Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woids,
Speaker 1: along with Tom Keene and Jonathan Ferrell, join us each
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Speaker 1: Andrew Hollandhurst expects more hikes this year, says the following.
Speaker 1: In a time of incredibly anivated uncertainty. We once against
Speaker 1: see markets as underpricing the level of policy rates this
Speaker 1: year and have maintained our base case for policy rates.
Speaker 1: Here's the number way for this, five fifty to five
Speaker 1: seventy five, despite an undeniably dovish March f WEMC meeting,
Speaker 1: even with a twenty five basis point hike. Andrew Hollandhurst,
Speaker 1: the man behind the note a City, joins us here
Speaker 1: in New York Morning, Andrew, Good morning, Okay, makes sense
Speaker 1: to that five seventy five on FED funds In the
Speaker 1: face of this, I think it's not hard to make
Speaker 1: sense of if you follow the inflation data. The big
Speaker 1: question is are we going to have a FED that's
Speaker 1: focused on financial stability issues or price stability issues. I
Speaker 1: think that's what we were talking about in the node.
Speaker 1: In terms of the incredible uncertainty is it looks quite
Speaker 1: uncertain relative to whether we're going to get this focus
Speaker 1: on financial stability, which would be more dubish, or this
Speaker 1: focus on price stability, which would be more harkish. The
Speaker 1: last few days it looks like things are stabilizing a bit.
Speaker 1: We're going to get some inflation data later this week,
Speaker 1: maybe we start to move the narrative a little bit
Speaker 1: back towards price stability. Let's talk about duration mismatches and
Speaker 1: not in the bond market and not at banks, just
Speaker 1: in terms of data and when we're going to find
Speaker 1: things out. We'll get inflation data on April twelfth. I
Speaker 1: just wonder how long it's going to take to find
Speaker 1: out the financial stability issues we're on the calendar and
Speaker 1: the mismatch this fed's got to grapple with because the
Speaker 1: timeline is going to be all over the place, and
Speaker 1: if they choose financial instability, they might have to wait
Speaker 1: and wait and wait and wait. And you think it
Speaker 1: might have to wait until twenty twenty four before they
Speaker 1: see the slowdown bike. It could really take some time
Speaker 1: before you see the slowdown coming in and affecting growth
Speaker 1: data and especially inflation data. If you think about the
Speaker 1: inflation data over the next three months, the next six months,
Speaker 1: it's probably going to come in essentially where it was
Speaker 1: going to come in before we had the issues in
Speaker 1: the banking sector, So they could really be waiting to
Speaker 1: see how this is going to trickle through and flow
Speaker 1: through the economy. If you go back to where we
Speaker 1: were just a couple of months ago, remember we'd had
Speaker 1: some months of softer core inflation prints, the FED was
Speaker 1: sounding a bit more dovish. Well, then you basically had
Speaker 1: one month of data, you had a strong January, and
Speaker 1: you had some revisions to the prior inflation data, and
Speaker 1: all of a sudden, you had a more hawkish FED.
Speaker 1: So we're trying to keep that in mind when we
Speaker 1: think about the FED here that the volatility that we
Speaker 1: saw in two year yields over the last couple of weeks,
Speaker 1: it makes some sense if you think that they were
Speaker 1: really moving between these two extremes where could be financial
Speaker 1: stability that would be more dovish or it could be
Speaker 1: price stability, and I think that really does mean that
Speaker 1: policy rates still need to get above five and a
Speaker 1: half percent. I love getting notes over the past two weeks.
Speaker 1: I've loved it even more because I feel this exasperation
Speaker 1: as people basically say rate cuts, everything is over, and
Speaker 1: you're just like, stop it, guys, please stop it. Things,
Speaker 1: how are still hot? We still have an inflation problem.
Speaker 1: What kind of feedback do you get every time we
Speaker 1: point of these out? Yeah, so it's interesting. I think
Speaker 1: we actually get a lot of resonance on this idea
Speaker 1: that inflation is still strong and underlying inflation is still strong.
Speaker 1: And where there's more of a question from clients is
Speaker 1: does the FED have the ability to respond to that
Speaker 1: strong inflation and do they have the willingness to do it,
Speaker 1: which which is a really important question for the FED,
Speaker 1: and I think a question that the FED should be
Speaker 1: aware people are asking, because one of the key things
Speaker 1: you want to do as a central bank is to
Speaker 1: provide that confidence that you have resolved to fight against
Speaker 1: higher inflation. I think the market really got there a
Speaker 1: month ago or so we had two yar yields above
Speaker 1: five percent. Now there are new questions about whether the
Speaker 1: Fed is going to essentially have to give a little
Speaker 1: bit on the price stability mandate to focus on the
Speaker 1: financial stability mandate. That could be problematic if we start
Speaker 1: to view central banks is unwilling to move against inflation.
Speaker 1: How high could ten year yields go if the Fed
Speaker 1: does pause despite hotter than expected CPI, PC all of
Speaker 1: the data indicators that we had been watching before the
Speaker 1: financial stability questions. Yeah, it's really interesting. We've been thinking
Speaker 1: about interest rates rising because policy rates are rising, but
Speaker 1: there's this other scenario where policy rates could actually stay
Speaker 1: lower and you could start to get longer term rates rising.
Speaker 1: I think FED officials are feeling pretty confident about that
Speaker 1: right now because if you look at longer term expectations
Speaker 1: of inflation in the market five year forward, five year
Speaker 1: inflation break events, well those have stayed relatively stable, relatively
Speaker 1: consistent with mandate consistent policy levels. But I think that's
Speaker 1: what they'll be watching. If that starts gliding up. If
Speaker 1: you start saying higher tenure yields because the Fed is
Speaker 1: being dovish, that would be a real concern for Fed officials.
Speaker 1: We've said a few times they're in the risk management
Speaker 1: business might say, they may decide are they going to
Speaker 1: have enough information to make the code to hike by
Speaker 1: the time I get to my third I think it's
Speaker 1: going to be a difficult meeting. I think they will
Speaker 1: have enough information to continue hiking at that meeting. The
Speaker 1: question is what guidance are they're giving beyond that. And
Speaker 1: we saw what happened with the dots at the last
Speaker 1: meeting a week ago, those dots that indicate where policy
Speaker 1: rates should be at the end of the year. I
Speaker 1: think there's no question they were going to move up
Speaker 1: at that meeting until you had the issue in the
Speaker 1: banking sector. So now the question we're asking about May's, well,
Speaker 1: they don't have to update those dots, but they have
Speaker 1: to give us some indication of will there be further
Speaker 1: rate hikes or will there not be further rate hikes.
Speaker 1: I don't know that you can do again what Central
Speaker 1: banks did a week or two weeks ago. If you
Speaker 1: remember the ECB hiking by fifty basis points and basically
Speaker 1: saying we can't tell you where we go from here.
Speaker 1: I think in May, at that time there'll be enough
Speaker 1: time to view the data, understand what's going on with
Speaker 1: financial stability, give some guidance will there be further rate
Speaker 1: hikes or will there not be further rate hikes. They'll
Speaker 1: have to make a decision. Well, the new line, I
Speaker 1: think is additional policy, firming additional policy from whatever whatever
Speaker 1: that means. I'm sure they spent a long time coming
Speaker 1: up with that. Clearly they believe that what's developed in
Speaker 1: the banking system is a substitute for rate hikes. And
Speaker 1: to your point about the dot plot, I think we
Speaker 1: can probably agree around the table that if we got
Speaker 1: the dot plot three weeks ago, that was going from
Speaker 1: five point one to five to sixty. So let's say
Speaker 1: they believe the development to the last couple of weeks
Speaker 1: are worth about fifty basis points. I've got no idea
Speaker 1: how much conviction they've got behind that view, or whether
Speaker 1: that really is their view, But I think we can
Speaker 1: read between the lines. Andrew, how on earth do you
Speaker 1: make an estimate as to how much the tightening of
Speaker 1: lending standards may develop off the back of the story
Speaker 1: the last couple of weeks and have had equates with
Speaker 1: a level in FED funds. Yeah, I think it's really
Speaker 1: really difficult, and I worry a little bit about these
Speaker 1: statements that the tightening and credit conditions it's going to
Speaker 1: substitute for exactly twenty five or exactly fifty basiness point
Speaker 1: of rate hikes, because you're making an assumption first about
Speaker 1: how policy rates transmit through the financial conditions broadly, and
Speaker 1: then how financial conditions broadly transmit through to the real economy,
Speaker 1: and think about what's happened here. There's all this talk
Speaker 1: about substituting for rate hikes. Well, we were pricing policy
Speaker 1: rates to go above five and a half percent. We
Speaker 1: had two year yields above five percent. Now we have
Speaker 1: two year yields around four percent, one hundred bases points lower.
Speaker 1: So do we think the tightening of credit conditions substitutes
Speaker 1: for one hundred bases point lower two year treasury yield
Speaker 1: because that's what's happened in the market. If we don't,
Speaker 1: then essentially what markets are pricing is the FED to
Speaker 1: fully offset or more than offset the tightening that we've
Speaker 1: had in credit conditions. And that's really an issue for
Speaker 1: the FED if they thought that they had to get
Speaker 1: policy rates above five and a half percent, and financial
Speaker 1: conditions are now loosening, so we have credit conditions tightening,
Speaker 1: We have financial conditions loosening. If you saw the housing
Speaker 1: data yesterday and over the last month, every indicator is
Speaker 1: turning up now, so we have a bottom in the
Speaker 1: housing market. It's rising from a bottom. I think that
Speaker 1: should be another concern where you say we were trying
Speaker 1: to slow down this economy. Now the sector that's most
Speaker 1: responsive to interest rates is starting to re accelerate. To
Speaker 1: your point, given where market pricing is now, how vulnerable
Speaker 1: is the infrastructure of a market that's been whipside again
Speaker 1: and again and has a lot of fragilities baked in
Speaker 1: through leverage. How vulnerable is this market to a FED surprise,
Speaker 1: a massive FED surprise that disrupts where things are now.
Speaker 1: I think that's the other real issue for FED officials now,
Speaker 1: especially given the new emphasis on financial stability risks. As
Speaker 1: a central bank, you're always trying to smoothly and incrementally
Speaker 1: guide policy rates, guide market pricing to what you think
Speaker 1: is the right level to be consistent with mandate consistent inflation.
Speaker 1: And the issue for the FED now is we have
Speaker 1: this huge disconnect between where the dots are and where
Speaker 1: the market is. Like we were just talking about, if anything,
Speaker 1: FED officials maybe wanted to go a bit higher than that.
Speaker 1: If we start seeing the inflation to come and strong again,
Speaker 1: and we think we will over the next few months,
Speaker 1: all of a sudden we could be back in this
Speaker 1: world with FEDE officials think the policy raising needs to
Speaker 1: be much higher. And then can you get there in
Speaker 1: an incremental and smooth way or does this become a
Speaker 1: more violent adjustment? And again, I mean, look look at
Speaker 1: the volatility we signed to your yields. I mean, in
Speaker 1: some ways that's reflecting the fact that we could very
Speaker 1: quickly replace what the FED is going to do if
Speaker 1: they're in a massive bind right now. I think once
Speaker 1: you get in the business of acknowledging that you think
Speaker 1: the developments of the last couple of weeks or a
Speaker 1: substitute for rate hikes if they get worse. I just
Speaker 1: wonder how you can keep saying that we're going to
Speaker 1: get no rate cuts this year, because if you believe
Speaker 1: they're a substitute and we're very close to what you've
Speaker 1: indicated as terminal, then ultimately you should be pulling back
Speaker 1: if things get worse with us now in place to
Speaker 1: say is Peter Ship they head a Mactrice strategy at
Speaker 1: Academy Securities. Let's talk about this equity market. The Nastack
Speaker 1: rip it from a descemberow what more than twenty percent?
Speaker 1: Whiley of black Rock said earlier on this week that
Speaker 1: this market believes we're going back to the old playbook,
Speaker 1: right cuts get along the Nastack, she says, we're not
Speaker 1: going back to the old playbook. Pete, what do you say?
Speaker 1: I would agree with that. I think the NASDAC rally
Speaker 1: is a bit overdone. People are expecting the same sort
Speaker 1: of performance we saw post COVID, and I think the
Speaker 1: conditions are just very different. It's not a supporter for
Speaker 1: that as a whole, though. I think we wanted to
Speaker 1: range trade this equity market. Right as things start getting good,
Speaker 1: the fat comes more into play, and as things deteriorate,
Speaker 1: the fat comes into play the other direction. So, Pete,
Speaker 1: that range at the moment, at least since November has
Speaker 1: been thirty eight hundred to forty two hundred on the SMP.
Speaker 1: Is that the range of sticks? Yeah? I think so.
Speaker 1: I'm certainly now fading this rally in the SMP. I'm
Speaker 1: fading it more through the NASTAC just because I think
Speaker 1: the old performance there has been greater, and I don't
Speaker 1: like the narrative that we return to twenty twenty two.
Speaker 1: The one thing that remains outstanding for me on the banks,
Speaker 1: and I think this is one thing that's different than
Speaker 1: the US versus Europe is people here have alternatives to
Speaker 1: earning more than zero point two percent or whatever bank
Speaker 1: deposit is paying because we've had this gap in rates,
Speaker 1: and I think people are just becoming aware of that.
Speaker 1: So that's what I'm watching to see. If we see
Speaker 1: ongoing deposits leaving the banking system, nothing to do with
Speaker 1: credit concerns and everything to do with what is a
Speaker 1: better yield alternative, And that's not the case in Europe
Speaker 1: yet because they just started their hiking cycle. Do you
Speaker 1: think that this concept of the natural disinflation, the immaculate
Speaker 1: disinflation hasn't gone away and it's almost embedded right now.
Speaker 1: And what we're seeing, which is that the FED has
Speaker 1: an excuse not to hike rates further into cut rates
Speaker 1: and that everything will be just fine and inflation will
Speaker 1: naturally go away. I've been in the camp that we
Speaker 1: are generally headed towards deflation, especially in the goods camp,
Speaker 1: and we had four or five solid months right from
Speaker 1: September of last year till January this year, where you
Speaker 1: saw nothing but deflation. We saw the data bounce a
Speaker 1: little bit. Right now, you look at inventories, they're creeping
Speaker 1: higher again. You start looking at shipments and free they're
Speaker 1: going lower. So I think, on the good side of
Speaker 1: the we're still in an overall deflationary environment. So I
Speaker 1: think that pulls down. I think housing is pulling down.
Speaker 1: Healthcare is something to watch. But yes, I think we
Speaker 1: have overreacted. We have to give this more time, and
Speaker 1: as these companies are pulling back on their jobs, I
Speaker 1: think that just filters through. What we've lost sight of.
Speaker 1: I think is that there is this long and lag
Speaker 1: effect and we're not giving it time. The problem is,
Speaker 1: as market participants, we don't have that time. We're moving
Speaker 1: so quickly. Now you have to be right ahead of
Speaker 1: the time. At what point does the four percent implied
Speaker 1: FED funds rate by January of next year, these things
Speaker 1: enough to reinflate some of those prices that have started
Speaker 1: to come down, you know right now. That's why the
Speaker 1: one thing I'm betting on is that either they can't
Speaker 1: hike as much as people are pricing in but I
Speaker 1: also do not think that we see massive cuts by
Speaker 1: the FAT. I think they're going to try and balance this.
Speaker 1: I think they're going to be very reluctant. I think
Speaker 1: we had a huge unlined of positions, especially in the
Speaker 1: two years, so some of those data, that data and
Speaker 1: how we're looking at what's going on further is just misprice.
Speaker 1: So I would not bet against the bed cutting a lot. Well, Pete,
Speaker 1: as you know, spreads this large aren't resolved by a speech,
Speaker 1: That resolved by incoming information. So can we keep returning
Speaker 1: back to something Lisha and I've been talking about over
Speaker 1: the last couple of weeks, what is the incoming information
Speaker 1: that will resolve that spread? Is it CPI, payrolls, is
Speaker 1: it lending standards? What is it? You know, I think
Speaker 1: it's going to be payrolls in particular, that's the one
Speaker 1: area that we had seen wage inflation take up, it
Speaker 1: was coming back down. Jobs have been probably the single
Speaker 1: strongest thing when for the last six months, at any
Speaker 1: given time, there are two or three things that you
Speaker 1: point to that were weak, and one thing that was
Speaker 1: constantly strong was jobs. So watch out what's happening in jobs.
Speaker 1: A lot of people are still scratching their head. How
Speaker 1: can we get these layouts and they're not showing up
Speaker 1: in the jobs number, So that'd be the one area
Speaker 1: I think if jobs continue, the Fed's going to have
Speaker 1: to hike. If they come back, maybe a little bit
Speaker 1: of reality reflect some of the anecdotal evidence. Maybe that's
Speaker 1: what lets the Fed pause. Do you think the market
Speaker 1: in the maintime for the next month or so, Pete,
Speaker 1: is desensitize somewhat to that data point, because the focus
Speaker 1: overwhelmingly is on bank stocks and what's happening in that sector.
Speaker 1: You know, I think hopefully we can move away a
Speaker 1: little bit from bank stocks. I think that's calming. It's
Speaker 1: all about do they keep deposits given us youel differential,
Speaker 1: and now it's time to start thinking about, Okay, where
Speaker 1: is the economy and what reads do we get as
Speaker 1: we start earnings And again, it's not going to be
Speaker 1: about this sport's earnings. It's going to be what the
Speaker 1: future outlook is, and I think that's very questionable, Pete,
Speaker 1: this was great as always, Peter, chair that of Academy Securities. Peter,
Speaker 1: thank you. Let's get back to the banking system. Joining
Speaker 1: us now after two days of testament on Capitol Hill
Speaker 1: from US regulators. Mara Rodrie gets Valladata's the principal at
Speaker 1: MRV Associates. Mora, let's start here. What did you learn
Speaker 1: over the last couple of days. Well, I think we
Speaker 1: really learned that history matters, and this is what happens
Speaker 1: when we have such a significant decline in history majors
Speaker 1: because people forget things. They forget that basic interest rate,
Speaker 1: risk management, and liquidity measures are at the heart of
Speaker 1: being a bank. So there's certainly going to be some
Speaker 1: changes in terms of supervisory and on site examination processes,
Speaker 1: but there's still a lot we don't know. Where is
Speaker 1: Where is Greg Becker? He needs to be there, he
Speaker 1: is at the end of the day, where the box stops.
Speaker 1: Where were the board members? We haven't heard from any
Speaker 1: of them. They're the ones that are supposed to provide oversight.
Speaker 1: It's not the FED or the California regulators that run
Speaker 1: the bank. So we still are missing from the whole
Speaker 1: range of cast of characters who were really responsible here.
Speaker 1: In the meantime, the bill we've heard is twenty three
Speaker 1: billion dollars at the FDIC incurred and is not taxpayer funded. Bailout.
Speaker 1: It is JP Morgan funded bailout. How much is there
Speaker 1: going to be some sort of consequence to the major
Speaker 1: banks having a special assessment that leaves the FDIC hall right?
Speaker 1: And I can't imagine that JP Morgan City Bank, all
Speaker 1: of the globally systemically important banks in this country are
Speaker 1: happy about this. They are not the problem. They're very
Speaker 1: very liquid, they're very well capitalized, and they certainly don't
Speaker 1: have concentrations of deposits the way that SVB did. And
Speaker 1: then the other regional banks are certainly going to take
Speaker 1: a hit. I don't believe the community banks will. I
Speaker 1: think there's absolutely no political will on either side of
Speaker 1: the aisle to hit the community banks. But at the
Speaker 1: end of the day, it's going to be the American
Speaker 1: consumer who is going to take a hit, because eventually,
Speaker 1: when premier rise for banks, eventually it gets passed on
Speaker 1: to depositors. So this is not going to be any
Speaker 1: kind of free launch for the regular, ordinary American who
Speaker 1: had nothing to do with svb's horrible mismanagement. You talked
Speaker 1: about history and sort of a lack of history. Majors.
Speaker 1: Greg ip in the Wall Street Journal wrote this column
Speaker 1: about how perhaps This isn't the same kind of two
Speaker 1: thousand and eight financial crisis where it happens all at once,
Speaker 1: and rather it's a slow moving crisis of smaller and
Speaker 1: medium sized banks losing relevance and losing some of their
Speaker 1: pre eminence in markets. Does that resonate with you? Unfortunately
Speaker 1: it does. I think what we're seeing here is that
Speaker 1: you're going to have a wide range of investors, journalists,
Speaker 1: pundits who are now looking, Okay, where's the next trouble spot.
Speaker 1: We have banks that have incredibly large portfolios of souring
Speaker 1: real estate loans. You also have leveraged companies that have
Speaker 1: very little in protection for the lenders. So there are
Speaker 1: some trouble spots there. They've been there all along. But
Speaker 1: with stock prices going up, investors were happy. The minute
Speaker 1: that you have a lot of volatility or you have
Speaker 1: stock prices going down, investors rediscover the religion of good
Speaker 1: due diligence in terms of credit. So I think we're
Speaker 1: going to have a lot of dribs and drabs of
Speaker 1: these kinds of issues. People are now talking about so
Speaker 1: called odd accounting rules or unusual accounting rules. No, those
Speaker 1: have been there all along, So you can move bonds around.
Speaker 1: You can also make all kinds of changes with non
Speaker 1: performing loans and loan loss reserves. So I think every
Speaker 1: time that investors nitpick a bit more or journalists nitpick
Speaker 1: a bit more, they're going to find that there are
Speaker 1: some serious problems that still have not been resolved in
Speaker 1: the world of bank regulation, supervision and accounting. Mario know
Speaker 1: how this works. One week later, an equity market roundy later,
Speaker 1: and the questions, the urgency just kind of dissipates. We've
Speaker 1: seen that over the last week. I mentioned this with
Speaker 1: least a few times. Last week, the big question was
Speaker 1: do we need legistive to change right now? What do
Speaker 1: we need to change? What do you need to do,
Speaker 1: like in the next twenty four hours, what do we
Speaker 1: need to change? I think what we need to change
Speaker 1: is to make sure that regulators, both statewide at at
Speaker 1: a federal level are empowered to do their job. You
Speaker 1: need to remove heads of banks from being at the
Speaker 1: district bank, so try to remove those conflicts of interest.
Speaker 1: And you really need to take this. You need to
Speaker 1: change the structure. You need to empower are both offsite
Speaker 1: and onsite examiners to do their job. The problem is
Speaker 1: that when any one of them steps up and tries
Speaker 1: to tell the truth, right, there's no incentive to do that.
Speaker 1: And you do need to make sure that those banks
Speaker 1: that are one hundred billion and more are properly regulated
Speaker 1: and supervised. You do need to do away with a
Speaker 1: Trump rule e gr RCPA that d designated, or change
Speaker 1: the definition as to what is a systemically important bank,
Speaker 1: because those regional banks, by definition, are very concentrated and
Speaker 1: they are very important in those regions. And hopefully this
Speaker 1: time around, politicians on both sides of the aisle have
Speaker 1: learned the importance of not watering down those regulations. That's
Speaker 1: implied by the very fact that a couple of weekends
Speaker 1: ago they had to use these systemic risk exception for
Speaker 1: these banks. Maria, thank you for joining us. As always.
Speaker 1: Mario Rodriquez Valadaris of MFI Associates pleased to say that
Speaker 1: joining us around the table here in New York is
Speaker 1: Steve Paliucer, senior advisor, a bank capital founder and CEO
Speaker 1: of PAGs Group Capital Partners and co owner of the
Speaker 1: Boston South Tis and Steve, it doesn't end there, but
Speaker 1: we haven't got a time, all right. It's good to
Speaker 1: see brackets. Can we start there? Steve Brackets for a cause,
Speaker 1: it's a great tradition here at Bloomberg as well. To
Speaker 1: put this together. March Madness happens every year. I can't
Speaker 1: follow it, but it's college basketball and everyone gets very excited.
Speaker 1: And you've done pretty well this year. Yeah, I'm excited. Uh,
Speaker 1: it's a it's a great group and this has probably
Speaker 1: be in the medus March. Ever, so, how many teams
Speaker 1: have you got left? Because the last time I tried
Speaker 1: to do this, I think I was out after the
Speaker 1: first couple of days. It was like, bracket done. I
Speaker 1: can't even fill in all the boxes. Who have you
Speaker 1: got left? I think I got one team left? One
Speaker 1: team left? You can't? And if you come top three?
Speaker 1: What's your charity? Charity is the Reform Alliance? Okay? What
Speaker 1: do they do? State? There are organizations set up by
Speaker 1: Bob Craft and Michael Ruben to basically help help prisoners
Speaker 1: get out get jobs when they get out of prison.
Speaker 1: We have a huge prison reform situation in this country.
Speaker 1: We've got to we've got to really help people get
Speaker 1: out of that cycle. And that's an organization nationally. It's
Speaker 1: been set up to do there, and uh, I have
Speaker 1: a double bonus this year, and that my son actually
Speaker 1: left his job and he works for the Reform Alliance,
Speaker 1: you know, try to help them, so they should get
Speaker 1: some money off the back of this. I hope, So,
Speaker 1: I hope. So gonna finish we have you have to
Speaker 1: go home tonight and say go Yukon Go. If Yukon wins,
Speaker 1: Reform Alliance gets the money. So go Yukon one, go
Speaker 1: sound another one and go at Atalanta, Fort Atalanta? When
Speaker 1: does this end? Are you done? Now? You've got enough
Speaker 1: sports teams? You never know. I'm really enjoying the ones
Speaker 1: that we have right now and they're winning, and I'm
Speaker 1: actually gonna go to Milwaukee tonight and see see the
Speaker 1: big game self explaining Milwaukee the number one verse number
Speaker 1: two in the East. So that'd be a lot of fun.
Speaker 1: You have a life that a lot of people would envy.
Speaker 1: I'm wondering there has been a lot of interest in
Speaker 1: getting into the professional sports game for quite a while.
Speaker 1: We talked about that during some of the heydays of
Speaker 1: low interest rates. Have you found that change as it
Speaker 1: becomes more difficult to access capital for a number of individuals,
Speaker 1: Perhaps not yourself. Well, it really has changed, you know.
Speaker 1: I think when when we did the Celtics purchase, it
Speaker 1: was something like three hundred and sixty million, and the
Speaker 1: average NBA club is worth three or four billion now,
Speaker 1: so it's been it's been a huge increase. But actually
Speaker 1: the markets have responded their firms that invest in sports
Speaker 1: franchises specifically, and people put together consortiums to get liquidity.
Speaker 1: But you feel like there is less interest, that people
Speaker 1: now are sort of focused more on the nuts and
Speaker 1: bolts of existence rather than you know, just the sport
Speaker 1: of it, because there is perhaps other opportunity, but also
Speaker 1: because they are constrained. No, I think it's remained the same.
Speaker 1: It's it's a highly competitive, fun environment and in Boston,
Speaker 1: you know, number one sports town in the country. Uh,
Speaker 1: it's just it's just a pleasure and sports has kind
Speaker 1: of transcended society, and the teams are really doing a
Speaker 1: lot of good in the community. NBA Cares, for example,
Speaker 1: Boston Celtics United for Social Justice. They're fantastic organizations that
Speaker 1: go out and help the community. So it's really become intertwined.
Speaker 1: Can we discuss exits you're clearly a fan. How do
Speaker 1: you think about a potential exit when you have a
Speaker 1: stake in a sporting organization and you see the appreciation
Speaker 1: in the overall league. I'm thinking about the Glazers and
Speaker 1: Man United. I'm thinking about John Henry over it over Liverpool.
Speaker 1: They're clearly looking at these levels and thinking that maybe
Speaker 1: now is the time to exit. How do you think
Speaker 1: about that? Well, our philosophy is a family office is
Speaker 1: just a long term hold. It's a great asset for
Speaker 1: a long term hold. Um. So you know, I would
Speaker 1: hope to go to the grave own owning these assets myself,
Speaker 1: hopefully hopefully quite a while from now, but but really
Speaker 1: long term hold. I think they're long term hold opportunities.
Speaker 1: And now the appreciations and so much people that got
Speaker 1: in earlier that want to get cashed. There's there's a
Speaker 1: big market out there of individuals want to get involved
Speaker 1: in sports teams and so they'll be successful doing that.
Speaker 1: We're seeing very high evaluations right now because of the
Speaker 1: interest in it and because of the growing television revenues
Speaker 1: and the whole television landscape changing now as as we
Speaker 1: go from bundling to unbundling back to bundling again, um
Speaker 1: and and and sports programming is the one solid thing
Speaker 1: in there. People still will tune in and watch that live.
Speaker 1: So it's become very valuable to all these digital properties
Speaker 1: and the networks and news as well, state not just sport.
Speaker 1: Just thrown that out those Sports Center news sports first,
Speaker 1: thank you st thanks for that. Now that's sport, that's
Speaker 1: sporting organizations across basketball, football, take your pick. Let's talk
Speaker 1: about the border of economy right now. If you've got
Speaker 1: money to put to work at the moment, how easy
Speaker 1: is it to transact? There's still plenty of opportunity out there. Um,
Speaker 1: there's a growing biotech sector in the United States, in Boston,
Speaker 1: San Francisco, m still technology companies that are that are
Speaker 1: doing well. And this this period reminds me of coming
Speaker 1: off of the kind of tech crash in ninety nine.
Speaker 1: We had a very overvalued situation in tech and then
Speaker 1: and then I remember in those days, I would fly
Speaker 1: out to California and someone would give me a term sheet,
Speaker 1: say you have two days to decide. You know, this
Speaker 1: company's worth one hundred one hundred million. It has no sales,
Speaker 1: but it's a great idea to put on the internet.
Speaker 1: And I was incredulous I mean I literally had seventeen
Speaker 1: or eighteen of these meetings, and I I was disoriented,
Speaker 1: and we actually I think I think the only year
Speaker 1: Bank Capital didn't make a major investment was nineteen ninety nine,
Speaker 1: thank goodness, and then that all crashed down in April.
Speaker 1: But do you feel like we've gotten the washout that
Speaker 1: eventually you got in nineteen ninety nine heading into two thousand,
Speaker 1: or do you feel like this still is a tenuous
Speaker 1: moment where evaluations haven't found their floor in any way?
Speaker 1: I would say it's still tenuous, and people are going
Speaker 1: back to the basics, back to fundamentals, looking at cash flow,
Speaker 1: looking at can the company be profitable. You can't have
Speaker 1: a thousand year timeframe anymore when interest rates or have
Speaker 1: gone from you know, next to zero to five and
Speaker 1: a half percent for a T bill. And you know,
Speaker 1: most of my career, I think three quarters of my
Speaker 1: career T bills were at four to five percent the
Speaker 1: vast majority of the time. So we really got trapped
Speaker 1: in this easy money period for the last ten or
Speaker 1: twelve years, and now the reckoning has come. One thing
Speaker 1: that you're so wonderful about is you've got an incredible
Speaker 1: view into so many smaller companies and how they're accessing credit.
Speaker 1: We've been talking a lot about the potential for a
Speaker 1: restriction and credit really weakening the profile of these companies.
Speaker 1: Have you seen any evidence of that accelerating, especially over
Speaker 1: the past couple of months. It's definitely an issue that
Speaker 1: we've invested in about forty or fifty venture companies in
Speaker 1: my family office, and many of them need more capital
Speaker 1: because the banks are with the Silicon Valley situation, they're
Speaker 1: reining in and making sure these companies have more capital
Speaker 1: to pay back those loans. So the market's reacting and
Speaker 1: there is capital out there. But I think that's something
Speaker 1: to watch for sure, Steve, we've talked about what to watch,
Speaker 1: the tradition only eight indicators, CPI, payrolls and whether it's
Speaker 1: lending standard up for the next couple of months. What
Speaker 1: do you watch every single day? How do how do
Speaker 1: you gauge things at the moment? Well, I actually travel
Speaker 1: around so much. I try to get out there in
Speaker 1: the real economy and see what's happening and talked to
Speaker 1: talk to lots and lots of people, and you know,
Speaker 1: we've had this this kind of savings build up through COVID,
Speaker 1: which is which is a good thing. And when you
Speaker 1: go in New York, restaurants are crowded. Every every flight
Speaker 1: I'm on is crowded. So I haven't seen, personally, I've
Speaker 1: seen a huge economic slowdown. There's still there's still money
Speaker 1: out there, there's lots of jobs, there's jobs, there's job offerings.
Speaker 1: Many of these tech cuts are because the tech companies
Speaker 1: overspent or with cheap money, just went into areas they
Speaker 1: should have never gone into. So I don't believe those
Speaker 1: are fundamental, you know, cutting to the core of the
Speaker 1: tech companies. That's just a restructuring to get back to
Speaker 1: the basics and get back to where they're really adding
Speaker 1: value and making money rather than trying to send a
Speaker 1: man to the moon. The Year of Efficiency at METSA. Yeah, yeah,
Speaker 1: seventy gain. Still plenty of guys trying to send people
Speaker 1: to the moon. Yeah, exactly, there's still are a lot
Speaker 1: of Yes, we talked about that. Hey, this is great.
Speaker 1: Soon you guys will be to be doing interviews in
Speaker 1: the moon in ten years. I'm looking for and maybe
Speaker 1: I'll look forwards to going up that with you. Yeah,
Speaker 1: I was about to say, perhaps, Yeah, first a little
Speaker 1: sorry Bristle, no doubt. Steve found your crypt bank Cappo, Steve,
Speaker 1: thank you, sir. Let's bring in Doug cast to talk
Speaker 1: about this se Seabreez Partners President. I think it's safe
Speaker 1: to say a friend of the show, Doug. I listened
Speaker 1: to this show typically when Tom and Paul are anchoring,
Speaker 1: so I hear you on here. I love listening to
Speaker 1: your take, and you've got one out in your most
Speaker 1: recent note on UM on the banking situation. What do
Speaker 1: you think about the turmoil some would say crisis that
Speaker 1: we've experienced. Is it behind us? Sure? Um? First of all,
Speaker 1: good morning, and hey Pramo, first time, long time, Hey,
Speaker 1: good morning. There's an English expression, you know, I always
Speaker 1: try to come out, Matt, you know, provide some differentiated viewpoints,
Speaker 1: not the regular bullet memorized bullet points, the permits and
Speaker 1: bulls and the permit bears. Anyway, there is an English
Speaker 1: expression that has claimed to be a translation of a
Speaker 1: traditional Chinese curse. May you live in interesting times? And
Speaker 1: I think it's an apt description of the market and
Speaker 1: the current business events over the last couple of weeks.
Speaker 1: I guess based upon the news over the last month,
Speaker 1: we have to relearn some old lessons from all this.
Speaker 1: What are the lessons good? Question? First, when a government
Speaker 1: official says a problem has been contained, pay no attention. Second,
Speaker 1: government and policymakers are the ultimate short term oriented players.
Speaker 1: They simply can't withstand much pain in the economy or
Speaker 1: in the financial markets, so bailouts and rescues always follow.
Speaker 1: And I think, finally, almost no one will accept responsibilit
Speaker 1: for his or her role in precipitating a crisis. Not
Speaker 1: de leverage speculators, not the willfully blind leaders of our
Speaker 1: banks and financial institutions, and certainly not our regulators, our
Speaker 1: government officials, members of the FED rating agencies, or politicians.
Speaker 1: And I think, if we look, getting back to Max's question,
Speaker 1: the banking crisis was seemingly the outgrowth of poor and
Speaker 1: aggressive individual bank managements, banking supervisory failures, coupled with monetary
Speaker 1: policy that was pitted against the industry, at first taking
Speaker 1: rates too low, which had a painful impact on the
Speaker 1: net interest income in margins, and then on a time
Speaker 1: with unprecedented climb and interest rates, rates were arose to
Speaker 1: levels that disintermediated and exposed banks with large wholesale deposit
Speaker 1: basis so I think that this crisis will exaggerate disinflationary
Speaker 1: impulses and as probably single and end to the tight
Speaker 1: cycle by slowing in the expansion and transmission of credit.
Speaker 1: But the SMP to US is now trading at the
Speaker 1: higher end of our projected trading range, and markets are
Speaker 1: likely poised to again give Burne for not believing the Fed. Well,
Speaker 1: I don't think sustained rate cuts so highly likely until
Speaker 1: at least twenty twenty four, And I agree with your
Speaker 1: assessment of the economy primo. Well good, I'm glad to
Speaker 1: hear it, but I was more of the gloo exactly. Well,
Speaker 1: hold on a second, it's it's not gloom as much
Speaker 1: as trying to be nuanced and understanding the dissonances in
Speaker 1: the market. And right now, one of the dissonances that
Speaker 1: you highlighted, Dug, was that people are pricing in significant
Speaker 1: rate cuts by the end of the year. They've retraced
Speaker 1: a bunch of that, and I think that we should
Speaker 1: reflect that this morning. We have seen a repricing back
Speaker 1: upward in terms of FED funds rates later this year
Speaker 1: and even earlier next mild but still, how much will
Speaker 1: that really be? Not the death knell, but but really
Speaker 1: a spike in the heart of this rally of equities
Speaker 1: when there is a realization the yes, perhaps there will
Speaker 1: be a pause from the FED, but not wholesale rate cuts.
Speaker 1: That's an important factor, but there are two. I think
Speaker 1: what contributed to this rally in part was what you
Speaker 1: describe the decline in rates, but also a rare thing.
Speaker 1: Mostly market positioning doesn't matter, Lisa, but to us it
Speaker 1: has mattered a lot recently. As an example, if you
Speaker 1: look at the American Association of Individual Investors, the bullish
Speaker 1: reading is in the bottom two percentile, and without exception,
Speaker 1: my hedge fund friends are are of a saturnine temperament
Speaker 1: and are defensively positioned. And the second thing I wanted
Speaker 1: to mention is I think that we all have a
Speaker 1: lot of respect from my old pal Bob Farrell, and
Speaker 1: his famous quote is that the breath of market is important,
Speaker 1: that broad based rallies have the potential to continue, while
Speaker 1: narrowing rallies are prone to failure. And I was reading
Speaker 1: some interesting research from Susquehanna yesterday. As of yesterday, the
Speaker 1: combination of Apple, Navidia, Microsoft, Meta Tesla, Amazon, Google, and
Speaker 1: Salesforce have contributed to over one hundred and sixty percent
Speaker 1: of the SMP gains for the year, So that means
Speaker 1: that the SMP would be negative without these stocks. That's
Speaker 1: a really important factoid. And if you look at just Microsoft, Amazon, Apple,
Speaker 1: Meta and Google, they're up nineteen percent year to date,
Speaker 1: the SMP is up four percent, which means that the
Speaker 1: remainder of the four hundred ninety five SMP companies are
Speaker 1: down on the year. And by the dip has been
Speaker 1: a very successful strategy this year. Do you buy those?
Speaker 1: Do you feel like the baby has been thrown out
Speaker 1: at the bathwater? At least when you look at banks
Speaker 1: and financials, we have been buying the dip. I had
Speaker 1: a non consensus view that we'd have a good first
Speaker 1: half when the consensus or groups was looking for a
Speaker 1: down first half if you remember as the year started,
Speaker 1: and but the second half would be challenging, and that
Speaker 1: we'd end up basically with the flat year. And I
Speaker 1: continue to see basically the market in a chop bucket
Speaker 1: from thirty seven hundred to forty one hundred or around
Speaker 1: forty fifty five right now. So obviously the fifty I
Speaker 1: don't mean to be precise but this fifty to one
Speaker 1: hundred SMP points of upside but probably three hundred twenty
Speaker 1: five to three hundred and fifty a downside. We moved
Speaker 1: to a market neutral position this morning, and if the
Speaker 1: market continues to expand higher, will likely move into a
Speaker 1: net short position. We've been talking about a divergence that
Speaker 1: seems to be growing between the smaller the regional banks
Speaker 1: and the larger banks for profitability, not just it with
Speaker 1: respect to the potential for collapsing. Do you believe in that?
Speaker 1: Do you think that there needs to be a greater
Speaker 1: differential and a greater risk premium place to on some
Speaker 1: of the regional banks just by virtue of the deposit
Speaker 1: data and the concerns that will end up being higher costs. Yeah,
Speaker 1: I think it's it's quite obvious that the small to
Speaker 1: medium sized banks are disadvantaged right now and will be
Speaker 1: for an extended period of time. Oddly enough, I think
Speaker 1: the large money center banks in this banking crisis, which
Speaker 1: we have been accumulating aggressively, may even represent a generational opportunity.
Speaker 1: And I know that's a very differentiated view, but if
Speaker 1: you're thinking about it, you look at JP Morgan Welles
Speaker 1: Bank of America, the industry, the large cap banks have
Speaker 1: reduced their leverage by half from the Great Financial Crisis.
Speaker 1: The liquidity is more than doubled. There's no subprime credit
Speaker 1: books have been generally de risked, notwithstanding the CRI issue, Dave.
Speaker 1: And what is never mentioned is the humongous technology investments
Speaker 1: a JP Morgan has spent upwards of ten billion dollars
Speaker 1: a year behind them, and that that again advantages back
Speaker 1: to your point, to large money center banks from their competition,
Speaker 1: especially the smaller ones, but also the non bank entities.
Speaker 1: And then they will pass the quite extreme stress tests.
Speaker 1: I mean assuming those those stress tests assumed the third
Speaker 1: lower value of commercial real estate, of having of the
Speaker 1: stock market, etc. And I'll have to or the small
Speaker 1: Also ironic, no one has ever mentioned that the bank
Speaker 1: stress tests never tested an increase or spike in interest rate,
Speaker 1: proving once again they're a bunch of effectless scoundrels. It's hey,
Speaker 1: by the way, nothing to do or not directly related
Speaker 1: to trading intelligence, but maybe more political or even social.
Speaker 1: I want to get your take on the twenty eighteen
Speaker 1: rollback of the Dodd Frank Bill, because a lot of
Speaker 1: people have said that has been part of the problem
Speaker 1: here in terms of you know, less regulation. On the
Speaker 1: other hand, Barney Frank himself co author of the bill
Speaker 1: and board member at Signature, came on the show and
Speaker 1: said he doesn't think that had anything to do with it.
Speaker 1: He doesn't think that regulation needs to be um beefed
Speaker 1: up at all. What's your take? I couldn't. I couldn't
Speaker 1: disagree with him more um, but what's the deal? He wrote,
Speaker 1: Dodd Frank, and then he goes out and says, we
Speaker 1: don't need regulation. The funniest thing is, um, um I talked.
Speaker 1: I was I don't even know if you guys remember
Speaker 1: what a nat A raider was, but anyway, I was
Speaker 1: a NATI raider with Ralph Nader and I wrote a
Speaker 1: book called City Bank while I was the second year
Speaker 1: student getting my MBA award. And then we talked about, um,
Speaker 1: the regulatory issues facing and mismatching of of assets and
Speaker 1: liabilities that would end up with a crisis. We were
Speaker 1: only about forty five years too early. UM. But the
Speaker 1: regular the regulatory pullbacks, I think it was in twenty
Speaker 1: eighteen by the four president. We're profoundly important and influential
Speaker 1: in creating the crisis that we have today. But I
Speaker 1: do think, Matt, that it was the supervisory functions that
Speaker 1: really failed. Yeah, and that's gonna be one big question
Speaker 1: as we examine the potential report that I think is
Speaker 1: coming out next month. Nobody dropped the hammer. Yeah, well,
Speaker 1: as exactly one senator put it, It's just the rules
Speaker 1: were there. They were everyone was talking about it, and
Speaker 1: no one did anything about it. An enforcement issue perhaps,
Speaker 1: rather than an oversight issue. Dodcast, thank you so much
Speaker 1: for being with us, Seabreep Partners President joining us on
Speaker 1: the phone. Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify,
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Speaker 1: on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz,
Speaker 1: and this is Bloomberg