Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz.
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Speaker 2: Joining us now with the shifts of Vita Supermanian head
Speaker 2: of Equity and Quantitative Strategy at BABA, give me the
Speaker 2: quant angle on how we lift up well above four thousand.
Speaker 2: What's the quantitative place we're in right now?
Speaker 1: It gets us out to a bull market.
Speaker 3: Yeah, Well, so we looked at a variety of signals,
Speaker 3: and first of all, narrow breath is not a precursor
Speaker 3: for doom and gloom. So I just want to get
Speaker 3: that out.
Speaker 2: There that Zanne Saunders agrees with that as schwall.
Speaker 3: Yeah, I think it's it's kind of a false negative.
Speaker 3: And then when you look at valuations right now, they
Speaker 3: look high, which is another reason nobody wants to buy stocks.
Speaker 3: But valuations generally look high when you're in an earnings recession,
Speaker 3: which we are in right now, and I think that
Speaker 3: when you look at the equity risk premium for stocks,
Speaker 3: it could actually go lower. And our call is the
Speaker 3: riskiest asset class in the world right now is the
Speaker 3: risk free rate, basically treasuries or the bubble. That's the
Speaker 3: epicenter of the bubble. Everyone's been buying treasuries and pushing
Speaker 3: interest rates down to close to zero and now we're
Speaker 3: working through that. But if we are in this sticky
Speaker 3: inflationary environment, do you really want to be in cash
Speaker 3: or bonds? Don't you want to be in stocks that
Speaker 3: participate in inflation. So that's our call, and I think
Speaker 3: that stocks are kind of, you know, reviled right now
Speaker 3: because everybody's worried that we're going into a recession. Think
Speaker 3: about it, We've been positioning for this recession for like
Speaker 3: six quarters, right So we're now at a point where
Speaker 3: the average money manager or individual investor is mostly in defensives,
Speaker 3: more over weight defensives and cyclicals than we've seen since
Speaker 3: two thousand and eight. So I feel like this is
Speaker 3: another setup for a cyclical rally. You know, forty three
Speaker 3: hundred isn't that far away from where we are today,
Speaker 3: So we're not being you know, heroes in terms of
Speaker 3: the cap weighted benchmark. But I do think that you
Speaker 3: can make money by owning some of these unloved cyclicals
Speaker 3: that aren't necessarily going to get roiled by you know,
Speaker 3: what looks to be, you know, not such a bad recession.
Speaker 3: I mean, our economists are basically forecasting zero point eight
Speaker 3: percent peak to trough declines and GDP not bad.
Speaker 4: Not bad. So let's get to it. Let's not bury
Speaker 4: the lead forty three hundred is not the headline. It's
Speaker 4: an equal way S and P five hundred calls. It's
Speaker 4: leaning into cyclicals for the cyclic calls. Just go through
Speaker 4: what industry groups, industrials, banks. What is it about the
Speaker 4: cyclic calls right now that you like?
Speaker 3: What I like about them is that nobody wants to
Speaker 3: talk about them. That the recession that we're heading into
Speaker 3: isn't that bad. And we are at a point where
Speaker 3: cyclical set vectors have actually become higher quality. And I
Speaker 3: know this sounds crazy to say, but if you look
Speaker 3: at energy, metals, even financials, right the big global regulated banks,
Speaker 3: these companies have been forced to get disciplined because they've
Speaker 3: been starved of capital for a very long time. We've
Speaker 3: been in a decade where nobody wants to invest in
Speaker 3: commodities or metals, or mining or banks, and these companies
Speaker 3: had to basically get discipline figure out how to become
Speaker 3: self sufficient. And today I would argue that they're higher
Speaker 3: quality than a lot of these so called secular growth
Speaker 3: plays that have just had a free ride from cheap
Speaker 3: capital globalization. Like all of these sort of low quality
Speaker 3: sources of growth.
Speaker 5: Let's talk about the other side of that call, especially
Speaker 5: given the equal weight is going to deliver double the
Speaker 5: gains of market cap weighted, which I think is fascinating
Speaker 5: and raises real questions about your tech call. And is
Speaker 5: it just simply trading sideways allowing this cyclicals to sort
Speaker 5: of gain and lifting the index, or does that mean
Speaker 5: that they sell off? I mean, are they basically going
Speaker 5: to go opposite each other?
Speaker 3: So I think there's a way that big tech can
Speaker 3: do all right during this period, and that's if these
Speaker 3: companies start to shorten their duration risk. And what I
Speaker 3: mean by this is a lot of these big tech
Speaker 3: companies offer great growth way out in the future, so
Speaker 3: they're going to get hurt harder by changes in the
Speaker 3: cost of capital. What some of these companies are doing
Speaker 3: is acknowledging that they're too big to grow as quickly,
Speaker 3: so they're returning cash and shortening their duration. I think
Speaker 3: that's the way that we can start investing in big
Speaker 3: tech again, is if we start getting more money upfront.
Speaker 3: And maybe that doesn't happen for a while. And I
Speaker 3: know it's heresy to say that some of these companies
Speaker 3: are going to initiate a dividend. All the growth investors
Speaker 3: that I talk to are like, what are you talking about.
Speaker 3: That's unthinkable, But you know, look at a lot of
Speaker 3: these tech companies in the past that have initiated dividends.
Speaker 3: They've rallied on the news. I think that this is
Speaker 3: one of those those themes where as we move forward
Speaker 3: the market, my trade sideways. Tech companies figure out how
Speaker 3: to navigate higher inflation, a higher cost of capital. Some
Speaker 3: of them go away. Some of them already have gone away.
Speaker 3: Smaller banks I worry about, but big banks I think
Speaker 3: are still in a very good capital position. So those
Speaker 3: are some of the things.
Speaker 2: Because it's a wide netted Bank of America. Are people cautious,
Speaker 2: so they gloomy? I mean I'm getting back and forth
Speaker 2: here in the world like the world's coming to an end,
Speaker 2: We're all going to die versus Well, that's what they're saying.
Speaker 2: But they're actually long Apple's.
Speaker 1: Well there, collective Apple.
Speaker 3: Yeah, I mean they're probably long big tech because it's
Speaker 3: dangerous not to be in those stocks, and those stocks
Speaker 3: are seen as defensive. I don't agree. I think those
Speaker 3: stocks are actually more cyclical. But I will tell you
Speaker 3: the mood is very gloomy, and I think that bears
Speaker 3: are just waiting for that downturn. But the one thing
Speaker 3: that makes me think we're not going to get a
Speaker 3: downturn is that the question we get most frequently is
Speaker 3: I have capital, I'd like to put it to work.
Speaker 3: Should I wait until the debt ceiling is behind us?
Speaker 3: Or do something now? And if everybody's asking that question,
Speaker 3: we're probably not going to see some major downdraft. That's
Speaker 3: our call.
Speaker 4: You think that some kind of debt agreement does deliver
Speaker 4: a pretty strong relief rally based on that, well, yeah.
Speaker 6: I think that.
Speaker 3: And I think that the reason the market hasn't sold
Speaker 3: off as much is that there is this sense, even
Speaker 3: when you listen to the most bearish investors. We all
Speaker 3: kind of think that they're going to get a deal done, right,
Speaker 3: I mean, that's the base case, So why bother selling
Speaker 3: if the base case is resolution?
Speaker 4: The psychology this moment I find fascinating. If you've made
Speaker 4: the call already and you're in the market, great. If
Speaker 4: you're on the sidelines and you're in cash, you're so
Speaker 4: nervous right now, sevida, because you believe that you're the
Speaker 4: guy that's going to get sucked in last right, right right,
Speaker 4: I mean enough, and they're going to smash into the
Speaker 4: downturn of course.
Speaker 3: Yeah. Well, here's the thing. If if you look at
Speaker 3: asset allocations, they're more overweight bonds than stocks that we've
Speaker 3: seen since O. Wait, so I think that there's less
Speaker 3: selling pressure. If you look at our own client flows,
Speaker 3: individual investors have been selling for the past four weeks.
Speaker 3: We actually saw big spike in outflows that would indicate
Speaker 3: almost capitulation like levels of selling. So I think that,
Speaker 3: you know, folks have basically braced themselves for this calendar date,
Speaker 3: this X date. And it's it's not necessarily.
Speaker 1: That people loving Savita talking here.
Speaker 2: I got stock recommendations, I mean, whalen emails good morning, Whalen,
Speaker 2: thank you for emailing.
Speaker 1: Whaleen emails in and says, go along.
Speaker 2: Fender f n d R. It's long Fender emailed in.
Speaker 2: Tell mom the Bryant Tyler, Bryan and Bryant pinky strat.
Speaker 1: Five seven hundred dollars.
Speaker 7: Whal good call.
Speaker 3: Yeah, we'll ask Sam.
Speaker 4: Oh Savita thank you this. Yeah, it's a bit of
Speaker 4: sup reminding the Bank of America. Granikfull Yer of AHF
Speaker 4: Investments running the following. If the X state really is
Speaker 4: June one, we're in trouble because there simply may not
Speaker 4: be enough time to write the deal into legislative language.
Speaker 4: Then give law makers time to actually read it. If
Speaker 4: the X state is around June sixth or seventh, there
Speaker 4: may be time to reach an agreement.
Speaker 7: TK.
Speaker 4: Pretty scathing from Greg this morning.
Speaker 2: Get out the calendar and someone that's known the calendar
Speaker 2: of Washington for decades and decades, mister Valier briefs this
Speaker 2: this morning here on May twenty third. I've been calling
Speaker 2: it next week Tuesday somewhere in the zeitgeist. Last night,
Speaker 2: Greg Valier, I saw people talking about next week is
Speaker 2: suddenly upon us?
Speaker 1: Is it?
Speaker 8: Yeah, we're getting there. Tom I've been very negative, as
Speaker 8: you know, but I think that the caps, these spending caps,
Speaker 8: are really crucial. That Democrats have agreed to spending freeze,
Speaker 8: that's a big deal. So I think we're not going
Speaker 8: to defall, however, a big caveat. I don't think they
Speaker 8: can get it done in time. I think there's going
Speaker 8: to have to be an extension of a week or
Speaker 8: two because there's a lot of members in both parties
Speaker 8: that need to be persuaded. But we're getting there. We're
Speaker 8: getting a little bit closer.
Speaker 2: Which can kick down the road is best for Americans?
Speaker 2: Is it a shorter term one where they fix us
Speaker 2: in two weeks or do we want it can kick
Speaker 2: down the road and to say September.
Speaker 8: You really don't want to go into September tom I
Speaker 8: think that's going to be annoying to the markets. The
Speaker 8: longer this thing sits out in the sun, the more
Speaker 8: it's going to attract flies. So I think that we've
Speaker 8: got to get something done, and I think it can
Speaker 8: be done, but there's going to probably have to be
Speaker 8: a short term extension.
Speaker 5: It's definitely already annoying to markets and far beyond, and
Speaker 5: it seems like there's been a shift in rhetoric away
Speaker 5: from job botting the other side with fiery threats of
Speaker 5: a default to something of a nature reflecting the fact
Speaker 5: that nobody wants to have the US default. Is this
Speaker 5: a political shift on both sides to basically say, look,
Speaker 5: we're not going to do this, We're not holding the
Speaker 5: US hostage, We're just trying to negotiate in good faith.
Speaker 8: Well, I think there's a growing feeling on Capitol Hill
Speaker 8: this could be a pox on both your houses if
Speaker 8: we don't get anything. I think the level of discuss
Speaker 8: toward Congress will increase, if that's possible. So no, I
Speaker 8: think both sides want to get this done. Both sides
Speaker 8: genuinely do not want to see that defall. What is
Speaker 8: annoying to me is that at the very last minute
Speaker 8: they've brought up revenues. We're going to talk about taxes now.
Speaker 8: That seems to be an issue that just complicates things.
Speaker 5: Let's talk about that, especially given the fact that tax
Speaker 5: receipts tax income this year was so far below what
Speaker 5: the US was expecting. Part of the reason why the
Speaker 5: X state perhaps is a bit earlier than other people
Speaker 5: had been projecting is this because of a lack of
Speaker 5: investment in the IRS. Is this because of loopholes, Is
Speaker 5: this because of tax code, or simply because the economy
Speaker 5: isn't doing as well as people had previously thought.
Speaker 8: Well, there are a lot of variables, Lisa, and I
Speaker 8: would say that the one that could snag this whole
Speaker 8: thing is a proposal to cut back dramatically on the
Speaker 8: IRS funding, as you mentioned, If they did that, that
Speaker 8: could drag this thing well into the summer. But I'd
Speaker 8: say they're there. They probably have at least half of
Speaker 8: the deal done, so the odds continue to improve slightly
Speaker 8: that we'll get a deal in a week or two.
Speaker 5: What happened to all of the intransigent members of both parties,
Speaker 5: basically the ones on the right who have been saying,
Speaker 5: we're not going to pass any kind of increase in
Speaker 5: the debt limit. We're going to mandate all sorts of
Speaker 5: cutting over our dead bodies. That was sort of the
Speaker 5: platform that they ran on. And then on the other side,
Speaker 5: people pushing back on Biden and saying, why are you
Speaker 5: even negotiating, You're giving in far too much and you're
Speaker 5: looking weak. How much are you seeing those two sides
Speaker 5: willing to come to the table and actually vote for
Speaker 5: a plan that is hashed out between McCarthy and Biden.
Speaker 8: It's a really good and it's a big wildcard right
Speaker 8: now that couldn't both parties hold their members. I think
Speaker 8: McCarthy's done a pretty good job at holding Republicans. I
Speaker 8: think a lot of Democrats don't want to be seen
Speaker 8: as contrasting with Joe Biden. So I say, in both parties,
Speaker 8: there's a resignation that they're going to have to get
Speaker 8: this done.
Speaker 1: Okay, Gregor, I want to see gow me here.
Speaker 2: I was thunderstruck in the early early morning yesterday of
Speaker 2: the Telegraph of London having is its lead headline, the
Speaker 2: opbed from the Washington Post on elderly presidents, of course
Speaker 2: led by President Biden. The study that the Washington Post did,
Speaker 2: what was the ramifications inside the Beltway of the post
Speaker 2: study of many older presidents.
Speaker 8: Well, I think a lot of people think this has
Speaker 8: been overdone. But we see overnight Hillary Clinton, who is
Speaker 8: late seventies, saying that, yes, I understand Joe Biden is
Speaker 8: real old and this could be a liability. You know,
Speaker 8: it's an issue that is not going to go away.
Speaker 8: But as I point out to people Donald Trump has
Speaker 8: a birthday in about a month, he turned seventy seven.
Speaker 4: Greg, don't you think, though, this is just a way
Speaker 4: of avoiding the actual elephant in the room. It's not
Speaker 4: about age, it's about mental acuity. Why don't we actually
Speaker 4: have that discussion. Not all seventy year olds are created equally,
Speaker 4: not all eighty year olds are created equally. In fact,
Speaker 4: I know some ninety year olds who were as sharp
Speaker 4: as some of the sixty year olds that I know. Greg,
Speaker 4: why don't we having a proper conversation about this topic?
Speaker 8: Well, you're right, and you guys mentioned a few minutes ago.
Speaker 8: Henry Kissinger turns our hundred today and he's still really sharp.
Speaker 8: So you're absolutely right, John. I think that's the big issue.
Speaker 8: But it's going to be a blood object used against
Speaker 8: Joe Biden whenever he says something in articulate, whenever he
Speaker 8: looks frail. It's an issue He's not going to be
Speaker 8: able to avoid.
Speaker 9: Greg.
Speaker 4: Value of a Jeff Investments, Greg, thank you appreciate itself.
Speaker 4: Around the trail, let's get to j D from Avacuil.
Speaker 10: Good morning, good morning.
Speaker 4: I'll give you two views. Bank of America constructive, JP Morgan,
Speaker 4: not at all. Why are giving the team right now?
Speaker 4: Somewhere in between?
Speaker 10: So think about it. Everything has been in between for
Speaker 10: the last seven months. Uh, this is one of these times, John,
Speaker 10: where the signal and the noise are incredibly difficult to
Speaker 10: pars and that there are times where there just isn't
Speaker 10: that much information from the price. And what it comes
Speaker 10: down to is we are waiting to see if one
Speaker 10: year's worth of incredible, incredible tightening, I mean really historic
Speaker 10: is going to have the effect, and we're seeing, you know,
Speaker 10: minor parts of that effect. So for us, essentially, what
Speaker 10: it comes down to is we do expect a recession
Speaker 10: to begin sometime in the second half, and for the
Speaker 10: equity market that means down first and then likely back up.
Speaker 1: Essentially, here take.
Speaker 2: The Heymen dynamics of a Hymen recession. It's in your
Speaker 2: note talking about some real gloom here in the first
Speaker 2: quarter twenty twenty four, and also his call of dramatically
Speaker 2: lower inflation getting out there under three percent, and you've
Speaker 2: got SPX forty one fifty. How are you going to
Speaker 2: frame equities forward given a Hymen recession and a Hymen disinflation.
Speaker 10: So that is where actually, when you think about it
Speaker 10: the long term, which we as investors have been guilty
Speaker 10: of perhaps not thinking about. Given the fact that these
Speaker 10: seven most difficult months of sideways actions, the view twenty
Speaker 10: four and thirty six months out is literally unequivocally positive
Speaker 10: because of the fact that inflation is likely to fall
Speaker 10: below three percent sustainably.
Speaker 5: Have we worked through the stimulus potentially dollars stimulus during COVID.
Speaker 5: How far are we down in that?
Speaker 10: So if you look in terms of the excess savings
Speaker 10: on the part of computer consumers, you're really only about
Speaker 10: halfway through. And I think that, again is one of
Speaker 10: these things that we failed to appreciate, is this idea
Speaker 10: that there was so much money put into the system,
Speaker 10: both monetary and fiscal, that it's really still working its
Speaker 10: way through. And then the question is, and this is
Speaker 10: both given the market action, a glass half empty and
Speaker 10: a glass half full view. The glass half empty view is,
Speaker 10: my goodness, if we could have had that banking problems
Speaker 10: of the last several months in an environment where stimulus
Speaker 10: is still working through, maybe that's not so good. Glass
Speaker 10: half full is that the stimulus is so profound that
Speaker 10: it's going to engineer this adjustment that we've had.
Speaker 5: This is the tale of two narratives, whatever you want
Speaker 5: to justify the data with.
Speaker 7: So how do you.
Speaker 5: Really work in an environment where you can basically come
Speaker 5: up with it whatever story you want to You might
Speaker 5: as well be happy and just go with stocks. Right.
Speaker 10: Look, we think you need to say invested. We think
Speaker 10: this is an alpha extraction time and defensive sectors have
Speaker 10: worked and then they've not worked. AI, as we all know,
Speaker 10: seems to be the overriding principle right now. We, like
Speaker 10: others of the last half hour, concerned that there's too
Speaker 10: much concentration there, and we do think that there is
Speaker 10: a bit of catch down to do, given the fact
Speaker 10: that small caps have underperformed the way they have. But
Speaker 10: you really need to stick to your ding. And the
Speaker 10: interesting thing about this environment is with rates where they are,
Speaker 10: if you want to hedge your portfolio, it's extremely cost
Speaker 10: efficient to do so.
Speaker 4: I've heard that before. So let's pick up on that
Speaker 4: point in just a moment. I just want to finish
Speaker 4: on the poor breath point. It's poor breath actually any
Speaker 4: indication of how much oxygen is left in a rally,
Speaker 4: because I feel like people complained about the breadth that
Speaker 4: is stock market and the ball market of the last
Speaker 4: ten years, and it carried on why can't this continue?
Speaker 10: Well, look, so it can continue provided that we get
Speaker 10: that sort of glide path in terms of the stimulus
Speaker 10: that we were talking about a few minutes to go
Speaker 10: wearing off. It's just our view that first of all,
Speaker 10: this whole rate cut talk forget about it. Sure they're not.
Speaker 10: So there is some repricing in our view that needs
Speaker 10: to occur based on that misperception.
Speaker 4: That the market happened in that Judy, and I think
Speaker 4: what's interesting for me is that we've repriced yields ower
Speaker 4: at the front end, taken back some of those rate cuts,
Speaker 4: and this Nastak's still fine. So can you explain to
Speaker 4: me what the relationship is between what's developing in the
Speaker 4: bond market and what's happening in stocks.
Speaker 10: So the relationship is again this question of the time
Speaker 10: before the recession. Remember we've had a lot of excitement
Speaker 10: around AI in these last two or three months, and
Speaker 10: what investors are sort of harping back to is the
Speaker 10: nineteen ninety eight yield curve inversion. I saw something this
Speaker 10: morning that said, best start to the Nasdaq since nineteen
Speaker 10: ninety eight. Well, two things happen. First, you had a
Speaker 10: roaring bear market in nineteen ninety eight, and then if
Speaker 10: you got defensive, you gave up three hundred percent gains
Speaker 10: and then over the next year and a half. So
Speaker 10: that's the conundrum that people face, and they don't want
Speaker 10: to let go, and that's perhaps the right decision.
Speaker 2: Your shop is going to do the most eagerly anticipated
Speaker 2: daily call in about ten minutes with mister Hymen. I
Speaker 2: want you to call us here. The message from your
Speaker 2: shop to people in cash scared stiff.
Speaker 10: So the message is is that it's okay to be
Speaker 10: in cash for now, but if you're thinking long term,
Speaker 10: you need to be prepared for that time where you
Speaker 10: need to shift assets. But that isn't coming until we
Speaker 10: get inflation sustainably lower, which again the path to get
Speaker 10: there is through an economic slowdown.
Speaker 4: Jillian, final question, you touched on it. I just want
Speaker 4: to squeeze it in optionality, do you want to hedge
Speaker 4: to the upside to the downside? Where do you want
Speaker 4: to take advantage of we things a christ at the moment?
Speaker 10: Well, that actually comes down to you know, one's own
Speaker 10: portfolio prep look at your portfolio, think about how you feel.
Speaker 10: And we always say for the retail investor is when
Speaker 10: the market's going here, and we do think you're at
Speaker 10: the upper end of the range here. We don't think
Speaker 10: this is a breakout. But if you have FOMO options
Speaker 10: are cheap enough that you can buy upside in themes.
Speaker 10: Like the rest of the world, we actually prefer portfolio
Speaker 10: hedges with the S and P five hundred, where you
Speaker 10: can sell upside to finance downside. And it's very as
Speaker 10: I said.
Speaker 4: Costa, there we go, brilliant, Jenny, and that was wonderful.
Speaker 4: Thank you, sir. Do you want to talk about it tests?
Speaker 4: I think I want to take a pass pass in
Speaker 4: the money what I've ever called.
Speaker 2: Torsten Slock joins, the chief economist that Apollo Global Management, Torston,
Speaker 2: I want to get to your spectacular chart today, which
Speaker 2: is lit up on Twitter right now. But I got
Speaker 2: to follow up on Lisa's note there on non farm payrolls.
Speaker 2: I'm gonna give you a should phrase, where should non
Speaker 2: firm payrolls be?
Speaker 11: Well, given that during the pandemic that was thrown five
Speaker 11: trillion fiscal stibulus on the economy and five trillion fit
Speaker 11: balance sheet expansion. It's not a surprise that when you
Speaker 11: throw ten trillion at a roughly twenty trillion dollar economy,
Speaker 11: drawing that out of the economy is taking time. So
Speaker 11: that's why, in some sense it's not surprising that it's
Speaker 11: taking time to get all this liquidity back, and therefore
Speaker 11: that is taking time to get household saving strong down,
Speaker 11: to get corporate saving strong down, and therefore, to your question,
Speaker 11: to get non found payrose to really slow meaningfully, we
Speaker 11: just need to go through a period before we get
Speaker 11: that slow down that we have.
Speaker 2: So let's double barrel. You've got non firm payrolls coming
Speaker 2: down at some point. Your spectacular chart today shows the
Speaker 2: miscall of recession, doom and gloom, drawing it out, drawing
Speaker 2: it out, folks. I'll put it on Twitter here when
Speaker 2: I can. Let's dovetail those together to get to where
Speaker 2: you think we're going to get. Is it just a
Speaker 2: smooth linear progression or is it going to be either
Speaker 2: a jump condition or even more brutal discontinuous.
Speaker 1: What's it going to be?
Speaker 11: This is absolutely critical because before when the FIT was
Speaker 11: just hiking rates twenty five basis points, they were looking
Speaker 11: around saying how is the economy doing? Okay, we go
Speaker 11: another twenty five and once we get through that process,
Speaker 11: that was all very smooth and gradual. But the challenge
Speaker 11: is that we have now over the last few months,
Speaker 11: added a banking crisis and tighter credit conditions, and a
Speaker 11: banking situation where banks are seeing much less demand for
Speaker 11: commercial real estate loans, must less demand for c any loans.
Speaker 11: Those indicate us are now at two thousand and eight levels.
Speaker 11: Those things raise the risk exactly as you're saying, Tom,
Speaker 11: that we may have that nonlinear slowdown over the coming
Speaker 11: quarters where tighter credit conditions may be accelerating the slowdown
Speaker 11: in the economy.
Speaker 5: This is the key debate. Is this recession delayed or
Speaker 5: recession interrupted? And we're looking at data and is there
Speaker 5: anything to give us any indication ahead of it or
Speaker 5: do we just have to wait and see what mystery
Speaker 5: box awaits us?
Speaker 11: Absolutely, because the challenge is if we threw central in
Speaker 11: at the economy, sucking that out again is going to
Speaker 11: take time, and how do I weigh that in my
Speaker 11: concitative model purpose of the US economy. We're on the
Speaker 11: one hand, we had huge stimulus that's still stimulating and
Speaker 11: at the same time, the FED is trying to slow
Speaker 11: things down, and we have tieder credit conditions. So the
Speaker 11: market thought, and that's what the chart is showing today,
Speaker 11: that the recession would have come like six months ago,
Speaker 11: but now it's taking a longer time to take that
Speaker 11: tentrillion out. But what we do know is that the
Speaker 11: FED is very very keen on getting inflation down from
Speaker 11: five percent to two percent, and as long as that's
Speaker 11: the case, the FED will continue to step on the brakes.
Speaker 11: The FED will continue to slow down earnings growth, and
Speaker 11: the FED will continue to slow down hiring.
Speaker 5: There's been this sort of conundrum baked into the market
Speaker 5: where certainly people are rethinking whether there was actually a
Speaker 5: banking crisis, perhaps taking that away from the equation a bit,
Speaker 5: and you're seeing yields creep higher, and it hasn't really
Speaker 5: taken a bike at a bite out of tech valuations.
Speaker 5: Do you think that there really has been an economic
Speaker 5: sea change resulting on artificial intelligence, resulting from some of
Speaker 5: the shifts in allocations of people's pocketbooks.
Speaker 7: I do think that very importantly.
Speaker 11: First of all, inflation is still way too high red
Speaker 11: to to the fed's target. So importantly, the FED will
Speaker 11: look at inflation at five and say we have to
Speaker 11: do more to get inflation at least key rates at
Speaker 11: these levels for a longer time, to get inflation down.
Speaker 11: And there are two reasons for that. Namely, first of all,
Speaker 11: housing is beginning to recover. That's putting up where pressure
Speaker 11: and housing as usual makes up forty percent of the
Speaker 11: CPI basket, so that's lifting potentially inflation down the road.
Speaker 11: And the other thing is also that wage inflation is
Speaker 11: also coming down too slowly. In other words, ways average
Speaker 11: our learnings that four and a half percent is not
Speaker 11: close to the two three percent week before the pandemic.
Speaker 11: So that raises the risk to your question, Lisa, that
Speaker 11: inflation will be sticky. And if invation is sticky, that
Speaker 11: does mean that tech and growth and venture capsal and
Speaker 11: particular growth. You mean, if it's trying to slow down growth,
Speaker 11: that should mean that growth should not be performing.
Speaker 7: Well, you're right, tech cute.
Speaker 2: David Rosenberg publishes moments ago out of Toronto and Sticky Inflation,
Speaker 2: and he goes all Newtonian on us, and he looks
Speaker 2: at first and second derivative, what's the derivative right now
Speaker 2: of the disinflation that we're seeing and at what level
Speaker 2: do you have to get We're at where you've got
Speaker 2: legit second derivative convexity down to a lower level.
Speaker 11: Yeah, there are two problems inflation and will get the
Speaker 11: new numbers on PCE, but that will just be the
Speaker 11: rivetive of the CPI we just got. But the problem
Speaker 11: is infasion is at five and five is not two,
Speaker 11: and most importantly live is not four. It's not four either,
Speaker 11: and therefore five is not even moving down to two.
Speaker 11: If you look at the six months change, the three
Speaker 11: months change, the twelve months change in core CPI, it's
Speaker 11: still moving sideways. So yes, it is true to say
Speaker 11: that maybe owners cull and rent and housing inflation could
Speaker 11: be coming down eventually. But with a lot of indicators
Speaker 11: in housing, traffic of perspective, buyers is going up, existing
Speaker 11: home sales is going up, new homes is going up,
Speaker 11: home buyer confidence and hope builder confidence is going up.
Speaker 11: Even number bits per home has also been going up.
Speaker 11: So that's all telling you that if CPI, in particular
Speaker 11: the housing component starts to go up, inflation will indeed
Speaker 11: turn out to be more sticky.
Speaker 2: Listen and I hang on every word. You publisher could
Speaker 2: kill us, but we hang on it. And one answers.
Speaker 2: Mortgage rates back up six point x percent suddenly six days,
Speaker 2: seven days, eight days worth seven point zero four percent
Speaker 2: thirty year bank rate this time with mortgage rates going up.
Speaker 1: What's it mean?
Speaker 11: So at this point is not only mortgage rates that
Speaker 11: have been driving the housing markets also that jobs have
Speaker 11: still been strong and wage growth has still been strong.
Speaker 11: So on the scale here that has clearly been dominating
Speaker 11: what has been happening to mortgage rates, and that's why
Speaker 11: housing has started to show a recovery.
Speaker 7: The fact that they are more bits per home.
Speaker 11: Sold now than there were six months ago is just
Speaker 11: stunning when you think about where morgage rates are. So
Speaker 11: that means that we will get to that infliction point,
Speaker 11: and through earlier discussion, where we might get that sharper
Speaker 11: slope down where it no.
Speaker 1: Longer be be like what Friday or Monday.
Speaker 11: Oh no, so this may be several months down the
Speaker 11: road because again remember both the banking sector tightening conditions
Speaker 11: and also morgus rates at these levels. Eventually the Fed
Speaker 11: will succeed with getting inflation down, and we should not
Speaker 11: doubt their commitment to getting inflation back to two percent,
Speaker 11: which takes.
Speaker 5: Us back to where we started in a sense. This
Speaker 5: ten trillion dollars of stimulus that was pumped into the
Speaker 5: economy and the uncertainty of where we are in terms
Speaker 5: of breaking it down and pulling it out of the economy.
Speaker 5: Do we have a sense of how much was sucked
Speaker 5: out and how much just keeps getting circulated in terms
Speaker 5: of wages and bigger incomes that go into spending.
Speaker 11: Absolutely, that's a really key question because the only way
Speaker 11: we can really get a good handle of that is
Speaker 11: to try to look at the data for how much
Speaker 11: savings is left across the income distribution.
Speaker 7: The feed has quality data for that.
Speaker 11: Some of the banks, City Bank and Bank of America
Speaker 11: have data that also on the private level. And the
Speaker 11: conclusion is still today you have both for high, middle
Speaker 11: and low income groups, still a higher levels of savings
Speaker 11: at these cash in checking accounts than what you had
Speaker 11: in the fourth quarter of twenty nineteen. So the answer
Speaker 11: to your question is we still need some more time
Speaker 11: before that excess savings has been worked down to a
Speaker 11: lower level, and that's when we also made a little
Speaker 11: begin We've seen you spoke about this Earlier, we've seen
Speaker 11: some of the credit card data showing some signs of weakness.
Speaker 11: You're also seen at Bloomberg Screen restaurant performance in DEX
Speaker 11: also beginning to roll lower a bit. So there are
Speaker 11: some early signs of maybe consumers are beginning to hold back,
Speaker 11: and delinquasy rates also in particular for lower fical scores
Speaker 11: are also beginning to go up. So yes, there's some
Speaker 11: early signs of cracks for the US consumer. But it's
Speaker 11: still exactly the question you're asking. Pretty difficult to get
Speaker 11: an exam firm handle on what is the timing, but
Speaker 11: it is coming. No one should doubt that there is
Speaker 11: ESSI is on the horizon.
Speaker 5: There's a big debate about what caused the inflation. Was
Speaker 5: it this question of some structural changes with people exiting
Speaker 5: the work workplace and just perhaps reglobalization or deglobalization, and
Speaker 5: how much was just modern monetary theory failed that essentially, Yes,
Speaker 5: if you do just print money, you're going to get
Speaker 5: more inflation, and that's essentially what happened. I mean, how
Speaker 5: much can you parse out these two things?
Speaker 7: Yees?
Speaker 11: So if you throw tentrall in that the economy no
Speaker 11: wonder that you get some inflation and if you're at
Speaker 11: the same time lower the capacity of the economy being
Speaker 11: lower the supply side. If capacity starts rinking, you both
Speaker 11: have more demand and you have less supply. That's a
Speaker 11: recipe for inflation going up. So now we're trying to
Speaker 11: balance that by pursuing demand that by hiking rates, and
Speaker 11: supply chains are coming back, so that means supply is
Speaker 11: coming up to get the economy more on balance. So
Speaker 11: that you have talked about this for many years. The
Speaker 11: tailor rule, if I look at my Bloomberg screen says
Speaker 11: the fit funtrates to they should be nine.
Speaker 7: That's obviously not where we are.
Speaker 11: But if we are so far away from the fedscal
Speaker 11: of inflation and unemployment that we still need more to
Speaker 11: do to get to the point where there's more balance
Speaker 11: between supply and demand.
Speaker 2: Chicago's by way of Austria, M two has been a study.
Speaker 2: Most people say, ignore M two doesn't have recent academic validity.
Speaker 1: I'm sorry. M two took off like a moonshot and
Speaker 1: it's cratered. What's it mean?
Speaker 11: So I would look at him too as a reflection
Speaker 11: of the tentrillion that was thrown in terms of accurcate
Speaker 11: demand that came along, and M two is indeed now collapsing,
Speaker 11: but that's because the FET is trying to withdraw Equaly,
Speaker 11: the FED is trying to really slow the economy down,
Speaker 11: and we should in equity and credit mark. It's not
Speaker 11: under estimate the commitment that the FET has to slow
Speaker 11: down earning's growth, slow down hiring. The whole idea from
Speaker 11: the FET is to slow down consumption, slow down cap
Speaker 11: e spending. That's a very very strong commitment to saying
Speaker 11: we need to slow the economy down in order to
Speaker 11: get inflation down from five to two percent, to.
Speaker 5: Put a bow on it. And the follow up on
Speaker 5: what you said with the tailor rule and a possible
Speaker 5: nine percent FED funds rate, which a lot of people
Speaker 5: say is implausible at this moment, how mispriced do you
Speaker 5: think where funds rates should go in order to slow
Speaker 5: this economy to bring out some of this ten trillion dollars.
Speaker 7: Of simil well.
Speaker 11: I think, as Tom was saying, that's exactly the debate
Speaker 11: on the air form C at the moment, some many
Speaker 11: firm C members are saying we no only longer need
Speaker 11: to hike more and others are saying, but wait a minute,
Speaker 11: maybe we do need to hike more, because maybe the
Speaker 11: transmission mechanism is saying that Moyes needed. So I do
Speaker 11: think for sure at least we will need to have
Speaker 11: rates elevated for a lot longer than what markets up pricing.
Speaker 2: The economist James Diamond, I believe that. I believe he
Speaker 2: said he's a little leery on quantitative tiding right now.
Speaker 2: I mean, is that the heart of the matter that
Speaker 2: I is gonna have to blink and lose QT.
Speaker 11: So well, there's a lot of discussion about what is
Speaker 11: the sequencing of how do we actually tighten policy. And
Speaker 11: here at this point, if you think that it is
Speaker 11: needed to get long rates further up to say, cool
Speaker 11: the housing market down.
Speaker 1: You've been driving them up.
Speaker 2: Torston slock Alone's answers to a four to forty two
Speaker 2: year yield and a thirty year bond four or four percent.
Speaker 5: Yeah, I mean this is what we've seen. This grind
Speaker 5: higher as people really rethink because the.
Speaker 11: Recession has been delayed and if this delayed more, well, okay,
Speaker 11: if it's not coming, maybe race do need to go
Speaker 11: up a bit more.
Speaker 2: I get the chart on Twitter it's clearly the chart
Speaker 2: of the day. His Torston sluck of a power global man.
Speaker 4: Fantastic conversation coming up right now with our colleague and
Speaker 4: good friend, Francine Lanquist, sitting down with the CEO of
Speaker 4: Standard Charted at the Qatar Economic Forum. Hello friend, Hi John,
Speaker 4: Thank you so much.
Speaker 9: I am delighted to speak to Bill Winters. We'll talk
Speaker 9: about them ago little least, we'll speak about markets, and
Speaker 9: we'll speak about everything in between.
Speaker 6: Bill Winters, thank you so much.
Speaker 7: Great to be.
Speaker 6: Here for joining us.
Speaker 9: We'll talk about the banks, and we'll talk about potential
Speaker 9: takeovers or not if stand a chart in the second.
Speaker 9: But what do you worry most about the markets? Is
Speaker 9: the debt ceiling? Is it a banking crisis? Is it
Speaker 9: FEDS policy mistakes?
Speaker 12: I mean, right this minute, I'm not worrying about it
Speaker 12: too much because I think things feel actually in a
Speaker 12: reasonable stasis in the world. Of course we're worried about
Speaker 12: the dead ceiling, but I heard the reassuring comments both
Speaker 12: from President Biden and Speak McCarthy yesterday.
Speaker 6: I have to think these guys know what they're playing with.
Speaker 12: So I'm okay that I think this is the structural
Speaker 12: resistance of inflation to come back down. That's the biggest concern,
Speaker 12: not right at this moment, but just as that plays
Speaker 12: out over time. What's economic growth look like.
Speaker 6: I've been very impressed by the resilience in the US,
Speaker 6: in Europe, and.
Speaker 12: Of course this region, the Middle East is booming, Asia
Speaker 12: is booming, India is booming despite higher interest rates.
Speaker 9: So it thinks, feel okay, Well, if you look at
Speaker 9: the debt ceiling, even if we have a resolution, are
Speaker 9: we playing with fire? Does it actually put to the
Speaker 9: US as reserve currency? As I know, leader's free world
Speaker 9: at risk?
Speaker 6: Look, I mean we've been the politicians in Washington have
Speaker 6: been playing with the debt.
Speaker 12: Ceiling for decades and you know, so far there's not
Speaker 12: been an accident. Of course, every time it happens, we wonder,
Speaker 12: you know, given how crazy the politics is in the
Speaker 12: US right now, is this going to be the time?
Speaker 12: But the fact is, the treasury, the treasury markets are
Speaker 12: behaving well. Credit markets are behaving well. So the market
Speaker 12: is not pricing yet a bad outcome here.
Speaker 9: There's a lot of money in the Middle East. Do
Speaker 9: you think they're after a bank like yours?
Speaker 12: Look, I think everybody in the world would love to
Speaker 12: own a piece of standard Charter Bank because it's a
Speaker 12: strong bank.
Speaker 6: We're doing well.
Speaker 12: We've got this super interesting foot train across Asian Middle East,
Speaker 12: in Africa, So.
Speaker 6: You're a takeover.
Speaker 3: We're cheap.
Speaker 6: So we're cheap over target.
Speaker 12: Like I say, if somebody wants to to come and say,
Speaker 12: we can add more value to this bank than what
Speaker 12: you're doing today, where you're drawing at double digit growth rates,
Speaker 12: profits at substantially higher you can have an idea on
Speaker 12: how to do something better.
Speaker 6: Please let us know. We'll come in.
Speaker 12: But is there The fact is we're a global bank today,
Speaker 12: We're adequately scaled for the environment.
Speaker 6: We're growing quite nicely. That's all I'm focused on.
Speaker 9: Okay, if you look at regulators in you know, in
Speaker 9: the UK and elsewhere, would they be ready for takeover
Speaker 9: of a large systemic bank by you know, Middle Eastern money.
Speaker 12: Well, I noticed that there was a takeover of a
Speaker 12: large systemic bank in Switzerland a few weeks back, and it.
Speaker 6: Happened in a weekend. So I guess that means it's domestic.
Speaker 12: In the right in the right circumstance, regulators can get
Speaker 12: things going.
Speaker 6: I think the it's very pressive to see how the various.
Speaker 12: Investors in the golf. We're sitting here in Qatar today.
Speaker 12: I just had a panel discussion with the head of
Speaker 12: the Qatar Investment Authority. That's a very impressive investor with
Speaker 12: a truly global perspective, a lot of experience investing, and
Speaker 12: I think these the various countries on the golf. Of course,
Speaker 12: they are accumulating savings right now and they're diversifying their economy.
Speaker 6: So that's why we're here.
Speaker 12: That's why we're investing so much capital into the Middle
Speaker 12: East because we see these huge opportunities to connect that
Speaker 12: capital with all the opportunities in Asia and vice versa.
Speaker 6: So do you need to have a bank to do that? No,
Speaker 6: you need to have a bank like us. It's prepared
Speaker 6: to play that bridging role.
Speaker 9: What's the hardest thing being the bank right now? Is
Speaker 9: it how to deal with China?
Speaker 7: Great?
Speaker 6: At the moment, I think everybody's very focused on liquidity.
Speaker 12: So even though we are we as a bank, and
Speaker 12: I think the banking industry broadly.
Speaker 6: Is extremely liquid and will remain.
Speaker 12: Liquid even after we go through a period of quantitative
Speaker 12: tightening or whatever. But the rules changed when Silicon Valley
Speaker 12: Bank went busted and then Credits Feees went through its
Speaker 12: from while a week later, and so everybody's looking.
Speaker 6: Hard at whether the deposits are as sticky as we thought.
Speaker 12: I think that that that, as so many things have
Speaker 12: made it through these testing prayers, will the industry will
Speaker 12: be fine here?
Speaker 6: I'm sure Center Trubor.
Speaker 7: Will be fine.
Speaker 6: So that's the immediate concern, I think.
Speaker 12: In the longer term from a banking perspective, of course,
Speaker 12: we've always got an eye on the East West tensions.
Speaker 12: But you know, the best thing that happens to our
Speaker 12: business is we keep trade levels very high, which is
Speaker 12: what they am record record levels of trade between China
Speaker 12: and the US, just as an example. But China is
Speaker 12: accelerating its pace of opening up, opening up as capital markets,
Speaker 12: and for a bank that's structurally a connector, that's a
Speaker 12: good thing.
Speaker 6: That's a good thing.
Speaker 9: And how can you be sure that it's opening up
Speaker 9: for real without a step forward to step backwards, because
Speaker 9: we're sometimes hearing mixed messages from the Chinese authorities.
Speaker 12: I think when you look over really over the decades now,
Speaker 12: China has been sort of race ahead, consolidated a bit
Speaker 12: race ahead. I think that's quite normal the structure. China
Speaker 12: is part of the global economy in a very, very
Speaker 12: big way and wants.
Speaker 6: To remain part of the global economy in a big way.
Speaker 12: In order to do that, they need to liberalize the
Speaker 12: arrangements for capital and goods and services moving in and
Speaker 12: out of China.
Speaker 6: That's been a steady objective for decades.
Speaker 12: Now it's accelerating at the moment, I think for all
Speaker 12: the reasons around the geopolitical tensions, and I think it.
Speaker 6: Will continue to move forward.
Speaker 12: But will they take time from time to time to consolidate,
Speaker 12: maybe just pull back a little bit before moving forward.
Speaker 9: Of course, But when you talk about deposits and actually liquidity,
Speaker 9: do we need to look at depositors base at some
Speaker 9: of the banks?
Speaker 6: Is there too much concentration so are we going to
Speaker 6: see more.
Speaker 9: Regulation and is that regulation warranted or could it.
Speaker 6: Be like wrong write this, It's a big question.
Speaker 12: I think it's very clear that there were some deposit
Speaker 12: bases in particular in the US, although some would say
Speaker 12: credit serace as well, that were too concentrated, and we
Speaker 12: know that the market was merciless with those players. We
Speaker 12: know that in the US, the fed now is but
Speaker 12: a term funding facility in place.
Speaker 6: It's not a.
Speaker 12: Guarantee of the banking system, but it is a very
Speaker 12: very substantial backstop.
Speaker 6: So I don't think we're gonna see any more prices.
Speaker 12: But I think everybody's looking to say, okay, let's think
Speaker 12: again about how sticky those deposits are.
Speaker 7: But free.
Speaker 12: At the heart of it is banking is a confidence business.
Speaker 12: And if we're going to have a fractional reserve banking
Speaker 12: system technical term meaning you borrow, you.
Speaker 6: Check deposits, and you turn them right.
Speaker 12: If we're gonna have that system central banks, we're gonna
Speaker 12: have to accommodate that with transparent liquidity facilities.
Speaker 6: For healthy banks.
Speaker 9: But does mobile banking change anything because we used to
Speaker 9: have to q op and actually get to we stuff
Speaker 9: to marke up.
Speaker 12: But I'll tell you the moment that there was a
Speaker 12: queue in front of Northern Rock in two thousand and seven,
Speaker 12: the bank was done so in fact way in some
Speaker 12: ways that might even be worse because it was visible.
Speaker 6: It was a news story. So the mobile banking means
Speaker 6: everything goes a bit faster.
Speaker 12: But bank runs are bank runs, and as soon as
Speaker 12: you lose confidence, it's hard to get it back.
Speaker 9: Does the end of credit sueeze actually mean that you
Speaker 9: get market share in Asia?
Speaker 12: On look, I mean credit Suiece's business is being distributed
Speaker 12: across the market. The UBS acquired a lot of it,
Speaker 12: but UBS was already they have four hundred pound gerilla,
Speaker 12: so they can't they can't retain everything that came in
Speaker 12: from the Credit Suaese.
Speaker 6: Some of the money had moved before.
Speaker 12: Obviously, there's almost over two hundred million dollars of outflows
Speaker 12: before that.
Speaker 6: That money all went someplace and it's not all going
Speaker 6: back to UBS.
Speaker 12: So yeah, we're picking up We're picking up rms so
Speaker 12: relationship managers, we're picking up asset center managements, we're picking.
Speaker 6: Up some loan market share. That's how much.
Speaker 12: We had twenty billion dollars of inflows last year and
Speaker 12: another five or so billion into our private bank in
Speaker 12: the first quarter of this year, which in the overall
Speaker 12: scheme of credit suitese is not a big deal for
Speaker 12: center Chutter.
Speaker 6: It's it's material.
Speaker 9: We talk about the UK almost every day, as you know,
Speaker 9: it could do better, it needs to do better. There's
Speaker 9: not enough investment do worry about the UK and London
Speaker 9: specifically as as a capital market.
Speaker 12: I'm a big believer in the UK right. It's a
Speaker 12: fundamentally resilient place. I think Bridgie Tunak and government are
Speaker 12: doing the right things right now. Of Course politically they've
Speaker 12: got they've got a challenge, given they've given everything that
Speaker 12: we've been through.
Speaker 6: But I think the country is doing the right thing,
Speaker 6: is incredibly resilient.
Speaker 12: I think the fact that that we've not had an
Speaker 12: actual drop in economy or negative economic growth, no recession,
Speaker 12: quite impressive given them the buffetting and the economy. But
Speaker 12: there's an inflation problem, there's a I think there's there's
Speaker 12: some all sorts of challenges around corporate governance which which
Speaker 12: have to be worked through.
Speaker 9: Okay, well we'll have to get you back on to
Speaker 9: talk about that, Bill, Thanks so much, Bill Winter's there
Speaker 9: a standard charged with that, John, and that'll send it
Speaker 9: back to you in New York and we'll have plenty
Speaker 9: more drive day.
Speaker 4: Hey, Frank, seeing wonderful work has always fran scein Lacquay
Speaker 4: there with Bill Winter's of standard Challe it's sitting in
Speaker 4: them at least at the Kata Economic Forum.
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