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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and 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 Minol and the Bloomberg Business App. And we're
Speaker 1: not going to turn this into a history lesson, but
Speaker 1: to give you some perspective. And I thought the Washington
Speaker 1: Post captured brilliantly this morning with the word rebellion. There
Speaker 1: are different kinds of Southerners. Knut Gingrich with Sean Hannity
Speaker 1: last night was heated and on fire. The former speaker
Speaker 1: with the revolution of nineteen ninety four, and now we
Speaker 1: have the immense honor speaking with french Hill. He's been
Speaker 1: a good friend of the program and far more important, folks,
Speaker 1: french Hill is linked to American finance through his banking
Speaker 1: and little Rock Frenchhill, how do you link this moment
Speaker 1: to confidence in our banking system?
Speaker 2: Well, Tom, it's good to be with you, and I
Speaker 2: don't like the dysfunction in the House. Of course, I
Speaker 2: was very opposed to what happened yesterday because if we
Speaker 2: want to continue to build confidence in the US and
Speaker 2: the US and global capital markets, we've got to show
Speaker 2: leadership on the fiscal side of the House. And right
Speaker 2: here in the midst of a appropriations fight and a
Speaker 2: fight over federal funding in less than now forty days
Speaker 2: to a government shut down, to be shut down in
Speaker 2: the House without a speaker for the next week is
Speaker 2: not contributing to that vote of confidence. So I think
Speaker 2: they are linked, and I would I really hate to
Speaker 2: say that, but this rebellion has come at a very
Speaker 2: poor time.
Speaker 1: The rebellion has a tinge of geography. We had votes
Speaker 1: from Montana and the rest, and John, you know, I'm sorry.
Speaker 1: I look at this as a political context of the nation.
Speaker 1: It's not just about what we're doing at surveillance or
Speaker 1: the cable TV theater that we're seeing in Washington.
Speaker 3: It's a real fitting that a Republican party shut it
Speaker 3: south in the foot Accompressman, the question I'd have to
Speaker 3: ask of you this morning is how can the American
Speaker 3: public have any confidence in your party's ability to govern?
Speaker 4: Well?
Speaker 2: I think under Kevin McCarthy in the past nine months
Speaker 2: we demonstrated that quite successfully.
Speaker 4: And that's why I'm so disappointed.
Speaker 2: In eight people, which represent about four percent of Republicans
Speaker 2: in Congress. Let me repeat that, about four percent of
Speaker 2: Republicans in Congress. They voted with all the Democrats yesterday
Speaker 2: to take down Kevin McCarthy's speakership. But under his speakership
Speaker 2: we passed in all the above energy strategy to make
Speaker 2: energy America energy independent once again. We passed border security
Speaker 2: that both reforms the immigration system that's failed and do
Speaker 2: border security. And it was Kevin McCarthy, after waiting ninety
Speaker 2: days for President Biden to provide any kind of leadership,
Speaker 2: that crafted a historic debt sealing deal which resulted in
Speaker 2: two trillion dollars of spending reductions and a one percent
Speaker 2: cap on discretionary spending. And then just last week pro
Speaker 2: offered a good stop gap spending measure so that we
Speaker 2: could finish our appropriations work, which also included a debt commission,
Speaker 2: which I think is so critically important if we want
Speaker 2: to get a handle on what really drives our deficit,
Speaker 2: which are our mandatory spending.
Speaker 5: Program Congressman, as yields do continue to rise, and I
Speaker 5: do know that every day you do come in and
Speaker 5: you look at that ten year yield and watch it
Speaker 5: climb in tandem with the interest payments of the US
Speaker 5: government Goleman's access estimating that yields climbing where they are
Speaker 5: at about one hundred billion dollars to the deficit come
Speaker 5: twenty twenty five versus expectations just in July alone. Do
Speaker 5: you think right now that other members of your party
Speaker 5: realize that the longer this dysfunction goes on, the more
Speaker 5: they contribute to that deficit, Lisa, such.
Speaker 2: An important question, but I want to really turn it
Speaker 2: around and say yes, I think every day in the
Speaker 2: last few weeks We've talked about the impact on fiscal
Speaker 2: finance and rising interest rates with our House members, but
Speaker 2: this is a fundamental issue that goes back to both
Speaker 2: pre pandemic and certainly during the pandemic, when the Democratic
Speaker 2: House Budget Committee chairman at the time said, there's no
Speaker 2: limit to what America can borrow from the world and
Speaker 2: spend it home. Deficits don't matter, and that went on
Speaker 2: steroids during the pandemic obstensively to help offset the output
Speaker 2: loss during the pandemic. But we did five or six
Speaker 2: times with that help point output loss was and we
Speaker 2: didn't take our foot off the accelerator and President Biden's
Speaker 2: compound of that. So it's a bipartisan second to do this.
Speaker 5: But Congressman, I mean to be fair, the deficit did
Speaker 5: rise by about eight trillion dollars during Trump's time in office,
Speaker 5: and it actually accelerated during that period, and a lot
Speaker 5: of the aid was accelerated during that point. So isn't
Speaker 5: this both parties And the fact that there's complete dysfunction
Speaker 5: now just exacerbates the inability to really address any of
Speaker 5: these issues, which is a bar partisan issue.
Speaker 2: Well, I just said that. I said during the pandemic.
Speaker 2: Well that's the Trump administration. Absolutely. We had spending out
Speaker 2: of control there with an eye towards trying to offset
Speaker 2: the output losses during the pandemic. The globe did that,
Speaker 2: but we over shot plus two. Lax monetary policy for
Speaker 2: too long, We've lost our way. I want to go
Speaker 2: back to when both parties said that zero deficits were
Speaker 2: the objective, not two trillion dollars, which is Joe Biden
Speaker 2: is projecting. So sure, both parties bear full responsibility for this,
Speaker 2: but what I've seen in my forty years of being
Speaker 2: in private business and in and out of government, is
Speaker 2: there is no consensus that large deficits are bad in
Speaker 2: the Democratic Party and some in the Republican Party. And
Speaker 2: that's what's got a change.
Speaker 1: I would suggest, Congressman Hill, that you and the former
Speaker 1: Speaker Gingrit are sort of on the same page. Well,
Speaker 1: this is embarrassing, let's fix it. The way to fix
Speaker 1: it is an anointed speaker of the House. How long
Speaker 1: is this going to take?
Speaker 4: Well, I hope Tom.
Speaker 2: I would have hoped that we could have started that
Speaker 2: process before we left this week, but we didn't, and
Speaker 2: so we're going to meet either Monday night or Tuesday
Speaker 2: morning early and start the process of selecting a new speaker,
Speaker 2: and I want to have that concluded next week. It's
Speaker 2: very important that we get on with our work in
Speaker 2: this midst of this appropriations fight that we have on
Speaker 2: our hands, with the government shut down looking us in
Speaker 2: the eye for November seventeen.
Speaker 3: Congressman, this is a difficult question, might be somewhat emotional
Speaker 3: for you as your party left you behind. Do you
Speaker 3: get the feeling that this is not the Republican Party
Speaker 3: that you joined and it's moved away from you.
Speaker 2: I think the Republican principles of balanced budgets, a strong defense,
Speaker 2: international leadership, the largest open market in the world that
Speaker 2: attracts people all over the world, these are core principles.
Speaker 2: Loyalty to the Bill of Rights in the Constitution, these
Speaker 2: are still fundamental tenets in the Republican Party. But I
Speaker 2: think we've lost our way tactically. We're throwing overboard a
Speaker 2: successful speaker that shares those views, absolutely shares those views,
Speaker 2: and was guiding us through the stormy waters of a
Speaker 2: dysfunctional presidency led by Joe Biden in a Democratic control Senate.
Speaker 6: Not easy to.
Speaker 2: Do with no plan. Those eight people who voted to
Speaker 2: throw Kevin McCarthy out yesterday incorrectly, in my view, don't
Speaker 2: have a plan except they're complaining about the fiscal conditions
Speaker 2: of the country. Well, that's shared by all Republicans. So tactically,
Speaker 2: I think they've failed. Strategically, I think the individual principles
Speaker 2: and governance that's guided the Republican Party are still intact.
Speaker 2: We've just got to move forward and regroup and find
Speaker 2: a leader that we can get behind.
Speaker 3: It's certainly shared by the Republicans, the majority of Republicans
Speaker 3: in Congress. The congressman is consistent with the views and
Speaker 3: the beliefs of the dominant leader in the presidential race
Speaker 3: for your party going into next year. I think overwhelming
Speaker 3: me the ads to that is no, isn't it?
Speaker 4: Well?
Speaker 2: I think President Trump believes certainly in a lot of
Speaker 2: those principles, and I've seen him do good work when
Speaker 2: he was president. But we need him to help rebuild
Speaker 2: this and not run counter to it. We need to
Speaker 2: have the Republican Party on the same page when it
Speaker 2: regards our role in the world and our role at
Speaker 2: home on how to do that. And you know, President
Speaker 2: Trump had challenges on the spending side too, and yet
Speaker 2: he was good on some other things. So we've got
Speaker 2: to get together and focus on the House in the
Speaker 2: next few days and get a House leader that Republicans
Speaker 2: can back, so that we're back in this game of
Speaker 2: countering the Biden's failed agenda on the border internationally and fiscally.
Speaker 3: Congressman, just find me in thirty seconds. Is he helping you?
Speaker 3: Were hurting you?
Speaker 6: Now?
Speaker 3: Who the former president?
Speaker 2: I don't think he comes into play in this issue
Speaker 2: in the House. What we've seen is these eight people
Speaker 2: were not doing Trump's bidding. They're concerned about the fiscal
Speaker 2: affairs of the United States. I get that they did
Speaker 2: not trust Kevin McCarthy. I don't agree with that, but
Speaker 2: I understand where they're coming from. This is an internal
Speaker 2: matter that we need to solve in the House, and
Speaker 2: we need to get a leader that we can get behind,
Speaker 2: as I say, in order to counter the mistakes and
Speaker 2: the direction of the Biden administration.
Speaker 3: A Congressman, thanks for your opinion of view this morning.
Speaker 3: We appreciate it as always. French Congressman french Hill there
Speaker 3: on the latest in Washington.
Speaker 1: Went in doubt, how'd we screw it up? In the thirties.
Speaker 1: We didn't look at the banks. BERNANKI one oh one.
Speaker 1: Michael Barr's a voting member as of today. Jean Sunuzzo
Speaker 1: could be a voting member someday, or governor Global had
Speaker 1: a fixed income a Columbia thread needle. He's surviving the
Speaker 1: wars gene. You know there's a point where it switches
Speaker 1: some yield analysis to price analysis.
Speaker 4: Are we there?
Speaker 7: It does feel like we're there, Tom, certainly. You know
Speaker 7: you're talking about it earlier. The sell off we've seen
Speaker 7: in the long end of the yield curve is equal
Speaker 7: to the amount of work that the Fed's done at
Speaker 7: the front end of.
Speaker 4: The curve all year.
Speaker 7: They've only raised interest rates by one percent through the
Speaker 7: course of this year, and maybe twenty five bases points more.
Speaker 7: But the risk premium that we've put into the long
Speaker 7: end of the curve is really what has.
Speaker 4: Taken investors by surprise.
Speaker 7: I think here because it doesn't seem to be driven
Speaker 7: by the fundamental data. We would argue that the most
Speaker 7: important fundamental data of the last couple of weeks for
Speaker 7: the bond market is the fact that core PCE inflation,
Speaker 7: the Fed's preferred gauge came in below expectations and is
Speaker 7: trending towards that two percent target. And yet we see
Speaker 7: this steepening and I think that should give investors pause
Speaker 7: and think that really there is a fiscal risk premium
Speaker 7: coming back into the treasury market.
Speaker 3: Jane, Have you changed your mind on that in the
Speaker 3: last couple of months.
Speaker 7: Well, I think what we've been doing, John is really
Speaker 7: trying to focus more on what we call the belly
Speaker 7: of the curve, or that five year point, where we
Speaker 7: think we've priced in more than a fair path for
Speaker 7: the FED funds rate and more than a fair higher
Speaker 7: for longer situation. And you have yields basically from the
Speaker 7: three year point all the way out to the thirty
Speaker 7: year point sitting right around or just below five percent,
Speaker 7: And for that same yield, we rather put our money
Speaker 7: in the five year point, where you're more looking at
Speaker 7: what the Fed might do and less worried about that
Speaker 7: term premium or that risk premium, which we learned last
Speaker 7: year in the UK guilt crisis, that that can get
Speaker 7: away from you pretty quickly.
Speaker 3: Jane, you think we've got the ingredients for that kind
Speaker 3: of outcome.
Speaker 4: I really don't. I think it's a very different market.
Speaker 7: The depth in the US treasury market is significantly greater
Speaker 7: than what we see in guilts. But you know, it's
Speaker 7: that time of year, and it was just a year
Speaker 7: ago we were looking at what was going on in
Speaker 7: the UK and that budget dynamic really did create scare
Speaker 7: across the market, and international investors.
Speaker 4: Drove yield hire quite rapidly.
Speaker 7: There are some similarities, but I do think the depth
Speaker 7: in the treasury market is very different.
Speaker 8: Gene.
Speaker 5: When we talk about the rest of the markets aside
Speaker 5: from treasuries, you can look at stocks which have been
Speaker 5: remarkably resilient in light of some of the recent moves.
Speaker 5: You can look at credit starting to maybe show a
Speaker 5: little concern but largely holding in. Does this indicate to
Speaker 5: you that the rest of the risk complex can actually
Speaker 5: sustain yields that a rising at this pace to these levels,
Speaker 5: or do you think that there is yet to be
Speaker 5: a wake up call that is coming.
Speaker 7: No. I think the wake up calls coming lista quite honestly,
Speaker 7: and we're starting to see that in liquidity of credit.
Speaker 7: It's starting to deteriorate, and spreads our widening and bid
Speaker 7: offers are widening. So it's a little bit of that
Speaker 7: unfavorable dynamic we saw for a lot of twenty twenty two,
Speaker 7: and this week that started to re emerge. So I
Speaker 7: think that credit investors are getting nervous and frankly, they
Speaker 7: realized that lags of monetary policy may be long or variable,
Speaker 7: but they do exist. And at the end of the day,
Speaker 7: companies and consumers are borrowing at much higher rates and
Speaker 7: that's going to cause cracks throughout the system.
Speaker 5: Are you saying things actually break or for selling or
Speaker 5: anything that seems like a catalyst, or just a little
Speaker 5: bit more fear that causes a little bit more caution
Speaker 5: in investments.
Speaker 4: I think it's more fear overall.
Speaker 7: Fundamentally, investment grade companies, for example, are very cash rich,
Speaker 7: and their cash flow profile is stronger than it was
Speaker 7: in twenty nineteen before the pandemic. So I don't think
Speaker 7: there's anything that's going to disrupt that from yields going
Speaker 7: up a quarter or to a half percent in a
Speaker 7: short period of time.
Speaker 4: When we think about highly levered.
Speaker 7: Companies, and for example, look at the fact that Triple
Speaker 7: C those highly levered companies that have returned over twelve
Speaker 7: percent through the course of this year. Year to date,
Speaker 7: well they're going to be really susceptible to higher borrowing costs,
Speaker 7: and as we go forward, I think that rally is
Speaker 7: going to be hard to sustain.
Speaker 1: Jane, let's go back to Minnesota Finance just a few
Speaker 1: years ago. There's a chapter there when it gets like this,
Speaker 1: look at the banks. You've got the advantage of Columbia
Speaker 1: thread needle that you're not representing a major bank directly
Speaker 1: in that, which is our advantage this morning. Are you
Speaker 1: stressed about the banks either too big to fail, those
Speaker 1: regionals below them, and critically the commercial real estate block
Speaker 1: below them?
Speaker 7: I think most importantly, we feel really comfortable with the
Speaker 7: global systemically important banks, those the sort of the big
Speaker 7: issuers here in the US, and we've actually been adding
Speaker 7: exposure since March through now to to that complex, and
Speaker 7: we think that they're exceptionally cheap rather relative to their
Speaker 7: industrial peers. As you get down into the regionals and
Speaker 7: some of the tier below that do have more of that.
Speaker 4: Commercial real estate exposure, I think you do have to
Speaker 4: be a bit nervous.
Speaker 7: I think there, you know, there's a degree of capital
Speaker 7: raising that's going on in that in that next tier
Speaker 7: of bank, but that's Frankly, it's been orderly in terms
Speaker 7: of investors being able to lend that capital. But I
Speaker 7: don't think we should be so confident as to say
Speaker 7: we'll never revisit any of the volatility that we saw
Speaker 7: with SVB.
Speaker 3: Jane, When you say you're adding, how are you doing that?
Speaker 7: Yeah, I mean we're we're adding in the new issue
Speaker 7: market and in the secondary. I think, you know, looking
Speaker 7: at you know the big you know, JP Morgan and
Speaker 7: Bank of America type, you know capital structures where you
Speaker 7: know the capital profile has already been fortified post financial crisis,
Speaker 7: unlike the regional the super.
Speaker 4: Regionals that are having to add that capital now.
Speaker 7: So that these are names that you know, over the
Speaker 7: last six months we've been adding to portfolios, and frankly,
Speaker 7: I think that they're good alternative relative to potentially more
Speaker 7: cyclical corporate exposures.
Speaker 3: Gens Jane, thank you for the insight. GININSA. They have
Speaker 3: Columbia Threatnaedo on credit at the end the banking stress
Speaker 3: we saw Earlie.
Speaker 9: This year.
Speaker 3: Andrew Hoddenhorse's city with this surrounded table. Andrew, your reaction
Speaker 3: to that, what would you expect on Friday now based
Speaker 3: on this? Does it change anything for you.
Speaker 10: It doesn't change anything.
Speaker 6: I think.
Speaker 10: Just look at the scatter plot of ADP versus NFP.
Speaker 10: There's not a high correlation between the two. So it's
Speaker 10: a big if if we get this number. If we
Speaker 10: get this number though, like Mike McKee said, it's a
Speaker 10: big if. But if we get this number for payrolls
Speaker 10: on Friday, this is goldilocks. Right around one hundred thousand
Speaker 10: jobs per month. That's about what the population growth can sustain.
Speaker 10: That would be a very sustainable piece of job growth.
Speaker 10: So if we see this number, that would be a goldilockomy.
Speaker 1: The heavyweight Janet Yellen was out yesterday with some select
Speaker 1: comments that I'm sure your team saw as well. There's
Speaker 1: another economist, Michael Tyson, who has a very famous quote
Speaker 1: about getting punched in the face. You know, everybody's got
Speaker 1: a plan here. How does the FED that? I mean,
Speaker 1: with the trauma that we've seen the last week in
Speaker 1: the bond market, I'm sorry, there's a point here where
Speaker 1: the FED put comes back into place. Are we anywhere
Speaker 1: near where the Fed looks at the financial trauma and
Speaker 1: says we got to adapt?
Speaker 10: So remember what the Fed is trying to do here
Speaker 10: is to raise interest rates and slow the economy. They've
Speaker 10: raised policy rates, but really what controls the economy mortgage rates,
Speaker 10: corporate borrowing rates. Those are going to depend be dependent
Speaker 10: on the tenure yield. So the fact that tenure yields
Speaker 10: are higher, I think is probably consistent with what the
Speaker 10: FED is trying to achieve. Now, like John was talking
Speaker 10: about earlier, being in a fifteen basis point trading range
Speaker 10: over the course of an hour or so in the
Speaker 10: day is probably not the level of volatility the FED
Speaker 10: officials would like to see. So they're watching this, as
Speaker 10: you know, Fed officials, government officials always tell us they're watching,
Speaker 10: and they'll be watching for do we see signs of
Speaker 10: liquidity stress that are emerging. If you saw those type
Speaker 10: of things, then yes, I think you could think about,
Speaker 10: you know, would the FED actually react to this you
Speaker 10: and first it would be with their rhetorics saying that,
Speaker 10: you know, maybe treasure yields have moved too far, but
Speaker 10: I think we're still away from that point. Treasure yield
Speaker 10: curve is still inverted. We still have ten yure yields
Speaker 10: below two year yields. They've come up a lot, We're
Speaker 10: not as inverted as we were. If you're not imminently
Speaker 10: looking at a recession, you're not staring down a recession.
Speaker 10: It's not clear why that yield curve needs to be
Speaker 10: as inverted as it was.
Speaker 5: A number of people have come on this show have
Speaker 5: said that a lot of the move in yields has
Speaker 5: not been fundamentally justified.
Speaker 11: Do you disagree? Do you think that fundamentally where the
Speaker 11: yield is currently on the.
Speaker 5: Ten year treasure and the thirty year treasury is completely
Speaker 5: justified and constant and compensating you for inflation.
Speaker 10: I think it depends on what you mean by fundamentals.
Speaker 10: But if you're including in those fundamentals the fact that
Speaker 10: we're running large deficits, there's more treasury supply that's coming
Speaker 10: to the market. So some people would call that a
Speaker 10: technical but I would say that is a fundamental structural
Speaker 10: part of the US economic backdrop right now. And along
Speaker 10: with that, we're running higher inflation, and that you were
Speaker 10: just talking about this earlier. If we're running inflation that's
Speaker 10: above four percent still by a lot of measures, it's
Speaker 10: not that surprising to see treasure yields above four percent.
Speaker 10: You need that yield just to be compensated for the
Speaker 10: inflation that we're running.
Speaker 3: Do you think dysfunction in Washington helps the Fed's cause.
Speaker 10: I would not say that it helps the Fed's cause.
Speaker 10: I don't know if it helps anyone's cause right now.
Speaker 10: You know the developments. It does raise questions about, you know,
Speaker 10: whether we're going to be in another shutdown November seventeenth,
Speaker 10: and you saw markets that we're trading that, you saw
Speaker 10: markets that priced out some of the probability of a
Speaker 10: FED hike in November. I think what the FED wants
Speaker 10: here is for the government to stay open, which would
Speaker 10: allow them to respond to the economic data. And now
Speaker 10: what's going on.
Speaker 3: In is a fantastic concert, well played, very diplomatic. You
Speaker 3: use my favorite phrase in the holy global financi and policymakers,
Speaker 3: we're watching this.
Speaker 6: That's rue.
Speaker 3: And we often ask on this program, what does that mean?
Speaker 3: What on earth does that mean? If they say we're watching.
Speaker 10: This means they have a bloomberg?
Speaker 3: Seriously, Andrew, stick.
Speaker 5: Around, Andrew, Just a final thought here, is there an
Speaker 5: incoherence between the Joeld data that we got yesterday, the
Speaker 5: ism manufacturing read that we got the fact that in
Speaker 5: general things have been coming in horder than expected, and
Speaker 5: even just the direction of these ADP figures.
Speaker 10: I think, especially seeing that manufacturing was down and the
Speaker 10: ADP figures is surprising. We've seen those manufacturing PMI ISM's
Speaker 10: bottom moving up, looks like they're going to move up
Speaker 10: through fifty and we're going to be expanding in the
Speaker 10: manufacturing sector. So I don't think that negative payroll growth
Speaker 10: for manufacturing really makes sense with where we are in
Speaker 10: the economy.
Speaker 1: Look, Andrew, you got to go back. You got to
Speaker 1: write an eight page paper with your team. A guestment
Speaker 1: forward in the heart of the matter is the vector
Speaker 1: of inflation? I mean within the dual mandate. Do you
Speaker 1: agree that we've seen three monthly annualized disinflation and can
Speaker 1: you state that we've got a generalized vector that is disinflation.
Speaker 10: I can't state that. I wish I could state that,
Speaker 10: but I can't state that. I think what we've seen
Speaker 10: is a soft patch in inflation. You had a lot
Speaker 10: of special factors that came together, autoprices moving down, airfares
Speaker 10: moving down. Some of those factors are going to go
Speaker 10: the other direction. We have a tight labor market.
Speaker 1: This is a key inside John. This is the arch
Speaker 1: debate on surveillance.
Speaker 3: Right now forty on Friday, still still a two forty
Speaker 3: on Friday. Unemployment at three point six three point six
Speaker 3: unemployment West.
Speaker 10: Wages wages we think zero point three percent, and that's
Speaker 10: a big question. Ultimately, it does come back to wages.
Speaker 10: Do we see wages that are slowing down where we
Speaker 10: have them zero point three percent month one month? That's
Speaker 10: kind of holding steady.
Speaker 3: How much weight would you put on job openings? Here's
Speaker 3: so many complaints about that data.
Speaker 10: It is not the most high fidelity reading that we
Speaker 10: have on the job market at all. So you know,
Speaker 10: I'm watching the whole mosaic of jobs figures, and if
Speaker 10: you look at the mosaic, I think it's all telling
Speaker 10: you it's a tight labor market.
Speaker 3: So it's talk an audition for the FM. Say that
Speaker 3: Andrew Honand hosts a.
Speaker 1: City Christopher Merinak joins the sound director of at Research.
Speaker 1: You know the chart, Christopher, I'm going to bring it out.
Speaker 1: I brought it out before. If Sandy Wild God love Him,
Speaker 1: was here today, I'd bring it out for him. And
Speaker 1: it's the Wild Group, It's City Group and the train
Speaker 1: wreck known as their immense boom and financialization all that
Speaker 1: love in two thousand and eight ten to one reverse
Speaker 1: stock split and worth three dollars ninety cents a day.
Speaker 1: When does the echals buildings stand up and go Houston,
Speaker 1: New York we have a problem.
Speaker 12: Well, Tom, I don't think the credit losses at City
Speaker 12: are tough enough to get us there. They're still training
Speaker 12: at a discount the tangible book and have been for
Speaker 12: quite some time. I think it's been a confidence issue
Speaker 12: in both the management team as well as the game
Speaker 12: plan and executing. It may just be too far flung,
Speaker 12: which I think may have been the issue of the
Speaker 12: past thirty years, and bringing it back home is going
Speaker 12: to be ultimately the answer. I don't think the credit
Speaker 12: losses there are wide enough, and I think that's the
Speaker 12: same issue for the domestic banks as well. We just
Speaker 12: don't have the credit problems to warrant that level of fear.
Speaker 1: As looking at commercial real estate. Just as one of
Speaker 1: the fears that are out there on a Wednesday at
Speaker 1: morning LinkedIn here Chris confidence, liquidity, and solvency. Link those
Speaker 1: emotions of say nineteen ninety eight into where the financial
Speaker 1: system is right now.
Speaker 12: So the banks, Tom have pre tax pre provisioned earnings.
Speaker 6: That's PP and R.
Speaker 12: It's the central feature of the FED stress test and
Speaker 12: really what we all look at as.
Speaker 6: Investors and analysts.
Speaker 12: That cash flow allows banks to build reserves, and we
Speaker 12: think reserve building is going to continue to happen. It's
Speaker 12: been strong year to date, will begetting again and next
Speaker 12: week with earnings for the big banks, we think reserves
Speaker 12: will rise for commercial real estate, for C and I loans,
Speaker 12: for everything. It's what has to happen during this part
Speaker 12: of the cycle, and then charge offs will rise. Charge
Speaker 12: Offs are normalizing, but by the Santogan they're going to
Speaker 12: be much higher in twenty four than they were in
Speaker 12: twenty eighteen, nineteen, and even going back to the thirteen
Speaker 12: fourteen years, we're going to retrace.
Speaker 6: All charge off levels and that's going to be healthy.
Speaker 12: We have to recognize risk and we have to recognize loss.
Speaker 12: I don't think we have anything close to what we
Speaker 12: had in the Great Financial Crisis era. We just have
Speaker 12: higher losses, which banks have to provide for. The Fear
Speaker 12: of the unknown in the commercial real estate is to
Speaker 12: my opinion, somewhat overblown.
Speaker 6: We still have to reserve for that, and Citygroup has
Speaker 6: their share of that.
Speaker 12: And so do all the other banks at all sizes
Speaker 12: of the spectrum.
Speaker 3: Chris, can we talk about the policy response to the
Speaker 3: banking stress. Earlier this year there was a big focus
Speaker 3: on unrealized losses in the treasury market. Based on the
Speaker 3: most we've seen, those losses are even bigger. Do you
Speaker 3: believe that these banks are well insulated with the policy
Speaker 3: response of spring even with these bigger moves in the
Speaker 3: treasury market?
Speaker 1: Now?
Speaker 6: Sure?
Speaker 12: I mean, the banks can still contribute to the BTFP
Speaker 12: a bank term funding program. They really have not done
Speaker 12: much in the last several months, but still around one
Speaker 12: hundred and eight billion dollars. It's twenty five percent of
Speaker 12: the incremental borrowing that the industry has done here to date.
Speaker 12: I think that the liquidity is perfectly fine. The challenge is,
Speaker 12: to your point, John, is that the losses continue to
Speaker 12: go up. We think there's another two to two and
Speaker 12: a half percent mark on every bank portfolio at the
Speaker 12: end of September, so that still is going to make
Speaker 12: a net negative to tangible book We estimate today that
Speaker 12: book values will probably fall about one and a half
Speaker 12: percent for the industry, using the KRE or the NASTAC
Speaker 12: Bank index as our benchmark, but that's still somewhat at
Speaker 12: a nuisance.
Speaker 6: The banks are still going to be profitable in the quarter.
Speaker 12: They're just the profits will not outweigh the mark they
Speaker 12: have at the end of September. We may find that
Speaker 12: that starts to reverse as we head into year end
Speaker 12: and next year, only because we've had such a big
Speaker 12: move in treasuries, it could.
Speaker 6: Simply quiet down.
Speaker 12: We don't have to have the Fed making a rate
Speaker 12: policy cut to see those marks start to reverse. Fact
Speaker 12: I actually think they're going to start reversing surely, because
Speaker 12: banks have a lot of four and five year securities
Speaker 12: they acquired in twenty twenty and twenty one that are
Speaker 12: starting to off. There's a portion that will begin to
Speaker 12: burn off, particularly in the next six.
Speaker 6: To twelve months.
Speaker 11: But still there is a point here underlying this.
Speaker 5: The risk is really in some of the reserves, the
Speaker 5: safety assets, the things they are supposed to be really liquid.
Speaker 5: At a certain point, you have to think these banks are
Speaker 5: incredibly constrained when it comes to new loans with new
Speaker 5: business if they have such a huge book of treasuries
Speaker 5: that they're trying to cordon off and sort of keep
Speaker 5: from any kind of active trading absolutely correct.
Speaker 6: I think you will see the loan growth slow.
Speaker 12: Down a fair amount in the third quarter and slow
Speaker 12: again in the fourth.
Speaker 6: We don't see loans going negative this point, but for
Speaker 6: some companies that will.
Speaker 12: Some companies are on a risk weighted asset diet, as
Speaker 12: you've heard a lot of that is simply machinations about
Speaker 12: what they're going to keep on their balance sheet. Do
Speaker 12: a little bit less commercial real estate, a little bit
Speaker 12: different mortgage lending, or other loans that have better risk weights.
Speaker 12: We've seen some companies like Sonova sell medical office portfolios
Speaker 12: because it's a better way for them to risk adjust
Speaker 12: their returns and enhance their risk weighted assets. I think
Speaker 12: you'll see Fifth Third the same, and many other regional banks.
Speaker 12: Those are just a few examples that have announced moves
Speaker 12: to limit their asset growth.
Speaker 5: So, Chris, you're saying that we've seen all the bank
Speaker 5: failures that we're not going to see anymore, especially in
Speaker 5: light of some of the very big moves and the
Speaker 5: constraints on lending.
Speaker 12: I definitely agree with that, Lisa, and I think if
Speaker 12: we have a bank failure, it's going to be a small,
Speaker 12: family run bank that you never heard of. It's unfortunate
Speaker 12: for any bank that fails. But we don't see anything
Speaker 12: big happening this year. We think all of that noise
Speaker 12: and drama.
Speaker 6: Is behind us. The deposits are stabilizing in the industry.
Speaker 12: The banks are simply struggling with net interest margin, and
Speaker 12: more than anything else, a perception issue about how bad
Speaker 12: credit is or is not.
Speaker 6: I think it's a lot more tamer.
Speaker 12: We simply have an increase in credit losses, which have
Speaker 12: been next to zero, and now they're coming off the
Speaker 12: floor and becoming normal.
Speaker 1: And Chris, we've been here before. We're going to get
Speaker 1: a marked down, We're gonna get a rework or redo
Speaker 1: or restructuring, and then new money is going to step
Speaker 1: in at a distress price. Who are those guys? Who
Speaker 1: is the new money that's going to step in? Or
Speaker 1: are we going to see foreign money step in? Sovereign
Speaker 1: wealth money step in. Private equity has appolled and own
Speaker 1: every sky scraper in America.
Speaker 12: So Tom, I think there's incremental dollars in family offices
Speaker 12: who actually have a fair amount of cash. You know,
Speaker 12: family offices becoming very, very powerful. A lot of advisors
Speaker 12: who used to be at the old first Republic are
Speaker 12: now at family offices that have reconstituted, and they're competing
Speaker 12: head to head with JP Morgan and those folks, in
Speaker 12: addition to private debt funds and other private equity funds
Speaker 12: are the new players. We think some of the institutional
Speaker 12: investors who are on the sidelines will change their minds
Speaker 12: and come back in, but they'll be followers. The leaders
Speaker 12: are going to be those family offices and other private
Speaker 12: equity and private funds.
Speaker 6: It'll be domestic, but I imagine.
Speaker 12: It will also be foreign as well. I don't think
Speaker 12: it's just a US trade in the moment, but the
Speaker 12: interest is there, and I think they're looking for better
Speaker 12: prices and opportunities, and clearly where the kre is you
Speaker 12: know below forty certainly attracts them.
Speaker 3: Now A much more constructive from Chris Marnak if gentny Montgongrisco, Chris,
Speaker 3: thank you said.
Speaker 1: This is really special, and we thank Invesco for letting
Speaker 1: him speak this morning to the head of US Government Affairs,
Speaker 1: because yesterday afternoon, in that history making moment, the bow
Speaker 1: tide one got up at the house and said we
Speaker 1: will continue forward. His name is mckenry. He's from the Carolinas.
Speaker 1: He's a really interesting guy working in the trenches of
Speaker 1: political operation for George Bush the younger and on through
Speaker 1: Carolina politics. Jennifer Flinton is with Invesco, Head of US
Speaker 1: Government Affairs, but has worked for Congressman McHenry over the
Speaker 1: number of years in chief of staff positions. Jennifer, thank
Speaker 1: you so much. Who is this guy? It was like
Speaker 1: Butch Cassidy last night. We know these faces, and to
Speaker 1: be honest, most of our audience, particularly our international audience,
Speaker 1: who is the Southerner McHenry?
Speaker 9: Yeah, Well, he's the chairman of the Financial Services Committee
Speaker 9: and he has been in Congress for almost two decades now.
Speaker 9: He is an institutionalist, and he is a policy wonk,
Speaker 9: and he's politically savvy. And it's not shocking that Speaker
Speaker 9: McCarthy chose him on that short list of members to
Speaker 9: succeed in time of emergency.
Speaker 1: Jennifer in the Washington Post this morning, Marianna Soda Mayor.
Speaker 1: They lead with the word rebellion that has a heritage,
Speaker 1: a tenor a tone south of the Mason Dixon line.
Speaker 1: Part the distinction of Southern Republicans like French Hill of
Speaker 1: Little Rock or mister McHenry of the Carolinas parse their
Speaker 1: distinction from eight or nine people that have rebelled.
Speaker 9: These are fairly new members, right. I Mean, you look
Speaker 9: at these eight and these are members who mostly came
Speaker 9: in after twenty eighteen, and they really represent a different
Speaker 9: thinking within the Republican Party that was made very clear
Speaker 9: after the election of Donald Trump. And it really is
Speaker 9: a small number, right, I mean, the vast majority of
Speaker 9: the Republican Conference stood behind Kevin McCarthy, but due to
Speaker 9: such small margins in the House a vote, basically five
Speaker 9: eight members were able to unseat the speaker for the
Speaker 9: first time in history.
Speaker 5: Jennifer I was reading a story interviewing some of the
Speaker 5: supporters of Congressman Gates in Florida, and they were very
Speaker 5: supportive of what he was doing, and they were saying, basically,
Speaker 5: the system hasn't worked for us. Throw it all down, basically,
Speaker 5: take it apart. Why are there so many voters who
Speaker 5: essentially want to disrupt the whole system. What's the galvanizing
Speaker 5: force behind that?
Speaker 9: There's a frustration, right, and Washington is but a reflection
Speaker 9: of a lot of that frustration.
Speaker 6: These are four.
Speaker 9: Hundred and thirty five members of Congress of the House
Speaker 9: who come to Washington to reflect their constituencies. There is
Speaker 9: a frustration, There is sort of a distrust in Washington,
Speaker 9: and yes, Matt Gates has decided to come in front
Speaker 9: of that and in his expression to try to lead that.
Speaker 8: But it does actually reflect.
Speaker 9: A concern over a thirty three trillion dollars debt, a
Speaker 9: one billion dollars of interest being paid every year. Right,
Speaker 9: I mean, so that frustration is real. Whether Matt Gates
Speaker 9: is necessarily the best to be the voice and the
Speaker 9: leader of that, I think is an open question.
Speaker 5: But the irony of this, Jennifer, is that the longer
Speaker 5: the government doesn't make a resolution, the more bond deals
Speaker 5: are going up, and the greater the interest expense and
Speaker 5: the debt profile of this country. So at what point,
Speaker 5: from a political standpoint, can you bridge that gap to
Speaker 5: try to communicate that Sometimes dealing with the frustrations and
Speaker 5: the inefficiencies of the system are maybe a more efficient
Speaker 5: way of getting to the same end.
Speaker 11: I mean, how do you communicate that politically well?
Speaker 9: And I think we're going to see exactly that as
Speaker 9: they negotiate this appropriations process over the next forty two days, Right,
Speaker 9: because they had until November seventeenth to either pass another
Speaker 9: stop gap resolution or to come to an agreement with
Speaker 9: the Senate on appropriations, and right now they're still very divided.
Speaker 8: Whoever is the next speaker is going to have to,
Speaker 8: as you say, bridge that divide, and I think it's
Speaker 8: a it's an open question, and over the next week,
Speaker 8: these Republican members of this conference, from the.
Speaker 9: Center to the far right, are going to have to
Speaker 9: grapple with that question.
Speaker 3: Jennifer, do you have a base case and where will
Speaker 3: be November seventeenth.
Speaker 9: I'm concerned, right, I mean, last night was very concerning,
Speaker 9: and I think there's an understanding within the conference that
Speaker 9: there needs to be unity among the Republicans if they're
Speaker 9: going to move forward and have any leeway with the
Speaker 9: Senate going forward. But it is clearly going to be
Speaker 9: difficult for any new Speaker to work with the Senate,
Speaker 9: which quite frankly has a bipartisan position on appropriations. So
Speaker 9: at this point, at this date, I'm rather concerned how
Speaker 9: we're going to move forward, and I think a government
Speaker 9: shutdown is probable in the near term.
Speaker 3: Jennifer, thank you your insident, your opinion. Jennifer flibb I,
Speaker 3: Ben Bestcaug.
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