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Speaker 1: This is the Bloomberg Surveillance podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz joined us each day

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Speaker 1: for insight from the best and economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app. We mentioned

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Speaker 1: yesterday Adam Posen was with us PhD. From Harvard. He

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Speaker 1: was lights out, I thought. And one of the reasons

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Speaker 1: we had doctor posenon is doctor Ferman of Harvard, teacher

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Speaker 1: of AC ten, which is the definitive economics course there

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Speaker 1: at Harvard. Manki used to throw chalk at people on it.

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Speaker 1: And the answer is that was on globalization, that was

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Speaker 1: on all the dynamics that out there. And we've got

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Speaker 1: a guy to start us off strong and as aar Lisa,

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Speaker 1: why don't you bring in not Kenneth Rogoff, but Bradley Rogoff,

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Speaker 1: who you know. I can understand why people got the

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Speaker 1: two of them confused in economics, but why do you

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Speaker 1: bring in brad Rogueoff on this bond mess? He and

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Speaker 1: Barclay's rot I have. Feldstein is my AC ten professor

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Speaker 1: at Harvard. Actually, so I'm dating back before, but I

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Speaker 1: wonder what Marty Feldstein would say of this crisis. He

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Speaker 1: would say, we have to clear the market, clear out

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Speaker 1: the losers, wouldn't I think that's probably about it. It's

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Speaker 1: probably about right. We're not doing that right now. What

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Speaker 1: I could tell but Bred, how do you make sense

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Speaker 1: right now? As the head of Fick Research over at Barclays,

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Speaker 1: how do you understand whether the market is just simply

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Speaker 1: wrong to price in both rate hikes and some sort

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Speaker 1: of disinflation that continues. Yeah, I think, well, we don't

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Speaker 1: agree with that. I'll start with that. I think we expect, Yes,

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Speaker 1: could there be rate hikes coming when you get to

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Speaker 1: rate cuts coming in twenty twenty four, Sure, right, but

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Speaker 1: we think there's gonna be one more hike this summer.

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Speaker 1: And it is hard to marry you guys. We're just

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Speaker 1: alluding to it where equities are which don't seem to

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Speaker 1: go down, and when you look at what the markets

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Speaker 1: pricing in terms of eventual cuts later this year. Now,

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Speaker 1: at least you were kind of alluding to some of

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Speaker 1: the stuff around banks, and look, this is a banking crisis.

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Speaker 1: But the reason, you know, if we're I think we're

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Speaker 1: calling it that, I guess at this point. But the

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Speaker 1: reason we got there is very different than a lot

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Speaker 1: of other banking crises. It wasn't because of bad assets, right,

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Speaker 1: It was because of duration really more than anything. And

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Speaker 1: I do think there's a little bit of a distinction

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Speaker 1: between that and I guess if you had to choose

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Speaker 1: your crisis, I probably rather have this one. But there's

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Speaker 1: also a distinction between the idea of bank failures and

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Speaker 1: the idea of credit materially constrained and more suddenly than

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Speaker 1: it has been in the past. How do you draw

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Speaker 1: that distinction in terms of how to price that into

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Speaker 1: a market that's looking for either two thousand and eight

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Speaker 1: or all clear? See see that that is the difference,

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Speaker 1: right is maybe right now we can say we're clear

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Speaker 1: of the crisis that we went through, you know, especially

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Speaker 1: the last couple of weeks, but it has consequences still,

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Speaker 1: and those consequences don't have to be two thousand and eight.

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Speaker 1: I think to your point, those consequences can be slower

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Speaker 1: growth and whether we get to you're loding some forecasts

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Speaker 1: of a modest recession in the back half of this

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Speaker 1: year or early next year. Some people have that in

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Speaker 1: or just really low near zero growth, which is what

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Speaker 1: we're kind of closer to. Those have a big impact

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Speaker 1: and also probably aren't that consistent with where equities are today. Right.

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Speaker 1: I had a guy just email in. He's watching the

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Speaker 1: show on jet Blue Airlines. I think it's on Direct TV.

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Speaker 1: Thank you for Direct TV and jet Blue for putting

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Speaker 1: us on across the nation. But he's got a really

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Speaker 1: important question, and that is, Okay, we had low rate

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Speaker 1: free lunch for decades and now we're back here. Is

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Speaker 1: this rate regime behavior forward like what you and I studied,

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Speaker 1: or is it something new, this new higher rate regime.

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Speaker 1: Well I think that yeah, if we don't have to

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Speaker 1: go back that far to have a rate regime like this, right,

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Speaker 1: we can go back fifteen years a little bit more

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Speaker 1: than fifteen years ago and have that the different friends,

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Speaker 1: I think is that prior to that, we didn't have

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Speaker 1: the really low rate regime. So I don't think it's

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Speaker 1: just the fact that we have this mud argue more

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Speaker 1: normal as opposed to high rate regime right now. I

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Speaker 1: think what it is is you had that period of

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Speaker 1: such low rates, So then it leads to so many

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Speaker 1: assets and fixed income specifically pricing at a substantial discount,

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Speaker 1: and that leads to the disconnect that led to the

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Speaker 1: problems that we saw in banks. So I do think

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Speaker 1: it's a low rate regime that's causing the problem as

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Speaker 1: opposed to the current rate regime the whole financial system.

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Speaker 1: And I'm going to go back to Chris Whalen's glorious

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Speaker 1: one volume on the American financial system and crisis as well.

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Speaker 1: So I got a guy on Jet Blow or whatever

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Speaker 1: airline they're on, watching this show, and what it signals here, Bradley,

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Speaker 1: is the fear that's out there. Should we fear this

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Speaker 1: new rate regime? As I said, I don't know that

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Speaker 1: we need to fear the current rate regime, also because

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Speaker 1: by having hyped the way the Fed has, they do

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Speaker 1: have some room now to act really through non extraordinary

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Speaker 1: policy have an impact if we get to a place

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Speaker 1: where inflations come down a bit. Let's say, you know,

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Speaker 1: later this year, early next year, and growth has come down.

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Speaker 1: So I think in that sense, you'd almost have more

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Speaker 1: fear if this was happening and rates were at zero today, right,

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Speaker 1: I think that could be agree with at least to me,

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Speaker 1: this is the heart of the matter. And there's so

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Speaker 1: many younger people who didn't study Martin Feldstine a million

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Speaker 1: years ago. Where can we celebrate that this is maybe

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Speaker 1: normal with proper incentives of capital versus mister Rogoff's comment

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Speaker 1: there on zero, Well, I would argue that it's really

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Speaker 1: too soon to set to tell, and I think that

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Speaker 1: to your point pride, and this, to me is really

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Speaker 1: the key point. It's one thing to have a normal

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Speaker 1: rate of interest, it's another thing to do it after

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Speaker 1: years and years of zero percent rates that inflated assets

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Speaker 1: and caused leverage to build up at a rate that

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Speaker 1: might be infeasible for companies based in a business model.

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Speaker 1: So how do you discern what seems like something that

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Speaker 1: gives you income versus something that will crimp companies, cause

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Speaker 1: higher defaults, and create someone to charge a much higher

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Speaker 1: risk premium. It's very interesting because what do we all expect,

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Speaker 1: And I'm sure you had a lot of people on

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Speaker 1: this show say it, well, how are these FED hikes

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Speaker 1: going to impact the economy? Where are we going to

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Speaker 1: see the problems? Well, the answer was going to be Hell,

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Speaker 1: maybe it's going to be the consumer for example, Right,

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Speaker 1: it's going to be higher levered assets and credit right

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Speaker 1: the world that I spent a lot of my time,

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Speaker 1: and it turns out it was the safest assets that

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Speaker 1: led to the first part of it, right, And I

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Speaker 1: think that's what you're getting to, Lisa. There will eventually

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Speaker 1: be some impact right on those riskier assets things you know,

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Speaker 1: you know, lower rated, high yel bonds and all of

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Speaker 1: those things. But just like twenty twenty is helpful in

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Speaker 1: the sense of and I know it's hard to say

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Speaker 1: this looking backwards, but there are companies that were higher

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Speaker 1: levered that were problematic, they defaulted then, and not as

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Speaker 1: much excess built in the system. So I think, just

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Speaker 1: like that, having this little bit of a preview, I

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Speaker 1: do think that even though we will see defaults come

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Speaker 1: up and all of that stuff, I don't think it'll

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Speaker 1: be as extreme. So this, to me is one of

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Speaker 1: the big questions, especially with the banking issues that we've seen.

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Speaker 1: Is this perhaps froth that we've already seen pushed out

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Speaker 1: of the system, or is there another shoe to drop?

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Speaker 1: Where would you look for that other shoe to drop? Yeah,

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Speaker 1: And I think, you know, it's a question of just

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Speaker 1: you know, from how far up you're dropping that shoe, right, Like,

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Speaker 1: so there will be eventual impact in terms of okay,

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Speaker 1: if banks are lending last, that has to have an

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Speaker 1: impact on corporate America. I do think we come into

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Speaker 1: this fundamentally in a pretty good spot, right, and so

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Speaker 1: we don't expect the normal recession default rates or ten

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Speaker 1: twelve percent that you've seen, right, We expected probably be

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Speaker 1: really half that. However, there's other areas, right, you know,

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Speaker 1: if you think about the increase in rates, commercial real

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Speaker 1: estate is the one that's coming up quite frequently right

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Speaker 1: now and in the interview. Yeah, that's why I came

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Speaker 1: into the studio, and that's why one where obviously with

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Speaker 1: cap rates have to move when when rates moved, um

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Speaker 1: and so I think there are a lot of other

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Speaker 1: areas and that has an impact too because people hold

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Speaker 1: that on balance sheet. We've got thirty seconds left, which

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Speaker 1: is a perfect time to dive into this commercial real

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Speaker 1: estate challenged, right, Yeah, I think it is. You know,

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Speaker 1: we're pretty focused on office um as being the area

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Speaker 1: we're most concerned about, and you know, we think the

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Speaker 1: peak to troff there could be up to Thank you

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Speaker 1: so much, Bradley Rogue Offfice with Barclays. One of the

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Speaker 1: things we missed here is a data check on Europe.

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Speaker 1: It was quite a ten days for Europe and we're

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Speaker 1: thrilled to bring you this morning. Katrina Dudley, portfolio manager

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Speaker 1: at Franklin Mutual Series, doesn't describe or true European portfolio expertise.

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Speaker 1: Are you optimistic about Europe, Miss Dudley, UM, I think

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Speaker 1: that if we look at what happened last week, you know,

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Speaker 1: Europe actually was kind of contained until the end of

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Speaker 1: last week from the banking crisis has really started in

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Speaker 1: the United States, and I think that that was a

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Speaker 1: positive that towards the end of last week we saw

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Speaker 1: what was happening in the US kind of move into

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Speaker 1: the European markets, and we saw some downward pressure in

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Speaker 1: those European banking stocks. As I look at Europe, I think, however,

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Speaker 1: that the structural drivers that we've been talking about for

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Speaker 1: now a couple of months continue to underpin that market.

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Speaker 1: So we can just continue to be optimistic. When we're optimistic,

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Speaker 1: we have to mop up a Swiss banking regime. I

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Speaker 1: thought over the weekend, particularly the FT had some nice

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Speaker 1: articles showing the Swiss people rebelling against a Swiss bank

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Speaker 1: bailout of Credit Swiss as well. Does that carry over

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Speaker 1: in the financial section in Europe to where there's a

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Speaker 1: huge tension between people, governments and the banking industry. I

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Speaker 1: think there's been a lot of tension in the European

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Speaker 1: banking industry already. I think that we need to understand

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Speaker 1: that the way that the U Zone it's construction constructed

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Speaker 1: is it's a series of countries and each of those

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Speaker 1: countries has a central bank that will support that in

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Speaker 1: country banking system. We saw that with Deutsche Bank. We've

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Speaker 1: seen that support come out for Germany, for example. We've

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Speaker 1: seen it as you described with Credit Swiss and with

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Speaker 1: UBS and the Swiss National Bank stepping in as well.

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Speaker 1: So you will see that on a country basis, and

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Speaker 1: it's a real reflection of the fact that Europe is

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Speaker 1: just a series of countries that have come together to

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Speaker 1: create the Eurozone, but those nationalistic interests still exist. There's

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Speaker 1: a larger question here underpinning some of the banking stress.

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Speaker 1: Are we at the end of red hiking cycles that

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Speaker 1: have been the fastest on record. Katrina what's your view.

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Speaker 1: I think that the FED is very data dependent, and

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Speaker 1: they're also watching that PCE number that is coming out

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Speaker 1: on Friday. I think that they'll be as glued to

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Speaker 1: their Bloomberg screens as I am. They're going to be

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Speaker 1: watching to see where there or not there is any

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Speaker 1: easy in inflation pressures. If there is, I think that

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Speaker 1: they can just take a pause in that rate hiking cycle.

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Speaker 1: But I have heard a lot of people thinking that

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Speaker 1: we are going to have rate cuts towards the end

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Speaker 1: of this year. We're not in that camp that we're

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Speaker 1: expecting the FED to turn so quickly. We think that

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Speaker 1: they're more likely to take a pause in terms of

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Speaker 1: the rate hikes, and potentially, you know, there's been a

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Speaker 1: lot of quantitative tightening in the market and we're starting

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Speaker 1: to see some of that ease. Could you know, if

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Speaker 1: that's the case, how do you play it through a

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Speaker 1: market that is priced in almost one hundred basis points

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Speaker 1: of rate cuts by the beginning of next year. In

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Speaker 1: terms of how we play it, we just think you

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Speaker 1: need to take a step back, and I think that

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Speaker 1: that's the benefit of being a long term investor, that

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Speaker 1: ability to take a step back and have a look.

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Speaker 1: I think that we were very concerned that the banking

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Speaker 1: crisis and the increase in rates would really impact those

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Speaker 1: smaller midsized companies. And we've talked in the past about

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Speaker 1: the industrial sector, and we talk about the three legs

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Speaker 1: to that investment thesis. We look at the legislation that's

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Speaker 1: positive and that's still in place. We look at some

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Speaker 1: of those structural drivers electrification, for example, IoT is another.

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Speaker 1: But the third leg was that supplier base that needed

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Speaker 1: financing in order to expand. And we've actually seen customers

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Speaker 1: step step into the place of the certainty that you

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Speaker 1: normally get from the financial sector. So we're actually continuing

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Speaker 1: to be very very positive on the industrial sector demand

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Speaker 1: because that third leg of the stool continues to be strong.

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Speaker 1: Kut and I get thirty seconds left. I'm sorry for this.

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Speaker 1: It deserves a much longer amount of time. Bernard Bruckwen

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Speaker 1: said by straw hats and Winner. I'm seeing images of

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Speaker 1: Paris in revolt. I'm seeing talk about a collapse of

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Speaker 1: the fifth Republic of mccram, maybe even a reformation of

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Speaker 1: a new republic, a sixth Republic. Can you go along

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Speaker 1: France here? Given all the turmoil. I think that what

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Speaker 1: you need to understand is what has happened in each

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Speaker 1: of these markets. Look at their response to the energy crisis,

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Speaker 1: because they stepped into the market to support that low

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Speaker 1: end consumer. And it's those consumers that are going to

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Speaker 1: remember that. And that's where the popular pressure really counts.

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Speaker 1: At populous pressure, which really looks at these markets fragmenting,

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Speaker 1: I think that that argument is really has gone out

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Speaker 1: of the window. We think that Europe stays together and

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Speaker 1: that is positive for all those markets in Europe. Contarina,

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Speaker 1: thank you for helping us start the show this morning.

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Speaker 1: Continua Dudley here with Franklin Mutual joining us now with

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Speaker 1: Jenny Montgomery Scout as Christopher Marinaki is in banking at

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Speaker 1: Research an important voice to speak to it this time,

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Speaker 1: let's just start with first principles. In the moment, Christopher,

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Speaker 1: is a crisis over. I think we're getting to the end.

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Speaker 1: The two troubled banks have been resolved, and I think

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Speaker 1: now we see resolution from both that's your bank last

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Speaker 1: week and yesterday which first citizens buying the Silicon Valley.

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Speaker 1: So I think we have to get to the end

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Speaker 1: of the quarter on Friday. But I feel like we

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Speaker 1: are on the road to recovery, and I think when

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Speaker 1: earnings are announced in a few weeks in mid April,

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Speaker 1: you're going to see much better results and much better

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Speaker 1: deposit flows. And most investors have understood the last few weeks.

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Speaker 1: I guess I'm going to go to deposit flows right now.

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Speaker 1: We're going to get more reporting on that. One of

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Speaker 1: the themes out there is well at five percent forgetting

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Speaker 1: about bank crisis. Money is going to move to money

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Speaker 1: market funds? Do you agree? While we've seen money market

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Speaker 1: mutual funds move two hundred and fifty billion dollars the

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Speaker 1: last two weeks if you look at the Thursday reporting,

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Speaker 1: so clearly there has been some movement. But I think

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Speaker 1: in the big picture, Tom, there's I think a lot

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Speaker 1: less deposit outflow in the system. It's only four and

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Speaker 1: a half percent if you look at the SAD data

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Speaker 1: last Friday night, so it's more are muted, and I

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Speaker 1: think we've been normalizing deposits all along. It just has

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Speaker 1: felt a lot worse the past few weeks. You know,

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Speaker 1: I'm going to use the Jenny Montgomery Scott history here

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Speaker 1: of Philadelphia. You go out to traditional banking outside Philadelphia,

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Speaker 1: and that's a place where it would be like anywhere

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Speaker 1: in America. What I detect here is banking by marketing concept.

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Speaker 1: When you talk to bankers who are like normal people,

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Speaker 1: how do they feel about marketing concept driven ideas intruding

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Speaker 1: in this crisis on their normal banking. Well, to most customers,

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Speaker 1: they're looking for service. They're looking for more than this

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Speaker 1: interest rate. If interest rate was the only thing that

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Speaker 1: I think we would have seen the bank deposit costs

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Speaker 1: rise a lot faster the previous four or five quarters.

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Speaker 1: It's been a very slow increase of deposit rates. I

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Speaker 1: think we are going to see a meaningful impact and

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Speaker 1: higher rates of Q one and Q two. But in

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Speaker 1: my opinion, it's a much more beauty response. Customers want

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Speaker 1: safety and surety, and they also want advice, so it's

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Speaker 1: not always about interest rate. That's the dog barking in

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Speaker 1: the background, just in case you that's his name as

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Speaker 1: Chipper ip. I was wondering if Chipper was having a

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Speaker 1: serious constipers parking. He's he's having ankst about the banking system.

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Speaker 1: The Braves have beat the Red Sox like four times

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Speaker 1: in spring training, just so you know, Thank you, Tom,

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Speaker 1: Christopher I am curious. There's an article by Muhammadalarianlobal Opinion.

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Speaker 1: I keep going back to it because it really highlights

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Speaker 1: this one aspect that people are honing in on. Even

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Speaker 1: if we don't get some collapse in financial system or

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Speaker 1: another bank, there still is going to be a grinding tightening,

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Speaker 1: a sort of acceleration. And how much some of these

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Speaker 1: regional banks withdraw some of their credit. How much are

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Speaker 1: you tracking that? How much do you believe that narrative? Well,

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Speaker 1: I think the credit always gets tightened in a crisis

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Speaker 1: like this, We saw it in two thousand and eight nine.

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Speaker 1: I think banks are going to be very discerning on

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Speaker 1: the new loans they make. There's a lot of pipeline

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Speaker 1: lending that was done in January and February, and I'm

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Speaker 1: sure it became a lot tighter the last three weeks.

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Speaker 1: So as we head into second and third quarter, I

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Speaker 1: think new loans will be very much lower, and if anything,

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Speaker 1: you're going to see much higher rates. I think one

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Speaker 1: of the mysteries is that bank loan rates are going

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Speaker 1: to be a lot higher. Banks you're going to charge

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Speaker 1: more for risk, and that actually is going to be

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Speaker 1: a benefit and it will offset some of the higher

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Speaker 1: deposit rates and we see But I think your question

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Speaker 1: is a good one, and ultimately credit is getting tighter.

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Speaker 1: So in other words, it just to sort of frame

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Speaker 1: this a little more starkly. Could we see banks survive

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Speaker 1: and even thrive, especially if they're consolidating business at the

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Speaker 1: same time that you see a more dramatic constriction in

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Speaker 1: overall growth in the US. Well, I think dramatic might

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Speaker 1: be the thing I would disagree with. I think it's

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Speaker 1: going to be incrementally slower. Banks are still in the

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Speaker 1: business of taking risk and making a discerning vote of

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Speaker 1: confidence for their customers. I think leverage overall is still

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Speaker 1: much lower today than it was fifteen years ago. We

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Speaker 1: see a lot of banks lending at sixty five to

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Speaker 1: seventy cents on the dollar when they used to lend

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Speaker 1: on ninety two hundred and then the properties were coming

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Speaker 1: down value significantly, So we have left leverage in the system,

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Speaker 1: and I think ultimately that's a key to what banks

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Speaker 1: right off and their problems. So I think credit does

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Speaker 1: get tighter, for sure, but I don't think it's impossible.

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Speaker 1: And I think if anything, banks are here for businesses

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Speaker 1: that they wish to support he is the company's I

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Speaker 1: think who are in a good financial positions can continue

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Speaker 1: to move forward and those who cannot will struggle. So

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Speaker 1: you know, we do expect to see higher levels of

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Speaker 1: credit issues as this year and next year unfold. One

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Speaker 1: of the big questions in the past couple of weeks

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Speaker 1: is how much of a risk premium will be charged

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Speaker 1: for some of the smaller and regional banks that could

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Speaker 1: suffer deposit outflows in a way that the large banks

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Speaker 1: just can't. How much is that going to be a

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Speaker 1: lasting feature that basically the valuation story is going to

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Speaker 1: be more disparate going forward of the behemoths versus the regionals.

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Speaker 1: I think the regionals and even the smaller community banks

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Speaker 1: are going to do quite well. We think the deposit

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Speaker 1: outflow same has been incorrect, and I think as the

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Speaker 1: data is shown for March thirty first, you'll see a

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Speaker 1: lot less outflows than folks have understood. I also think

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Speaker 1: you're going to see a lot more clarity about the

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Speaker 1: level of granularity and deposits at these smaller and mid

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Speaker 1: sized banks. So I actually think it's an opportunity for

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Speaker 1: them to really open the Kimona give a lot more

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Speaker 1: disclosure on deposits for lack of deposit concentration, that's going

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Speaker 1: to be a huge difference when we see earnings come

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Speaker 1: out in a few weeks. Chris the Wall Street Journal

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Speaker 1: editorial lays out the first whatever it is the bank

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Speaker 1: that went up forty five percent yesterday, they're taking outs

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Speaker 1: first citizens, They're taking out SVB. How do the banks

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Speaker 1: you follow, Chris Marinac compete with a bank that has

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Speaker 1: a massive support, gains losses, deposit coverage, etc. Deposit flight?

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Speaker 1: How do other banks compete with someone so aided by

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Speaker 1: the government of the United States of America. Well, the

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Speaker 1: reality is a lot of it comes down to individual

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Speaker 1: relationships with bankers, and so you can have a lot

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Speaker 1: of government aid for a given bank and a support

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Speaker 1: at a moment in time, but it really doesn't have

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Speaker 1: anything to do with the individual relationships and the advice

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Speaker 1: that's given a bank. I think a lot of commercial

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Speaker 1: businesses see a bank as a trusted advisor in addition

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Speaker 1: to their attorney, in addition to their accounts. So I

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Speaker 1: don't think that the government aid has much to do

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Speaker 1: with that. I think, if anything, it's going to be

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Speaker 1: an ongoing conversation about what those customers need and ultimately

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Speaker 1: what they need to grow their business. I think businesses

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Speaker 1: are slowing down as a result of this crisis this month,

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Speaker 1: and that goes back to the credit tightening that is

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Speaker 1: out there. I think there's a decision by many businesses

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Speaker 1: to not increase their factories and increase their workers incrementally,

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Speaker 1: just given what they've seen. Excuse you, valuable, Christopher Marinack,

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Speaker 1: Thank you so much. Jenny Montgomery Scott there this morning

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Speaker 1: joining us down Victoria Fernandez, who's a major charman. She's

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Speaker 1: not on the island of Manhattan. She is out there

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Speaker 1: and across the rest of America also on with us

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Speaker 1: because I have a final zero and she's actually I

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Speaker 1: think she had one or two of the final four

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Speaker 1: picked out, So she's our resident genius from our Victoria Fernandez.

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Speaker 1: I'm going to cut to the chase. There is a

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Speaker 1: banking crisis in a play is differently among the financial centers,

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Speaker 1: and it does across Texas and the rest of this country.

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Speaker 1: Tell us how the financial crisis, the banking crisis rather

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Speaker 1: that we're in now adjust the strategies of cross market

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Speaker 1: global investments. Yeah. Well, first of all, I'm going to

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Speaker 1: say Unfortunately, my cougars are no longer in the final four.

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Speaker 1: But that's okay. We'll go from there. When we look

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Speaker 1: at what's going on in the banking sector, we have

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Speaker 1: to say, wait, all of this has tightened financial conditions.

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Speaker 1: That's the key point that we're looking at right here.

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Speaker 1: So when you have tighter financial conditions, which the FED

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Speaker 1: has been trying to do for such a long period

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Speaker 1: of time and has not been very successful at it,

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Speaker 1: the banking crisis did it pretty quickly. People are saying,

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Speaker 1: depending on what analysts you talk to, it could be

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Speaker 1: anywhere from twenty five to one hundred basis points of

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Speaker 1: rate heights that they have seen because of the crisis.

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Speaker 1: That's kind of now built in. Here's what we have

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Speaker 1: to watch with that. When you have tighter financial conditions.

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Speaker 1: You guys were talking about the smaller banks that are

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Speaker 1: out there. Let's look at the Senior Loan Officer survey

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Speaker 1: that comes out in a couple of weeks and see

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Speaker 1: what is happening with lending. It's probably coming down. That's

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Speaker 1: going to affect M two growth. It's going to affect

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Speaker 1: economic activity that flows through to earnings because pricing power

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Speaker 1: is gone, margins are going to get hit and that

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Speaker 1: then flows through to the labor market. This is the

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Speaker 1: progress that the FED is watching. They want to see

432
00:22:29,080 --> 00:22:33,000
Speaker 1: this happen, and so I think this fits into their story.

433
00:22:33,440 --> 00:22:36,160
Speaker 1: But Tom, here's the thing that can change pretty quickly

434
00:22:36,600 --> 00:22:41,240
Speaker 1: if the data changes. So how do you change equity allocation?

435
00:22:41,400 --> 00:22:44,320
Speaker 1: I mean the charm of cross Mark is you're working

436
00:22:44,359 --> 00:22:48,000
Speaker 1: with real people with real money. Everybody, including me, is

437
00:22:48,040 --> 00:22:51,119
Speaker 1: real scared about some of the banking news that we see.

438
00:22:51,640 --> 00:22:56,560
Speaker 1: Given some level of new restriction or super restriction, how

439
00:22:56,600 --> 00:23:00,879
Speaker 1: do you change your equity allocation? Yeah, well John's not

440
00:23:00,920 --> 00:23:02,480
Speaker 1: there today, so I guess we can talk about the

441
00:23:02,520 --> 00:23:08,520
Speaker 1: Dow a little bit. Continue. We've seen the Dow down

442
00:23:08,600 --> 00:23:10,440
Speaker 1: year to date, but we've seen the NASTAC in the

443
00:23:10,600 --> 00:23:14,160
Speaker 1: SMP higher because of the big turnover people going into

444
00:23:14,240 --> 00:23:17,120
Speaker 1: those tech stalks. What we're actually doing a cross Mark

445
00:23:17,280 --> 00:23:20,000
Speaker 1: is trimming some of those tech stocks because they've have

446
00:23:20,240 --> 00:23:23,160
Speaker 1: this run and we don't anticipate we're going to continue

447
00:23:23,160 --> 00:23:24,720
Speaker 1: to see it. Because we don't think rates are going

448
00:23:24,800 --> 00:23:27,120
Speaker 1: to continue to fall right here. We think we're gonna

449
00:23:27,160 --> 00:23:30,359
Speaker 1: see them turn around. We continue to look at quality names,

450
00:23:30,640 --> 00:23:33,960
Speaker 1: names with strong balance sheets, names with good business models.

451
00:23:34,280 --> 00:23:37,119
Speaker 1: That's what we're focusing on. We have some cyclical we

452
00:23:37,240 --> 00:23:39,000
Speaker 1: have a little bit of growth in there too, but

453
00:23:39,119 --> 00:23:42,280
Speaker 1: some of those value names, it's when we hit the reception,

454
00:23:42,720 --> 00:23:45,280
Speaker 1: which previously we would have said that was later in

455
00:23:45,320 --> 00:23:48,240
Speaker 1: the year. Now we're looking more summertime. That's when you're

456
00:23:48,240 --> 00:23:49,879
Speaker 1: going to start to go a little bit growth here.

457
00:23:49,960 --> 00:23:51,600
Speaker 1: That's when you're going to start to look at maybe

458
00:23:51,640 --> 00:23:55,160
Speaker 1: the lower quality names that tend to do better once

459
00:23:55,240 --> 00:23:58,000
Speaker 1: we hit a sustained recovery. What are the quote unquote

460
00:23:58,200 --> 00:24:04,760
Speaker 1: lower quality names in the Dow Jones Industrial Average. Well,

461
00:24:04,800 --> 00:24:06,399
Speaker 1: I think you just have to look at some of

462
00:24:06,440 --> 00:24:08,560
Speaker 1: the names, some of these that have been really hard hit.

463
00:24:08,840 --> 00:24:11,080
Speaker 1: We're looking at names they do the opposite of what

464
00:24:11,119 --> 00:24:14,399
Speaker 1: we were just talking about, that typically don't have the

465
00:24:14,480 --> 00:24:17,160
Speaker 1: strongest balance chets, their earnings are not the strongest there.

466
00:24:17,359 --> 00:24:19,720
Speaker 1: I'm not going to give specific names on those because

467
00:24:19,760 --> 00:24:21,879
Speaker 1: we're not buying them right now, so compliance would be

468
00:24:21,920 --> 00:24:28,240
Speaker 1: a little have an issue, yes, exactly, so you can't

469
00:24:28,280 --> 00:24:30,520
Speaker 1: do that. I will say names that we have been

470
00:24:30,560 --> 00:24:33,920
Speaker 1: adding a little bit to JP Morgan because of what's

471
00:24:33,920 --> 00:24:37,240
Speaker 1: happened there and their valuations look strong. Some of the

472
00:24:37,320 --> 00:24:39,920
Speaker 1: more stable names that we have in there in healthcare

473
00:24:40,040 --> 00:24:42,520
Speaker 1: names will come out of those and go into some

474
00:24:42,600 --> 00:24:45,399
Speaker 1: of the other names, um, you know, looking at the

475
00:24:45,480 --> 00:24:49,080
Speaker 1: more cyclical growth names. Once we hit a recession, looking

476
00:24:49,119 --> 00:24:51,160
Speaker 1: at the middle of the year, Victoria, if the Fed

477
00:24:51,200 --> 00:24:55,760
Speaker 1: cuts rates, do you get more bullish on risk assets? Yeah,

478
00:24:56,640 --> 00:25:00,160
Speaker 1: you know, it's an interesting question because it depends. That's

479
00:25:00,160 --> 00:25:02,440
Speaker 1: why we're seeing rates being cut. If we're seeing rates

480
00:25:02,480 --> 00:25:05,480
Speaker 1: cut because we anticipate a recession, we're gonna wait a

481
00:25:05,520 --> 00:25:08,600
Speaker 1: little bit longer. If we're actually in a recession and

482
00:25:08,640 --> 00:25:10,720
Speaker 1: we're cutting rates and it's the start of the new

483
00:25:10,800 --> 00:25:14,360
Speaker 1: sustained bull market, then yes, then I think you can

484
00:25:14,400 --> 00:25:17,000
Speaker 1: do some risk assets. You don't want to go into

485
00:25:17,080 --> 00:25:20,080
Speaker 1: those names until we get to the recession. You don't

486
00:25:20,119 --> 00:25:22,960
Speaker 1: get your bottom in your market before that, so we

487
00:25:23,040 --> 00:25:26,320
Speaker 1: need to wait and see that. We're not particularly saying

488
00:25:26,359 --> 00:25:29,040
Speaker 1: one hundred percent. We've already seen the bottom in the market,

489
00:25:29,160 --> 00:25:33,040
Speaker 1: so we're still being cautious, biting our time a little bit.

490
00:25:33,080 --> 00:25:35,520
Speaker 1: I'd rather be a little late to the party than

491
00:25:35,600 --> 00:25:38,840
Speaker 1: get there early and not have anything there just quickly, Victoria.

492
00:25:38,880 --> 00:25:42,120
Speaker 1: What's the best head right now against potentially higher inflation

493
00:25:42,200 --> 00:25:46,760
Speaker 1: environment for longer. Well, look, you're asking a bond girl

494
00:25:46,840 --> 00:25:49,000
Speaker 1: this question, and so I'm going to tell you need

495
00:25:49,040 --> 00:25:51,920
Speaker 1: to have that diversification in your portfolio by adding some

496
00:25:51,960 --> 00:25:55,080
Speaker 1: fixed income, and don't just add short term fixed income,

497
00:25:55,080 --> 00:25:58,560
Speaker 1: because you're setting yourself up for interest or for reinvestment risk.

498
00:25:58,920 --> 00:26:02,240
Speaker 1: Once those bonds match, or a Barbell strategy, add some

499
00:26:02,359 --> 00:26:05,800
Speaker 1: fixed income and then the equity adds some of those lams.

500
00:26:05,920 --> 00:26:09,600
Speaker 1: Bond girl, with thirty seconds here United Healthcare with that

501
00:26:09,760 --> 00:26:13,879
Speaker 1: ginormous bond deal. It takes him out to eleven percent

502
00:26:14,000 --> 00:26:17,040
Speaker 1: twelve percent debt, which many people in the textbooks would

503
00:26:17,040 --> 00:26:20,920
Speaker 1: stay still underdebted. United Healthcare in the last ten years

504
00:26:21,000 --> 00:26:24,440
Speaker 1: is up twenty five point six percent per year. That's

505
00:26:24,440 --> 00:26:26,639
Speaker 1: their stock. Are we going to see a ton of

506
00:26:26,720 --> 00:26:31,160
Speaker 1: issuances by the quality names of the Dow Jones Industrial average.

507
00:26:32,560 --> 00:26:35,040
Speaker 1: I wouldn't be surprised if we did, tom, especially if

508
00:26:35,040 --> 00:26:37,120
Speaker 1: people anticipate the rates are going to go a little

509
00:26:37,119 --> 00:26:40,040
Speaker 1: bit higher, if they believe the central banks that there's

510
00:26:40,119 --> 00:26:42,680
Speaker 1: more work to do than we could see some issues

511
00:26:42,720 --> 00:26:44,480
Speaker 1: come in and lock in some of the lower rates

512
00:26:44,480 --> 00:26:46,680
Speaker 1: that they have right now. Victoria, thank you so much.

513
00:26:46,760 --> 00:26:54,680
Speaker 1: Victoria Fernandas their crossmart Global Investments to give us a

514
00:26:54,800 --> 00:26:58,480
Speaker 1: perspective now our definitive expert on China, Stephen Engel in

515
00:26:58,520 --> 00:27:01,800
Speaker 1: his very late evening and Steven Angel, I want to

516
00:27:01,800 --> 00:27:04,879
Speaker 1: go beyond the headlines here, just a your perspective on

517
00:27:04,960 --> 00:27:08,840
Speaker 1: the government, on mister g and on Jack Mah. Is

518
00:27:08,920 --> 00:27:12,480
Speaker 1: Jack Mah still part of a new six unit Ali Baba?

519
00:27:13,960 --> 00:27:16,280
Speaker 1: Yes and no. He is the face obviously, is the

520
00:27:16,320 --> 00:27:19,399
Speaker 1: founder co founder of Ali Baba. And I love this

521
00:27:19,480 --> 00:27:22,000
Speaker 1: story that you just talked about about meeting Jack Ma.

522
00:27:22,240 --> 00:27:24,840
Speaker 1: I've met him many times over my twenty years at

523
00:27:24,840 --> 00:27:27,959
Speaker 1: Bloomberg in thirty two years now in Asia Pacific, and

524
00:27:28,040 --> 00:27:32,280
Speaker 1: he always talked kind of not nonchalantly, but a bit

525
00:27:32,280 --> 00:27:35,520
Speaker 1: of a chest puffed out about regulation and that how

526
00:27:35,560 --> 00:27:38,880
Speaker 1: he had to stay ahead of the regulators. Well, obviously

527
00:27:38,920 --> 00:27:42,600
Speaker 1: the regulators caught up with him in October or thereabouts

528
00:27:42,600 --> 00:27:49,560
Speaker 1: of twenty twenty, scuppering that big multi universe IPO for

529
00:27:49,640 --> 00:27:55,040
Speaker 1: Aunt Financial, And since then the company has been absolutely obliterated,

530
00:27:55,119 --> 00:27:59,120
Speaker 1: going from I'm not talking about Aunt. Aunt's been sidelined absolutely,

531
00:27:59,520 --> 00:28:02,440
Speaker 1: but I'll bob has gone from an eight hundred billion

532
00:28:02,600 --> 00:28:06,199
Speaker 1: valuated company down to about two hundred and twenty billion.

533
00:28:06,480 --> 00:28:09,159
Speaker 1: So now they're they're going to not break up, but

534
00:28:09,200 --> 00:28:12,360
Speaker 1: they're going to kind of be reshuffled. Is this at

535
00:28:12,440 --> 00:28:15,760
Speaker 1: government order? We don't know. Is it going to unlock

536
00:28:15,920 --> 00:28:20,280
Speaker 1: more value than the pre break up if you will,

537
00:28:20,400 --> 00:28:24,160
Speaker 1: or pre excuse me, pre at breakup. We don't know yet,

538
00:28:24,160 --> 00:28:26,360
Speaker 1: a lot of questions to be answered. There is though,

539
00:28:26,720 --> 00:28:30,480
Speaker 1: one clear underlying feature here, which is government intervention in

540
00:28:30,560 --> 00:28:32,760
Speaker 1: businesses that used to be the darlings of the nation.

541
00:28:32,920 --> 00:28:35,400
Speaker 1: This person who used to be Steve Jobs, but even

542
00:28:35,480 --> 00:28:37,359
Speaker 1: much more so in terms of the reception that he

543
00:28:37,400 --> 00:28:39,160
Speaker 1: would get on stage and in these sort of rock

544
00:28:39,240 --> 00:28:41,760
Speaker 1: star events that he would hold. Stephen, what does this

545
00:28:41,880 --> 00:28:44,880
Speaker 1: say in terms of the climate right now and how

546
00:28:44,960 --> 00:28:49,840
Speaker 1: quickly it is changing in modern China. Well, the government's

547
00:28:49,880 --> 00:28:51,840
Speaker 1: trying to say all the right things. Keep in mind

548
00:28:51,880 --> 00:28:54,479
Speaker 1: they're having the China Development Form in fact in Beijing

549
00:28:54,600 --> 00:28:57,560
Speaker 1: right now at the Dalutai State Guesthouse just wrapped up today.

550
00:28:57,600 --> 00:28:59,960
Speaker 1: Tim Cook is their Ray Dalio and a few others,

551
00:29:00,120 --> 00:29:02,720
Speaker 1: but a number of big name USCO has kind of

552
00:29:02,760 --> 00:29:06,320
Speaker 1: stayed away, not necessarily wanting the blowback in the United

553
00:29:06,360 --> 00:29:09,200
Speaker 1: States because of the relationship troubles between China and the

554
00:29:09,280 --> 00:29:11,440
Speaker 1: United States. But then they're going to have their world

555
00:29:11,440 --> 00:29:15,560
Speaker 1: Economic forum called the BOOL Forum that started today as well.

556
00:29:15,600 --> 00:29:18,320
Speaker 1: Down in Hainan Island. They're trying to make the sales

557
00:29:18,360 --> 00:29:23,960
Speaker 1: pitch back to skeptical global investors after three punishing years

558
00:29:24,000 --> 00:29:29,760
Speaker 1: of COVID zero as well these regulatory simultaneous regulatory crackdowns

559
00:29:29,840 --> 00:29:33,680
Speaker 1: on the platform economy, on the private sector, on property,

560
00:29:34,080 --> 00:29:37,440
Speaker 1: on online gaming, on so many sectors of the economy

561
00:29:37,520 --> 00:29:41,880
Speaker 1: all at once. They're talking up the private sector. The

562
00:29:41,960 --> 00:29:45,200
Speaker 1: government wants to support the private sector. But again, we've

563
00:29:45,320 --> 00:29:47,320
Speaker 1: kind of rolled our eyes a little bit because we

564
00:29:47,360 --> 00:29:49,560
Speaker 1: get tired of the narrative for three straight years of

565
00:29:49,600 --> 00:29:52,200
Speaker 1: saying they want to do this and then acting differently.

566
00:29:52,880 --> 00:29:55,200
Speaker 1: I'm gonna throw a little bit of caution on this.

567
00:29:55,440 --> 00:29:58,360
Speaker 1: The market likes this right now. They think this is

568
00:29:58,400 --> 00:30:02,840
Speaker 1: an opportunity to reinvigorate and get that entrepreneurial spirit back

569
00:30:02,920 --> 00:30:06,520
Speaker 1: into a Beachheim, which was a behemoth Ali Baba, but

570
00:30:06,600 --> 00:30:10,640
Speaker 1: it's been dwindled down by regulation as well as large s. Stephen,

571
00:30:11,040 --> 00:30:14,280
Speaker 1: what is the public reception to the intervention of the

572
00:30:14,280 --> 00:30:18,040
Speaker 1: Communist Party of China In some of these previously much

573
00:30:18,080 --> 00:30:22,920
Speaker 1: heralded companies that represented the mainland. I think there's a

574
00:30:22,920 --> 00:30:25,840
Speaker 1: lot of frustration. That's anecdotal. I mean, I do talk

575
00:30:25,840 --> 00:30:28,920
Speaker 1: to my sources in mainland China. There's there's there is

576
00:30:28,960 --> 00:30:31,400
Speaker 1: a bit of frustration. Few people will go on record

577
00:30:31,440 --> 00:30:34,880
Speaker 1: to say this frustration. But there's been a power grab

578
00:30:34,960 --> 00:30:37,280
Speaker 1: if you will, at the top of you know, leader

579
00:30:37,520 --> 00:30:41,960
Speaker 1: echelon of leadership there with chie Jumping almost becoming absolute

580
00:30:42,040 --> 00:30:46,480
Speaker 1: ruther with his loyalists as his deputies. So there's some

581
00:30:46,560 --> 00:30:50,800
Speaker 1: speculation or some you know, skepticism if you will, that

582
00:30:50,920 --> 00:30:54,280
Speaker 1: the good old days perhaps for the private sector are

583
00:30:54,440 --> 00:30:59,120
Speaker 1: our pars them. But again, we we just don't know,

584
00:30:59,320 --> 00:31:01,920
Speaker 1: Tom even what's so important here. And to use your

585
00:31:02,080 --> 00:31:05,720
Speaker 1: years and years of expertise behind those red doors in Beijing,

586
00:31:06,520 --> 00:31:10,880
Speaker 1: they're obviously recalibrating after the political moment of November, after

587
00:31:11,560 --> 00:31:14,680
Speaker 1: the coronation, if you will, of moving mister g forward.

588
00:31:15,200 --> 00:31:18,360
Speaker 1: And then the reality is we're hearing reports from Bloomberg

589
00:31:18,400 --> 00:31:20,920
Speaker 1: News and others that the Belt in the Road initiative

590
00:31:21,600 --> 00:31:26,480
Speaker 1: to be polite is struggling. How successful right now is

591
00:31:26,520 --> 00:31:31,520
Speaker 1: their business, is their finance? Is the Chinese capitalistic experience.

592
00:31:32,720 --> 00:31:36,240
Speaker 1: It's struggling obviously, coming out of three years of COVID

593
00:31:36,360 --> 00:31:41,720
Speaker 1: zero that really decimated confidence, It decimated investment coming into China.

594
00:31:41,840 --> 00:31:48,440
Speaker 1: It perhaps also harmed in a more tangible way the

595
00:31:48,480 --> 00:31:51,560
Speaker 1: confidence that others have in China. So the Belt and

596
00:31:51,640 --> 00:31:54,840
Speaker 1: Road initiative has turned into what some would say is

597
00:31:54,920 --> 00:31:57,800
Speaker 1: debt diplomacy in some countries that are having some debt

598
00:31:57,840 --> 00:32:01,560
Speaker 1: issues obviously, so the jury is still out on the

599
00:32:01,600 --> 00:32:04,520
Speaker 1: Belton Road for sure. Stephen. One final question, if I may,

600
00:32:04,560 --> 00:32:07,200
Speaker 1: with great respect for your years of service in Hong Kong,

601
00:32:07,360 --> 00:32:10,080
Speaker 1: is Hong Kong the new Hong Kong? Is it open

602
00:32:10,160 --> 00:32:13,360
Speaker 1: for business? It seems like it's open for business, and

603
00:32:13,400 --> 00:32:15,920
Speaker 1: they're sure doing everything that they can. And we'll have

604
00:32:15,960 --> 00:32:18,120
Speaker 1: to see as well whether the IPO market is going

605
00:32:18,200 --> 00:32:21,160
Speaker 1: to rekindle confidence in Hong Kong as well. And that's

606
00:32:21,200 --> 00:32:23,640
Speaker 1: one interesting thing on come full circle on the Ali

607
00:32:23,680 --> 00:32:27,680
Speaker 1: Baba's story. Those six individual units. Daniel John, the CEO, says,

608
00:32:27,720 --> 00:32:31,320
Speaker 1: each one of those six individual units will be able

609
00:32:31,360 --> 00:32:33,880
Speaker 1: to do their own fundraising and if that means IPO,

610
00:32:33,960 --> 00:32:35,520
Speaker 1: that means IPO. It's going to be up to the

611
00:32:35,520 --> 00:32:39,360
Speaker 1: heads of those individual divisions that could because no restructuring

612
00:32:39,400 --> 00:32:42,240
Speaker 1: like this would come without the blessing of the central

613
00:32:42,240 --> 00:32:45,520
Speaker 1: government in Beijing, So this means could mean that IPOs

614
00:32:45,520 --> 00:32:47,720
Speaker 1: could be coming back to Hong Kong. Are Stephen Engel

615
00:32:47,960 --> 00:32:52,440
Speaker 1: from Hong Kong. Subscribe to the Bloomberg Surveillance podcasts on Ample,

616
00:32:52,640 --> 00:32:56,840
Speaker 1: Spotify and anywhere else you get your podcasts. Listen live

617
00:32:57,000 --> 00:33:01,400
Speaker 1: every weekday starting at seven am Eastern. I'm Bloomberg dot Com,

618
00:33:01,400 --> 00:33:05,560
Speaker 1: the iHeartRadio app tune In, and the Bloomberg Business app.

619
00:33:06,040 --> 00:33:09,720
Speaker 1: You can watch us live on Bloomberg Television and always

620
00:33:10,080 --> 00:33:13,960
Speaker 1: I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane,

621
00:33:14,120 --> 00:33:15,920
Speaker 1: and this is Bloomberg