Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 1: of the things we want to do is get qualified
Speaker 1: people to talk to her and do that right now.
Speaker 1: The story is extraordinary. Jelenac Williams is a former FDIC chair. Yes, Akravth,
Speaker 1: Swain and Moore, but far more than that, She's enjoyed
Speaker 1: the failure of deposit insurance. Her father was flatten in
Speaker 1: Yugoslavia years and years ago over a failure of a bank.
Speaker 1: She wanted into Berkeley sterling academic career, including service in
Speaker 1: the law business in Palo Alto, California. There's no one
Speaker 1: more qualified to talk about this banking mess in the
Speaker 1: former FDIIC chair, Jo Thank you so much for joining
Speaker 1: us this morning. Let me cut to the chase right now.
Speaker 1: Does this crisis have staying power or are we solving
Speaker 1: idiosyncratic tech banking problems?
Speaker 2: I would say, and thank you, by the way for
Speaker 2: having me this morning. I would say that we're at
Speaker 2: the place where this crisis should not have had staying power,
Speaker 2: and yet here we are about five six weeks in,
Speaker 2: and I'm hoping that we're at the tail end of that.
Speaker 3: The government does have a number.
Speaker 2: Of tools they need to use, and I'm happy to
Speaker 2: chat with you.
Speaker 3: About what those tools are.
Speaker 2: But the problems are not so much indiosyncratic as much
Speaker 2: as this point, we have created a crisis of confidence
Speaker 2: in the banking system and that's where we are.
Speaker 1: How does real estate fold into this? Many will say, Okay,
Speaker 1: it's not going to be the drama we've seen over
Speaker 1: the last number of weeks. But commercial real estate, what
Speaker 1: do you observe there?
Speaker 2: A lot of the banks have, actually, especially regional banks,
Speaker 2: have high concentrations and exposure to commercial real estate. In
Speaker 2: good times, they're generally able to navigate the concentrations in.
Speaker 3: Their portfolio very well.
Speaker 2: But again, we are the point where there's so much
Speaker 2: volatility in the marketplace with the market expectations of the banks,
Speaker 2: and frankly, the empty offices in a number of commercial
Speaker 2: markets in the United States are not going to.
Speaker 4: Help that, Jelena. Should these banks be in that business?
Speaker 4: I mean, this is sort of one of the questions
Speaker 4: at a time or seeing the number of smaller and
Speaker 4: regional banks shrink dramatically over the past few years, should
Speaker 4: it be their business to provide a majority of the
Speaker 4: commercial industrial loans, the majority of the commercial real estate lending?
Speaker 2: You know, I think this goes back to the intrinsic
Speaker 2: question of the tiered banking says system in the United States.
Speaker 2: You have different levels of banks and different sizes, so
Speaker 2: one of them, you know, you have community banks. There
Speaker 2: are generally banks below ten billion dollars in asset, mid
Speaker 2: size banks above that, and I would say below one
Speaker 2: hundred billion. Then you get into the regional land, and
Speaker 2: that regional land is about one hundred billion to as
Speaker 2: high as like five hundred billion. Above that, you get
Speaker 2: into the very large banks. And the truth of the
Speaker 2: matter is that if those banks, the regional banks and
Speaker 2: mid sized banks and community banks are not financing local
Speaker 2: real estate commercial real estate transactions, they won't get financed.
Speaker 2: The role of these banks in the US economy is
Speaker 2: so high that people actually frankly underestimate what these banks
Speaker 2: mean for our financial ecosystem. So should they be in it?
Speaker 2: Should they not be in it? It's almost irrelevant that
Speaker 2: they are in it. They need to manage the risk
Speaker 2: in their portfolios and with the rising interest rate environment,
Speaker 2: it's going to be incredibly difficult for them. And frankly,
Speaker 2: the pandemic didn't help with people not wanting to come
Speaker 2: back to offices.
Speaker 3: And you have tens of thousands of.
Speaker 2: Square fit of commercial real estate, even in some of
Speaker 2: the most prime locations, sitting empty. I was just in
Speaker 2: San Francisco a couple of weeks ago, and it's a
Speaker 2: ghost down.
Speaker 4: Well, as a former regulator yourself, should there also be
Speaker 4: the same kind of regulatory scrutiny and requirements at some
Speaker 4: of these regional banks as there are at larger banks.
Speaker 3: No, actually, absolutely not.
Speaker 2: And here's why our regulatory system needs to account for
Speaker 2: different tiers and different I would say strata in our
Speaker 2: banking sector. These banks present different types of risks than
Speaker 2: the GESIS, the global systemically important banks. They present different
Speaker 2: type of risk than mid sized banks, and the job
Speaker 2: of the regulators is basically to accommodate that risk. The
Speaker 2: job of the bank is to manage that risk. The
Speaker 2: bottom line is when the bank fails to manage that risk,
Speaker 2: you get into in a situation that we have been
Speaker 2: in the past few weeks. But it's not you know,
Speaker 2: as much a blame as we can put on the
Speaker 2: banks and the bank risk management in some of the
Speaker 2: failed bank situations, I think there is there is a
Speaker 2: portion of blame that goes on the US government.
Speaker 1: I just looked at the bank assessment rates that the
Speaker 1: FDI CE and my eyes glazed over. Ms McWilliams. I
Speaker 1: mean it's complex, to say the least. How much does
Speaker 1: JP Morgan or Bank of America pay each year for
Speaker 1: FDIC insurance? Do you have a number?
Speaker 3: Well, there is a number. You can go to the FDIC.
Speaker 2: I don't want to single out a bank. It's a
Speaker 2: lot of money. It is a lot of money. There
Speaker 2: are two different sets of formulas. There is a complex
Speaker 2: bank formula. There is a less complex or a small
Speaker 2: bank formula.
Speaker 1: I don't mean interrupt, but I am Senator Warren would say,
Speaker 1: raise the raid on James Diamond and Brian moynan. Is
Speaker 1: there wiggle room here for the big guys to pay more?
Speaker 1: FDI Insurance to take the load off the back of
Speaker 1: Andrew Jackson's four thousand banks.
Speaker 2: So it is very possible that the FDIC may just
Speaker 2: come out in that direction with the special assessment that
Speaker 2: they need to impose to make the deposit Insurance Fund whole.
Speaker 2: As you know, some of the banks that have failed
Speaker 2: and have been subsequently sold have created a deficit for
Speaker 2: the Deposit Insurance Fund and as a result of that,
Speaker 2: there is going to be a special assessment, and I
Speaker 2: believe that's where the.
Speaker 3: FDIC is heading.
Speaker 4: Elena, Are you concerned about the Federal Reserve in its
Speaker 4: role as regulator? Do you put the blame there? It
Speaker 4: seems like everyone's just basically quietly blaming Randy Quarrels and
Speaker 4: then leaving it at that, But do you think that
Speaker 4: this is something endemic in the oversight and the enforcement
Speaker 4: role that they've fed often plays.
Speaker 2: Quite frankly, to blame prior vice chairman for supervision for
Speaker 2: something that has happened about a year and a half
Speaker 2: after he left office is a little bit preposterous. But
Speaker 2: I do think as a former Federal Reserve staff or
Speaker 2: I was there during two thousand and seven, eight nine
Speaker 2: ten crisis, I will tell you this. They're good people
Speaker 2: working at the Fed. They have a lot of mandates
Speaker 2: they have to satisfy. But we are at a place
Speaker 2: that is about financial stability and the whole debate about
Speaker 2: monetary policy and financial stability. We're at the place if
Speaker 2: the banks are not stabilized, are not going to have
Speaker 2: financial stability. And so to the extent the Federal Reserve
Speaker 2: takes its financial stability mandate seriously, I think it's long
Speaker 2: overdue that they take a look at the banking situation
Speaker 2: in the United States and what the interest rate rises
Speaker 2: have done to the banking sector as they contemplate where
Speaker 2: to keep the interest rates.
Speaker 5: Yelena, thank you for wank and on all of this.
Speaker 5: Thank you. Jelena McWilliams stack.
Speaker 1: DA Lipsyng joins this chief Global Economist at PGUM Fixed
Speaker 1: Income with serious experience recently in the White House, in
Speaker 1: the in the office. Is it tomorrow They're going to
Speaker 1: have a meeting a conon fab on the debt. It's
Speaker 1: all politics, isn't it?
Speaker 6: More in more than Lisa, Look, talking is always better
Speaker 6: than not talking. But I'd be surprised if we get
Speaker 6: a decisive break through tomorrow. The incentives are just not
Speaker 6: yet in place. McCarthy is his speakership. If he folds
Speaker 6: early to the president with a clean increase in the
Speaker 6: debt limit, the President can't give a nod to anything
Speaker 6: near the scale of spending cuts proposed by McCarthy because
Speaker 6: they would undercut much of his domestic agenda and lose
Speaker 6: his political base. So I'm afraid market stress is still
Speaker 6: what's needed to create cover for face saving compromise. And
Speaker 6: that's why perversely market complacency asty.
Speaker 1: You and Jeane Spirling have been very good at this
Speaker 1: of trying to link this policy dynamic into Wall Street.
Speaker 1: As Lisa mentioned earlier, Wall Street seems soundly removed from
Speaker 1: this discussion, this debate. Are they correct on that, to
Speaker 1: be removed to not worry about this debt crisis?
Speaker 6: You know, look, it's muscle memory, and that muscle memory
Speaker 6: is dangerous because the context has changed pretty dramatically from
Speaker 6: the last time we had a serious flirtation with default
Speaker 6: back in twenty eleven. For one, Congress is as polarized
Speaker 6: as it's been in our country's history. Second, you know
Speaker 6: we are we are trying to roll over a debt
Speaker 6: stock that's twice as large as it was in twenty
Speaker 6: eleven three four, and holdings of treasuries are up to
Speaker 6: seven trillion dollars. That's almost three trillion higher than what
Speaker 6: we had in twenty eleven. Or back in twenty eleven,
Speaker 6: Europe was in an existential debt crisis. China have yet
Speaker 6: to lure serious influence were abroad. Digital assets had yet
Speaker 6: to go mainstream. There were no alternatives to dollars. That's changed.
Speaker 6: And lastly, and I think most importantly, we're currently the
Speaker 6: US spearheading the most severe economic sanctions campaign against the
Speaker 6: G twenty country and financial history that creates incentives, geopolitical
Speaker 6: incentives for countries to hedge. The debt ceiling just needlessly
Speaker 6: adds impetus to those incentives at a time of geopolitical peril.
Speaker 4: Why do you think, Dalli, from your vantage point of
Speaker 4: having worked at the White House, of having worked at
Speaker 4: the Treasury, of having worked at the Fed, all of
Speaker 4: these different agencies, why do you think things have gotten
Speaker 4: so dysfunctional in Washington, d C.
Speaker 6: Yeah, I mean, that's ceiling really is just symptomatic of
Speaker 6: that polarization, Lisa, I mean, I think it's derivative about
Speaker 6: the atomization of the media, extreme levels of inequality and
Speaker 6: technology that allows political movements to gain scale at speeds
Speaker 6: that we haven't seen before. And look, now we're on
Speaker 6: the cost of doing something that great powers just don't do.
Speaker 6: They don't default, they don't talk about default, they don't
Speaker 6: think about default. And your measure of greatness is when
Speaker 6: no country questions whether you would ever do so. Some
Speaker 6: people brought us to this point.
Speaker 4: Some people would say, de leip that there are already
Speaker 4: our economic consequences to even having this discussion in such
Speaker 4: real time, And given the fact that it does have
Speaker 4: a different kind of more polarized nature to it, what
Speaker 4: are the longer term impacts, even if there is a
Speaker 4: solution that is found the last minute, when the market
Speaker 4: finally wakes up and applies the real pressure that Washington's
Speaker 4: waiting for.
Speaker 6: Lisa dollar primacy is a national treasure. It allows us
Speaker 6: to fund our government at twenty to fifty basis points
Speaker 6: cheaper than otherwise would that as up to real money
Speaker 6: one hundred and fifty billion dollars for every fifty basis
Speaker 6: points on treasure yields. It allows us to absorb a
Speaker 6: shock like the twenty eleven downgrade of our credit rating,
Speaker 6: and it allows us to deliver a shock. All of
Speaker 6: that is being put at risk in terms of the
Speaker 6: long term scarring effects of this type of debate. Just remember,
Speaker 6: dollar primacy is nothing more than a network. Okay, it's
Speaker 6: rooted in trust and inertia and an assumed lack of alternatives.
Speaker 6: But every network, whether it's in biology or ecology or
Speaker 6: in finance, they have tipping points. They're usually psychological tipping
Speaker 6: points that you can't see in advance. And we're now
Speaker 6: pushing ourselves towards what I would consider to be a
Speaker 6: very dangerous place the closer we get to the X state.
Speaker 6: So this is very serious.
Speaker 7: A lot is at stake.
Speaker 4: Well, this is actually a really important point that a
Speaker 4: lot of people argue against, saying that the loss of
Speaker 4: the dollars supremacy as the global currency has been overstated.
Speaker 4: The death of the dollar has been perhaps overwrought. However,
Speaker 4: other people like yourself saying, actually it's becoming much more real.
Speaker 4: What are you looking for in the data to show
Speaker 4: that that is actually that what is transpiring, that people
Speaker 4: are moving away from the dollar is the main dominant
Speaker 4: currency of exchange.
Speaker 6: You're not going to see it on paper. I mean
Speaker 6: the measure of privacy is really you use the dollar
Speaker 6: to buyer sell stuff? Do you use it to borrow money?
Speaker 6: And do you use it to price transactions? And on paper,
Speaker 6: there's nothing to see here. This is a tail risk.
Speaker 6: But we're gambling with an exorbitant privilege that has incalculable benefits,
Speaker 6: and so it's the kind of tail risk that you
Speaker 6: should never take. That's the point.
Speaker 1: I look, dullypitt this and it's a history which you
Speaker 1: studied at Carolina and also up at MIT, the ageless
Speaker 1: history of our debt caution. I'm going to call it
Speaker 1: our almost debt religiosity. What do the people where they say,
Speaker 1: we got to get rid of the debt. It's just
Speaker 1: like Apple's corporate debt. Kyle Browner and others wrote a
Speaker 1: book forty years ago saying, no, it's not. How do
Speaker 1: you respond to people that viscerally feel this government debt
Speaker 1: is bad?
Speaker 6: Yeah, this is a legitimate question, Tom, I don't think
Speaker 6: we're in a crisis. However, so long as our nominal
Speaker 6: GDP growth is higher than the average interest we pay,
Speaker 6: the math of debt sustainability improves over time, and right now,
Speaker 6: that's the case, our nominal GDP growth year every year
Speaker 6: is about seven percent. It's actually been in the double
Speaker 6: digits with much of the past two years. The way
Speaker 6: that average interest rate in our public debt is two
Speaker 6: point six percent. Now for that to be sustained, of course,
Speaker 6: the market has to believe the money we're borrowing will
Speaker 6: be put to productive use. That's the key question, and
Speaker 6: I think look that argues for the kind of investments
Speaker 6: that the public sector is making, where the private sector
Speaker 6: is underinvested, R and D infrastructure, technology programs that grow
Speaker 6: a workforce make them more productive. That's really the measure
Speaker 6: of whether the debt that we're borrowing is going to
Speaker 6: raise our nominal GDP growth to levels that can sustain
Speaker 6: arising interest rate costs.
Speaker 1: And with that beautiful explanation good enough for Olivia Blanchard
Speaker 1: to Joseph Stieglitz as they've studied this as well. Wrapped
Speaker 1: around our start and the rest, the trust mechanism is
Speaker 1: that government will put it into good projects. Can't that
Speaker 1: be discussed tomorrow among a fractured polity in Washington?
Speaker 6: It can, but not with a gun to our head.
Speaker 6: The consequence of not reaching agreement can't be we're going
Speaker 6: to burn the house down. We absolutely should have a
Speaker 6: discussion about spending in revenue levels. How are we going
Speaker 6: to use our resources to solve structural problems that the
Speaker 6: private sector will solve by itself, Extreme inequality, social disparity, vulnerabilities,
Speaker 6: are supply chains, the climate crisis, All of that should
Speaker 6: be on the table. The point is, how do we
Speaker 6: have that discussion in a way that doesn't make us
Speaker 6: a global spectacle. That's the question.
Speaker 1: This has been wonderful. Dully's saying my most favorite discussion
Speaker 1: so far in this debt idiocy. He's a pGEM fixed income.
Speaker 5: Well, it's around a table. David Libovitz, the Global Market
Speaker 5: Strategistic JP, Morgan Asset Management, David Good, Mornings here morning.
Speaker 5: How long before we're talking about a June hike again?
Speaker 7: So it's interesting and the point that I think you
Speaker 7: all were discussing prior to the break, I think is
Speaker 7: really what investors need to focus on, which is everybody's
Speaker 7: expecting that the FED is done. Everybody's expecting that the
Speaker 7: FED is going to start cutting rates at some point
Speaker 7: in the back half of this year. If you think
Speaker 7: about where the risk lies relative to that view, it
Speaker 7: very much lies to the upside, right, So the risk
Speaker 7: here is that people find themselves flat footed. I would
Speaker 7: agree with you on the inflation point. The rate of
Speaker 7: inflation is entirely too high, not to mention Pal's favorite
Speaker 7: indicator continues to trend higher, right, which nobody's really talking about.
Speaker 7: And so you know, is the FED gonna do four, five,
Speaker 7: six more twenty five basis point hikes? Probably not. But
Speaker 7: if you're thinking about a portfolio and you're thinking about
Speaker 7: what could give the market jitters going forward, I think
Speaker 7: it very much lies in that upside risk about around
Speaker 7: the Fed doing more than the market expects. That could
Speaker 7: even be staying on hold given the way futures a
Speaker 7: price today. But again, very much view of the risk as
Speaker 7: being to the upside.
Speaker 5: Equity data ship, what does it come from? If that's
Speaker 5: your backdrop?
Speaker 7: So I think, you know, the interesting thing that we've
Speaker 7: spent a lot of time talking to clients about is,
Speaker 7: you know, back in March when when we started to
Speaker 7: see stress in the banking system, why aren't equities going down?
Speaker 7: And the answer was the ten year fil fifty basis
Speaker 7: points and that boosted all of the tech names, and
Speaker 7: that allowed the s and P. Five hundred to keep
Speaker 7: its head above water. I don't think you're going to
Speaker 7: see the market, the market broadly do particularly well in
Speaker 7: that environment because the big heavyweights in the market are
Speaker 7: just too sensitive to the overall movement of rates, and
Speaker 7: so I think what you end up seeing is kind
Speaker 7: of a nowhere market right where the average stock arguably
Speaker 7: starts doing a little bit better, maybe some utilities, healthcare staples,
Speaker 7: but you know, tech's not going to lead us out
Speaker 7: of this hole if the risk to rates is to
Speaker 7: the upside.
Speaker 1: I want you to talk about this because you're going
Speaker 1: into institutional and high network people and they're scared. You
Speaker 1: know what. The bottom line here is the rest of
Speaker 1: the market is witnessed by the SPX has come out
Speaker 1: of a brutal bear market in October and it's made
Speaker 1: back a huge part of that loss. I think that's
Speaker 1: underplayed by people addicted to covering Apple every fifteen minutes breathless.
Speaker 1: Do you look at this as the bottom of a
Speaker 1: market in October and we're climbing out of it into
Speaker 1: a positive return for everything else besides Apple.
Speaker 7: So I think at the end of the day, the
Speaker 7: problem with saying that October was the low. It reminds
Speaker 7: me of people telling me that June was the low
Speaker 7: right in the middle of last year, and we had
Speaker 7: priced it in recession because the median decline excuse me,
Speaker 7: as twenty five percent peaked to troth and we did
Speaker 7: that right, So we must have priced it in. But
Speaker 7: let's talk about the growth data. Let's talk about the
Speaker 7: jobs report. I mean, this is not an economy that
Speaker 7: is anywhere close to being in recession in our view
Speaker 7: when you look across the board. I don't think we
Speaker 7: necessarily set a new low, but we could arguably retest
Speaker 7: those existing lows at some time before the end of
Speaker 7: the year.
Speaker 4: So it's good news good news again.
Speaker 7: I think good news right now. It's an interesting question
Speaker 7: because the market has shifted its focus away from inflation
Speaker 7: and back to growth, and on the one hand, that's
Speaker 7: allowed the negative correlation between stocks and bonds to take
Speaker 7: hold again, and so market performance this year has very
Speaker 7: much been better. But I worry that if the inflation
Speaker 7: data doesn't cool off, then good news becomes bad news
Speaker 7: because it means that the FED is going to have
Speaker 7: to do more. So we're in this kind of weird,
Speaker 7: nebulous state today. Where it just doesn't seem to us
Speaker 7: like investors broadly are accurately pricing in the risks around
Speaker 7: monetary policy that we see on the horizon.
Speaker 4: If there is another bank failure or another bank jitter
Speaker 4: that emerges, does the data matter about inflation or do
Speaker 4: people basically discount the FED no matter what.
Speaker 7: So I think that that's the problem, and that's what's
Speaker 7: happening today, is that people are saying, look what's going
Speaker 7: on in the banking space. You know, it looks and
Speaker 7: feels and smells like something we may have seen before.
Speaker 7: The Fed's going to have to go on hold. But
Speaker 7: you know, again, I would make the point that banks
Speaker 7: fail every single year, right, it's just not usually the
Speaker 7: sixteenth largest bank by assets, And that's what really caught
Speaker 7: people's attention. And so, you know, I think we could
Speaker 7: see continued stress in the banking system broadly, but very
Speaker 7: much at the lower end, as we work through some
Speaker 7: of these COVID excesses and we work through the duration
Speaker 7: mismatch that we know exists today. I'm not sure that
Speaker 7: we're out of the woods, but I do think that
Speaker 7: the big booms have probably been heard.
Speaker 1: I don't want to get in trouble with mister Diamond.
Speaker 1: He hangs on your earvy word. But the bottom line is,
Speaker 1: are we going to see a banking roll up in
Speaker 1: this country? Keep JP Morgan out of it. Are we
Speaker 1: going to see a banking roll up in this country?
Speaker 7: Well? I think what's interesting that really ties back to
Speaker 7: the structure of the US banking system right, which is
Speaker 7: much more fragmented than what you see in other parts
Speaker 7: of the world, and so arguably that caters more to
Speaker 7: M and A activity than would be the case in
Speaker 7: some place like Europe. I think it would be premature
Speaker 7: to say that we've seen the end of consolidation in banking.
Speaker 1: He read. That's like when Powell's and his press conference
Speaker 1: reading off the piece of paper David did that absolutely
Speaker 1: nailed them.
Speaker 5: Please you mentioned a bank failures and how much more
Speaker 5: regular they are related to how much they get talked about.
Speaker 5: The FDIC has got a nice little table. You can
Speaker 5: access it easily on Google. I just did twenty seventeen
Speaker 5: eight banks in America failed. I don't remember talking about
Speaker 5: in twenty seventeen, twenty twenty four went under, twenty nineteen
Speaker 5: four went under. There's a reason, and you've pointed out
Speaker 5: they're that much bigger this time around, and there seems
Speaker 5: to be a feeling that perhaps that can bleed into
Speaker 5: and towards a credit crunch. More broadly, do you have
Speaker 5: those fears that we do get that credit crunch ultimately?
Speaker 5: And that's why you shouldn't be pricing in high up
Speaker 5: higher rates off the back of this robust data, because
Speaker 5: ultimately the banks are going to take care of business.
Speaker 7: So I think that you do get a further tightening
Speaker 7: and credit conditions. But I think the mistake that people
Speaker 7: are making is they hear the word bank and they
Speaker 7: think two thousand and eight, and structurally, this is a
Speaker 7: very different issue than what we were dealing with fifteen
Speaker 7: years ago. And so could the market, right, we're back
Speaker 7: to the market doing the Fed's job for them. Could
Speaker 7: the market do some additional tightening and maybe that means
Speaker 7: the FED doesn't need to continue hiking rates. Absolutely, I
Speaker 7: wouldn't be surprised to see that occur. You're actually already
Speaker 7: seeing right in some of the more cyclical parts of
Speaker 7: the economy, things like manufacturing cracks begin to form. But
Speaker 7: is the banking situation in general going to you know,
Speaker 7: get a FED, get the FED to do a complete
Speaker 7: about face. I think that that's a bit of a risk.
Speaker 7: I think, if anything, it speeds up any potential rate
Speaker 7: cuts later on this year. But I still think summertime
Speaker 7: for you know, easy monetary policy may be a little
Speaker 7: bit premature.
Speaker 5: David appreciate it. Thank you, buddy, David Levitz, the of
Speaker 5: jp MULKAN Asset Management.
Speaker 1: It's a really important time to talk to so Broader
Speaker 1: a job ahead of US rate strategy at sock Gen
Speaker 1: over the silence over the weekend off of a shocking
Speaker 1: jobs report and maybe a reset of what interest rates
Speaker 1: will do as the thermometer of the system. Sobrada, did
Speaker 1: you adjust? If I say to you, where's the ten
Speaker 1: year yield twelve months out? Is this an adjustable number
Speaker 1: or is it one big sock Gen guess No.
Speaker 8: I think we've kept our forecast relatively stable. You know,
Speaker 8: we've seen sort of this up and down motion in
Speaker 8: the in the data week after week. You know, on
Speaker 8: the one side you have the digional banking crisis. On
Speaker 8: the other side you have strong fundamentals. But if you
Speaker 8: look at the bond market broadly speaking, from early March
Speaker 8: to now, really nothing has moved much. The two year
Speaker 8: has stayed around four percent. Broadly speaking, the tenure has
Speaker 8: stayed between three forty and three sixty, and the two
Speaker 8: Stents curve has been anywhere around negative fifty five negative
Speaker 8: fifty basis points. So it's been a lot of movement,
Speaker 8: but within a very very narrow rage because the market
Speaker 8: really lacks clear conviction on where we go from here.
Speaker 8: But that said, I think that risks continue to be
Speaker 8: skewed to the downside for years. If we do get
Speaker 8: strong data, the market's going to dismiss it. If we
Speaker 8: do get weak data, I think you want to see
Speaker 8: a little bit more of an outsized move lower in yields.
Speaker 1: You went right where I want to go, Sobrada, If
Speaker 1: I look at the Bloomberg Total Return Aggregate all in index,
Speaker 1: it's a price index, folks, and it's basically a straight line.
Speaker 1: I think Bill Gross, Muhammad al Arian's success at PIMCO
Speaker 1: for fifteen years and then, as you know, Sobroada down
Speaker 1: seventeen percent and the mother of all all in bond
Speaker 1: bear markets. And yes there's been a bounce, but we
Speaker 1: don't talk about it like we talk about stock bounces.
Speaker 1: Are we bouncing off a bond bear market? To something constructive.
Speaker 8: Yeah, it certainly seems that way. Yels do seem like
Speaker 8: they peaked around four percent and tens in the second
Speaker 8: in the so she said fourth quarter of last year,
Speaker 8: and the trajectory seems to be towards lower yels. I
Speaker 8: think that this time around, the key difference is that
Speaker 8: we might you know, FED funds rate nobody's expecting Fed
Speaker 8: FUNDRAI to get back to the zero lower bound, and
Speaker 8: the decline in years from her on is going to
Speaker 8: be much more modest and gradual. You know, even in
Speaker 8: our own forecast we have teny years only getting to
Speaker 8: three and a quarter percent by the end of the year. Why,
Speaker 8: because of the fact that you have blown will bond
Speaker 8: yields continue to rise and the easyb is poised to
Speaker 8: hike more. The Bank of Japan could widen its YCC
Speaker 8: band at the June meeting. So in this sort of context,
Speaker 8: and inflation is also high and sticky, it's going to
Speaker 8: be very hard for a meaningful decline in yields from
Speaker 8: here on as well. So it's going to be one
Speaker 8: of those situations where yields remain range bound, we get
Speaker 8: perhaps very weak data, we price down to a lower range,
Speaker 8: But we're not going to go back to the zero
Speaker 8: lower bound and fed funds and tenny yield decline is
Speaker 8: going to be a lot more gradual than that context.
Speaker 4: Supatra, What do people do when there's kind of this
Speaker 4: tight trading range and you don't really expect it to
Speaker 4: break out? I mean they basically just clock in for
Speaker 4: an hour, making sure nothing changes, and then go take
Speaker 4: a break. I'm serious, Like, I'm just wondering how sort
Speaker 4: of sleepy things are out there as people realize that
Speaker 4: there is no conviction and there's very little visibility to
Speaker 4: get an edge at one side or another.
Speaker 8: Well, you can trade the volatility within the range because
Speaker 8: you've seen pretty sharp moves in gamma, so you probably
Speaker 8: want to be long gamma in the balls to the
Speaker 8: market and maybe pick up some returns there. But you're
Speaker 8: absolutely right, there are no larger directional moves to uh
Speaker 8: to to to play in this market given the fact
Speaker 8: that years have been ranged bound and people are positioning
Speaker 8: for the for the next leg lower in yields because
Speaker 8: that seems to be the broader directional they given tightening
Speaker 8: credit conditions. I mean, we know that policy works with
Speaker 8: long and variable lags and the employment picture is going
Speaker 8: to remain relatively strong until the bottom falls off. So
Speaker 8: you're going to you're kind of positioning, if you will,
Speaker 8: for that sort of scenario where you see a meaningful
Speaker 8: store on in the second half, then you could see
Speaker 8: that next leg lower in yields. But again, you know,
Speaker 8: as you were speaking earlier in your program, I think
Speaker 8: that the market is underpricing the risk of the FED
Speaker 8: remaining on hold for the remainder of the year. We're
Speaker 8: pressing in cuts for the second half of the year,
Speaker 8: if you know, if we can get as a regional
Speaker 8: banking crisis, I don't see any reason for the FED
Speaker 8: to jump into cut cutting rates in the second half.
Speaker 4: What would it take to not be past the regional
Speaker 4: banking crisis? I mean, at a certain point people are
Speaker 4: pricing in that it will persist. When do we signal
Speaker 4: the all clear?
Speaker 8: You know, that's a very very difficult, you know, question
Speaker 8: to answer, because you're looking at an economy of haves
Speaker 8: and have nots. The larger banks are doing, you know,
Speaker 8: quite well. The smaller banks and the small business business areas,
Speaker 8: if you will, are coming under a lot of pressure
Speaker 8: because of the dependencies to regional banks. So this sort
Speaker 8: of bifurcation is going to really muddy the picture, and
Speaker 8: in some respects even that the Fed continues to say say,
Speaker 8: say that the financial stability concerns they have tools to
Speaker 8: deal with that, they have tools to deal with inflation. Uh.
Speaker 8: These two uh, you know, uh, these two opposing factors
Speaker 8: are going to make it very very difficult for the
Speaker 8: Fed to really just policy in a meaningful way. They
Speaker 8: can't cut rates for financial stability and they can't high
Speaker 8: rates for inflation. So that's where policy gets very tricky.
Speaker 8: They're probably going to be on hold for the remainder
Speaker 8: of the year.
Speaker 5: So badger. Never mind the Fed, We've got to talk
Speaker 5: about the ECB. Eric Nilsen Uni Credit Fantastic note over
Speaker 5: the weekend said this, My fear is that as the
Speaker 5: lacked defects of a monetary policy tightening now begin to
Speaker 5: hit the economies, the European underperformance will be longer deeper
Speaker 5: than needed because of excessive monetary tightening. Savanta industrial production
Speaker 5: in Germany this morning, downside, surprise factory orders last week,
Speaker 5: ugly earnings from mess don't really scream that trade is
Speaker 5: good right now, Sabantra, do you think is a real
Speaker 5: risk here that perhaps the ECB, relative to the FED,
Speaker 5: is the central bank most at risk of making a
Speaker 5: policy mistake at the moment.
Speaker 3: Well, that is.
Speaker 8: Always a problem when you're following the FED and not
Speaker 8: leading the FED in an inflationary environment or a hiking
Speaker 8: and randal. Broadly speaking, this almost always happens in every
Speaker 8: cycle where the easy be you know, overshoots or delivers
Speaker 8: more hikes because they're singularly focused on inflation but not
Speaker 8: broader economic fundamentals, and then they have to play catch
Speaker 8: up on the downside to the to the US. I
Speaker 8: mean broadly speaking, you know, if anything, coming into this year,
Speaker 8: I think a lot of people who are expecting the
Speaker 8: European economy to go into a recession. The European economies
Speaker 8: and UK even has done a lot better than people
Speaker 8: had broadly expected. That said, a slow down is to
Speaker 8: be expected given how aggressively the ECB has high grades.
Speaker 8: So you know, the the trajectory I think ultimately will
Speaker 8: be that the FED will have to pivot and the
Speaker 8: ECB will have to pivot shortly thereafter.
Speaker 5: So bat wonderful to get a perspective, as always, Sabato Chapa,
Speaker 5: the of selk Gen. I'm the lightest on the FED
Speaker 5: and the ECP.
Speaker 1: This is a joy and we had a huge response
Speaker 1: from Professor two has joined us a few weeks ago.
Speaker 1: He is a Columbia University history professor, but far more
Speaker 1: than that, was the Barton Biggs professor or at Yale
Speaker 1: University and had to replace the giant Paul Kennedy very quickly. Adam,
Speaker 1: what was it like trying to replace Paul Kennedy at Yale?
Speaker 1: I can't imagine.
Speaker 9: It was definitely a lesson in humility to absolutely honest.
Speaker 9: I mean Paul is still going strong, it should be said,
Speaker 9: because when I left, he came back and he's absolutely
Speaker 9: on all cylinders. But yeah, a legend in his own lifetime.
Speaker 1: And I'm Your essay in March is my early choice
Speaker 1: for Essay of the Year in the Financial Times. You
Speaker 1: beautifully walk through the trillion dollar rebalancing as we move
Speaker 1: from pandemic to poly crisis. What is this poly crisis
Speaker 1: for living? And when does the joy end? When do
Speaker 1: we rebalance to some form of stability.
Speaker 9: I think the absolutely first lesson, Tom is that we
Speaker 9: probably don't. I think we actually have to abandon that
Speaker 9: assumption that the best way to think about the world
Speaker 9: is as a self equilibrating system that will move back
Speaker 9: to normality. If you just look at the narrow space
Speaker 9: of finance, does that seem like a reasonable description of
Speaker 9: the world that we've been in since the two thousand
Speaker 9: and eight crisis, or if you're talking about Japan since
Speaker 9: the late nineteen nineties. It doesn't seem to me to
Speaker 9: be that kind of reality. And that's a little bit.
Speaker 9: I think what we're seeing in the banking this mini
Speaker 9: crisis that's unfolding in the banking system, where ultimately the
Speaker 9: big driver of that is the interest rate shock rights
Speaker 9: and the interest rate shock comes somewhere when it comes
Speaker 9: from this unprecedented surge of inflation, which is quite unlike
Speaker 9: any inflation we've seen before, and follows immediately out of
Speaker 9: the COVID shock, which ditto is also quite unlike anything
Speaker 9: we've seen before. So I think we're in this very
Speaker 9: broken play a world of a series of not just
Speaker 9: serious but quite unique and rather unprecedented disruptions.
Speaker 4: Well, and Adam, you say that one of the responses
Speaker 4: to it has been basically bailout and the sort of
Speaker 4: moral hazard of not allowing failure, which you've seen in
Speaker 4: some of the banking institutions in a prior life. We're
Speaker 4: being considered too big to fail or systemic or any
Speaker 4: of these names. So what does that do in terms
Speaker 4: of the zombies. I know that Tom's been talking a
Speaker 4: lot about the zombie roll ups. Do you think that
Speaker 4: we end up with a host of zombies or zombie
Speaker 4: assets that kind of are allowed to persist in a
Speaker 4: sort of inefficient manner for a longer period of time.
Speaker 9: I think we clearly need new forms of discipline, We
Speaker 9: need new forms of workout. And if you look in
Speaker 9: the legal space, if you actually look in the mechanics
Speaker 9: of bankruptcy restructuring in the United States and indeed across
Speaker 9: the world, lawyers and corporate financial officers are very actively
Speaker 9: engaged in that process of trying to figure out new
Speaker 9: forms of discipline which aren't simply the old style Darwinian
Speaker 9: process of free fall bankruptcy, which is increasingly the exception. Right,
Speaker 9: there are forms of discipline which don't have to consist
Speaker 9: in systemically dangerous bank failure, which is the sort of
Speaker 9: type that we have been at risk of. But certainly, Lisi,
Speaker 9: you're right, we need to be thinking very hard about
Speaker 9: how we adjust and how we find new forms of
Speaker 9: yes discipline selection, if you like, in Darwinian terms, to
Speaker 9: to avoid a process of ever greater zombification.
Speaker 4: This morning this weekend, when I was reading about the
Speaker 4: regional banks and sort of where we are and the
Speaker 4: amount of lending that they account for and the amount
Speaker 4: of a real estate commercial real estate in particular that
Speaker 4: they lend to, I wondered, is this model being challenged.
Speaker 4: Is the private sector, private equity, private debts, some of
Speaker 4: these financing companies taking over a greater share of the
Speaker 4: business that regional banks used to do and really render
Speaker 4: them less necessary.
Speaker 9: I think it's actually, I would say, rather the reverse,
Speaker 9: a very healthy reminder just of the actual structure of
Speaker 9: American society and American business, which, as Matt Williams was saying,
Speaker 9: is firmly and solidly routed not in the very large businesses,
Speaker 9: but in a deep undergrowth of small and medium sized enterprise.
Speaker 9: That's where a huge part of the job creation goes on.
Speaker 9: And the bank ecosystem that the United States have is
Speaker 9: internationally unusual. America has a lot of banks, But what
Speaker 9: I do think we need to be taken care of
Speaker 9: is exactly as you say, the huge shifts which are
Speaker 9: going on and in terms of risk going forward, in
Speaker 9: a way, I'm more worried about that new private equity
Speaker 9: zone of very untransparent finance, trillions of dollars worth of
Speaker 9: it in the SA leverage loan market, then I am
Speaker 9: about the FDIC regulated small than medium sized banks, which,
Speaker 9: on the whole, when they're not terribly managed like Silicon
Speaker 9: Valley Bank was or First Republic, are a crucial part
Speaker 9: of the American economy.
Speaker 1: Adam, you straut of both sides of this with your academics.
Speaker 1: The book Folks Is shut Down, How COVID shook the
Speaker 1: world's economy, Adam TuS cancer. Enough about this effort from
Speaker 1: I'm going to call it eighteen months ago, and Adam,
Speaker 1: I want you to address the polarities in our politics
Speaker 1: with the too small to succeed. I'm absolutely fascinated by
Speaker 1: the focus of an America that is succeeding like Apple
Speaker 1: with an apptless five trunch bond offering this morning. That's
Speaker 1: all you know, Bloomberg surveillance Babbel. There's a huge body
Speaker 1: of America that feels they're too small to succeed. Where
Speaker 1: are they in a number of years.
Speaker 9: This, I think has got to be the big worry.
Speaker 9: I think we're seeing the bifurcation or maybe even a
Speaker 9: three way separation of the US economy right now. There
Speaker 9: are big slices of it which are continuing to thrive.
Speaker 9: Think of the innovative energy space, the Chips Act, the
Speaker 9: kind of money that's pouring into a genuine revival in
Speaker 9: manufacturing investment. But those are big players. And what I
Speaker 9: think we have to worry about is the credit crunch,
Speaker 9: which looks as though it's beginning to unfold. If you
Speaker 9: look at bankruptcies amongst smaller businesses, those numbers are beginning
Speaker 9: to spike that that well as it will make that divide,
Speaker 9: dig that ditch ever ever deeper. And that's ultimately, I think,
Speaker 9: what is then reflected as it should be in democratic politics,
Speaker 9: which ultimately in distorted ways for sure, but nevertheless does
Speaker 9: reflect the broad tidal shifts in American society. And at
Speaker 9: this moment we are think beginning to see the point
Speaker 9: at which the extraordinary labor market story, which is after all,
Speaker 9: the huge success of the recovery from COVID and America's
Speaker 9: never seen unemployment numbers like this could be tipping into
Speaker 9: something rather different, which would be a sort of two
Speaker 9: speed recession or two types of landing. You know, we've
Speaker 9: talked a lot about hard landings and soft landings and
Speaker 9: low landings. What if one bit of the plane lands
Speaker 9: quite hard on the other bit, as it were, sows away.
Speaker 3: Well, just quickly.
Speaker 4: Then you mentioned that you are concerned that there's an
Speaker 4: increasing role of private capital away from some of these
Speaker 4: smaller banks that is playing a part in what you
Speaker 4: see as sort of this bifurcation that's developing.
Speaker 3: Can you explain can you elaborate on that?
Speaker 7: Well?
Speaker 9: That I think would be a third element. This is
Speaker 9: where the story gets really complicated, because I think the
Speaker 9: credit squeeze is going to run through the stressed balance
Speaker 9: sheets of smaller banks. The bit which I think is
Speaker 9: riskiest in a sense, not risky the way that a
Speaker 9: you know, city group getting to into trouble in two
Speaker 9: thousand and eight or Aleman in two thousand and eight
Speaker 9: is risk be it. Nevertheless, high risk is precisely the
Speaker 9: space in between the high yield segment. These are big
Speaker 9: players in that segment. We're not talking about small businesses here,
Speaker 9: but They are very untransparently linked at this point, and
Speaker 9: it's not by accident that in bankruptcy in the United
Speaker 9: States today, the private equity owned firms are absolutely dominating
Speaker 9: the corporate if you like, restructuring and crisis market. That's
Speaker 9: where this sort of capital goes to play. The returns
Speaker 9: are outsized if you can get in, and the privileged
Speaker 9: elite that can play in this market earns those returns.
Speaker 9: The question we're going to face now is what happens
Speaker 9: when the risks come home to roost and where the
Speaker 9: safety nets are and whether they're even appropriate to have
Speaker 9: safety nets for this kind of actor.
Speaker 1: And the new financialization as we move into the decade.
Speaker 1: Adam twos thank you so much with Columbia University. Subscribe
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg