WEBVTT - Surveillance: Barclays' Rogoff on Fed Cuts 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.280 with Jonathan Farrell 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 on Bloomberg dot Com, 0:00:26.600 --> 0:00:31.360 the Bloomberg Terminal, and the Bloomberg Business app. We mentioned 0:00:31.400 --> 0:00:34.360 yesterday Adam Posen was with us PhD. From Harvard. He 0:00:34.479 --> 0:00:36.720 was lights out, I thought. And one of the reasons 0:00:36.800 --> 0:00:39.960 we had doctor posenon is doctor Ferman of Harvard, teacher 0:00:39.960 --> 0:00:43.560 of AC ten, which is the definitive economics course there 0:00:43.600 --> 0:00:46.720 at Harvard. Manki used to throw chalk at people on it. 0:00:46.800 --> 0:00:50.120 And the answer is that was on globalization, that was 0:00:50.200 --> 0:00:52.919 on all the dynamics that out there. And we've got 0:00:52.920 --> 0:00:55.400 a guy to start us off strong and as aar Lisa, 0:00:55.440 --> 0:00:59.120 why don't you bring in not Kenneth Rogoff, but Bradley Rogoff, 0:00:59.400 --> 0:01:01.400 who you know. I can understand why people got the 0:01:01.440 --> 0:01:03.600 two of them confused in economics, but why do you 0:01:03.600 --> 0:01:06.360 bring in brad Rogueoff on this bond mess? He and 0:01:06.440 --> 0:01:10.200 Barclay's rot I have. Feldstein is my AC ten professor 0:01:10.480 --> 0:01:12.720 at Harvard. Actually, so I'm dating back before, but I 0:01:12.760 --> 0:01:15.640 wonder what Marty Feldstein would say of this crisis. He 0:01:15.680 --> 0:01:17.800 would say, we have to clear the market, clear out 0:01:17.840 --> 0:01:20.360 the losers, wouldn't I think that's probably about it. It's 0:01:20.360 --> 0:01:22.520 probably about right. We're not doing that right now. What 0:01:22.640 --> 0:01:24.560 I could tell but Bred, how do you make sense 0:01:25.240 --> 0:01:28.720 right now? As the head of Fick Research over at Barclays, 0:01:28.840 --> 0:01:31.760 how do you understand whether the market is just simply 0:01:32.000 --> 0:01:35.000 wrong to price in both rate hikes and some sort 0:01:35.040 --> 0:01:39.319 of disinflation that continues. Yeah, I think, well, we don't 0:01:39.319 --> 0:01:42.520 agree with that. I'll start with that. I think we expect, Yes, 0:01:42.600 --> 0:01:44.160 could there be rate hikes coming when you get to 0:01:44.840 --> 0:01:47.560 rate cuts coming in twenty twenty four, Sure, right, but 0:01:47.560 --> 0:01:49.760 we think there's gonna be one more hike this summer. 0:01:50.680 --> 0:01:52.960 And it is hard to marry you guys. We're just 0:01:53.000 --> 0:01:55.080 alluding to it where equities are which don't seem to 0:01:55.160 --> 0:01:58.200 go down, and when you look at what the markets 0:01:58.200 --> 0:02:01.440 pricing in terms of eventual cuts later this year. Now, 0:02:01.680 --> 0:02:03.360 at least you were kind of alluding to some of 0:02:03.400 --> 0:02:07.680 the stuff around banks, and look, this is a banking crisis. 0:02:07.720 --> 0:02:10.000 But the reason, you know, if we're I think we're 0:02:10.040 --> 0:02:11.920 calling it that, I guess at this point. But the 0:02:12.000 --> 0:02:14.040 reason we got there is very different than a lot 0:02:14.040 --> 0:02:18.600 of other banking crises. It wasn't because of bad assets, right, 0:02:18.880 --> 0:02:22.359 It was because of duration really more than anything. And 0:02:22.440 --> 0:02:24.400 I do think there's a little bit of a distinction 0:02:24.639 --> 0:02:27.480 between that and I guess if you had to choose 0:02:27.480 --> 0:02:30.320 your crisis, I probably rather have this one. But there's 0:02:30.360 --> 0:02:33.560 also a distinction between the idea of bank failures and 0:02:33.639 --> 0:02:37.520 the idea of credit materially constrained and more suddenly than 0:02:37.560 --> 0:02:39.480 it has been in the past. How do you draw 0:02:39.520 --> 0:02:41.840 that distinction in terms of how to price that into 0:02:41.840 --> 0:02:44.280 a market that's looking for either two thousand and eight 0:02:44.360 --> 0:02:47.440 or all clear? See see that that is the difference, 0:02:47.520 --> 0:02:51.280 right is maybe right now we can say we're clear 0:02:51.520 --> 0:02:54.120 of the crisis that we went through, you know, especially 0:02:54.160 --> 0:02:57.520 the last couple of weeks, but it has consequences still, 0:02:57.560 --> 0:03:00.320 and those consequences don't have to be two thousand and eight. 0:03:00.360 --> 0:03:03.600 I think to your point, those consequences can be slower 0:03:03.600 --> 0:03:06.880 growth and whether we get to you're loding some forecasts 0:03:06.880 --> 0:03:09.880 of a modest recession in the back half of this 0:03:09.960 --> 0:03:12.040 year or early next year. Some people have that in 0:03:12.240 --> 0:03:15.360 or just really low near zero growth, which is what 0:03:15.360 --> 0:03:19.000 we're kind of closer to. Those have a big impact 0:03:19.080 --> 0:03:24.000 and also probably aren't that consistent with where equities are today. Right. 0:03:24.240 --> 0:03:26.440 I had a guy just email in. He's watching the 0:03:26.520 --> 0:03:29.200 show on jet Blue Airlines. I think it's on Direct TV. 0:03:29.360 --> 0:03:31.600 Thank you for Direct TV and jet Blue for putting 0:03:31.680 --> 0:03:34.280 us on across the nation. But he's got a really 0:03:34.320 --> 0:03:38.160 important question, and that is, Okay, we had low rate 0:03:38.240 --> 0:03:41.920 free lunch for decades and now we're back here. Is 0:03:41.960 --> 0:03:46.920 this rate regime behavior forward like what you and I studied, 0:03:47.520 --> 0:03:50.520 or is it something new, this new higher rate regime. 0:03:51.240 --> 0:03:53.880 Well I think that yeah, if we don't have to 0:03:53.880 --> 0:03:56.040 go back that far to have a rate regime like this, right, 0:03:56.040 --> 0:03:58.040 we can go back fifteen years a little bit more 0:03:58.080 --> 0:04:00.280 than fifteen years ago and have that the different friends, 0:04:00.360 --> 0:04:03.280 I think is that prior to that, we didn't have 0:04:03.320 --> 0:04:06.320 the really low rate regime. So I don't think it's 0:04:06.320 --> 0:04:08.960 just the fact that we have this mud argue more 0:04:09.000 --> 0:04:12.240 normal as opposed to high rate regime right now. I 0:04:12.280 --> 0:04:14.200 think what it is is you had that period of 0:04:14.240 --> 0:04:17.240 such low rates, So then it leads to so many 0:04:17.240 --> 0:04:21.040 assets and fixed income specifically pricing at a substantial discount, 0:04:21.279 --> 0:04:23.760 and that leads to the disconnect that led to the 0:04:23.800 --> 0:04:26.360 problems that we saw in banks. So I do think 0:04:26.360 --> 0:04:28.680 it's a low rate regime that's causing the problem as 0:04:28.680 --> 0:04:32.120 opposed to the current rate regime the whole financial system. 0:04:32.240 --> 0:04:34.480 And I'm going to go back to Chris Whalen's glorious 0:04:34.560 --> 0:04:38.360 one volume on the American financial system and crisis as well. 0:04:38.680 --> 0:04:40.600 So I got a guy on Jet Blow or whatever 0:04:40.720 --> 0:04:45.000 airline they're on, watching this show, and what it signals here, Bradley, 0:04:45.440 --> 0:04:48.960 is the fear that's out there. Should we fear this 0:04:49.080 --> 0:04:52.400 new rate regime? As I said, I don't know that 0:04:52.440 --> 0:04:54.920 we need to fear the current rate regime, also because 0:04:54.920 --> 0:04:58.280 by having hyped the way the Fed has, they do 0:04:58.440 --> 0:05:02.240 have some room now to act really through non extraordinary 0:05:02.320 --> 0:05:05.200 policy have an impact if we get to a place 0:05:05.200 --> 0:05:07.440 where inflations come down a bit. Let's say, you know, 0:05:07.560 --> 0:05:10.479 later this year, early next year, and growth has come down. 0:05:10.640 --> 0:05:14.000 So I think in that sense, you'd almost have more 0:05:14.040 --> 0:05:17.680 fear if this was happening and rates were at zero today, right, 0:05:18.320 --> 0:05:21.080 I think that could be agree with at least to me, 0:05:21.200 --> 0:05:23.599 this is the heart of the matter. And there's so 0:05:23.640 --> 0:05:27.440 many younger people who didn't study Martin Feldstine a million 0:05:27.520 --> 0:05:31.600 years ago. Where can we celebrate that this is maybe 0:05:32.080 --> 0:05:37.279 normal with proper incentives of capital versus mister Rogoff's comment 0:05:37.320 --> 0:05:40.240 there on zero, Well, I would argue that it's really 0:05:40.240 --> 0:05:41.800 too soon to set to tell, and I think that 0:05:41.880 --> 0:05:44.040 to your point pride, and this, to me is really 0:05:44.080 --> 0:05:46.279 the key point. It's one thing to have a normal 0:05:46.400 --> 0:05:49.120 rate of interest, it's another thing to do it after 0:05:49.560 --> 0:05:52.880 years and years of zero percent rates that inflated assets 0:05:52.880 --> 0:05:55.320 and caused leverage to build up at a rate that 0:05:55.400 --> 0:05:58.080 might be infeasible for companies based in a business model. 0:05:58.120 --> 0:06:00.880 So how do you discern what seems like something that 0:06:00.960 --> 0:06:04.120 gives you income versus something that will crimp companies, cause 0:06:04.200 --> 0:06:06.880 higher defaults, and create someone to charge a much higher 0:06:06.920 --> 0:06:09.960 risk premium. It's very interesting because what do we all expect, 0:06:10.000 --> 0:06:11.200 And I'm sure you had a lot of people on 0:06:11.240 --> 0:06:15.159 this show say it, well, how are these FED hikes 0:06:15.200 --> 0:06:17.160 going to impact the economy? Where are we going to 0:06:17.240 --> 0:06:19.640 see the problems? Well, the answer was going to be Hell, 0:06:19.680 --> 0:06:22.440 maybe it's going to be the consumer for example, Right, 0:06:22.680 --> 0:06:26.320 it's going to be higher levered assets and credit right 0:06:26.360 --> 0:06:27.920 the world that I spent a lot of my time, 0:06:27.960 --> 0:06:30.520 and it turns out it was the safest assets that 0:06:30.600 --> 0:06:32.200 led to the first part of it, right, And I 0:06:32.240 --> 0:06:36.000 think that's what you're getting to, Lisa. There will eventually 0:06:36.040 --> 0:06:40.760 be some impact right on those riskier assets things you know, 0:06:40.640 --> 0:06:42.960 you know, lower rated, high yel bonds and all of 0:06:43.000 --> 0:06:47.080 those things. But just like twenty twenty is helpful in 0:06:47.120 --> 0:06:48.800 the sense of and I know it's hard to say 0:06:48.800 --> 0:06:51.800 this looking backwards, but there are companies that were higher 0:06:51.839 --> 0:06:54.640 levered that were problematic, they defaulted then, and not as 0:06:54.720 --> 0:06:57.600 much excess built in the system. So I think, just 0:06:57.680 --> 0:07:00.520 like that, having this little bit of a preview, I 0:07:01.000 --> 0:07:03.240 do think that even though we will see defaults come 0:07:03.320 --> 0:07:05.240 up and all of that stuff, I don't think it'll 0:07:05.279 --> 0:07:07.719 be as extreme. So this, to me is one of 0:07:07.720 --> 0:07:10.440 the big questions, especially with the banking issues that we've seen. 0:07:11.160 --> 0:07:14.320 Is this perhaps froth that we've already seen pushed out 0:07:14.320 --> 0:07:16.440 of the system, or is there another shoe to drop? 0:07:16.520 --> 0:07:19.400 Where would you look for that other shoe to drop? Yeah, 0:07:19.760 --> 0:07:21.760 And I think, you know, it's a question of just 0:07:21.840 --> 0:07:24.360 you know, from how far up you're dropping that shoe, right, Like, 0:07:24.400 --> 0:07:27.559 so there will be eventual impact in terms of okay, 0:07:27.560 --> 0:07:29.920 if banks are lending last, that has to have an 0:07:29.960 --> 0:07:33.240 impact on corporate America. I do think we come into 0:07:33.280 --> 0:07:36.120 this fundamentally in a pretty good spot, right, and so 0:07:36.160 --> 0:07:39.640 we don't expect the normal recession default rates or ten 0:07:39.720 --> 0:07:42.320 twelve percent that you've seen, right, We expected probably be 0:07:42.560 --> 0:07:46.040 really half that. However, there's other areas, right, you know, 0:07:46.040 --> 0:07:48.120 if you think about the increase in rates, commercial real 0:07:48.200 --> 0:07:50.280 estate is the one that's coming up quite frequently right 0:07:50.280 --> 0:07:53.840 now and in the interview. Yeah, that's why I came 0:07:53.880 --> 0:07:58.320 into the studio, and that's why one where obviously with 0:07:58.640 --> 0:08:02.440 cap rates have to move when when rates moved, um 0:08:02.520 --> 0:08:04.400 and so I think there are a lot of other 0:08:04.400 --> 0:08:06.400 areas and that has an impact too because people hold 0:08:06.440 --> 0:08:08.720 that on balance sheet. We've got thirty seconds left, which 0:08:08.800 --> 0:08:11.240 is a perfect time to dive into this commercial real 0:08:11.400 --> 0:08:14.440 estate challenged, right, Yeah, I think it is. You know, 0:08:14.480 --> 0:08:17.320 we're pretty focused on office um as being the area 0:08:17.360 --> 0:08:20.200 we're most concerned about, and you know, we think the 0:08:20.240 --> 0:08:24.000 peak to troff there could be up to Thank you 0:08:24.000 --> 0:08:35.960 so much, Bradley Rogue Offfice with Barclays. One of the 0:08:35.960 --> 0:08:38.240 things we missed here is a data check on Europe. 0:08:38.240 --> 0:08:40.360 It was quite a ten days for Europe and we're 0:08:40.400 --> 0:08:43.960 thrilled to bring you this morning. Katrina Dudley, portfolio manager 0:08:43.960 --> 0:08:49.960 at Franklin Mutual Series, doesn't describe or true European portfolio expertise. 0:08:50.160 --> 0:08:55.320 Are you optimistic about Europe, Miss Dudley, UM, I think 0:08:55.360 --> 0:08:58.040 that if we look at what happened last week, you know, 0:08:58.200 --> 0:09:01.000 Europe actually was kind of contained until the end of 0:09:01.120 --> 0:09:04.520 last week from the banking crisis has really started in 0:09:04.559 --> 0:09:06.920 the United States, and I think that that was a 0:09:06.960 --> 0:09:09.839 positive that towards the end of last week we saw 0:09:09.880 --> 0:09:12.520 what was happening in the US kind of move into 0:09:12.520 --> 0:09:15.240 the European markets, and we saw some downward pressure in 0:09:15.320 --> 0:09:20.360 those European banking stocks. As I look at Europe, I think, however, 0:09:20.440 --> 0:09:23.600 that the structural drivers that we've been talking about for 0:09:23.760 --> 0:09:27.000 now a couple of months continue to underpin that market. 0:09:27.040 --> 0:09:30.760 So we can just continue to be optimistic. When we're optimistic, 0:09:30.800 --> 0:09:32.840 we have to mop up a Swiss banking regime. I 0:09:32.880 --> 0:09:35.360 thought over the weekend, particularly the FT had some nice 0:09:35.480 --> 0:09:39.680 articles showing the Swiss people rebelling against a Swiss bank 0:09:39.800 --> 0:09:43.800 bailout of Credit Swiss as well. Does that carry over 0:09:43.880 --> 0:09:47.120 in the financial section in Europe to where there's a 0:09:47.200 --> 0:09:52.560 huge tension between people, governments and the banking industry. I 0:09:52.640 --> 0:09:55.240 think there's been a lot of tension in the European 0:09:55.280 --> 0:09:58.839 banking industry already. I think that we need to understand 0:09:58.880 --> 0:10:02.199 that the way that the U Zone it's construction constructed 0:10:02.320 --> 0:10:05.840 is it's a series of countries and each of those 0:10:05.880 --> 0:10:09.560 countries has a central bank that will support that in 0:10:09.640 --> 0:10:13.800 country banking system. We saw that with Deutsche Bank. We've 0:10:13.840 --> 0:10:17.120 seen that support come out for Germany, for example. We've 0:10:17.160 --> 0:10:20.200 seen it as you described with Credit Swiss and with 0:10:20.360 --> 0:10:23.400 UBS and the Swiss National Bank stepping in as well. 0:10:23.640 --> 0:10:26.720 So you will see that on a country basis, and 0:10:26.760 --> 0:10:29.480 it's a real reflection of the fact that Europe is 0:10:29.520 --> 0:10:32.880 just a series of countries that have come together to 0:10:32.920 --> 0:10:37.200 create the Eurozone, but those nationalistic interests still exist. There's 0:10:37.200 --> 0:10:39.760 a larger question here underpinning some of the banking stress. 0:10:40.040 --> 0:10:42.120 Are we at the end of red hiking cycles that 0:10:42.120 --> 0:10:44.240 have been the fastest on record. Katrina what's your view. 0:10:45.440 --> 0:10:48.760 I think that the FED is very data dependent, and 0:10:48.800 --> 0:10:52.079 they're also watching that PCE number that is coming out 0:10:52.120 --> 0:10:55.280 on Friday. I think that they'll be as glued to 0:10:55.280 --> 0:10:58.560 their Bloomberg screens as I am. They're going to be 0:10:58.679 --> 0:11:01.400 watching to see where there or not there is any 0:11:01.640 --> 0:11:05.440 easy in inflation pressures. If there is, I think that 0:11:05.480 --> 0:11:09.640 they can just take a pause in that rate hiking cycle. 0:11:10.360 --> 0:11:12.760 But I have heard a lot of people thinking that 0:11:12.800 --> 0:11:15.559 we are going to have rate cuts towards the end 0:11:15.559 --> 0:11:18.160 of this year. We're not in that camp that we're 0:11:18.200 --> 0:11:21.360 expecting the FED to turn so quickly. We think that 0:11:21.400 --> 0:11:23.760 they're more likely to take a pause in terms of 0:11:23.760 --> 0:11:26.560 the rate hikes, and potentially, you know, there's been a 0:11:26.600 --> 0:11:29.959 lot of quantitative tightening in the market and we're starting 0:11:29.960 --> 0:11:32.400 to see some of that ease. Could you know, if 0:11:32.400 --> 0:11:34.160 that's the case, how do you play it through a 0:11:34.200 --> 0:11:36.520 market that is priced in almost one hundred basis points 0:11:36.520 --> 0:11:39.720 of rate cuts by the beginning of next year. In 0:11:39.840 --> 0:11:41.680 terms of how we play it, we just think you 0:11:41.760 --> 0:11:44.080 need to take a step back, and I think that 0:11:44.080 --> 0:11:46.600 that's the benefit of being a long term investor, that 0:11:46.679 --> 0:11:49.080 ability to take a step back and have a look. 0:11:49.760 --> 0:11:53.640 I think that we were very concerned that the banking 0:11:53.720 --> 0:11:57.199 crisis and the increase in rates would really impact those 0:11:57.240 --> 0:12:00.800 smaller midsized companies. And we've talked in the past about 0:12:00.800 --> 0:12:03.400 the industrial sector, and we talk about the three legs 0:12:03.440 --> 0:12:07.120 to that investment thesis. We look at the legislation that's 0:12:07.200 --> 0:12:09.640 positive and that's still in place. We look at some 0:12:09.679 --> 0:12:14.000 of those structural drivers electrification, for example, IoT is another. 0:12:14.280 --> 0:12:17.959 But the third leg was that supplier base that needed 0:12:18.040 --> 0:12:21.880 financing in order to expand. And we've actually seen customers 0:12:21.920 --> 0:12:25.240 step step into the place of the certainty that you 0:12:25.360 --> 0:12:28.880 normally get from the financial sector. So we're actually continuing 0:12:28.960 --> 0:12:32.080 to be very very positive on the industrial sector demand 0:12:32.400 --> 0:12:35.480 because that third leg of the stool continues to be strong. 0:12:35.840 --> 0:12:38.360 Kut and I get thirty seconds left. I'm sorry for this. 0:12:38.400 --> 0:12:41.840 It deserves a much longer amount of time. Bernard Bruckwen 0:12:41.920 --> 0:12:44.840 said by straw hats and Winner. I'm seeing images of 0:12:44.920 --> 0:12:48.240 Paris in revolt. I'm seeing talk about a collapse of 0:12:48.280 --> 0:12:51.680 the fifth Republic of mccram, maybe even a reformation of 0:12:51.720 --> 0:12:54.920 a new republic, a sixth Republic. Can you go along 0:12:55.040 --> 0:12:59.400 France here? Given all the turmoil. I think that what 0:12:59.559 --> 0:13:03.000 you need to understand is what has happened in each 0:13:03.040 --> 0:13:06.800 of these markets. Look at their response to the energy crisis, 0:13:07.200 --> 0:13:11.720 because they stepped into the market to support that low 0:13:11.800 --> 0:13:15.040 end consumer. And it's those consumers that are going to 0:13:15.080 --> 0:13:18.960 remember that. And that's where the popular pressure really counts. 0:13:18.960 --> 0:13:23.679 At populous pressure, which really looks at these markets fragmenting, 0:13:23.920 --> 0:13:26.760 I think that that argument is really has gone out 0:13:26.760 --> 0:13:29.040 of the window. We think that Europe stays together and 0:13:29.080 --> 0:13:32.200 that is positive for all those markets in Europe. Contarina, 0:13:32.320 --> 0:13:34.199 thank you for helping us start the show this morning. 0:13:34.240 --> 0:13:41.640 Continua Dudley here with Franklin Mutual joining us now with 0:13:41.760 --> 0:13:45.400 Jenny Montgomery Scout as Christopher Marinaki is in banking at 0:13:45.440 --> 0:13:47.800 Research an important voice to speak to it this time, 0:13:48.240 --> 0:13:50.920 let's just start with first principles. In the moment, Christopher, 0:13:51.040 --> 0:13:54.760 is a crisis over. I think we're getting to the end. 0:13:55.160 --> 0:13:57.680 The two troubled banks have been resolved, and I think 0:13:57.679 --> 0:14:00.840 now we see resolution from both that's your bank last 0:14:00.880 --> 0:14:03.679 week and yesterday which first citizens buying the Silicon Valley. 0:14:04.080 --> 0:14:05.440 So I think we have to get to the end 0:14:05.440 --> 0:14:07.320 of the quarter on Friday. But I feel like we 0:14:07.400 --> 0:14:09.000 are on the road to recovery, and I think when 0:14:09.000 --> 0:14:11.840 earnings are announced in a few weeks in mid April, 0:14:11.920 --> 0:14:14.040 you're going to see much better results and much better 0:14:14.040 --> 0:14:17.640 deposit flows. And most investors have understood the last few weeks. 0:14:17.840 --> 0:14:19.960 I guess I'm going to go to deposit flows right now. 0:14:20.000 --> 0:14:23.200 We're going to get more reporting on that. One of 0:14:23.240 --> 0:14:26.760 the themes out there is well at five percent forgetting 0:14:26.760 --> 0:14:29.320 about bank crisis. Money is going to move to money 0:14:29.360 --> 0:14:33.000 market funds? Do you agree? While we've seen money market 0:14:33.080 --> 0:14:36.040 mutual funds move two hundred and fifty billion dollars the 0:14:36.120 --> 0:14:38.320 last two weeks if you look at the Thursday reporting, 0:14:38.400 --> 0:14:40.840 so clearly there has been some movement. But I think 0:14:40.840 --> 0:14:43.200 in the big picture, Tom, there's I think a lot 0:14:43.360 --> 0:14:45.800 less deposit outflow in the system. It's only four and 0:14:45.800 --> 0:14:47.680 a half percent if you look at the SAD data 0:14:47.800 --> 0:14:50.360 last Friday night, so it's more are muted, and I 0:14:50.400 --> 0:14:53.320 think we've been normalizing deposits all along. It just has 0:14:53.400 --> 0:14:56.080 felt a lot worse the past few weeks. You know, 0:14:56.200 --> 0:14:58.600 I'm going to use the Jenny Montgomery Scott history here 0:14:58.600 --> 0:15:02.920 of Philadelphia. You go out to traditional banking outside Philadelphia, 0:15:03.000 --> 0:15:05.360 and that's a place where it would be like anywhere 0:15:05.360 --> 0:15:11.120 in America. What I detect here is banking by marketing concept. 0:15:11.680 --> 0:15:15.160 When you talk to bankers who are like normal people, 0:15:15.800 --> 0:15:21.840 how do they feel about marketing concept driven ideas intruding 0:15:21.840 --> 0:15:26.760 in this crisis on their normal banking. Well, to most customers, 0:15:26.800 --> 0:15:29.360 they're looking for service. They're looking for more than this 0:15:29.560 --> 0:15:31.480 interest rate. If interest rate was the only thing that 0:15:31.560 --> 0:15:33.480 I think we would have seen the bank deposit costs 0:15:33.600 --> 0:15:37.320 rise a lot faster the previous four or five quarters. 0:15:37.320 --> 0:15:40.080 It's been a very slow increase of deposit rates. I 0:15:40.120 --> 0:15:42.600 think we are going to see a meaningful impact and 0:15:42.760 --> 0:15:45.720 higher rates of Q one and Q two. But in 0:15:45.760 --> 0:15:48.800 my opinion, it's a much more beauty response. Customers want 0:15:49.120 --> 0:15:52.040 safety and surety, and they also want advice, so it's 0:15:52.080 --> 0:15:55.120 not always about interest rate. That's the dog barking in 0:15:55.200 --> 0:15:58.200 the background, just in case you that's his name as 0:15:58.280 --> 0:16:01.520 Chipper ip. I was wondering if Chipper was having a 0:16:01.560 --> 0:16:06.400 serious constipers parking. He's he's having ankst about the banking system. 0:16:06.640 --> 0:16:09.120 The Braves have beat the Red Sox like four times 0:16:09.120 --> 0:16:11.440 in spring training, just so you know, Thank you, Tom, 0:16:11.560 --> 0:16:16.600 Christopher I am curious. There's an article by Muhammadalarianlobal Opinion. 0:16:16.600 --> 0:16:18.720 I keep going back to it because it really highlights 0:16:18.800 --> 0:16:21.720 this one aspect that people are honing in on. Even 0:16:21.720 --> 0:16:25.000 if we don't get some collapse in financial system or 0:16:25.000 --> 0:16:28.680 another bank, there still is going to be a grinding tightening, 0:16:28.720 --> 0:16:31.360 a sort of acceleration. And how much some of these 0:16:31.360 --> 0:16:34.440 regional banks withdraw some of their credit. How much are 0:16:34.440 --> 0:16:38.080 you tracking that? How much do you believe that narrative? Well, 0:16:38.120 --> 0:16:41.560 I think the credit always gets tightened in a crisis 0:16:41.680 --> 0:16:43.560 like this, We saw it in two thousand and eight nine. 0:16:43.640 --> 0:16:45.480 I think banks are going to be very discerning on 0:16:45.520 --> 0:16:47.640 the new loans they make. There's a lot of pipeline 0:16:48.240 --> 0:16:50.480 lending that was done in January and February, and I'm 0:16:50.520 --> 0:16:53.040 sure it became a lot tighter the last three weeks. 0:16:53.360 --> 0:16:55.880 So as we head into second and third quarter, I 0:16:55.880 --> 0:16:59.960 think new loans will be very much lower, and if anything, 0:17:00.080 --> 0:17:01.800 you're going to see much higher rates. I think one 0:17:01.800 --> 0:17:04.600 of the mysteries is that bank loan rates are going 0:17:04.640 --> 0:17:06.399 to be a lot higher. Banks you're going to charge 0:17:06.440 --> 0:17:08.720 more for risk, and that actually is going to be 0:17:08.760 --> 0:17:10.879 a benefit and it will offset some of the higher 0:17:11.040 --> 0:17:12.920 deposit rates and we see But I think your question 0:17:13.000 --> 0:17:15.320 is a good one, and ultimately credit is getting tighter. 0:17:15.440 --> 0:17:17.120 So in other words, it just to sort of frame 0:17:17.160 --> 0:17:20.400 this a little more starkly. Could we see banks survive 0:17:20.440 --> 0:17:23.520 and even thrive, especially if they're consolidating business at the 0:17:23.560 --> 0:17:26.800 same time that you see a more dramatic constriction in 0:17:26.920 --> 0:17:31.000 overall growth in the US. Well, I think dramatic might 0:17:31.040 --> 0:17:33.520 be the thing I would disagree with. I think it's 0:17:33.520 --> 0:17:36.440 going to be incrementally slower. Banks are still in the 0:17:36.480 --> 0:17:39.800 business of taking risk and making a discerning vote of 0:17:39.880 --> 0:17:43.160 confidence for their customers. I think leverage overall is still 0:17:43.200 --> 0:17:45.520 much lower today than it was fifteen years ago. We 0:17:45.560 --> 0:17:47.600 see a lot of banks lending at sixty five to 0:17:47.680 --> 0:17:50.080 seventy cents on the dollar when they used to lend 0:17:50.119 --> 0:17:53.359 on ninety two hundred and then the properties were coming 0:17:53.400 --> 0:17:56.520 down value significantly, So we have left leverage in the system, 0:17:56.560 --> 0:17:59.040 and I think ultimately that's a key to what banks 0:17:59.480 --> 0:18:01.760 right off and their problems. So I think credit does 0:18:01.800 --> 0:18:04.400 get tighter, for sure, but I don't think it's impossible. 0:18:04.640 --> 0:18:07.000 And I think if anything, banks are here for businesses 0:18:07.000 --> 0:18:09.840 that they wish to support he is the company's I 0:18:09.840 --> 0:18:12.159 think who are in a good financial positions can continue 0:18:12.160 --> 0:18:14.960 to move forward and those who cannot will struggle. So 0:18:15.080 --> 0:18:17.240 you know, we do expect to see higher levels of 0:18:17.280 --> 0:18:20.000 credit issues as this year and next year unfold. One 0:18:20.000 --> 0:18:21.880 of the big questions in the past couple of weeks 0:18:22.000 --> 0:18:24.160 is how much of a risk premium will be charged 0:18:24.200 --> 0:18:26.000 for some of the smaller and regional banks that could 0:18:26.040 --> 0:18:28.320 suffer deposit outflows in a way that the large banks 0:18:28.359 --> 0:18:30.359 just can't. How much is that going to be a 0:18:30.440 --> 0:18:34.359 lasting feature that basically the valuation story is going to 0:18:34.400 --> 0:18:38.640 be more disparate going forward of the behemoths versus the regionals. 0:18:39.640 --> 0:18:41.880 I think the regionals and even the smaller community banks 0:18:41.880 --> 0:18:43.800 are going to do quite well. We think the deposit 0:18:43.840 --> 0:18:46.320 outflow same has been incorrect, and I think as the 0:18:46.440 --> 0:18:49.080 data is shown for March thirty first, you'll see a 0:18:49.080 --> 0:18:51.880 lot less outflows than folks have understood. I also think 0:18:51.880 --> 0:18:54.119 you're going to see a lot more clarity about the 0:18:54.240 --> 0:18:57.480 level of granularity and deposits at these smaller and mid 0:18:57.520 --> 0:18:59.720 sized banks. So I actually think it's an opportunity for 0:18:59.760 --> 0:19:02.240 them to really open the Kimona give a lot more 0:19:02.280 --> 0:19:06.679 disclosure on deposits for lack of deposit concentration, that's going 0:19:06.720 --> 0:19:08.639 to be a huge difference when we see earnings come 0:19:08.640 --> 0:19:10.600 out in a few weeks. Chris the Wall Street Journal 0:19:10.680 --> 0:19:13.120 editorial lays out the first whatever it is the bank 0:19:13.160 --> 0:19:15.639 that went up forty five percent yesterday, they're taking outs 0:19:15.640 --> 0:19:19.160 first citizens, They're taking out SVB. How do the banks 0:19:19.280 --> 0:19:23.880 you follow, Chris Marinac compete with a bank that has 0:19:23.920 --> 0:19:30.720 a massive support, gains losses, deposit coverage, etc. Deposit flight? 0:19:31.160 --> 0:19:35.159 How do other banks compete with someone so aided by 0:19:35.200 --> 0:19:39.080 the government of the United States of America. Well, the 0:19:39.119 --> 0:19:41.399 reality is a lot of it comes down to individual 0:19:41.440 --> 0:19:44.800 relationships with bankers, and so you can have a lot 0:19:44.840 --> 0:19:46.919 of government aid for a given bank and a support 0:19:46.960 --> 0:19:48.919 at a moment in time, but it really doesn't have 0:19:48.960 --> 0:19:51.639 anything to do with the individual relationships and the advice 0:19:51.680 --> 0:19:53.600 that's given a bank. I think a lot of commercial 0:19:53.640 --> 0:19:57.280 businesses see a bank as a trusted advisor in addition 0:19:57.320 --> 0:20:00.080 to their attorney, in addition to their accounts. So I 0:20:00.119 --> 0:20:02.280 don't think that the government aid has much to do 0:20:02.320 --> 0:20:04.040 with that. I think, if anything, it's going to be 0:20:04.080 --> 0:20:08.720 an ongoing conversation about what those customers need and ultimately 0:20:08.720 --> 0:20:10.840 what they need to grow their business. I think businesses 0:20:10.880 --> 0:20:14.080 are slowing down as a result of this crisis this month, 0:20:14.119 --> 0:20:16.480 and that goes back to the credit tightening that is 0:20:16.480 --> 0:20:18.840 out there. I think there's a decision by many businesses 0:20:18.880 --> 0:20:23.000 to not increase their factories and increase their workers incrementally, 0:20:23.040 --> 0:20:25.800 just given what they've seen. Excuse you, valuable, Christopher Marinack, 0:20:25.920 --> 0:20:28.359 Thank you so much. Jenny Montgomery Scott there this morning 0:20:37.800 --> 0:20:41.160 joining us down Victoria Fernandez, who's a major charman. She's 0:20:41.200 --> 0:20:43.400 not on the island of Manhattan. She is out there 0:20:43.400 --> 0:20:46.159 and across the rest of America also on with us 0:20:46.160 --> 0:20:49.040 because I have a final zero and she's actually I 0:20:49.080 --> 0:20:51.000