WEBVTT - Surveillance: Bank Supervision with Clarida 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrow and Lisa Abramowitz joined us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.920 the Bloomberg Terminal and the Bloomberg Business App. From Richard Claridis, 0:00:30.960 --> 0:00:34.919 with US Global Economic advisor at PIMCO and student of 0:00:35.040 --> 0:00:39.600 his economic history professor claren As. Somebody spoke of creative 0:00:39.600 --> 0:00:42.239 destruction this morning, and that reminded me of a guy 0:00:42.320 --> 0:00:46.040 named Hyman Minsky who long ago in faraway had Chumpeter 0:00:46.120 --> 0:00:49.920 as his doctoral advisor. And of course Hyman Minsky, and 0:00:49.960 --> 0:00:53.760 the lore talks about a Minsky moment, or maybe talks 0:00:53.800 --> 0:00:58.000 about the efficacy of regulation. Let's bring over the cacophony 0:00:58.040 --> 0:01:01.960 of another time in Hyman Minsk over to what Michael 0:01:02.040 --> 0:01:06.399 Barr at the FED needs to do. What is the 0:01:06.440 --> 0:01:11.640 best outcome of bank the new bank regulation and the 0:01:11.720 --> 0:01:16.800 lessons we're learning in this march. Well, I think that 0:01:17.920 --> 0:01:20.679 you know, there's been a lot of progress DoD Frank 0:01:21.160 --> 0:01:25.600 and in particular for the large, systemically important institutions with 0:01:25.640 --> 0:01:28.480 stress testing and liquidity and all the rest. I think 0:01:28.520 --> 0:01:34.120 what this episode does reveal is that institutions may look small, 0:01:34.360 --> 0:01:36.720 they can get big, as you know, a SVB, for example, 0:01:36.800 --> 0:01:40.280 tripled in size in a couple of years, and even 0:01:40.319 --> 0:01:43.560 institutions of that size, as we saw with the Weekend, 0:01:43.600 --> 0:01:47.120 can be systemic. So I think the clearer direction of 0:01:47.160 --> 0:01:51.520 travel is going to be that under existing statutes and laws, 0:01:51.880 --> 0:01:55.560 the FED has enormous flexibility in the way that it 0:01:55.640 --> 0:01:59.400 supervises institutions on a case by case basis, and I 0:01:59.440 --> 0:02:02.760 think we're going to see that level of supervision, in 0:02:02.800 --> 0:02:07.240 particular scrutiny of things like the hold of maturity portfolios 0:02:07.280 --> 0:02:11.520 being under water, and liquidity and the uninsured deposits. They're 0:02:11.560 --> 0:02:14.000 all going to be factors in So the direction of 0:02:14.000 --> 0:02:17.560 tap travel is going to be Tighter's vision. Would you 0:02:17.560 --> 0:02:20.280 suggest our Central Bank will have to adapt to the 0:02:20.360 --> 0:02:27.000 political realities of Republicans hugely distrustful of the big accumulation 0:02:27.040 --> 0:02:30.519 of capital, almost in a Jacksonian way. How big will 0:02:30.560 --> 0:02:35.760 that umbrella extend out from the too big defails? I 0:02:35.919 --> 0:02:39.040 think I think it's going to certainly extend into a 0:02:39.160 --> 0:02:42.480 number of the names that are in that one hundred 0:02:42.560 --> 0:02:44.440 to two hundred and fifty. I remind you that was 0:02:44.480 --> 0:02:47.280 actually by statute in twenty eighteen. The statute said that 0:02:48.639 --> 0:02:53.600 less prudential scrutiny for banks under two hundred and fifty billion. 0:02:53.680 --> 0:02:56.320 But again, the legislation given the FAT a lot of 0:02:56.400 --> 0:02:59.240 autonomy within that on an individual bank basis, and we're 0:02:59.280 --> 0:03:02.040 going to see see that, I think with tighter supervision. 0:03:02.520 --> 0:03:04.320 What we just saw, though, a lot of people are 0:03:04.320 --> 0:03:06.560 putting the finger at the Federal Reserve and saying that 0:03:06.600 --> 0:03:10.160 they should have had more supervision of this bank, and 0:03:10.200 --> 0:03:12.840 that this was a policy failure that has really interfered 0:03:12.880 --> 0:03:15.560 now at their ability to raise rates elsewhere. Do you 0:03:15.560 --> 0:03:17.480 think that that's fair? Do you think that this was 0:03:17.520 --> 0:03:19.520 a policy mistake, or do you think that this is 0:03:19.800 --> 0:03:22.720 a direct result of rolling back that aspect of Dodd 0:03:22.720 --> 0:03:26.679 Frank in twenty eighteen. Well, I've looked into it a 0:03:26.720 --> 0:03:29.040 little bit again. You know, I'm no longer in that 0:03:29.120 --> 0:03:32.160 building or talking to those folks. The interesting thing, Lisa, 0:03:32.400 --> 0:03:35.200 is that the stress tests that were set up very 0:03:35.240 --> 0:03:39.640 successfully after Dodd Frank typically looked at scenarios with deep recessions, 0:03:39.760 --> 0:03:44.160 high unemployment and falling interest rates, and SVP would have 0:03:44.160 --> 0:03:46.320 done great in that scenario. They didn't have a lot 0:03:46.360 --> 0:03:50.160 of direct exposure in lending or the like, but what 0:03:50.240 --> 0:03:53.040 they did have, obviously is a lot of exposure in 0:03:53.160 --> 0:03:58.800 long duration treasuries and mortgages. In particular. There's something called 0:03:58.840 --> 0:04:02.480 a global market shock that looks into to that. I've 0:04:02.480 --> 0:04:05.280 also seen some work that indicates, again I can't judge, 0:04:05.320 --> 0:04:10.200 but that SVP would have passed the standard liquidity test. 0:04:10.520 --> 0:04:13.360 So clearly, I think they're going to be setting this 0:04:13.440 --> 0:04:15.000 on where to pre judge where they end up, but 0:04:15.040 --> 0:04:18.039 I think that is going to be reviewed and changed. 0:04:18.360 --> 0:04:20.039 That's said rich And this is a point that Neil 0:04:20.080 --> 0:04:21.600 Data made and he's going to be on later in 0:04:21.640 --> 0:04:24.000 the show. He said, you know, the FED basically is 0:04:24.080 --> 0:04:27.359 hiked a lot. Why are they surprised by duration risk 0:04:27.640 --> 0:04:30.159 and why is it being treated as a bug rather 0:04:30.240 --> 0:04:33.679 than a feature of the hiking program. From your vantage point, 0:04:34.040 --> 0:04:36.360 do you think that perhaps there has been a bit 0:04:36.400 --> 0:04:40.320 of complacency about the resilience of an economy that so 0:04:40.360 --> 0:04:43.159 far hasn't broken, but now it's starting to show some 0:04:43.240 --> 0:04:47.600 more acute strains. I don't think i'd use the term complacency. 0:04:47.640 --> 0:04:50.400 What I would say is I broadly agree with Neil 0:04:50.440 --> 0:04:52.920 in the direction of travel. Look, when you raise rates, 0:04:53.720 --> 0:04:57.720 you invert the yield curve on a sustained basis that 0:04:57.839 --> 0:05:01.040 is intended to tighten financial and credib conditions, and it 0:05:01.160 --> 0:05:04.680 is tightening financial and credit conditions. And so I don't 0:05:04.720 --> 0:05:07.200 I hope nobody in the building spot that we could 0:05:07.200 --> 0:05:10.000 get to this point without there being a tightening and 0:05:10.080 --> 0:05:12.400 lending now importantly, and let me get this on the table. 0:05:12.440 --> 0:05:16.960 What the FED did Sunday night was exactly the right move. 0:05:16.960 --> 0:05:20.880 It's essentially expanding the discount window authority to lend against 0:05:20.880 --> 0:05:24.000 good collateral, which has been in place since nineteen thirteen, 0:05:24.040 --> 0:05:26.960 and that's an entirely appropriate thing for the FED to do, 0:05:27.080 --> 0:05:32.760 to give institutions liquidity against their security portfolio. So I 0:05:32.800 --> 0:05:35.800 think that was right. But yes, I'm broadly in that 0:05:35.880 --> 0:05:38.520 camp that when you raise rachel and you invert the curve, 0:05:39.120 --> 0:05:44.360 you're going to make lending more expensive and intermediaries are 0:05:44.360 --> 0:05:47.080 going to bear some of that burden. Absolutely, how much 0:05:47.120 --> 0:05:49.359 more likely is a hard landing in your view? A 0:05:49.440 --> 0:05:52.760 recession that does inflict some more pain today than say, 0:05:52.760 --> 0:05:56.680 a week ago. It's certainly more likely. You know, I've 0:05:56.680 --> 0:05:59.200 been in the camp consistently. I think since doing your 0:05:59.240 --> 0:06:02.560 show last all that we we more likely than that 0:06:02.720 --> 0:06:05.040 we will see a recession with a with a rise 0:06:05.120 --> 0:06:08.320 and unemployment and some negative prints on GDP. Again, we 0:06:08.400 --> 0:06:11.800 have a rat hiph cycle of this magnitude and how 0:06:11.880 --> 0:06:15.320 quickly that is going to be the outcome. But yeah, 0:06:15.640 --> 0:06:19.240 have the odds of a hard landing gone up? They 0:06:19.279 --> 0:06:21.760 certainly have. I'm still I don't think that's my baseline 0:06:21.760 --> 0:06:24.680 for a hardline landing, but sure the odds have to 0:06:24.720 --> 0:06:26.720 have gone up somewhat riche and I just want to 0:06:26.720 --> 0:06:29.400 finish on this this line that you often hear when 0:06:29.480 --> 0:06:32.039 central banks don't do something you expected them to do, 0:06:32.320 --> 0:06:35.039 and you hear things like they might know something we 0:06:35.120 --> 0:06:41.920 don't know. Does the FED ever know something we don't know? Well, look, 0:06:43.040 --> 0:06:46.200 the short answer is yes, not often, and not to 0:06:46.279 --> 0:06:49.240 a great degree. I tell you one one situation where 0:06:49.279 --> 0:06:52.520 we didn't know anything that people didn't know was about 0:06:52.520 --> 0:06:56.719 the coronavirus, and so we didn't have any special briefings 0:06:56.800 --> 0:06:59.960 or insight banking troubles. Richard if they weren't. Banking trouble 0:07:00.080 --> 0:07:01.719 was behind the scenes, So they things that the FED 0:07:01.760 --> 0:07:05.680 wouldn't know about but wouldn't talk about. Well, yes, because 0:07:05.720 --> 0:07:09.640 the FAT has supervisors on the ground with thousands of 0:07:10.320 --> 0:07:15.840 banks at a very granular level, and so certainly some 0:07:15.920 --> 0:07:19.000 of that information is not in the public domain and 0:07:19.080 --> 0:07:22.960 appropriately So that's why things become so speculative. TOMP in 0:07:23.000 --> 0:07:25.240 the next week down into this decision. It's so difficult 0:07:25.320 --> 0:07:27.200 for this FED chair. Should we have cleared on tomorrow? 0:07:27.240 --> 0:07:28.800 Can we get a man for another? I think he's 0:07:28.880 --> 0:07:30.520 joining us every day. You're out next week. What you 0:07:30.520 --> 0:07:32.360 don't know is that Richard clod is going to be 0:07:32.400 --> 0:07:36.080 he He's going to be guest anry next week. Richard, 0:07:36.120 --> 0:07:37.920 Thank you sir for being with us. What an important morning, 0:07:38.000 --> 0:07:40.240 Richard Clardy. There the form of FED chair, FED Vice 0:07:40.360 --> 0:07:47.200 Chair and currently of pimcut Donic Constant does not have 0:07:47.280 --> 0:07:48.800 Laren Jackson. He's going to make a cool he's the 0:07:48.800 --> 0:07:53.360 head of macro strategy at MAZOOO Americus Dominic. Let's start here, ECB. First, 0:07:53.600 --> 0:07:56.040 how much daylight is there between what you think they 0:07:56.080 --> 0:08:01.800 should do and what you expect they will do? Um? Well, 0:08:01.920 --> 0:08:04.280 well not too much. I mean, I think they are 0:08:04.320 --> 0:08:07.000 a little bit behind the FED in terms of raising 0:08:07.120 --> 0:08:10.640 real rates and fighting inflation. So if I were to 0:08:10.680 --> 0:08:12.480 expect the FED, for the sake of argument, to stop 0:08:12.640 --> 0:08:15.400 and the ECB was expected to raise fifty, it is 0:08:15.400 --> 0:08:17.920 pretty easy for them to just scale that back and 0:08:18.160 --> 0:08:20.680 sort of signal that they're almost done. But I would 0:08:20.680 --> 0:08:22.960 expect them to sort of still push push rates a 0:08:23.000 --> 0:08:27.400 little bit higher. In a famous Constant twenty twenty hindsight, Dominique, 0:08:27.520 --> 0:08:30.560 you absolutely nailed it on this show a number of 0:08:30.600 --> 0:08:34.559 weeks ago. You pounded the table, a lonely table, saying 0:08:34.679 --> 0:08:38.319 they are super restrictive. Is they go into these set 0:08:38.400 --> 0:08:43.600 of meetings? Are they still super restrictive? Yeah, I mean 0:08:43.679 --> 0:08:47.280 financial conditions are actually tightening through all of this. You know, 0:08:47.640 --> 0:08:50.079 the idea is, I don't know, if you recall last year, 0:08:50.120 --> 0:08:52.679 there was this FED paper talking around sort of our 0:08:52.800 --> 0:08:55.520 double star, that's we won't know it until we see it. 0:08:56.080 --> 0:08:58.000 And I think the idea is that we're seeing it 0:08:58.120 --> 0:09:00.760 now that rates have basically been getting to sort of 0:09:00.760 --> 0:09:03.920 break aspects of the financial system, particularly in the US, 0:09:04.000 --> 0:09:08.120 which is a different situation than say Europe. But yeah, 0:09:08.160 --> 0:09:11.280 I mean absolutely super restrictive if you, I think it's 0:09:11.320 --> 0:09:13.280 part of the speed with which rates have gone up, 0:09:13.360 --> 0:09:16.680 so you can sort of maybe revisit these levels in 0:09:16.720 --> 0:09:19.720 a more calmer tone. But the fact is, if you 0:09:19.720 --> 0:09:22.240 want to find inflation, you better sort out your financial 0:09:22.240 --> 0:09:26.000 system first. You can't fight inflation and solve a financial 0:09:26.000 --> 0:09:29.240 system at the same time by raising rates. Dominic, we're 0:09:29.280 --> 0:09:32.120 expecting to hear from Janet Yellen later this morning that 0:09:32.200 --> 0:09:34.440 everything is fine in the financial system, that we have 0:09:34.880 --> 0:09:38.920 real resilience. What would it say from your advantage point 0:09:39.120 --> 0:09:41.960 to risk markets if the FED comes out and says, 0:09:42.320 --> 0:09:44.679 you know what we were wrong. Inflation isn't the pre 0:09:44.760 --> 0:09:46.960 eminent concern, and even though everything is stable, we're not 0:09:47.000 --> 0:09:50.040 going to raise rates anymore. Don't that don't don't don't 0:09:50.160 --> 0:09:52.439 think that could potentially be a liability for some of 0:09:52.480 --> 0:09:56.880 the risk your assets. Well, the issue for the financial 0:09:56.880 --> 0:10:00.439 system in a sense. If you say it's fine from 0:10:00.440 --> 0:10:04.720 a capital perspective, you know that's that's largely true. But 0:10:04.760 --> 0:10:07.440 obviously it's from a liquidity perspective that you've got the issue. 0:10:07.520 --> 0:10:10.000 And we saw it in the guilt market last year, 0:10:10.640 --> 0:10:15.480 whereby liquidity problems can become solvency problems for in that 0:10:15.559 --> 0:10:17.640 example of the insurance sector, and that's what you're seeing 0:10:17.640 --> 0:10:21.040 in the medium sized bank. So you you know, you 0:10:21.360 --> 0:10:23.280 do you know it is true. You can say, you know, 0:10:23.360 --> 0:10:26.000 financial system is fine, but you've got to focus on 0:10:26.040 --> 0:10:29.120 liquidity and on that basis you have to kind of 0:10:29.360 --> 0:10:33.200 when the liquidity problems coming from the so called you know, 0:10:33.600 --> 0:10:36.920 risk free rate and the Treasury yeel curve that's attached 0:10:36.960 --> 0:10:39.880 to that, then then that's your problem. So you can't 0:10:40.480 --> 0:10:43.360 basically fight inflation. And I agree that does maybe give 0:10:43.400 --> 0:10:46.360 people a cause for concerning around the credibility around inflation. 0:10:46.600 --> 0:10:48.160 But the other thing that we've been arguing for a 0:10:48.160 --> 0:10:51.199 while is this inflation is sticky and it's almost beyond 0:10:51.240 --> 0:10:54.240 the control of the FED. There's a time element with 0:10:54.320 --> 0:10:57.160 which inflation will come down that the FAT can't necessarily control. 0:10:57.640 --> 0:11:02.040 Domini const you invented the linkage quantitative finance into economics 0:11:02.040 --> 0:11:05.360 of credit suis with Neil Sas years ago. You do 0:11:05.480 --> 0:11:08.600 have experience a credit suis to say the least. Can 0:11:08.640 --> 0:11:15.920 you imagine UBS merging with the credit suis? You know, oh, absolutely, yes, 0:11:16.000 --> 0:11:18.679 I mean that's I think that's the h you know, 0:11:18.960 --> 0:11:20.880 I don't think. I mean that what the Swiss National 0:11:20.920 --> 0:11:24.520 Bank has done is obviously extremely important, a massive liquidity facility. 0:11:24.800 --> 0:11:28.160 There a lot of idiosyncratic problems obviously, you know, at 0:11:28.160 --> 0:11:32.800 Credit Suis. It would it's kind of fairly intuitive that 0:11:33.400 --> 0:11:35.520 in the long run or the medium term, some sort 0:11:35.520 --> 0:11:40.320 of resolution would involve the Swiss banks finding some kind 0:11:40.320 --> 0:11:43.840 of uh tie up, you know, good bank, bad bank, 0:11:44.000 --> 0:11:46.000 whatever you want to call it. The main thing about 0:11:46.040 --> 0:11:48.480 Credit Suie is they have a wonderful private bank and 0:11:48.520 --> 0:11:51.160 that's what they kind of want to preserve. An investment 0:11:51.160 --> 0:11:53.200 bank is you know, it is what it is. Would 0:11:53.200 --> 0:11:58.160 that private bank be valuable to other UK, Continental or 0:11:58.200 --> 0:12:01.719 American banks? I mean there's a mystery here to the 0:12:02.200 --> 0:12:06.520 new culture of credit. Sueetz, do you denote a new culture? Yeah, 0:12:06.520 --> 0:12:08.480 I mean I'm not a bank analyst, but I mean 0:12:08.520 --> 0:12:10.280 I would say the private bank has always been the 0:12:10.280 --> 0:12:12.480 sort of jewel in the crown, and you know, it's 0:12:12.559 --> 0:12:15.839 it's been very impressive and I would I would absolutely 0:12:15.840 --> 0:12:20.200 imagine it would be attractive to a lot of people. Yes, 0:12:20.360 --> 0:12:24.240 I think we're all bank analysts this week. Thank you, 0:12:24.240 --> 0:12:37.920 you know, Dominate Constant, Thank you, sir of Missouo. Let's 0:12:37.920 --> 0:12:40.520 go straight to the guest, Peter Roppenheimer, Chief Global equity 0:12:40.520 --> 0:12:43.240 strategistic Gamer Sacks. Peter, great to catch up with the 0:12:43.640 --> 0:12:45.720 really difficult moments. So thanks for having at some time 0:12:46.160 --> 0:12:49.679 in your schedule. You did like European banks. The facts 0:12:49.679 --> 0:12:53.360 have changed in the last week. Do you still like them? 0:12:53.480 --> 0:12:57.599 We do, clearly. In a situation like this is massive uncertainty, 0:12:57.600 --> 0:12:59.880 and I think the volatility that you've been speaking of 0:13:00.360 --> 0:13:03.640 Lisa discussed is going to continue. But I do think 0:13:03.679 --> 0:13:08.040 it's important to recognize the underlying fundamentals here are pretty good. 0:13:08.080 --> 0:13:12.360 You've got strong capital buffers kill core to one capital 0:13:12.360 --> 0:13:15.600 of around fifteen percent from head about five percent to 0:13:15.600 --> 0:13:19.080 the European banks during the crisis in two thousand and eight. 0:13:19.360 --> 0:13:22.960 You've got stable funding dynamics one point eight trillion of 0:13:23.040 --> 0:13:27.559 excess deposits, and you've got very ample liquidity and the 0:13:27.640 --> 0:13:31.920 liquidity coverage ratios around one hundred and fifty percent at 0:13:31.920 --> 0:13:34.280 the end of last year. So it's a very different 0:13:34.400 --> 0:13:38.400 fundamental situation. And indeed, rising interest rates, which we've been 0:13:38.440 --> 0:13:44.040 seeing is actually very good for the banks, but confidences everything, 0:13:44.120 --> 0:13:48.440 and while this uncertainty continues they're likely to remain volatile, 0:13:48.480 --> 0:13:50.880 but they are cheap, and I think they're fundamentally in 0:13:50.880 --> 0:13:53.960 a relatively strong place. Peter, we note your decades of 0:13:54.040 --> 0:13:57.920 experience and seeing multiple crises. I know you've been to 0:13:58.280 --> 0:14:01.160 Zurich any number of times that what matters is to 0:14:01.200 --> 0:14:04.760 take lunch at the Chronoole. Does restaurant Chronoole, that's what 0:14:04.920 --> 0:14:07.160 everybody does in Zeroca is the only place to eat. 0:14:07.200 --> 0:14:10.000 I get it. But when you're eating there now in 0:14:10.040 --> 0:14:15.240 this crisis a Chronoole? Is Switzerland part of Europe? Or 0:14:15.360 --> 0:14:20.040 is Switzerland still separate from Europe amid this crisis? Well, 0:14:20.080 --> 0:14:23.560 I don't think in a banking crisis that anything is 0:14:23.600 --> 0:14:28.240 really separate, and particularly in a banking situation where you've 0:14:28.240 --> 0:14:33.440 got cross border integration and connectivity. So other central banks 0:14:33.480 --> 0:14:36.840 around the world will be talking to the Swiss authorities, 0:14:37.200 --> 0:14:41.920 and I think will be also preparing statements or willing 0:14:41.960 --> 0:14:47.440 to provide as much liquidity that's required if this situation 0:14:47.520 --> 0:14:51.760 continues to unwide. Obviously there's a difficult decision that the 0:14:51.920 --> 0:14:54.320 CB have got to make, as Lisa was saying earlier, 0:14:55.040 --> 0:14:58.160 but I think again they will emphasize the robustness of 0:14:58.200 --> 0:15:02.800 the underlying system and their readiness to provide liquidity using 0:15:02.840 --> 0:15:05.760 some of the existing tools that they already have, potentially 0:15:05.800 --> 0:15:10.240 providing more. But I think they'll take some comfort from 0:15:10.480 --> 0:15:15.240 the underlying balance sheet strength of the banking sector in Europe, 0:15:15.240 --> 0:15:18.360 which of course we couldn't have said a decade ago. 0:15:18.440 --> 0:15:20.560 So I think from that perspective it's a much more 0:15:21.280 --> 0:15:25.880 robust underlying situation. Peter, will you still be bullish on 0:15:25.960 --> 0:15:28.760 European banks? Off? The ECB does not code, does not 0:15:28.920 --> 0:15:31.800 hike rates today and indicates that they're on pause until 0:15:31.840 --> 0:15:36.840 they have more clarity. I think that it's very unlikely 0:15:36.880 --> 0:15:41.120 they'll say they're on pause, because that will, if anything, 0:15:41.320 --> 0:15:44.320 provide some sort of sense that they're concerned about the 0:15:44.320 --> 0:15:46.560 contagion effects of this. I think they've got to look 0:15:46.560 --> 0:15:50.000 at the underlying fundamentals of the economy. Actually that's looking 0:15:50.000 --> 0:15:54.240 pretty good. We don't expect a recession this year in Europe. Inflation, 0:15:54.600 --> 0:15:59.000 core inflation, underlying inflations above their target rate. They've signaled 0:15:59.080 --> 0:16:02.480 quite strongly they expect a raiser. It's by fifty basis points. 0:16:02.880 --> 0:16:05.520 And the banking system, again, as I would say, appears 0:16:06.480 --> 0:16:09.480 fundamentally resilient and so I think they would want to 0:16:09.520 --> 0:16:12.560 sort of stay the course, but at the same time 0:16:12.640 --> 0:16:18.120 provide statements that are reassuring about their willingness to provide liquidity, 0:16:18.920 --> 0:16:22.480 to emphasize existing tools that are in place that have 0:16:22.560 --> 0:16:25.040 been built up over the last few years since the 0:16:26.000 --> 0:16:29.000 sovereign debt crisis, and their ability to look at other 0:16:29.040 --> 0:16:32.600 things as well if it's required. And Peter, do you 0:16:32.640 --> 0:16:36.360 think that tighter financial conditions, tighter lending standards are just 0:16:36.400 --> 0:16:40.480 inevitable now after what we've seen in the last week. Yes, 0:16:40.560 --> 0:16:43.320 I do, and I think this is all really a 0:16:43.360 --> 0:16:46.400 function of a massive shift in the cost of capital 0:16:46.480 --> 0:16:49.200 that we've been seeing over the last year year and 0:16:49.200 --> 0:16:51.240 a half. I mean, you only have to go back 0:16:51.280 --> 0:16:53.560 a year and a half and about a course of 0:16:53.600 --> 0:16:56.400 all government debt around the world had a negative yield. 0:16:56.440 --> 0:16:58.680 You know, people were paying for the privilege of lending 0:16:58.720 --> 0:17:02.600 money to governments. That world has changed. You're getting close 0:17:02.680 --> 0:17:07.960 to five percent on US dollar cash for zero volatility 0:17:08.240 --> 0:17:12.480 and risk, and that's high hurdle for asset markets to pass. 0:17:12.520 --> 0:17:15.520 But it also means that there is a tightening in 0:17:15.600 --> 0:17:18.480 financial conditions and arise in the cost of cattle, which 0:17:18.520 --> 0:17:23.680 is inevitably having an impact on pushing valuations of assets down, 0:17:24.160 --> 0:17:28.840 and it's clearly causing some friction in areas of the 0:17:28.880 --> 0:17:35.520 financial markets. But if the underlying situation is robust and 0:17:35.680 --> 0:17:39.440 the cattle buffers are in place, it won't prevent these problems, 0:17:39.480 --> 0:17:44.880 but may restrict the contagion and the systemic fallout from them. 0:17:44.960 --> 0:17:49.440 And that's I think fundamentally the important point to take 0:17:49.480 --> 0:17:52.520 away from this delicate moment. But we appreciate your time 0:17:52.560 --> 0:17:55.440 this morning. Thank you. Up in hind there of Garment Sex. 0:17:59.440 --> 0:18:01.840 I think they're going to look asymmetrically and they're gonna say, 0:18:01.880 --> 0:18:04.240 if we make decision A, what does it mean on 0:18:04.280 --> 0:18:06.720 an asymmetric basis B and C as well? And to 0:18:06.720 --> 0:18:09.560 give us clarity on that not only in the United States, 0:18:09.560 --> 0:18:12.280 but in a Europe that surprised a lot of people 0:18:12.320 --> 0:18:15.359 with optimism is Neil Datta. He's out of you as 0:18:15.400 --> 0:18:19.679 economic research at Renaissance Macro and he has absolutely nailed 0:18:19.680 --> 0:18:24.760 the resilient American economic experiment over the last number of quarters. Neil, 0:18:24.800 --> 0:18:27.000 wonderful to have you with us and try to get 0:18:27.040 --> 0:18:30.679 away from talking about banking crisis. Just in all of 0:18:30.720 --> 0:18:34.080 your study of economics at NYU Neil Datta. Is it 0:18:34.200 --> 0:18:37.840 just simple the ECB will ignore the data and the 0:18:37.960 --> 0:18:43.760 ECB will be on plan as scheduled. I don't know, 0:18:43.920 --> 0:18:47.240 that's an open question. My own sense is that they 0:18:47.400 --> 0:18:50.560 probably don't go fifty. I mean, remember, wasn't it Laguard 0:18:50.720 --> 0:18:56.000 that was called picking up the phone? And how terrible 0:18:56.040 --> 0:18:57.960 of a decision it was for him to let Lehman 0:18:58.040 --> 0:19:02.920 go under. So you know, she's again, We'll see that 0:19:03.680 --> 0:19:05.560 she's probably going to air on the side of faustion 0:19:05.640 --> 0:19:07.879 here and we'll see that again in the next hour 0:19:08.000 --> 0:19:11.679 here with daylight savings time in America. And you know, 0:19:11.920 --> 0:19:14.040 I've never heard dot to talk about ECB, so that's 0:19:14.040 --> 0:19:17.520 pretty cool. You know that this is a moment where 0:19:17.520 --> 0:19:19.880 all experts in random things that just seem to pop 0:19:20.000 --> 0:19:21.879 up day to day. And that's sort of the question 0:19:21.880 --> 0:19:23.880 that I have for you is how do you even 0:19:23.920 --> 0:19:26.440 chart a path forward when the facts change this quickly 0:19:26.840 --> 0:19:29.880 and they are material because this leads to an actual 0:19:29.920 --> 0:19:35.040 tightening and credit conditions with lending. Yeah, I mean that's true. 0:19:35.080 --> 0:19:37.119 I mean the question is exactly. I mean, part of 0:19:37.160 --> 0:19:40.520 the reason why the economy was so resilient, remember, was 0:19:40.560 --> 0:19:43.239 that it wasn't especially credit sensitive to begin with, right, 0:19:43.280 --> 0:19:46.240 that's one of the reasons why you know, the folks 0:19:46.280 --> 0:19:49.159 talking about long and variable lags for the last eighteen months, 0:19:49.280 --> 0:19:52.200 then shifted talking about the weather, then shifted talking about 0:19:52.200 --> 0:19:54.920 seasonal adjustment issues, and now are saying, oh, look, the 0:19:55.000 --> 0:19:57.280 lags finally kicked in. You know sometimes in this business 0:19:57.320 --> 0:20:00.480 lease that's better to be lucky than good. Well, and 0:20:00.520 --> 0:20:02.800 this raises this issue of how do we even know 0:20:03.160 --> 0:20:05.719 what our biggest challenge, what our biggest threat is. And 0:20:05.760 --> 0:20:08.040 I go back to what Nerio Rubini was saying, which is, 0:20:08.400 --> 0:20:11.720 if the FED pauses, if the ECP pauses, this could 0:20:11.720 --> 0:20:15.640 allow an unmooring of inflation expectations at a time when 0:20:15.640 --> 0:20:18.400 you do have an economy with strength. What is your 0:20:18.440 --> 0:20:21.639 concern about that? Is that still a pre eminent risk 0:20:21.840 --> 0:20:26.040 or will the tightening take care of itself? No? Absolutely, 0:20:26.080 --> 0:20:27.960 I think it's a risk. I mean I don't think 0:20:28.000 --> 0:20:32.040 what's happened right now in the banking system, as unnerving 0:20:32.080 --> 0:20:36.040 as it may be, is enough to really send the 0:20:36.119 --> 0:20:39.679 US economy into a below potential growth state. I mean remember, 0:20:39.720 --> 0:20:42.480 I mean, as the data make clear, we went into 0:20:42.520 --> 0:20:45.960 this with a lot of momentum, right, You're talking about 0:20:45.960 --> 0:20:49.480 Atlanta FED tracking three three and a half percent, and 0:20:49.560 --> 0:20:52.320 you're talking about inflation running five percent, so you're talking 0:20:52.320 --> 0:20:56.879 about an eight nine percent nominal growth environment. That helps 0:20:56.920 --> 0:20:58.840 grease the wheels a little bit. So, you know, even 0:20:58.840 --> 0:21:01.399 though the data is still let's try to remember them, 0:21:01.480 --> 0:21:04.239 the momentum going into all this is pretty robust, and 0:21:04.320 --> 0:21:06.920 that gives us a bit of a shock absorber once 0:21:06.960 --> 0:21:10.320 this goes on. At the same time, the inflation data 0:21:10.359 --> 0:21:13.680 are not encouraging. I mean, people looking at PPI and saying, oh, 0:21:13.800 --> 0:21:15.720 you know, this is a reason for them to back off. 0:21:15.880 --> 0:21:20.760 I mean, it's absolutely ridiculous. You know, core inflation is 0:21:20.840 --> 0:21:24.120 running hot. Inflation has been so strong over the first 0:21:24.160 --> 0:21:25.600 two months of the year that if it didn't do 0:21:25.640 --> 0:21:27.199 anything for the rest of the year, it'd still be 0:21:27.280 --> 0:21:31.080 up one percent. So yeah, I mean, I think the 0:21:31.240 --> 0:21:36.160 risk is if they pause, they may have to come 0:21:36.200 --> 0:21:39.000 in later and then they may have to be even 0:21:39.040 --> 0:21:43.080 more aggressive. So I tend to sympathize with that view. 0:21:43.359 --> 0:21:45.080 You'll give me a level here, And one of my 0:21:45.119 --> 0:21:48.200 great themes is Europe just flat out does not have 0:21:48.760 --> 0:21:54.040 a nominal GDP persistency like America. We are generally because 0:21:54.040 --> 0:21:58.560 of technology and maybe a different demographic and economy set 0:21:58.600 --> 0:22:01.680 at a higher level. If I'm right on that, what's 0:22:01.720 --> 0:22:05.119 your run rate a nominal GDP? I think we're in 0:22:05.160 --> 0:22:08.359 a five to six percent underlying nominal growth environment right now. 0:22:09.240 --> 0:22:12.080 You know, you talk about two two and a half 0:22:12.119 --> 0:22:16.760 percent real growth around four percent inflation, So you know, 0:22:16.840 --> 0:22:20.800 six percent I think is a reasonable benchmark. That seems 0:22:20.840 --> 0:22:25.360 to me to be pretty constructive as well. Can they pause, 0:22:26.080 --> 0:22:30.240 I mean ECB today or FED here in a number 0:22:30.280 --> 0:22:34.879 of days. Can they pause with a strong statement that 0:22:35.000 --> 0:22:38.800 they will resume rate hikes is appropriate at some point. 0:22:39.600 --> 0:22:41.800 I mean, they could do that, but I mean my 0:22:41.880 --> 0:22:44.600 sense was, in reading the events of last weekend and 0:22:44.640 --> 0:22:49.120 what the FED is done, my assessment is it goes 0:22:49.160 --> 0:22:52.320 back to the Bernanke discussion about using the right tools 0:22:52.359 --> 0:22:54.560 for the right job. What they did was try to 0:22:54.680 --> 0:22:57.399 ring fence the banking system to create the space for 0:22:57.440 --> 0:23:01.720 themselves to keep hiking to deal what's slowing down the economy, 0:23:03.640 --> 0:23:05.840 you know, an underlying demand. Remember, rates are a blunt 0:23:05.880 --> 0:23:09.360 tool that affects you know, all industries at the same time, right, 0:23:09.440 --> 0:23:12.880 not just the banking sector. So I thought, in some 0:23:12.920 --> 0:23:15.440 ways you can make the argument that what they did 0:23:15.480 --> 0:23:18.000 over the weekend was a way to create the space 0:23:18.000 --> 0:23:21.320 to ultimately hike you know, at the margin, obviously it 0:23:21.359 --> 0:23:24.920