WEBVTT - Surveillance: Risk Management with McWilliams 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.880 for insight from the best an economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.400 the Bloomberg Terminal, and the Bloomberg Business app. John one 0:00:30.400 --> 0:00:32.200 of the things we want to do is get qualified 0:00:32.240 --> 0:00:34.360 people to talk to her and do that right now. 0:00:34.440 --> 0:00:40.360 The story is extraordinary. Jelenac Williams is a former FDIC chair. Yes, Akravth, 0:00:40.360 --> 0:00:43.280 Swain and Moore, but far more than that, She's enjoyed 0:00:43.280 --> 0:00:47.000 the failure of deposit insurance. Her father was flatten in 0:00:47.080 --> 0:00:51.240 Yugoslavia years and years ago over a failure of a bank. 0:00:51.360 --> 0:00:56.360 She wanted into Berkeley sterling academic career, including service in 0:00:56.440 --> 0:01:00.200 the law business in Palo Alto, California. There's no one 0:01:00.560 --> 0:01:03.680 more qualified to talk about this banking mess in the 0:01:03.720 --> 0:01:07.959 former FDIIC chair, Jo Thank you so much for joining 0:01:08.000 --> 0:01:10.479 us this morning. Let me cut to the chase right now. 0:01:11.120 --> 0:01:15.360 Does this crisis have staying power or are we solving 0:01:15.680 --> 0:01:18.840 idiosyncratic tech banking problems? 0:01:20.480 --> 0:01:21.880 I would say, and thank you, by the way for 0:01:21.920 --> 0:01:24.840 having me this morning. I would say that we're at 0:01:24.880 --> 0:01:28.280 the place where this crisis should not have had staying power, 0:01:28.680 --> 0:01:31.440 and yet here we are about five six weeks in, 0:01:32.080 --> 0:01:35.240 and I'm hoping that we're at the tail end of that. 0:01:36.040 --> 0:01:38.240 The government does have a number. 0:01:37.959 --> 0:01:40.280 Of tools they need to use, and I'm happy to 0:01:40.360 --> 0:01:40.920 chat with you. 0:01:40.880 --> 0:01:42.199 About what those tools are. 0:01:42.640 --> 0:01:45.920 But the problems are not so much indiosyncratic as much 0:01:46.000 --> 0:01:49.600 as this point, we have created a crisis of confidence 0:01:49.600 --> 0:01:51.600 in the banking system and that's where we are. 0:01:52.120 --> 0:01:55.440 How does real estate fold into this? Many will say, Okay, 0:01:55.440 --> 0:01:57.520 it's not going to be the drama we've seen over 0:01:57.520 --> 0:02:01.480 the last number of weeks. But commercial real estate, what 0:02:01.560 --> 0:02:02.520 do you observe there? 0:02:04.000 --> 0:02:06.960 A lot of the banks have, actually, especially regional banks, 0:02:06.960 --> 0:02:11.160 have high concentrations and exposure to commercial real estate. In 0:02:11.240 --> 0:02:15.400 good times, they're generally able to navigate the concentrations in. 0:02:15.440 --> 0:02:16.720 Their portfolio very well. 0:02:17.040 --> 0:02:19.120 But again, we are the point where there's so much 0:02:19.160 --> 0:02:23.280 volatility in the marketplace with the market expectations of the banks, 0:02:24.000 --> 0:02:27.920 and frankly, the empty offices in a number of commercial 0:02:27.919 --> 0:02:29.720 markets in the United States are not going to. 0:02:29.680 --> 0:02:33.080 Help that, Jelena. Should these banks be in that business? 0:02:33.080 --> 0:02:34.600 I mean, this is sort of one of the questions 0:02:34.639 --> 0:02:37.040 at a time or seeing the number of smaller and 0:02:37.080 --> 0:02:40.519 regional banks shrink dramatically over the past few years, should 0:02:40.520 --> 0:02:42.959 it be their business to provide a majority of the 0:02:43.000 --> 0:02:46.239 commercial industrial loans, the majority of the commercial real estate lending? 0:02:47.760 --> 0:02:49.600 You know, I think this goes back to the intrinsic 0:02:49.680 --> 0:02:52.640 question of the tiered banking says system in the United States. 0:02:52.720 --> 0:02:55.480 You have different levels of banks and different sizes, so 0:02:55.520 --> 0:02:57.280 one of them, you know, you have community banks. There 0:02:57.280 --> 0:03:00.200 are generally banks below ten billion dollars in asset, mid 0:03:00.200 --> 0:03:03.160 size banks above that, and I would say below one 0:03:03.200 --> 0:03:05.960 hundred billion. Then you get into the regional land, and 0:03:06.000 --> 0:03:09.000 that regional land is about one hundred billion to as 0:03:09.040 --> 0:03:11.200 high as like five hundred billion. Above that, you get 0:03:11.200 --> 0:03:13.680 into the very large banks. And the truth of the 0:03:13.720 --> 0:03:16.720 matter is that if those banks, the regional banks and 0:03:16.760 --> 0:03:20.680 mid sized banks and community banks are not financing local 0:03:20.760 --> 0:03:24.920 real estate commercial real estate transactions, they won't get financed. 0:03:25.320 --> 0:03:27.640 The role of these banks in the US economy is 0:03:27.840 --> 0:03:31.720 so high that people actually frankly underestimate what these banks 0:03:31.760 --> 0:03:35.360 mean for our financial ecosystem. So should they be in it? 0:03:35.400 --> 0:03:37.680 Should they not be in it? It's almost irrelevant that 0:03:37.720 --> 0:03:39.960 they are in it. They need to manage the risk 0:03:40.000 --> 0:03:43.040 in their portfolios and with the rising interest rate environment, 0:03:43.440 --> 0:03:46.000 it's going to be incredibly difficult for them. And frankly, 0:03:46.000 --> 0:03:48.680 the pandemic didn't help with people not wanting to come 0:03:48.680 --> 0:03:49.960 back to offices. 0:03:50.240 --> 0:03:51.680 And you have tens of thousands of. 0:03:51.680 --> 0:03:54.080 Square fit of commercial real estate, even in some of 0:03:54.160 --> 0:03:57.320 the most prime locations, sitting empty. I was just in 0:03:57.360 --> 0:03:59.280 San Francisco a couple of weeks ago, and it's a 0:03:59.280 --> 0:03:59.839 ghost down. 0:04:00.240 --> 0:04:03.680 Well, as a former regulator yourself, should there also be 0:04:03.720 --> 0:04:06.840 the same kind of regulatory scrutiny and requirements at some 0:04:06.880 --> 0:04:09.040 of these regional banks as there are at larger banks. 0:04:10.400 --> 0:04:12.160 No, actually, absolutely not. 0:04:12.280 --> 0:04:16.240 And here's why our regulatory system needs to account for 0:04:16.279 --> 0:04:20.040 different tiers and different I would say strata in our 0:04:20.080 --> 0:04:23.480 banking sector. These banks present different types of risks than 0:04:23.560 --> 0:04:27.719 the GESIS, the global systemically important banks. They present different 0:04:27.720 --> 0:04:30.240 type of risk than mid sized banks, and the job 0:04:30.320 --> 0:04:33.520 of the regulators is basically to accommodate that risk. The 0:04:33.600 --> 0:04:36.240 job of the bank is to manage that risk. The 0:04:37.000 --> 0:04:39.800 bottom line is when the bank fails to manage that risk, 0:04:39.839 --> 0:04:42.480 you get into in a situation that we have been 0:04:42.520 --> 0:04:44.640 in the past few weeks. But it's not you know, 0:04:44.720 --> 0:04:46.279 as much a blame as we can put on the 0:04:46.320 --> 0:04:48.800 banks and the bank risk management in some of the 0:04:48.800 --> 0:04:51.479 failed bank situations, I think there is there is a 0:04:51.480 --> 0:04:53.599 portion of blame that goes on the US government. 0:04:54.160 --> 0:04:56.880 I just looked at the bank assessment rates that the 0:04:56.960 --> 0:05:01.320 FDI CE and my eyes glazed over. Ms McWilliams. I 0:05:01.320 --> 0:05:04.280 mean it's complex, to say the least. How much does 0:05:04.360 --> 0:05:08.039 JP Morgan or Bank of America pay each year for 0:05:08.279 --> 0:05:10.480 FDIC insurance? Do you have a number? 0:05:11.839 --> 0:05:13.960 Well, there is a number. You can go to the FDIC. 0:05:14.000 --> 0:05:15.479 I don't want to single out a bank. It's a 0:05:15.480 --> 0:05:17.039 lot of money. It is a lot of money. There 0:05:17.040 --> 0:05:19.720 are two different sets of formulas. There is a complex 0:05:19.760 --> 0:05:22.479 bank formula. There is a less complex or a small 0:05:22.520 --> 0:05:25.760 bank formula. 0:05:25.920 --> 0:05:28.880 I don't mean interrupt, but I am Senator Warren would say, 0:05:29.000 --> 0:05:32.039 raise the raid on James Diamond and Brian moynan. Is 0:05:32.080 --> 0:05:35.240 there wiggle room here for the big guys to pay more? 0:05:35.400 --> 0:05:39.120 FDI Insurance to take the load off the back of 0:05:39.200 --> 0:05:41.679 Andrew Jackson's four thousand banks. 0:05:43.279 --> 0:05:46.520 So it is very possible that the FDIC may just 0:05:46.600 --> 0:05:50.440 come out in that direction with the special assessment that 0:05:50.480 --> 0:05:53.960 they need to impose to make the deposit Insurance Fund whole. 0:05:54.080 --> 0:05:56.799 As you know, some of the banks that have failed 0:05:56.800 --> 0:06:01.520 and have been subsequently sold have created a deficit for 0:06:01.560 --> 0:06:04.000 the Deposit Insurance Fund and as a result of that, 0:06:04.200 --> 0:06:07.039 there is going to be a special assessment, and I 0:06:07.160 --> 0:06:08.200 believe that's where the. 0:06:08.160 --> 0:06:09.159 FDIC is heading. 0:06:09.440 --> 0:06:12.680 Elena, Are you concerned about the Federal Reserve in its 0:06:12.720 --> 0:06:14.599 role as regulator? Do you put the blame there? It 0:06:14.600 --> 0:06:18.240 seems like everyone's just basically quietly blaming Randy Quarrels and 0:06:18.240 --> 0:06:19.960 then leaving it at that, But do you think that 0:06:20.000 --> 0:06:23.160 this is something endemic in the oversight and the enforcement 0:06:23.279 --> 0:06:25.120 role that they've fed often plays. 0:06:26.120 --> 0:06:30.200 Quite frankly, to blame prior vice chairman for supervision for 0:06:30.360 --> 0:06:33.160 something that has happened about a year and a half 0:06:33.200 --> 0:06:35.800 after he left office is a little bit preposterous. But 0:06:35.839 --> 0:06:38.040 I do think as a former Federal Reserve staff or 0:06:38.120 --> 0:06:40.440 I was there during two thousand and seven, eight nine 0:06:40.480 --> 0:06:43.960 ten crisis, I will tell you this. They're good people 0:06:44.000 --> 0:06:46.560 working at the Fed. They have a lot of mandates 0:06:46.600 --> 0:06:49.279 they have to satisfy. But we are at a place 0:06:49.520 --> 0:06:54.479 that is about financial stability and the whole debate about 0:06:54.480 --> 0:06:57.680 monetary policy and financial stability. We're at the place if 0:06:57.680 --> 0:07:00.760 the banks are not stabilized, are not going to have 0:07:00.839 --> 0:07:03.440 financial stability. And so to the extent the Federal Reserve 0:07:03.520 --> 0:07:06.800 takes its financial stability mandate seriously, I think it's long 0:07:06.880 --> 0:07:09.680 overdue that they take a look at the banking situation 0:07:09.760 --> 0:07:11.960 in the United States and what the interest rate rises 0:07:11.960 --> 0:07:14.880 have done to the banking sector as they contemplate where 0:07:14.920 --> 0:07:16.000 to keep the interest rates. 0:07:16.080 --> 0:07:18.560 Yelena, thank you for wank and on all of this. 0:07:18.760 --> 0:07:20.640 Thank you. Jelena McWilliams stack. 0:07:30.800 --> 0:07:35.200 DA Lipsyng joins this chief Global Economist at PGUM Fixed 0:07:35.240 --> 0:07:40.920 Income with serious experience recently in the White House, in 0:07:41.040 --> 0:07:43.800 the in the office. Is it tomorrow They're going to 0:07:43.880 --> 0:07:46.840 have a meeting a conon fab on the debt. It's 0:07:46.840 --> 0:07:49.800 all politics, isn't it? 0:07:49.880 --> 0:07:52.680 More in more than Lisa, Look, talking is always better 0:07:52.720 --> 0:07:54.920 than not talking. But I'd be surprised if we get 0:07:54.920 --> 0:07:57.960 a decisive break through tomorrow. The incentives are just not 0:07:58.040 --> 0:08:01.520 yet in place. McCarthy is his speakership. If he folds 0:08:01.560 --> 0:08:04.040 early to the president with a clean increase in the 0:08:04.080 --> 0:08:07.080 debt limit, the President can't give a nod to anything 0:08:07.120 --> 0:08:10.400 near the scale of spending cuts proposed by McCarthy because 0:08:10.400 --> 0:08:13.000 they would undercut much of his domestic agenda and lose 0:08:13.000 --> 0:08:16.480 his political base. So I'm afraid market stress is still 0:08:16.520 --> 0:08:20.000 what's needed to create cover for face saving compromise. And 0:08:20.040 --> 0:08:23.000 that's why perversely market complacency asty. 0:08:24.400 --> 0:08:26.640 You and Jeane Spirling have been very good at this 0:08:26.720 --> 0:08:29.920 of trying to link this policy dynamic into Wall Street. 0:08:30.000 --> 0:08:35.080 As Lisa mentioned earlier, Wall Street seems soundly removed from 0:08:35.080 --> 0:08:38.960 this discussion, this debate. Are they correct on that, to 0:08:39.080 --> 0:08:42.680 be removed to not worry about this debt crisis? 0:08:44.120 --> 0:08:47.200 You know, look, it's muscle memory, and that muscle memory 0:08:47.240 --> 0:08:51.000 is dangerous because the context has changed pretty dramatically from 0:08:51.040 --> 0:08:53.720 the last time we had a serious flirtation with default 0:08:53.720 --> 0:08:57.479 back in twenty eleven. For one, Congress is as polarized 0:08:57.480 --> 0:09:00.679 as it's been in our country's history. Second, you know 0:09:00.720 --> 0:09:03.640 we are we are trying to roll over a debt 0:09:03.640 --> 0:09:05.679 stock that's twice as large as it was in twenty 0:09:05.679 --> 0:09:08.840 eleven three four, and holdings of treasuries are up to 0:09:08.880 --> 0:09:11.960 seven trillion dollars. That's almost three trillion higher than what 0:09:12.000 --> 0:09:15.040 we had in twenty eleven. Or back in twenty eleven, 0:09:15.080 --> 0:09:18.560 Europe was in an existential debt crisis. China have yet 0:09:18.600 --> 0:09:22.679 to lure serious influence were abroad. Digital assets had yet 0:09:22.720 --> 0:09:26.520 to go mainstream. There were no alternatives to dollars. That's changed. 0:09:26.559 --> 0:09:29.839 And lastly, and I think most importantly, we're currently the 0:09:29.960 --> 0:09:33.160 US spearheading the most severe economic sanctions campaign against the 0:09:33.240 --> 0:09:37.559 G twenty country and financial history that creates incentives, geopolitical 0:09:37.559 --> 0:09:41.800 incentives for countries to hedge. The debt ceiling just needlessly 0:09:41.800 --> 0:09:46.240 adds impetus to those incentives at a time of geopolitical peril. 0:09:47.040 --> 0:09:49.560 Why do you think, Dalli, from your vantage point of 0:09:49.640 --> 0:09:51.640 having worked at the White House, of having worked at 0:09:51.640 --> 0:09:53.520 the Treasury, of having worked at the Fed, all of 0:09:53.559 --> 0:09:57.160 these different agencies, why do you think things have gotten 0:09:57.240 --> 0:09:59.319 so dysfunctional in Washington, d C. 0:10:01.280 --> 0:10:03.760 Yeah, I mean, that's ceiling really is just symptomatic of 0:10:03.800 --> 0:10:07.280 that polarization, Lisa, I mean, I think it's derivative about 0:10:07.280 --> 0:10:11.200 the atomization of the media, extreme levels of inequality and 0:10:11.320 --> 0:10:15.080 technology that allows political movements to gain scale at speeds 0:10:15.080 --> 0:10:18.559 that we haven't seen before. And look, now we're on 0:10:18.679 --> 0:10:21.040 the cost of doing something that great powers just don't do. 0:10:21.679 --> 0:10:24.280 They don't default, they don't talk about default, they don't 0:10:24.320 --> 0:10:26.839 think about default. And your measure of greatness is when 0:10:26.880 --> 0:10:29.360 no country questions whether you would ever do so. Some 0:10:29.400 --> 0:10:30.960 people brought us to this point. 0:10:31.120 --> 0:10:33.240 Some people would say, de leip that there are already 0:10:33.240 --> 0:10:36.520 our economic consequences to even having this discussion in such 0:10:36.520 --> 0:10:38.320 real time, And given the fact that it does have 0:10:38.360 --> 0:10:40.960 a different kind of more polarized nature to it, what 0:10:41.120 --> 0:10:43.600 are the longer term impacts, even if there is a 0:10:43.600 --> 0:10:46.480 solution that is found the last minute, when the market 0:10:46.520 --> 0:10:50.080 finally wakes up and applies the real pressure that Washington's 0:10:50.120 --> 0:10:50.600 waiting for. 0:10:51.720 --> 0:10:55.000 Lisa dollar primacy is a national treasure. It allows us 0:10:55.040 --> 0:10:58.439 to fund our government at twenty to fifty basis points 0:10:58.520 --> 0:11:01.440 cheaper than otherwise would that as up to real money 0:11:01.440 --> 0:11:03.800 one hundred and fifty billion dollars for every fifty basis 0:11:03.840 --> 0:11:07.160 points on treasure yields. It allows us to absorb a 0:11:07.200 --> 0:11:09.880 shock like the twenty eleven downgrade of our credit rating, 0:11:10.320 --> 0:11:12.280 and it allows us to deliver a shock. All of 0:11:12.280 --> 0:11:14.440 that is being put at risk in terms of the 0:11:14.440 --> 0:11:17.200 long term scarring effects of this type of debate. Just remember, 0:11:17.720 --> 0:11:20.520 dollar primacy is nothing more than a network. Okay, it's 0:11:20.559 --> 0:11:24.480 rooted in trust and inertia and an assumed lack of alternatives. 0:11:24.520 --> 0:11:28.160 But every network, whether it's in biology or ecology or 0:11:28.160 --> 0:11:31.559 in finance, they have tipping points. They're usually psychological tipping 0:11:31.559 --> 0:11:34.960 points that you can't see in advance. And we're now 0:11:35.080 --> 0:11:37.760 pushing ourselves towards what I would consider to be a 0:11:37.840 --> 0:11:40.640 very dangerous place the closer we get to the X state. 0:11:40.920 --> 0:11:42.120 So this is very serious. 0:11:42.200 --> 0:11:43.040 A lot is at stake. 0:11:43.440 --> 0:11:45.400 Well, this is actually a really important point that a 0:11:45.400 --> 0:11:48.360 lot of people argue against, saying that the loss of 0:11:48.400 --> 0:11:51.679 the dollars supremacy as the global currency has been overstated. 0:11:51.720 --> 0:11:55.480 The death of the dollar has been perhaps overwrought. However, 0:11:55.679 --> 0:11:58.880 other people like yourself saying, actually it's becoming much more real. 0:11:58.960 --> 0:12:01.600 What are you looking for in the data to show 0:12:01.640 --> 0:12:05.040 that that is actually that what is transpiring, that people 0:12:05.080 --> 0:12:08.400 are moving away from the dollar is the main dominant 0:12:08.440 --> 0:12:09.560 currency of exchange. 0:12:10.280 --> 0:12:11.880 You're not going to see it on paper. I mean 0:12:11.880 --> 0:12:14.440 the measure of privacy is really you use the dollar 0:12:14.480 --> 0:12:16.960 to buyer sell stuff? Do you use it to borrow money? 0:12:17.960 --> 0:12:21.520 And do you use it to price transactions? And on paper, 0:12:21.559 --> 0:12:24.000 there's nothing to see here. This is a tail risk. 0:12:24.280 --> 0:12:28.600 But we're gambling with an exorbitant privilege that has incalculable benefits, 0:12:28.920 --> 0:12:30.680 and so it's the kind of tail risk that you 0:12:30.679 --> 0:12:32.559 should never take. That's the point. 0:12:34.320 --> 0:12:36.400 I look, dullypitt this and it's a history which you 0:12:36.480 --> 0:12:41.000 studied at Carolina and also up at MIT, the ageless 0:12:41.080 --> 0:12:44.120 history of our debt caution. I'm going to call it 0:12:44.240 --> 0:12:48.960 our almost debt religiosity. What do the people where they say, 0:12:49.480 --> 0:12:51.400 we got to get rid of the debt. It's just 0:12:51.480 --> 0:12:55.200 like Apple's corporate debt. Kyle Browner and others wrote a 0:12:55.200 --> 0:12:58.640 book forty years ago saying, no, it's not. How do 0:12:58.679 --> 0:13:03.040 you respond to people that viscerally feel this government debt 0:13:03.240 --> 0:13:03.800 is bad? 0:13:04.640 --> 0:13:08.280 Yeah, this is a legitimate question, Tom, I don't think 0:13:08.280 --> 0:13:11.240 we're in a crisis. However, so long as our nominal 0:13:11.280 --> 0:13:14.040 GDP growth is higher than the average interest we pay, 0:13:14.600 --> 0:13:18.160 the math of debt sustainability improves over time, and right now, 0:13:18.160 --> 0:13:21.000 that's the case, our nominal GDP growth year every year 0:13:21.160 --> 0:13:23.880 is about seven percent. It's actually been in the double 0:13:23.920 --> 0:13:26.240 digits with much of the past two years. The way 0:13:26.280 --> 0:13:28.320 that average interest rate in our public debt is two 0:13:28.360 --> 0:13:31.800 point six percent. Now for that to be sustained, of course, 0:13:31.880 --> 0:13:34.640 the market has to believe the money we're borrowing will 0:13:34.679 --> 0:13:37.320 be put to productive use. That's the key question, and 0:13:37.559 --> 0:13:40.359 I think look that argues for the kind of investments 0:13:40.760 --> 0:13:43.200 that the public sector is making, where the private sector 0:13:43.240 --> 0:13:47.840 is underinvested, R and D infrastructure, technology programs that grow 0:13:47.840 --> 0:13:51.320 a workforce make them more productive. That's really the measure 0:13:51.360 --> 0:13:54.120 of whether the debt that we're borrowing is going to 0:13:54.280 --> 0:13:57.000 raise our nominal GDP growth to levels that can sustain 0:13:57.160 --> 0:13:58.439 arising interest rate costs. 0:13:58.520 --> 0:14:02.880 And with that beautiful explanation good enough for Olivia Blanchard 0:14:02.920 --> 0:14:06.360 to Joseph Stieglitz as they've studied this as well. Wrapped 0:14:06.360 --> 0:14:10.080 around our start and the rest, the trust mechanism is 0:14:10.080 --> 0:14:14.439 that government will put it into good projects. Can't that 0:14:14.559 --> 0:14:19.240 be discussed tomorrow among a fractured polity in Washington? 0:14:20.120 --> 0:14:22.120 It can, but not with a gun to our head. 0:14:22.800 --> 0:14:25.560 The consequence of not reaching agreement can't be we're going 0:14:25.640 --> 0:14:29.280 to burn the house down. We absolutely should have a 0:14:29.320 --> 0:14:32.040 discussion about spending in revenue levels. How are we going 0:14:32.120 --> 0:14:34.560 to use our resources to solve structural problems that the 0:14:34.560 --> 0:14:39.320 private sector will solve by itself, Extreme inequality, social disparity, vulnerabilities, 0:14:39.360 --> 0:14:42.480 are supply chains, the climate crisis, All of that should 0:14:42.480 --> 0:14:44.280 be on the table. The point is, how do we 0:14:44.360 --> 0:14:46.960 have that discussion in a way that doesn't make us 0:14:46.960 --> 0:14:49.880 a global spectacle. That's the question. 0:14:50.560 --> 0:14:54.840 This has been wonderful. Dully's saying my most favorite discussion 0:14:54.920 --> 0:14:57.840 so far in this debt idiocy. He's a pGEM fixed income. 0:15:02.200 --> 0:15:04.520 Well, it's around a table. David Libovitz, the Global Market 0:15:04.560 --> 0:15:07.680 Strategistic JP, Morgan Asset Management, David Good, Mornings here morning. 0:15:07.920 --> 0:15:09.920 How long before we're talking about a June hike again? 0:15:10.240 --> 0:15:13.040 So it's interesting and the point that I think you 0:15:13.080 --> 0:15:15.720 all were discussing prior to the break, I think is 0:15:15.760 --> 0:15:19.040 really what investors need to focus on, which is everybody's 0:15:19.080 --> 0:15:21.680 expecting that the FED is done. Everybody's expecting that the 0:15:21.680 --> 0:15:23.560 FED is going to start cutting rates at some point 0:15:23.560 --> 0:15:25.560 in the back half of this year. If you think 0:15:25.600 --> 0:15:27.960 about where the risk lies relative to that view, it 0:15:28.040 --> 0:15:30.160 very much lies to the upside, right, So the risk 0:15:30.200 --> 0:15:32.440 here is that people find themselves flat footed. I would 0:15:32.440 --> 0:15:34.320 agree with you on the inflation point. The rate of 0:15:34.360 --> 0:15:37.760 inflation is entirely too high, not to mention Pal's favorite 0:15:37.800 --> 0:15:41.200 indicator continues to trend higher, right, which nobody's really talking about. 0:15:41.240 --> 0:15:44.320 And so you know, is the FED gonna do four, five, 0:15:44.440 --> 0:15:47.320 six more twenty five basis point hikes? Probably not. But 0:15:47.320 --> 0:15:49.560 if you're thinking about a portfolio and you're thinking about 0:15:49.560 --> 0:15:51.960 what could give the market jitters going forward, I think 0:15:51.960 --> 0:15:54.160 it very much lies in that upside risk about around 0:15:54.200 --> 0:15:56.920 the Fed doing more than the market expects. That could 0:15:56.960 --> 0:15:58.920 even be staying on hold given the way futures a 0:15:58.960 --> 0:16:00.960 price today. But again, very much view of the risk as 0:16:00.960 --> 0:16:02.000 being to the upside. 0:16:02.120 --> 0:16:04.400 Equity data ship, what does it come from? If that's 0:16:04.400 --> 0:16:05.080 your backdrop? 0:16:05.480 --> 0:16:08.040 So I think, you know, the interesting thing that we've 0:16:08.080 --> 0:16:10.280 spent a lot of time talking to clients about is, 0:16:10.320 --> 0:16:12.200 you know, back in March when when we started to 0:16:12.240 --> 0:16:15.640 see stress in the banking system, why aren't equities going down? 0:16:15.680 --> 0:16:17.920 And the answer was the ten year fil fifty basis 0:16:17.920 --> 0:16:19.840 points and that boosted all of the tech names, and 0:16:20.160 --> 0:16:22.200 that allowed the s and P. Five hundred to keep 0:16:22.240 --> 0:16:24.560 its head above water. I don't think you're going to 0:16:24.600 --> 0:16:28.000 see the market, the market broadly do particularly well in 0:16:28.000 --> 0:16:30.400 that environment because the big heavyweights in the market are 0:16:30.440 --> 0:16:33.120 just too sensitive to the overall movement of rates, and 0:16:33.200 --> 0:16:35.120 so I think what you end up seeing is kind 0:16:35.160 --> 0:16:38.200 of a nowhere market right where the average stock arguably 0:16:38.200 --> 0:16:42.120 starts doing a little bit better, maybe some utilities, healthcare staples, 0:16:42.160 --> 0:16:43.920 but you know, tech's not going to lead us out 0:16:43.920 --> 0:16:45.360 of this hole if the risk to rates is to 0:16:45.360 --> 0:16:45.800 the upside. 0:16:45.920 --> 0:16:47.840 I want you to talk about this because you're going 0:16:47.880 --> 0:16:51.000 into institutional and high network people and they're scared. You 0:16:51.040 --> 0:16:53.800 know what. The bottom line here is the rest of 0:16:53.800 --> 0:16:56.160 the market is witnessed by the SPX has come out 0:16:56.160 --> 0:16:58.880 of a brutal bear market in October and it's made 0:16:58.960 --> 0:17:02.240 back a huge part of that loss. I think that's 0:17:02.320 --> 0:17:06.760 underplayed by people addicted to covering Apple every fifteen minutes breathless. 0:17:06.960 --> 0:17:08.960 Do you look at this as the bottom of a 0:17:09.040 --> 0:17:12.480 market in October and we're climbing out of it into 0:17:12.520 --> 0:17:15.679 a positive return for everything else besides Apple. 0:17:16.200 --> 0:17:18.199 So I think at the end of the day, the 0:17:18.280 --> 0:17:21.800 problem with saying that October was the low. It reminds 0:17:21.840 --> 0:17:23.560 me of people telling me that June was the low 0:17:23.840 --> 0:17:25.560 right in the middle of last year, and we had 0:17:25.560 --> 0:17:28.800 priced it in recession because the median decline excuse me, 0:17:28.800 --> 0:17:31.560 as twenty five percent peaked to troth and we did 0:17:31.560 --> 0:17:33.359 that right, So we must have priced it in. But 0:17:33.840 --> 0:17:35.879 let's talk about the growth data. Let's talk about the 0:17:35.960 --> 0:17:38.000 jobs report. I mean, this is not an economy that 0:17:38.080 --> 0:17:40.760 is anywhere close to being in recession in our view 0:17:40.800 --> 0:17:42.800 when you look across the board. I don't think we 0:17:42.880 --> 0:17:46.160 necessarily set a new low, but we could arguably retest 0:17:46.280 --> 0:17:48.560 those existing lows at some time before the end of 0:17:48.560 --> 0:17:48.840 the year. 0:17:48.960 --> 0:17:50.440 So it's good news good news again. 0:17:50.680 --> 0:17:53.760 I think good news right now. It's an interesting question 0:17:53.800 --> 0:17:56.720 because the market has shifted its focus away from inflation 0:17:56.880 --> 0:17:59.480 and back to growth, and on the one hand, that's 0:17:59.480 --> 0:18:02.640 allowed the negative correlation between stocks and bonds to take 0:18:02.680 --> 0:18:05.520 hold again, and so market performance this year has very 0:18:05.560 --> 0:18:07.800 much been better. But I worry that if the inflation 0:18:07.920 --> 0:18:11.119 data doesn't cool off, then good news becomes bad news 0:18:11.200 --> 0:18:12.520 because it means that the FED is going to have 0:18:12.560 --> 0:18:14.359 to do more. So we're in this kind of weird, 0:18:14.480 --> 0:18:17.640 nebulous state today. Where it just doesn't seem to us 0:18:17.680 --> 0:18:20.760 like investors broadly are accurately pricing in the risks around 0:18:20.760 --> 0:18:23.000 monetary policy that we see on the horizon. 0:18:23.240 --> 0:18:26.119 If there is another bank failure or another bank jitter 0:18:26.320 --> 0:18:30.040 that emerges, does the data matter about inflation or do 0:18:30.119 --> 0:18:32.000 people basically discount the FED no matter what. 0:18:32.520 --> 0:18:34.360 So I think that that's the problem, and that's what's 0:18:34.359 --> 0:18:36.600 happening today, is that people are saying, look what's going 0:18:36.640 --> 0:18:38.960 on in the banking space. You know, it looks and 0:18:39.040 --> 0:18:41.560 feels and smells like something we may have seen before. 0:18:41.960 --> 0:18:44.000 The Fed's going to have to go on hold. But 0:18:44.280 --> 0:18:46.760 you know, again, I would make the point that banks 0:18:46.800 --> 0:18:49.760 fail every single year, right, it's just not usually the 0:18:49.800 --> 0:18:52.520 sixteenth largest bank by assets, And that's what really caught 0:18:52.520 --> 0:18:54.680 people's attention. And so, you know, I think we could 0:18:54.680 --> 0:18:58.560 see continued stress in the banking system broadly, but very 0:18:58.640 --> 0:19:00.600 much at the lower end, as we work through some 0:19:00.640 --> 0:19:02.879 of these COVID excesses and we work through the duration 0:19:03.000 --> 0:19:06.000 mismatch that we know exists today. I'm not sure that 0:19:06.000 --> 0:19:07.720 we're out of the woods, but I do think that 0:19:07.760 --> 0:19:09.360 the big booms have probably been heard. 0:19:09.400 --> 0:19:11.119 I don't want to get in trouble with mister Diamond. 0:19:11.119 --> 0:19:13.560 He hangs on your earvy word. But the bottom line is, 0:19:13.600 --> 0:19:15.399 are we going to see a banking roll up in 0:19:15.400 --> 0:19:17.960 this country? Keep JP Morgan out of it. Are we 0:19:17.960 --> 0:19:20.160 going to see a banking roll up in this country? 0:19:20.359 --> 0:19:22.439 Well? I think what's interesting that really ties back to 0:19:22.480 --> 0:19:24.639 the structure of the US banking system right, which is 0:19:24.720 --> 0:19:27.520 much more fragmented than what you see in other parts 0:19:27.520 --> 0:19:30.480 of the world, and so arguably that caters more to 0:19:30.840 --> 0:19:32.639 M and A activity than would be the case in 0:19:32.680 --> 0:19:35.000 some place like Europe. I think it would be premature 0:19:35.040 --> 0:19:37.840 to say that we've seen the end of consolidation in banking. 0:19:37.880 --> 0:19:40.320 He read. That's like when Powell's and his press conference 0:19:40.400 --> 0:19:43.720 reading off the piece of paper David did that absolutely 0:19:43.800 --> 0:19:44.239 nailed them. 0:19:44.440 --> 0:19:47.160 Please you mentioned a bank failures and how much more 0:19:47.200 --> 0:19:50.200 regular they are related to how much they get talked about. 0:19:50.240 --> 0:19:52.439