to pay for the privilege of
Speaker 9: borrowing money and bond buyers get something in return. This
Speaker 9: just looks like a more normalized environment, and we like it.
Speaker 5: Does it make you nervous that everyone seems to be
Speaker 5: agreeing with you these day?
Speaker 6: I'm sure it does. That's the one thing.
Speaker 9: You know.
Speaker 6: We saw an awful lot of the bears last year.
Speaker 9: We're telling us about the pending recession and the massive
Speaker 9: unemployment that was coming and all this stuff that was negative.
Speaker 6: They took the negative pitch book sold.
Speaker 9: Last year and it's what we believe really caused the
Speaker 9: market to decline as it did last year on things
Speaker 9: that were never realized, and so the bears have pivoted.
Speaker 9: But when they pivot, you get that feeling if you're
Speaker 9: on a boat. All of a sudden, everybody's on your
Speaker 9: side of the boat. You start looking for a little ballast.
Speaker 9: And that might well be in terms of taking advantage
Speaker 9: of some of the diversification that fixed income offers, as
Speaker 9: well as other areas of the market that have the
Speaker 9: equity market that have yet to participate in this rally.
Speaker 4: So does that mean John, that you're broadening out to
Speaker 4: small caps some of the less loved areas away from
Speaker 4: just focusing on big tech.
Speaker 10: Yeah.
Speaker 9: You know, at LISA, we've been we've been working with
Speaker 9: better quality small caps on an alpha basis and in
Speaker 9: terms of on a beta basis, or using passive indexes,
Speaker 9: using the S and P six hundred ETFs versus the
Speaker 9: Russell two thousand for that purpose for quite a while.
Speaker 9: It's heard as in terms of overall performance, but it's
Speaker 9: given a stability. We can't help but notice on days
Speaker 9: when there's volatility in the market that's caused by nervous
Speaker 9: money pulling out of the large caps. Usually these days
Speaker 9: they're going into the S and P four hundred mid caps,
Speaker 9: or the S and P six hundred, or when all
Speaker 9: when the tide comes in at all ships are floating,
Speaker 9: they roar into the Russell two thousand.
Speaker 1: John, what's a comfortable price to earnings ratio? Right now
Speaker 1: we're twenty one SPX. Obviously there's been multiple expansion, But
Speaker 1: what's a historically comfortable pe for our viewers and listeners?
Speaker 9: I think tomboyend it comes to historically. You got to
Speaker 9: think the generations. I can't help but think Leon Cooperman's
Speaker 9: ratio is probably about twelve. It is the most twelve times.
Speaker 9: For most boomers it's around sixteen. And as you get younger,
Speaker 9: the generations keep pushing that multiple up. Some of that
Speaker 9: is probably because they wreck some of them. It's just
Speaker 9: a more aggressive positioning, okay. But it also has to
Speaker 9: do with the need that I think people are beginning
Speaker 9: to realize that social security will not be in the
Speaker 9: same instead that it was for many decades for generations
Speaker 9: to come and people need to invest. And it's just
Speaker 9: like real estate in New York, you know, back in
Speaker 9: seventy eight, you could buy a co op really cheap,
Speaker 9: even today with all the problems the city has.
Speaker 6: Gosh, if you look at the prices on co ops, at.
Speaker 9: Least the ask is just you pale looking at it
Speaker 9: when you give it a historic comparison. We think equities
Speaker 9: move higher here, so probably twenty one to twenty two.
Speaker 6: And I'm not a gunslinger.
Speaker 9: It's just that the demand for equities when private equity
Speaker 9: has taken so many stocks out of the market that
Speaker 9: it creates demand that is chasing supply.
Speaker 7: John Iyes have a good bank co op phase another day.
Speaker 7: Love that.
Speaker 8: John steff Is Offenheimer Asset Management. John, have a wonderful Christmas.
Speaker 8: It's going to catch up with the set.
Speaker 1: Michael Schumacher, Global ahead of macro Strategy at Wells Fargo,
Speaker 1: joins us right now. Michael, I love your calculus illusion.
Speaker 1: We're on a down escalator or a down elevator. What
Speaker 1: does twenty twenty four look like? Am I on the
Speaker 1: escalator or AM on the lower yield elevator?
Speaker 11: Think you're on the escalator. So it's going to be
Speaker 11: a slow move down in yields time. From art perspective,
Speaker 11: I thought it was really interesting to hear about the
Speaker 11: move since the last FED, meaning it's been phenomenal in
Speaker 11: terms of equities, bonds, what have you. But we do
Speaker 11: think the market's a bit overdone. It's probably overdone as
Speaker 11: yields went up. We think it's overdone as yields have
Speaker 11: gone down. We like the direction, we think it makes sense,
Speaker 11: but the ghost slow path here is our preferred route
Speaker 11: right now.
Speaker 1: How do you follow Jay Brison's economics into your study?
Speaker 1: Is it a study of global weakness as the IMF
Speaker 1: structures out to twenty twenty eight or can there be
Speaker 1: the surprise resiliency we saw at Q three US.
Speaker 11: You can always get a resiliency. There's a potential for
Speaker 11: your surprise. China is probably a decent example. Expectations are solo.
Speaker 11: Wouldn't take much for China to surprise to the upside.
Speaker 11: But I agree with Jay and his team. You think
Speaker 11: about the global backdrop economically, frankly, it's not that great,
Speaker 11: whether it's especially Europe. Canada looks like it's either in
Speaker 11: recession or very likely to go into one pretty soon.
Speaker 11: US probably lagging behind a bit so weakening but not
Speaker 11: as fast.
Speaker 10: But it's not a pretty picture.
Speaker 11: And yet that's really what you want from a power standpoint,
Speaker 11: you to take the wind out of the sales of inflation.
Speaker 4: You said that the move is overdone, and I'm curious
Speaker 4: which move in particular. Is it the fact that we're
Speaker 4: going to get so many rate cuts next year, is
Speaker 4: it the fact that we're going to have a strong
Speaker 4: economy that persists despite where we are in this economic cycle,
Speaker 4: or is it that this inflation can continue at the
Speaker 4: pace that we've seen.
Speaker 11: Now, what I was talking about, Lisa was the yield
Speaker 11: move up and then down. We think the volatility and
Speaker 11: bonds has been extraordinary, too much, so thinking about other
Speaker 11: things that are probably a bit overcooked as well. Think
Speaker 11: about market expectations for easing by pick your favorite central bank,
Speaker 11: the FED, ecb Bank of Canada, whatever it might be.
Speaker 11: They seem pretty aggressive to us right now for next year.
Speaker 11: That's not to say the central banks won't get there,
Speaker 11: but the market's ahead of the policy makers. So, for instance,
Speaker 11: the FED price to ease forty five basis points something
Speaker 11: like that by June of next year. It might actually
Speaker 11: do it, but the market, we think, is running too
Speaker 11: far ahead of j. Powle on team right now. So
Speaker 11: I think that also is a bit ahead of the
Speaker 11: game and overdone.
Speaker 4: So do you think that essentially the equity bet that
Speaker 4: the economy will remain strong is the correct one, but
Speaker 4: the idea that disinflation will come down enough to edify
Speaker 4: rate cut bets is not going to really follow through?
Speaker 4: Is that your call.
Speaker 11: It seems to me, is really an equity layman that
Speaker 11: what's going on now in risk markets is risk markets
Speaker 11: are reacting to what they think central bankers will do.
Speaker 11: So as it becomes less likely central bankers will hike
Speaker 11: or let's assume that's off the table, extra pan, more
Speaker 11: likely they're going to cut pretty soon. Risk markets like that.
Speaker 11: I think it's been about that simple. Chris Harvey can
Speaker 11: give you a chapter and verse, but to me, that
Speaker 11: seems to be the picture right now.
Speaker 1: Mike sure Maker, part of this is just folding in
Speaker 1: what the dollar would do. John mentioned Euro earlier, Wells
Speaker 1: Fargus did some great work on Euro, and all of
Speaker 1: this comes back to just the assumption weaker dollar. I
Speaker 1: don't want to make theater out of it, but just
Speaker 1: an ebbing dollar, if you will, is that your call.
Speaker 11: Dollar probably weekends somewhat, Tom, But I think there's a
Speaker 11: consensus for you out there and we disagree with it
Speaker 11: that the dollar files out of bed. And the basic
Speaker 11: thesis behind that argument is, Hey, the Fed's hiked a lot,
Speaker 11: the Fed's got the highest policy rate, therefore the Federal
Speaker 11: cut the most dollar weekends. Well, okay, but it's really
Speaker 11: all driven by the idea of the Fed goes first.
Speaker 11: Why should the Fed go first? Why shouldn't the ECB
Speaker 11: lead the way, or maybe the Bank of Canada. So
Speaker 11: we think that view the dollar really I wouldn't say collapses,
Speaker 11: but takes a big help.
Speaker 10: We think it's off base.
Speaker 11: A bit of weakness, yes, but massive weakness, no, we
Speaker 11: don't think that's on tap.
Speaker 8: Let's play that game. Just priced in a lot of
Speaker 8: rate cuts over the Bank of England. Growth not great, Mike,
Speaker 8: who do you think goes first?
Speaker 11: So let's say the candidate's John are, FED, Bank of Canada, ECB, BOE.
Speaker 11: I'll put the ECB in first place, Bank of Canada second,
Speaker 11: boees kind of a strange one to handicap.
Speaker 10: Fed's probably or BOE fourth?
Speaker 7: Is that growth call or a disinflation coll.
Speaker 10: Now it's the inflation comfort level call. I guess I
Speaker 10: would call it.
Speaker 11: So, how how certain are you as a policymaker, whether
Speaker 11: it's Andrew Bailey, J Powell, whomever, that inflation is not
Speaker 11: just down, but it's actually out.
Speaker 10: That to me is what's going to dictate the path.
Speaker 8: Hey, Mikey, one of the best. Thank you sir, and
Speaker 8: enjoy the holiday. It's happy Christmas. Always great to catch
Speaker 8: up my Schumacher there of Wells Falco.
Speaker 1: Our stress is to get the right person to talk to.
Speaker 1: Christopher mcgrety is with KBW. They are the institutional investor.
Speaker 2: Mid Camp bank.
Speaker 1: Do you look at JP Morgan at all or do
Speaker 1: you just ignore Fortresstein?
Speaker 12: Now you have to look at it. You have to
Speaker 12: look at it. There's another whatever for the industry.
Speaker 1: So what it's like the midcalf So I want to
Speaker 1: go to Tacoma, Washington, one of the banks you follow.
Speaker 2: I don't even know where Dacoma is on.
Speaker 1: The map, Tacoma nine eighty four or three. Columbia Banking system,
Speaker 1: Where are they going to be in a year?
Speaker 2: Where are the mid caps like Columbia Banking going to
Speaker 2: be five years?
Speaker 1: Right?
Speaker 12: I think consolidation is part of the question. Tom. The
Speaker 12: Colombia is a bank that's doubled in size over the
Speaker 12: past two years, and so we think scale is really
Speaker 12: important in this In this industry, we've done a lot
Speaker 12: of work and there's a really strong correlation between the
Speaker 12: size of your bank and the degree of profitability. And importantly,
Speaker 12: the market rewards scale. They also punish scale, and regulation
Speaker 12: is one of the things that we have to deal
Speaker 12: with the out of the COVID.
Speaker 8: Have you been surprised by how little consolidation we've seen
Speaker 8: between the stress of spring and now?
Speaker 10: No.
Speaker 12: I think it's an evolution, right. The spring was forced consolidation,
Speaker 12: it was failures. We saw three or four notable failures.
Speaker 12: But as the industry picks up the pieces from from
Speaker 12: March and that is that is happening, we will see consolidation.
Speaker 12: The industry still has four thousand banks, uh, that's the
Speaker 12: only developed country in the world that has this level
Speaker 12: of fragmentation. And I think one of the one of
Speaker 12: the consequences of failures and stress is that we need
Speaker 12: to pick up the pieces and and move forward.
Speaker 5: What's the right number of banks.
Speaker 12: A fewer, But I think what's important about the number
Speaker 12: of banks is we need more competition for the top
Speaker 12: three or four. Right, the biggest banks are the most
Speaker 12: regulated in the world, but there's really a general hesitation
Speaker 12: by the regulators to let the bigger banks get bigger.
Speaker 12: So the regionals the one hundred billions of two hundred billions,
Speaker 12: they need to be bigger to compete more effectively with
Speaker 12: the JP Morgans of the world, the Wells Fargo's of
Speaker 12: the world. We think once the rules are written on regulation,
Speaker 12: and there's a lot of pushback on regulation, that is
Speaker 12: an opportunity over the next several years.
Speaker 5: Where is the growth going to come from.
Speaker 4: Is it going to come from deposits, Is it going
Speaker 4: to become from consumer lending. Is it going to come
Speaker 4: from some of the areas where they suddenly have some
Speaker 4: real competition.
Speaker 5: From private credit and private equity firms.
Speaker 12: I think your term there isn't going to be a
Speaker 12: lot of growth. Just to be very candid, I think
Speaker 12: the banks are deleveraging. If you go back to the
Speaker 12: financial crisis, they had credit first and deleveraging second. This cycle,
Speaker 12: we are deleveraging. We are shrinking balance sheets, we are
Speaker 12: raising capital and liquid and I think, you know, going forward,
Speaker 12: that's going to be a challenge for the next one
Speaker 12: to two years.
Speaker 1: David Conrad, your shop covers the larger regionals like PNC
Speaker 1: Financial and all they do for the Pittsburgh Pirates great.
Speaker 1: When do they finally merge to compete with the major banks?
Speaker 1: I mean it's ridiculous. We used to have five, six,
Speaker 1: seven major banks. Now we've got four with an asterisk
Speaker 1: that's called City Group. Okay, but we got to get
Speaker 1: more major banks. When do the pncs get to play?
Speaker 12: I think we need to know what the rules are
Speaker 12: going to be. Basel three is a big, a big development.
Speaker 12: That's that's being debated right now. I think a near
Speaker 12: term with the credit uncertainty in the economy, I think
Speaker 12: pencils are down for M and A, but I think
Speaker 12: over time there will be there will be more consolidation.
Speaker 8: Think about what you just said, we got to get
Speaker 8: more major banks. Does anyone in Washington agree with something?
Speaker 6: No?
Speaker 12: No, not right now?
Speaker 2: No no.
Speaker 7: So why would that be the direction to travel any
Speaker 7: time soon?
Speaker 2: Because every other nation's done this, you mentioned it.
Speaker 7: I'm with you. You totally goes this is Wendy Schiller. Okay,
Speaker 7: So we have.
Speaker 8: To figure out why we say in care in this
Speaker 8: so lonely developed nation with four thousand banks.
Speaker 7: We're here because someone wants us to be here, right.
Speaker 12: But regulation changes.
Speaker 2: Right.
Speaker 12: So for two thousand and eight global financial crisis, the
Speaker 12: fifty billion systemic level was put a line in the
Speaker 12: sand that was walked back in twenty sixteen after the
Speaker 12: Trump administration. So without getting political, there is there is
Speaker 12: an element of political consideration that you have to think about.
Speaker 1: I mean, I just remember John being in London as
Speaker 1: a paperback writer. Was just released by the Beatles. I'm
Speaker 1: walking around there's no banks. I mean I remember.
Speaker 2: Looking around compared to America. There's a bank in America
Speaker 2: on every corner. And that's not true.
Speaker 8: You bring it up a different conversation. The footprint on
Speaker 8: the high street, on main Street in the UK has
Speaker 8: changed massively. We've seen a lot of closures. I don't
Speaker 8: see that in quite the same way here in the States.
Speaker 12: Why is that the bank the branch you are, you're
Speaker 12: seeing smaller and fewer. But certainly there's a lot of regulation.
Speaker 12: You have to also pay attention to fair lending, you know,
Speaker 12: making sure a bank has exposure in certain pockets of
Speaker 12: the economy in different markets.
Speaker 4: What's the advantage to having strong regional banks. I mean,
Speaker 4: with all due respect, I mean there's this question of
Speaker 4: whether banks have been saved again and again, particularly on
Speaker 4: the smaller end, who didn't hedge appropriately when it came
Speaker 4: to some of their interest rate exposure, who invested in
Speaker 4: a lot of commercial real estate that was faulty, and
Speaker 4: a lot of those activities in terms of consumer loans
Speaker 4: are moving to other investment firms. What's the argument for
Speaker 4: beefing up this industry in a more material way?
Speaker 12: The smaller banks that are the lifeblood of the economy.
Speaker 12: JP Morgan, Great Company, City, grow Wells Fargo, big powerful institutions,
Speaker 12: but at the local level, you do need the local
Speaker 12: small bank to give that customer service. Now you're right,
Speaker 12: a lot a lot of mistakes were made with interstratement,
Speaker 12: interst rate risk, and interstrate management, and those shareholders and
Speaker 12: those companies certainly paid paid the ultimate price. But I
Speaker 12: think for a healthy and thriving economy, you do need
Speaker 12: more scale it and size across the gamut.
Speaker 1: If you took the three of us, we haven't been
Speaker 1: in a branch since I think, you know, the Red
Speaker 1: Sox were.
Speaker 2: In first place.
Speaker 5: Going to say the same, we do.
Speaker 1: Everything Zell this zell that all the rest of it
Speaker 1: in our banking, How does Colombia Savings Bank to Coma
Speaker 1: Washington compete with the digital investment of the major banks.
Speaker 2: I just don't understand that, right.
Speaker 12: The smaller banks are certainly one A. The bigger banks
Speaker 12: are going to move first. The small banks are going
Speaker 12: to adapt second. But certainly they have they have built
Speaker 12: out capabilities these smaller banks to compete effectively. Maybe not
Speaker 12: to the sophistication of an international international.
Speaker 2: Example of that, what's a capability they have?
Speaker 1: And Tacoma, Washington where they don't want Brian moynan to
Speaker 1: come in from Bank of America.
Speaker 12: So I would say, turn around in online speed for
Speaker 12: deposit captures. Right, we can go in deposit money without
Speaker 12: going into a branch. I haven't been to a branch
Speaker 12: either in years, and.
Speaker 2: Certainly show goes in every day. Be careful what you
Speaker 2: say personally, KBW.
Speaker 12: We do, we do, But I mean the capabilities for
Speaker 12: you and I as a consumer. Certainly the smaller banks
Speaker 12: can accommodate that. Maybe not, they're not going to have
Speaker 12: the budget initially, but.
Speaker 2: They will follow.
Speaker 8: This isn't really hot runny off the lives for the regional.
Speaker 8: We're still down about twenty five percent from the highs
Speaker 8: of the year. Any reason to believe we reclaim those
Speaker 8: highs next year?
Speaker 12: Right, We're still market weight to the US banks we moved.
Speaker 12: This is the one year anniversary of moving to market weight,
Speaker 12: and what we've seen over the past twelve months is
Speaker 12: a thirty point divergence between the S and P and
Speaker 12: the banks. And so the first part of the year,
Speaker 12: the spring was really about net interst margin, netatures, income,
Speaker 12: deposit flows, and systemic risk. That leg of the relay
Speaker 12: race has largely played out and that's stabilized. What we're
Speaker 12: feeling now is what is credit going to look like
Speaker 12: as interest rates have risen. How much of a credit
Speaker 12: normalization process are we going to go through and how
Speaker 12: much will this weigh on earnings estimates going forward? The
Speaker 12: key for us is the direction of earnings dictate the direction.
Speaker 7: Of the stocks, not just the direction of the tenure yield.
Speaker 12: The last few months has definitely been a trade on
Speaker 12: the tenure.
Speaker 8: It's been amazing, Lisa, all of it pretty much off
Speaker 8: the back of this move in a bond.
Speaker 4: Market, and completely counterintuitive because usually higher rates were good
Speaker 4: for banks and now lower rates going down and pretty
Speaker 4: racily are better for banks. This is default risk concern
Speaker 4: about withdrawals of consumer deposits.
Speaker 5: This is concerned about breaking the system.
Speaker 4: If that's taken off the table, people can get perhaps
Speaker 4: a bit more optimistic.
Speaker 8: In twenty seconds. Any reason for that to change anytime soon?
Speaker 8: The correlction between bones and rachel os.
Speaker 12: I think the question of why rates are coming down?
Speaker 12: Our rates coming down because inflation is moderating, or is
Speaker 12: it because growth is slow? Your prior guests talked about
Speaker 12: that if we get a softish landing, which KBW is
Speaker 12: in the camp of softish, I think the banks can work.
Speaker 12: But I think if it's because we see something break
Speaker 12: in the system, and if the I think the future's
Speaker 12: market one hundred basis points a little ahead of itself. Yeah,
Speaker 12: but if credit credit's a.
Speaker 7: Big wildcer, maybe the thing's breaking out of this.
Speaker 2: Yeah.
Speaker 7: Chris is going to say, yeah.
Speaker 1: We're going to digress here for a little minute, because
Speaker 1: some of my heritage goes way back to Thanksgiving.
Speaker 2: The world stopped.
Speaker 1: Yep, and a m with the core can that stand
Speaker 1: freezing would play a small team from Austin and lose.
Speaker 1: That was always the case in the world is moved
Speaker 1: on to the fight in Texas Aggies now one of
Speaker 1: the great universities of America, and before we talked the
Speaker 1: airline business here on Southwest Airlines and their CEO, Bob Jordan.
Speaker 1: We're going to talk to him about how College station
Speaker 1: has changed from.
Speaker 2: When my father went there seventy years ago. Tell us
Speaker 2: about the new college station.
Speaker 13: It's changed considerably. And I'll have you know we did
Speaker 13: not lose every Thanksgiving that was uncalled for. But no,
Speaker 13: it's really changed A and n When I was there
Speaker 13: was probably thirty thousand students. We are now the largest
Speaker 13: university in the country twenty five thousand students in engineering
Speaker 13: as an example.
Speaker 2: No chiography, I mean they reinvented it.
Speaker 13: We don't have twenty five thousand, but we do have
Speaker 13: twenty five thousand engineering, but no fabulous place. And we
Speaker 13: just named a new president, General Mark Welsh, yesterday and
Speaker 13: he will do a fabulous job.
Speaker 1: Honitive with us, just meant today fight in Texas Aggie
Speaker 1: as well, usually doing equities with us, but with Bob
Speaker 1: Jordan of Southwest Airlines, the airline business, I don't get
Speaker 1: I was looking at what I was paying for a
Speaker 1: year ago, eighteen months ago.
Speaker 2: How do you manage the new capacity and the fair declines.
Speaker 13: We're all celebrating, you know, the Southwest is born out
Speaker 13: of low cost that produced low fairs. We Southwest Airlines
Speaker 13: created the low fair industry and really gave Americans the
Speaker 13: freedom to fly. And fares are up, but if you
Speaker 13: go back to pre pandemic, fairs are only up about
Speaker 13: eight percent from twenty nineteen. So while they're up, they
Speaker 13: have absolutely not risen with inflation. And our goal as
Speaker 13: always is to keep costs low and keep fares low.
Speaker 14: So Bob, talk to us about kind of we know
Speaker 14: the holiday We're hearing from a lot of from you,
Speaker 14: your earnings you reported, and from some of your peers.
Speaker 14: Holiday travels strong. How about post holiday travel? Now investors
Speaker 14: are trying to ask about post holiday travel. What are
Speaker 14: you see in terms of demand AF fairs, that type
Speaker 14: of thing.
Speaker 13: Yeah, the holiday bookings are really strong, especially close in
Speaker 13: November December. In fact, we've got an eight k out
Speaker 13: this morning that is revising our guidance and revenue to
Speaker 13: the better end of the range. I'm very proud of that.
Speaker 13: The travel demand is different. It's really driven by the
Speaker 13: fact that for the most part, business is strong. Leisure
Speaker 13: is strong, but business travel is not restored to twenty
Speaker 13: nineteen pre pandemic, and so we're all adapting our schedules
Speaker 13: to deal with that. In the first quarter, for example,
Speaker 13: we took out some capacity and it's really about drawing
Speaker 13: down Tuesdays and Wednesdays because those are the days you're
Speaker 13: just missing business travel that was there. But I have
Speaker 13: confidence that business will recover. We're seeing sequential improvements from
Speaker 13: order to quarter to quarter, but no bookings are strong,
Speaker 13: both on the leisure and the business side.
Speaker 2: The Texas boom just met and jump in here.
Speaker 15: Well, there's so much debate about whether or not we're
Speaker 15: headed for an impending recession, but you look at the
Speaker 15: consumer spending data is still very resilient. From your point
Speaker 15: of view as the CEO of one of the major airlines,
Speaker 15: where do you see things headed and are we headed
Speaker 15: toward a recession or not?
Speaker 13: It is so hard to predict, and there's been a
Speaker 13: call for a soft landing, a o landing, a hard
Speaker 13: landing for nearly a year now, and as we look forward,
Speaker 13: bookings are strong and again on the on the business
Speaker 13: and the leisure side, again, travel is different, so we've
Speaker 13: actually modified our twenty twenty four capacity. We've taken a
Speaker 13: little capacity out, will grow sixty eight percent next year,
Speaker 13: and it's really to reflect the network to the new
Speaker 13: demand trends. This morning we also announced that our longer
Speaker 13: term growth plans twenty twenty five and forward, we moderated
Speaker 13: those from signed mid single digit growth each year to
Speaker 13: low to mid single digit. That's really a reflection of that.
Speaker 13: And second, it gives us a chance with a little
Speaker 13: bit lower capacity to manage our capex and really make
Speaker 13: a push to hit shareholder returns. Our goals are to
Speaker 13: have returns that exceed our weight at average cost of capital,
Speaker 13: and we will not stop until we get there well above.
Speaker 14: In fact, Bob, talk to us about your fleet. Boeing
Speaker 14: seven three seven backbone of your fleet. How's Boeing doing
Speaker 14: and delivering what they are contracted to deliver to you guys.
Speaker 13: You know, Boeing's a fantastic partner, always have been. We've
Speaker 13: been with Boeing since the very beginning in nineteen seventy one,
Speaker 13: and they dealt with supply chain issues like we all have.
Speaker 13: They are in my mind, in really good shape. We
Speaker 13: have a new Boeing order that we put in place recently.
Speaker 13: It flows out aircraft are evenly, allows for very even
Speaker 13: capacity growth about ninety aircraft a year, very cost effective
Speaker 13: aircraft purchases. But no Boeing has been a very good
Speaker 13: partner and it has really gotten their delivery house and shape.
Speaker 13: In my mind. Now we need the Max seven, which
Speaker 13: is not certified yet Boeing. I think their latest guidance
Speaker 13: is January of next year. It's a little smaller than
Speaker 13: the Max eight, and we have some routes that are
Speaker 13: you know, we've got the larger aircraft on really could
Speaker 13: use the Max seven. But I've got a lot of
Speaker 13: confidence that Bowey's going to get that done and get
Speaker 13: that done soon.
Speaker 1: We get two more questions, and I think one of
Speaker 1: them is your best practice to say no to all
Speaker 1: the people around you are going we've got a flight
Speaker 1: to London or you know the romance of Delta United
Speaker 1: all the bigger airlines as well. And you have to
Speaker 1: have a discipline among people that desire for Southwest to
Speaker 1: do something different. How do you respond to those endless requests?
Speaker 13: Southwest history is to manage ourselves and manage ourselves well,
Speaker 13: we've got a very strong balance sheet. We have a
Speaker 13: net cash cash cash above debt. Her Boys said he
Speaker 13: he planned for ten of the next two recessions. But
Speaker 13: we manage ourselves well. We have a lot of domestic opportunities.
Speaker 13: We have the best domestic.
Speaker 1: Give me a city, Give me a city you're not
Speaker 1: covering now where you say we.
Speaker 2: Got to go there.
Speaker 13: I'm not going to give you a city. I'm just
Speaker 13: telling you some news because I'll hear from them tomorrow.
Speaker 13: But we always have I'll tell you we always have
Speaker 13: a lifts, a list of fifty or so in front
Speaker 13: of us. During the pandemic, I'm sure you know this,
Speaker 13: we added eighteen new cities. We grew the network during
Speaker 13: the pandemic. We did not shrink the network, and those
Speaker 13: cities are performing. We also grew our Hawaii franchise, and
Speaker 13: we will have continued steady growth that includes new city openings.
Speaker 13: But our focus for twenty twenty four really is to
Speaker 13: optimize the network for the new travel patterns because it
Speaker 13: helps us get to returns faster, returns that exceed and
Speaker 13: well exceed our way at average cost to cap.
Speaker 1: My focus is someday I will get to college Station
Speaker 1: Texas to go to the Hullabaloo Diner.
Speaker 2: I mean, that's what you gotta.
Speaker 1: I mean, it's like it's like it's a New York
Speaker 1: diner folks that a million years ago, before Southwest existed,
Speaker 1: was transported by you know, I don't know, Storks or whatever.
Speaker 2: Have you been there a college even I have?
Speaker 13: But I've got to tell you know where you really
Speaker 13: need to go is the Dixie Chicken. I agree, I mean, yeah, Jess,
Speaker 13: nice cold beer, best burger ever.
Speaker 15: It's the best burger you can have, Fries, chicken wings,
Speaker 15: all that good stuff, but the beer, of course, Shiner Bock.
Speaker 1: Fondest hope in Michael Barr's not here now, Arch Detroit
Speaker 1: Lions fan. But my fondest hope is is that you
Speaker 1: get Texas A and M University of Texas football back
Speaker 1: Thanksgiving morning.
Speaker 13: We played next November thirtieth. It's a Saturday because it's
Speaker 13: not it's not back to Thanksgiving, but we'll work to
Speaker 13: get it there.
Speaker 10: Am I going to the.
Speaker 2: Fort making Pleasant?
Speaker 1: Just metten in charge of our daykiller Bob Jordan's Southwest Airline.
Speaker 2: He is from College Station.
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Speaker 2: Thanks for listening. I'm Tom Keen, and this is Bloomberg