Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. USCPI members reinforcing concerns about inflation,
Speaker 1: the financial stories that shape our work a really different
Speaker 1: reaction to Mark. It's more indications of just how hot
Speaker 1: the US economy really is. Through the eyes of the
Speaker 1: most influential voices Larry Summers, the former Treasurer Secretary, Katherine Keating,
Speaker 1: CEO of bny ME, and Sam zel Sharman and founder
Speaker 1: of Aquatic Group Investment. Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. China gets going, Banks keep going
Speaker 1: and Fox Well Fox gets out of the trap that
Speaker 1: it made for itself. This is Bloomberg Wall Street Week.
Speaker 1: I'm David Weston. This week's special contributor Larry Summers and
Speaker 1: why we aren't more worried about that debt ceiling.
Speaker 2: We do need to have a fundamental conversation about the
Speaker 2: future of government finances in our country.
Speaker 1: Brian Winahan of Bank of America on what the bank
Speaker 1: tremors did to regional and local banks.
Speaker 3: The good news is the basic industry is to report
Speaker 3: of good earnings across the board.
Speaker 1: And Rick Reader of black Rock on whether the FED
Speaker 1: is too focused on inflation.
Speaker 4: FED needs too exhibit a bit more patients. We don't
Speaker 4: have to hit the two percent target next month.
Speaker 1: Global Wall Street waited for direction this week and spent
Speaker 1: its time sorting through the tea leaves to find the
Speaker 1: next big thing. China reported numbers showing its economy and
Speaker 1: particularly its consumers, are starting up again after the COVID shutdown.
Speaker 1: Looks like we are in China eighteen out a lot
Speaker 1: and buying a lot of fancy pants jewelry. As Secretary,
Speaker 1: Yellen tried to draw a line between US policy that
Speaker 1: affects the Chinese economy and having a specific goal of
Speaker 1: slowing its growth.
Speaker 5: The United States will assert ourselves when our vital interests
Speaker 5: are at stake, but we do not seek to decouple
Speaker 5: our economy from China's. A full separation of our economies
Speaker 5: would be disastrous for both countries.
Speaker 1: Bank earnings continued, with Bank of America, Golden Sex, and
Speaker 1: Morgan Stanley all posting some hits and some misses, but
Speaker 1: not a lot of evidence of real trouble. Following the
Speaker 1: tremors of.
Speaker 3: March, we thought this would be the tea leaves we
Speaker 3: were looking for, and then we get guidance.
Speaker 1: It's kind of like, eh, We're not sure. Fox walked
Speaker 1: right up to the brink of a libel trial with
Speaker 1: one point six billion dollars on the line and got
Speaker 1: away with paying Dominion only seven hundred and eighty seven
Speaker 1: million dollars, still one of the largest libel awards in history. Well,
Speaker 1: one thing Dominion earned, as they are now the world's
Speaker 1: most famous voting machines. And the job cuts just kept
Speaker 1: on coming, with Meta and Disney both cutting thousands of
Speaker 1: jobs in a big pivot for both companies.
Speaker 6: In a way, they're a little worse than you anticipated,
Speaker 6: because while Meta is cutting ten thousand jobs now, they
Speaker 6: already cut eleven thousand in November, Disney losing up to
Speaker 6: seven thousand jobs across the board.
Speaker 1: And what about the markets, Well, they pretty much moved
Speaker 1: sideways through the week, with the SMP five hundred down
Speaker 1: one tenth of a percent and just above forty one thirty,
Speaker 1: the NASDA giving up four tenths of a percent, and
Speaker 1: the yield on the tenure moving up about five basis
Speaker 1: points to just under three point five seven percent by
Speaker 1: the end of the week. For their reaction to what
Speaker 1: we've seen welcome back now, Charmin most of our rock money.
Speaker 1: She's Goldman Sachs Wealth Management CIO and head of investment Strategy.
Speaker 1: And David Bianco, DWS Group, Chief Investment Officer. Welcome back
Speaker 1: to both of you here in our studio, New York.
Speaker 1: Great to have you. So let me start with you, David.
Speaker 1: Does the equity market agree with the bond market about
Speaker 1: where we're headed?
Speaker 7: I don't think so.
Speaker 8: And then sometimes there are good reasons for the bond
Speaker 8: market and equity market looking like they're disagreeing when they're
Speaker 8: really agreeing. But this time around, I think the equity
Speaker 8: market is ignoring the recession signals that are flashing.
Speaker 1: Well you think about that, Charmaine. Are there recession flashes
Speaker 1: signals flashing and is the equity market disregarding it?
Speaker 9: The cover of our outlook this year was Caution, heavy Fog,
Speaker 9: and the whole point was that there's a lot of uncertainty,
Speaker 9: there's heavy fog, and to have too much conviction on
Speaker 9: the probability for a recession is not prudent. We actually
Speaker 9: think the probability is forty five to fifty five percent.
Speaker 9: We've never been this high and we've never had a
Speaker 9: ten percentage point range. So our view is a recession
Speaker 9: is not obvious, and clients shouldn't position themselves saying there's
Speaker 9: a recession and let's go underweight equities, or there's no recession,
Speaker 9: we should go overweight equities. And we actually don't think
Speaker 9: the bond market and the equity market are sending mixed signals.
Speaker 9: If you look at where the equity market is, where
Speaker 9: interest rates are, and you compare them to appeared like
Speaker 9: two thousand and three, four or five six that average period,
Speaker 9: the equity risk premium, meaning the incremental earning zield relative
Speaker 9: to treasuries is the same as it was then when
Speaker 9: interest rates were the same level. So we don't think
Speaker 9: it's actually an inconsistent message.
Speaker 1: What about the so called credit crunch, love he was,
Speaker 1: it's not a crunch at all, But at least there's
Speaker 1: credit tightening already agrees with that Charmine. What is that
Speaker 1: going to do? Does that make the likely to recession
Speaker 1: go up?
Speaker 9: There's no doubt that we are seeing tightening of lending.
Speaker 9: So if you look at the loan officer surveys, more
Speaker 9: people are pulling back on lending than not so quite right,
Speaker 9: You see it across the board, all sectors, real estate
Speaker 9: and otherwise. But the fact is is that already priced
Speaker 9: in the market and is a growth rate of around
Speaker 9: one point four or one point six percent. That's the
Speaker 9: range we have actually reflecting that we believe it is.
Speaker 9: Growth will probably be slower by about point four too
Speaker 9: point five percent because of tightening of credit, but not
Speaker 9: so much to cause a recession.
Speaker 1: There were you on this unlikely to recession and particularly
Speaker 1: let me tie in the credit tightening with what the
Speaker 1: Fed's likely to do is just let the FED off
Speaker 1: the hook a little bit.
Speaker 8: Well, it's helping the Fed, but the Fed has more
Speaker 8: work to do. We expect to another hike in May,
Speaker 8: and there might be more hikes perhaps in the autumn
Speaker 8: if inflation doesn't come down faster. I agree with Charman
Speaker 8: that the equity market under the surface there has been
Speaker 8: a defensive rotation, so there is some acknowledgment of the
Speaker 8: risks ahead, and the equity risk premium is also a
Speaker 8: healthy equity risk premu under normal conditions. But we're trying
Speaker 8: to figure out if earnings are sustainable and if these
Speaker 8: interest rates are sustainable. There's risk that interest rates go
Speaker 8: up after this flight to safety that I think the
Speaker 8: bond market is doing right now, and earnings are going downward.
Speaker 8: We're in a profit receession. We'll talk more about it later,
Speaker 8: but there's more risks to the earnings outlook.
Speaker 7: Charm me.
Speaker 1: Let's switch to China just for a moment. We've got
Speaker 1: China data out this week. There were somewhat encouraging about growth.
Speaker 1: You have a big report out actually on China. You
Speaker 1: actually even have a chart in which you compare what
Speaker 1: happens if you take one hundred million dollars at the
Speaker 1: blow point of the Great Financial Crisis and investing in
Speaker 1: different securities. Take us through that chart.
Speaker 9: Yes, if I had to say, over the last twenty
Speaker 9: years of being in private wealth management, it's one of
Speaker 9: my favorite charts because we've had a US pre eminence
Speaker 9: investment view and this chart bears the fact that this
Speaker 9: is actually what is happening, and we think that's going
Speaker 9: to continue, and that is very important in terms of
Speaker 9: flow of funds into the US. What the chart actually
Speaker 9: shows you is if you had put in let's say,
Speaker 9: one hundred dollars in US equities, the S and P
Speaker 9: five hundred versus one hundred dollars in emerging markets or
Speaker 9: in developed non US markets or China, what would the
Speaker 9: return have been.
Speaker 1: You would have earned eight.
Speaker 9: Hundred dollars if it was in US equities, and only
Speaker 9: about two hundred and fifty in Chinese equities. So in
Speaker 9: spite of all this growth and enthusiasm for China, it
Speaker 9: has not been a good place to invest at all.
Speaker 9: In fact, you'd only earn about a third. And going forward,
Speaker 9: we think there's too much euphoria that this recovery from
Speaker 9: the lockdowns would be that meaningful. We can have a
Speaker 9: short term recovery, but generally we think China's going to
Speaker 9: have a substantially sower trend growth and we encapsulated it
Speaker 9: in our report called middle Kingdom middle income. They're not
Speaker 9: going to escape the middle income trap.
Speaker 1: David, too much euphoria over China, do you agree?
Speaker 8: I think there's a bit of too much of your
Speaker 8: euphoria over the reopening in China. And it's good for China,
Speaker 8: it's good for China's service consumption, but I don't think
Speaker 8: it's going to stop the profit recession that we expect
Speaker 8: at the.
Speaker 7: S and P.
Speaker 8: And the interesting thing is America is the greatest and
Speaker 8: US equities over the past ten fifteen years have been
Speaker 8: the place to be large cats, growth stocks, tech stocks,
Speaker 8: and so many investors have said, why should I just
Speaker 8: deviate from what has worked so well over the past
Speaker 8: ten years. The trouble is things are changing, and uncertainty
Speaker 8: on the ability of profits to keep growing at a
Speaker 8: strong pace and intrade straight stay low is the concern.
Speaker 1: So I don't want to be cute about this, but
Speaker 1: this is sort of like past performance is not a
Speaker 1: predictor of future exactly right. As your point about Charmine's chart,
Speaker 1: I mean that is all finding good going back to
Speaker 1: great financhurises. Going forward, it might be quite different. We're
Speaker 1: facing more challenges, Charmie.
Speaker 9: So the gap between the US and the rest of
Speaker 9: the world may not continue to be as big in
Speaker 9: terms of outperformance. But the growth in the US is
Speaker 9: driven by earnings per share growth. It's not driven just
Speaker 9: by price action and multiple action. And if you look
Speaker 9: at the earnings per share growth in the US, the
Speaker 9: other countries don't even come close.
Speaker 7: If you look.
Speaker 9: At China, it has lacked. And it's not looking at
Speaker 9: a particular window where earnings per share growth may have
Speaker 9: been much higher. It's actually looking at long term earnings
Speaker 9: growth in the US and sector bisector, most of them
Speaker 9: have underperformed the US.
Speaker 7: I love what you're saying.
Speaker 8: I'm happy to elaborate on it. There's a difference between
Speaker 8: growth and good return on capital. And the S and
Speaker 8: P five hundred American companies, they know how to get
Speaker 8: strong returns on their incremental investment spending, but a lot
Speaker 8: of that has come through globalization, digitalization, and we have
Speaker 8: to see how much more upside there is on those things.
Speaker 1: Well, let's just end on that globalization question, because I'm
Speaker 1: not saying we're going entirely away from globals, but it's
Speaker 1: not going to be the way it was in the past.
Speaker 1: It looks like it's going to be more divisive than
Speaker 1: it was in the past. Sherman, how does that affect
Speaker 1: your analysis?
Speaker 9: If one has to think of which country in the
Speaker 9: world has benefited the most from globalization, it has been China.
Speaker 9: China's growth rate is completely dependent on globalization. They have
Speaker 9: huge surpluses. They've used that surplus to build a property sector,
Speaker 9: build the infrastructure infrastructure business that they have, and very
Speaker 9: dependent on exports. If globalization at the margin decreases a
Speaker 9: little bit, and globalization peaked in two thousand and eight before,
Speaker 9: just at the peak of the global financial crisis. Then
Speaker 9: they are going to be hurt the most and the
Speaker 9: US hurt the least. So in fact, the slightly globalization
Speaker 9: even would be very beneficial for the US and hurt China.
Speaker 1: Okay, this is a great conversation, so let's continue it.
Speaker 1: Coming up, we're going to continue this marketing conversation with
Speaker 1: David Bianco and Sherman and most of them our cliny,
Speaker 1: and we're going to bring back the iconic elves of
Speaker 1: the original Wall Street Week, updated of course for twenty
Speaker 1: twenty three. That's coming up next on Wall Street Week.
Speaker 10: On Bloomberg, the continuing comeback of the volatile technology sector
Speaker 10: left NASDAK with a gain for the week. Can't scare
Speaker 10: our elves, though their consensus on the Dow's outlook for
Speaker 10: the next three months remains an.
Speaker 1: Ultra bullish plus six.
Speaker 10: So quickly was the mood improving that one of our
Speaker 10: bullish chief elves, Michael Metz, grew cautious and changed his
Speaker 10: boat on the next six months to neutral, bringing urlves
Speaker 10: index down a notch to a still bullish plus three.
Speaker 10: There was no stopping nasdak Amex or Russell, which seemed
Speaker 10: to be operating in an entirely different parallel universe, which,
Speaker 10: come to think of it, may be where good elves
Speaker 10: come from. Our crew are unchanged at are highly bullish
Speaker 10: plus seven.
Speaker 1: That, of course is lews Erguiser talking about hiconic elves
Speaker 1: on the original version of Wall Street Week back in
Speaker 1: January of nineteen ninety eight, and today today we are
Speaker 1: bringing those elves back, modified and updated a bit. Instead
Speaker 1: of ten technical factors crunched by a contributor, which is
Speaker 1: what Lewis had, our elves are real people. They are
Speaker 1: the twenty four equity and analysts Bloomberg has relied on
Speaker 1: four years to come up with a consensus call on
Speaker 1: where the SMP will end up the year, and as
Speaker 1: of this week, the medium of their projections was foury
Speaker 1: twenty five, with Tom Lee of Funstrat the highest at
Speaker 1: four thousand and seven to fifty and Michael Cantowitz of
Speaker 1: Piper Sandler the most conservative, projecting the s and P
Speaker 1: five hundred will end the year at three two hundred
Speaker 1: and twenty five. Every week we're going to check in
Speaker 1: to see how they are doing and whether they have
Speaker 1: moved their projections. Still with us are Charmin, most of
Speaker 1: our rock Commanie of Goldbin Sachs, and David Bianco of
Speaker 1: DWS Group. So it's great to have you here back. Charmin,
Speaker 1: tell me of a David Constant. He's at four thousand,
Speaker 1: right in the middle. Yes he is.
Speaker 9: And we obviously chat to get with each other all
Speaker 9: the time. We go through their earnings views and our
Speaker 9: earnings used and why are they different than what's driving it.
Speaker 9: It's interesting because Jan Hatzis are chief economist at Golobin
Speaker 9: Sachs has a thirty five percent probability of a recession.
Speaker 9: It's one of the lowest in the industry, actually compared
Speaker 9: to somebody like Bill Dudley who's at sixty percent. So
Speaker 9: it's very important what is actually being factored into David's numbers.
Speaker 9: Our view is that there the S and P will
Speaker 9: end up the year at forty two fifty, so a
Speaker 9: thirteen percent total return. We allocate a fifty percent probability
Speaker 9: to that, and then we have a twenty percent probability
Speaker 9: that it actually does much better and you end up
Speaker 9: with something like your return in the twenty plus percent.
Speaker 9: Now there's a small probability to the downside, but nothing
Speaker 9: like the lows you have with the NEU l's we
Speaker 9: are more down like thirty there's a thirty percent probability
Speaker 9: of thirty six hundred. Rview is that in the background
Speaker 9: the backdrop for earnings is generally modestly positive.
Speaker 1: David is actually you were an ELF. Yeah, that's it.
Speaker 7: Was an ELF. Hopefully I haven't graduated control, but yeah, I.
Speaker 8: Was one of those equity strategists for many years.
Speaker 1: So you see a high and a low. What are
Speaker 1: the factors are going to determine whether it's high or low?
Speaker 1: From your point of view, David.
Speaker 8: Whether whether the high turns out to be correct or
Speaker 8: the lows. I think four thousand on the SMP at
Speaker 8: the end of the year, a little bit above four
Speaker 8: thousand for the SMP early twenty twenty four is a
Speaker 8: fair reasonable outlook. But I think there's downside skewed risks
Speaker 8: more than usual. I think it's quite possible the SMP
Speaker 8: re visits thirty six hundred and thirty seven hundred before
Speaker 8: it moves to something well above forty two hundred.
Speaker 1: So Charmin, you have somebody supporting David Coston right at
Speaker 1: four thousand, Thanks so much to David Bianco and Charmen
Speaker 1: most of our RACHMANI. The failure of Silicon Valley Bank
Speaker 1: sent shivers through the entire banking industry, particularly when it
Speaker 1: comes to the trust depositors place in their own banks.
Speaker 1: We spoke with Brian moynihan, Chair and CEO of Bank
Speaker 1: of America about the lasting effects of what we've seen.
Speaker 3: I think, at the end of the day, at crisis
Speaker 3: is too strong a word. Words like that get used
Speaker 3: a lot, but at the end of day, there was
Speaker 3: a fair amount of disruption for a few weeks there. Well,
Speaker 3: certain business models were sorted through. But on the other hand,
Speaker 3: you could see and we could see the stability and
Speaker 3: the other business models which would the way banking is
Speaker 3: down Gray Grand or business and stuff. And so the
Speaker 3: good news is you're seeing the earnings by the broad
Speaker 3: industry come out this week. You're seeing things have sort
Speaker 3: of played out that way, which is very specific business models.
Speaker 3: Because the unique circumstances of the last twenty four months
Speaker 3: of thirty six months of massive amounts of cash putting
Speaker 3: the system and then rates changing caught people and.
Speaker 7: Those had to be sorted out.
Speaker 3: The good news is the basic industry is reported good
Speaker 3: earnings across the board. Deposits have come down, but that's
Speaker 3: intended by the FED taking money out of the system.
Speaker 3: It's got to come out of somewhere. Banking system is
Speaker 3: what they want to do to you, frankly, make credit
Speaker 3: tighter and help slow down the economy. So that's gone on,
Speaker 3: but you look at the cap pub liquidity and the
Speaker 3: earnings power of all these companies have been tremendous, and
Speaker 3: that's that's reassuring to people, and that's good news because
Speaker 3: in the end of the day, the banking system reflects
Speaker 3: economy and American accounties around the world, and.
Speaker 7: You hope it's in good shape, and it is. There's
Speaker 7: no question its good.
Speaker 1: Shap our banks at an inherent disadvantage on their business model.
Speaker 1: In this sense, you're funding by demand deposits that people
Speaker 1: by definition can pull whenever they want. You're putting into
Speaker 1: long term assets you know, that are long term as
Speaker 1: opposed to some of the private credit ufits. You get
Speaker 1: locked up capital for a long period of time that
Speaker 1: they can match with the assets. Do you have an
Speaker 1: inherent mismatch in the deposits versus the assets?
Speaker 3: Well, and we manage that. That's why we have outcome
Speaker 3: management and the team of people, and that's managed to
Speaker 3: maintain the balance and that sensitivity. So up one hundred
Speaker 3: basis points we make three billion dollars more in an
Speaker 3: I and down we make three billion less on a
Speaker 3: base of your fifty five billion dollars a year.
Speaker 7: So it's a little bit of movement of.
Speaker 3: Money, but that's how you balance it, because the entire
Speaker 3: balance sheet moves, and everybody looks at certain parts of
Speaker 3: it in this part.
Speaker 7: So it's it's it's the way you manage money.
Speaker 3: So our consumer customers, I don't know, eighty five percent
Speaker 3: of balance have been here for customers.
Speaker 7: For ten years plus.
Speaker 3: You know, it's it's an even on a commercial side,
Speaker 3: same thing. All the all the balance of people been
Speaker 3: relationships for a long period of time. These customers run
Speaker 3: around for decades, you know, decades and decades in some cases,
Speaker 3: and so they're very stable. It's just a matter of
Speaker 3: the ebbs and flows of the rate environment will change
Speaker 3: the profitability. But you say, is a business model flawed.
Speaker 3: There's only four companies that have made more than fifteen
Speaker 3: billion dollars in America in the last eight years in
Speaker 3: a row. Two of them are banks, and so I
Speaker 3: don't think the business model's flawed.
Speaker 1: As they head of Bank of America, you have a
Speaker 1: almost unique UH insight into the American economy. It's specifically
Speaker 1: the consumer. I know you said that March over March,
Speaker 1: consumer spending is up. Same time you're taking more provisions against.
Speaker 7: Possible some losses. It's the wanting.
Speaker 1: What does that tell you? What's around the corner? Are
Speaker 1: you seeing the end of the the spurt and consumer spending?
Speaker 7: So the.
Speaker 3: Three different topics. One is consumer spending in March was
Speaker 3: up nine percent of the last March across all different forms.
Speaker 3: In April, that's slowed down a little bit. We'll see
Speaker 3: how it ends up, but that's slowed down. It was
Speaker 3: slower in January, ferry picked back up in March. That
Speaker 3: that means the consumers still doing things. They're traveling. It's
Speaker 3: a lot more travel out. The home experience is so
Speaker 3: called theaters, et cetera, concert tickets, any sporting events. Everything's
Speaker 3: going strong there. When you look at April, you're seeing
Speaker 3: it slow down a little bit.
Speaker 7: The debate's going to.
Speaker 3: Be is that due to some at tax timing and stuff,
Speaker 3: because that's changed this year we'll see a play out.
Speaker 7: But the consumers a good shape.
Speaker 3: They have more money in accounts than they did by
Speaker 3: them by multiples, especially.
Speaker 7: The lower STRATEUSY.
Speaker 3: The ones that don't have it are the wealthiest consumers
Speaker 3: are on platform because they put the money into the
Speaker 3: into the first in the market, now into the in
Speaker 3: the money funds. They have money. The credit quality, our
Speaker 3: charge our freight this quarter was a number which is
Speaker 3: about a third under where it was nineteen. To give
Speaker 3: you a centense saying it, but that's a fifty three
Speaker 3: year low in nineteen. So the credit quality is ye, unbelievable,
Speaker 3: and so that's good news. Are we putting up provisions, Yeah,
Speaker 3: because we keep planning on this recession.
Speaker 7: It seems to.
Speaker 3: Always be out there that we haven't gotten to yet.
Speaker 3: And then the third thing is the consumers have capacity
Speaker 3: to borrow. So the usage of our lines are credit
Speaker 3: on the consumer side, home micro loans are down by
Speaker 3: from thirty billion in outstandings twenty billion outs standings during
Speaker 3: the pandemic.
Speaker 7: And the card lines are.
Speaker 3: Down from probably a hundred and some billion down about
Speaker 3: ninety billion. They were down as low as seventy you
Speaker 3: come back up. So there's plenty of barring capacity for consumers.
Speaker 3: So that means the consumer is going to be there
Speaker 3: and are employee, which means the job of the FED
Speaker 3: is tougher. And that's why the f FED has to
Speaker 3: be more resilient, because the consumer drives the US economy,
Speaker 3: and the consumer is still in the game, and the
Speaker 3: consumers still employed, and we're paying our colleagues and teammates
Speaker 3: more that they're in the room, and then they have
Speaker 3: money in accouncilor spending. And that's not true for every
Speaker 3: single human being in America, but it's the average is true.
Speaker 1: That That was Brian moynihan, Chair and CEO of Back
Speaker 1: of America coming up. Could the price of getting inflation
Speaker 1: back down to two percent be too high for the
Speaker 1: economy to pay well? As Rick Reader of black Rock.
Speaker 1: That's coming up next on Wall Street Week on Bloomberg.
Speaker 9: This is Bloomberg Wall Street Week with David Weston from
Speaker 9: Bloomberg Radio.
Speaker 1: Interest rates, they've been all over the place from the
Speaker 1: negative rates that ECB President Leguard was gingerly trying to
Speaker 1: recover from less than a year ago. We are turning
Speaker 1: our back to negative interest rates we are moving very
Speaker 1: likely into positive territory to rates going up higher and
Speaker 1: faster than ever before, with uncertain effects.
Speaker 11: The interest rate tool as a means of controlling inflations
Speaker 11: of it's like having served you with a dull knife,
Speaker 11: because you hit the housing sector, you hit the manufacturing sector,
Speaker 11: you hit parts of the economy that have a very
Speaker 11: high sense to be the interest rates.
Speaker 1: And quantitative tightening like we've never seen before.
Speaker 12: The Fed has to meet this now with raising rates
Speaker 12: and QT. And the new part of this isn't the
Speaker 12: raising rates, it's the QT. We've never had QE before
Speaker 12: like this. Therefore, we've never had QT like this.
Speaker 1: So now the question is where things will settle down.
Speaker 1: Will we come back to the very low pre pandemic levels,
Speaker 1: the way the IMF predicts in its latest World Economic Outlook, or,
Speaker 1: as Nobel Prize winning economist Michael Spence's warned, are their
Speaker 1: long term structural factors that favor continued inflation and higher
Speaker 1: interest rates.
Speaker 13: There's been a fundamental sort of structural shift on the
Speaker 13: global economy, the world in which we had very wrong
Speaker 13: deflationary pressures from just endless supplies of tradable goods coming
Speaker 13: from emerging economies, those days are in fading, if not over.
Speaker 1: And when it comes to interest rates, there is one
Speaker 1: person we want to talk to. That is Rick Reader,
Speaker 1: a Blackrock where he is a global CIO for fixed
Speaker 1: income as well as head of global allocation there And
Speaker 1: on top of all that, he was just named by
Speaker 1: morning Star the Outstanding Portfolio Manager of twenty twenty three.
Speaker 1: Congratulations by the way on the.
Speaker 7: Award, Ravin, thanks a lot, thanks for having me.
Speaker 1: So there's a lot of debate about where we're headed
Speaker 1: with interestrates in the short term, but also in the
Speaker 1: longer term, where we're going to settle down when all
Speaker 1: this is over whenever that is. Give us your perspective,
Speaker 1: not just on that question, but does the FED have
Speaker 1: the right way of thinking about the question?
Speaker 4: Yeah, I mean it's a pretty complex question because there
Speaker 4: are so many factors that play today.
Speaker 7: In fact, we introduced in the last month we introduced.
Speaker 4: Something that wasn't part of the equation, that the financial sector,
Speaker 4: instability and the banking system. So that introduced another dynamic
Speaker 4: to the fact which quite.
Speaker 7: Frankly, I think has an influence.
Speaker 4: So listen, I think the FED is right to focus
Speaker 4: on inflation we've got the funds rate up and the
Speaker 4: market's projecting they're going to go to five and a quarter,
Speaker 4: which seems about right in terms where the funds rate
Speaker 4: is going to get to.
Speaker 7: But now you got to think about you know, you've
Speaker 7: gone from zero. I think about where we were last year.
Speaker 4: The funds rate was at fifty base this time last
Speaker 4: year were at fifty base points, and we're doing one
Speaker 4: hundred and twenty billion a QI.
Speaker 1: So if they're trying to figure out how much damage
Speaker 1: are we doing? How much queen we tolerate? What factors
Speaker 1: should they looking at? What is on their dashboard? Should
Speaker 1: be on their dashboard saying wait a second, this is
Speaker 1: damages is too much.
Speaker 7: So I I think people underestimate.
Speaker 4: First of all, commercial real estate is about a ten
Speaker 4: trillion dollar market. Residential real estate it's about four times
Speaker 4: the size. The other stat that I don't think people
Speaker 4: realize the banking system is critically important, but it's only
Speaker 4: about fifteen percent of bening on how you measure it,
Speaker 4: of the financing in the country. So you got to
Speaker 4: think about what other things. Boy, did you hurt the
Speaker 4: banking system?
Speaker 7: How much capital?
Speaker 4: When you move rates this much, you think about other
Speaker 4: areas venture capitalist. It's part of why we've never seen
Speaker 4: rates move this much higher. We've never seen this much
Speaker 4: QI put in and then let's back off, and so
Speaker 4: there are so many considerations. Modern economy is incredibly complex.
Speaker 1: Yeah, and as I understand, you're not saying we shouldn't
Speaker 1: pay attention to inflation at all, but there are other
Speaker 1: factors as well. And I know you have a different
Speaker 1: sort of analysis comparing on the one hand, unemployment with
Speaker 1: inflation sort of a traditional way of doing as opposed
Speaker 1: to comparing employment with real wages.
Speaker 4: So if you go back, yes, so you know traditional
Speaker 4: misery index, unemployment, inflation, and the FED job is how
Speaker 4: do we improve both of those for the general well
Speaker 4: being of the economy. However, read a unique point in time,
Speaker 4: why is inflation higher? You had two exogenous shocks. You
Speaker 4: had a pandemic and they had massive monetary and fiscal
Speaker 4: stimulus come and try to try.
Speaker 7: And solve that.
Speaker 4: And then you had a war, a global war that
Speaker 4: inact infected food prices, energy prices, and by the way,
Speaker 4: we'll create a deglobalization that creates some durable inflation. So
Speaker 4: those were pretty extreme dynamics. So now we have to, like,
Speaker 4: how does a FED that inflation down? But it's pretty
Speaker 4: hard to bring those big macro structural dynamics down quickly. However,
Speaker 4: if wages for the people that are being infected by
Speaker 4: higher shelter food energy costs are higher, maybe we can
Speaker 4: tolerate it a bit longer. And maybe the costs of
Speaker 4: bringing that inflation down unilaterally to a two percent goal
Speaker 4: is too painful to create, to take two or three
Speaker 4: million people out of work to the people are getting hurt.
Speaker 7: By this inflation. There's a trade off today is as.
Speaker 4: Long as wages are up, as long as we're moving
Speaker 4: capital to labor, which is happening today and has been happening.
Speaker 7: That's really effective.
Speaker 4: So I just think FED needs to exhibit a bit
Speaker 4: more patience. We don't have to hit the two percent
Speaker 4: target next month.
Speaker 1: So time is really important to what you just said.
Speaker 1: How much time does the FED have with the two percent?
Speaker 1: They've sort of put that marker down, they can't just
Speaker 1: walk away from it, but how much time do they
Speaker 1: have to get there?
Speaker 10: Yeah?
Speaker 4: I mean I FED, you know, if it gets a
Speaker 4: there are a lot of critics and a lot of criticism,
Speaker 4: and can we pause for a year. Can we pause
Speaker 4: for six months? You're going to see real credit contraction.
Speaker 4: The banking system is going to amplify that credit contraction.
Speaker 4: You're going to see the natural forces, and you're seeing
Speaker 4: things like trucking. You think about how pressurized that was.
Speaker 4: I've seen some dabta about trucking be in a recession.
Speaker 7: Now.
Speaker 4: A lot of supply chain issues are alleviating themselves. Give
Speaker 4: it a bit of time, and you know some of
Speaker 4: the things like food costs that comes down.
Speaker 1: And so let's be specific here when you say pause,
Speaker 1: pause now before the may this issue. And by the way,
Speaker 1: when do they start coming down again?
Speaker 7: So I think the debate.
Speaker 4: I think they're going to get in a room, and
Speaker 4: I think they're different constituents on that FED committee. I
Speaker 4: think they're going to get in a room and hash
Speaker 4: out can we pause now? My sense is as long
Speaker 4: as the economy is okay, as long as you don't
Speaker 4: see more stress in the banking system. My senses they
Speaker 4: want to do one more and then I think that
Speaker 4: will be the compromise.
Speaker 7: We're going to do one more and then we're going
Speaker 7: they're gonna put it on hold. Listen. I don't the
Speaker 7: markets are priced in that the Fed's going to ease.
Speaker 4: It's a lot of it's come out recently, but it's
Speaker 4: priced in they're going to start easing. It was in
Speaker 4: the summer so and I think the Fed is going
Speaker 4: to start easing next year.
Speaker 7: It's possible in December.
Speaker 1: What are the markets telling you, Rick reader about coming down?
Speaker 1: Because there was something in the last Fed minutes I
Speaker 1: suggested some of what we're seeing in the FED fund's
Speaker 1: futures right now is a matter of liquidity injection because
Speaker 1: of the financial issues with Silicon Valley Bank and the likes.
Speaker 1: Wasn't so much about an anticipating cut.
Speaker 7: No, you hear people all.
Speaker 4: The time saying the markets are stupid. They think the
Speaker 4: Fed's going to ease. Of course, the Fed's not going
Speaker 4: to ease. Markets aren't actually not that stupid. What they're
Speaker 4: doing is they're pricing in two things. One, the liquidity
Speaker 4: is immense. People are piling huge amounts of money, and
Speaker 4: we haven't seen these short term interest rates. I mean
Speaker 4: you can buy I have been buying commercial paper it's
Speaker 4: six percent, and so people are like, get me, I
Speaker 4: want to lock in maybe a little longer term.
Speaker 7: If I can lock in these.
Speaker 4: Short term interesting there's a massive amount of liquidity that's
Speaker 4: come in. That's one second being when when the Fed
Speaker 4: cuts rates, people don't believe it's going to be a
Speaker 4: wellable start easing gradually twenty five base points. If the
Speaker 4: banking system is a problem, if you have more to
Speaker 4: rest in the system, they're going to cut interest rates
Speaker 4: really quickly.
Speaker 7: You know, it's a one hundred based once at a time.
Speaker 4: So what the markets are doing is a probability adjusted
Speaker 4: ratio of actually, maybe they're.
Speaker 7: Not going to cut rates gradually, maybe they cut them
Speaker 7: a lot.
Speaker 1: Well, if they start cutting rates because of some pressure
Speaker 1: on the blankets, how does it work? Does that ease
Speaker 1: some of the mark to market problems we saw, for example,
Speaker 1: as Silicon Valley Bank, we have treasuries on their books.
Speaker 1: They're not worth as much as they used to be.
Speaker 4: Yeah, this was a unique I don't I'll describe it
Speaker 4: as crisis. This is a unique period in the banking system.
Speaker 4: And so you think about what happened. The banks were
Speaker 4: getting hurt onto, but with quality assets, treasuries, agency mortgages
Speaker 4: to a large extent, a commercial real estate being an issue, obviously, do.
Speaker 1: You have an advantage over the banks. What does it
Speaker 1: mean for the future of banking?
Speaker 7: How much time you have this is? I mean that
Speaker 7: that is a tricky question.
Speaker 4: And you know, one of the things I think about
Speaker 4: all the time is it gets a capital It's what
Speaker 4: are your assets?
Speaker 9: Is?
Speaker 7: What are your asses? A liability?
Speaker 4: Your cost? What are you getting paid on your asses?
Speaker 4: Again paying your liability? And what's the term of each sad.
Speaker 4: I think something's going to happen on the backside of that.
Speaker 4: You're going to see capital raised in the banking system.
Speaker 4: But I think regulation and efficient regulation will be how
Speaker 4: do you manage duration?
Speaker 7: Well?
Speaker 1: How much downward pressure on the real economy is the
Speaker 1: uncertainty imposing?
Speaker 4: Yeah, so you know this is part of the reason
Speaker 4: why I think the FED has the pause, because nobody
Speaker 4: has the playbook for this, and nobody really knows. Listen,
Speaker 4: I think when you stress it, you think about you
Speaker 4: know you're going to get credit contraction. How much does
Speaker 4: it affect GDP? You know, I've seen numbers all you know,
Speaker 4: I'd say it's not a bad assessment to say it's
Speaker 4: fifty basin points on GDP. Let's say you were running
Speaker 4: real GDP, there was going to be about one percent
Speaker 4: this year.
Speaker 7: You're taking about half off of it.
Speaker 4: What does it mean for investment though, is incredibly stratified.
Speaker 4: There are cyclical parts of the economy and non cyclic
Speaker 4: parts parts of the economy. They're interest sensitive parts of
Speaker 4: the economy, non interestensive. You know, today a lot of
Speaker 4: the equity investments were making things like defense.
Speaker 7: Healthcare, parts of technology, not that interest rate sensitive. I'd
Speaker 7: rather stay there for a while.
Speaker 4: See how the cyclicals play out, See how what is
Speaker 4: censitative sensitive the interest rate plays out, and so it
Speaker 4: changes the investment paradigm. The other one that changes the
Speaker 4: investment paradigm is you can buy short term interest rates.
Speaker 4: It's like you can sit in you know, people say,
Speaker 4: you know, what are you doing right? Your cash? My
Speaker 4: cash is my best friend today. I mean, because I'm garnering,
Speaker 4: I'll talk about commercially. Were at six percent five and
Speaker 4: a half to six for three months, six month, nine
Speaker 4: month paper. It changes how you build a portfolio today
Speaker 4: in a big way.
Speaker 1: Rick, thank you so much for being back on walls.
Speaker 7: Great area.
Speaker 1: That's Rick reader of black Rock coming up. When the
Speaker 1: best of intentions may not lead to the best of results.
Speaker 1: That's the next down on Wall Street Week on Bloomberg. Finally,
Speaker 1: one more thought. The law of unintended consequences when we
Speaker 1: set out to do one thing and it leads to
Speaker 1: an outcome we never anticipated. American sociologist Robert Merton first
Speaker 1: laid it out in a paperback in nineteen thirty six,
Speaker 1: though it's been kicking around since sixteen ninety two, when
Speaker 1: John Locke wrote about how a law restricting interest rates
Speaker 1: might well have the unintended consequence of hurting borrowers by
Speaker 1: discouraging lending. These days, consequences we didn't intend are everywhere
Speaker 1: we look. Take the FED who tried to get inflation
Speaker 1: back under control by raising interest rates and managed to
Speaker 1: sideswipe a Silicon Valley bank and tech startups in the process.
Speaker 8: What's most predictable is that they're going to come down,
Speaker 8: except we can never seem to predict what seems to
Speaker 8: be most predictable.
Speaker 1: Not to mention rich New Yorkers getting interest only mortgages
Speaker 1: for their Hampton's estates.
Speaker 5: They were tons of loans to wealthy clientele that were
Speaker 5: interest only mortgage payments.
Speaker 1: Or the Walt Disney Company thinking it was standing up
Speaker 1: for LGBTQ plus members of the community by taking a
Speaker 1: position against proposed Florida legislation, only to wind up with
Speaker 1: the governor threatening to build a prison next to Disney World.
Speaker 14: People have said, you know, maybe have another maybe create
Speaker 14: a state park, maybe try to do more amusement parts.
Speaker 14: Someone even said like, maybe you need another state prison.
Speaker 7: Who knows.
Speaker 14: I mean, I just think that the possibilities are endless.
Speaker 1: Netflix had the best of intentions to create a mega
Speaker 1: hit with Love Is Blind, a franchise built with the
Speaker 1: premise of getting people who'd never seen each other get engaged,
Speaker 1: only have a crash and burn its own network.
Speaker 7: A huge disaster for Netflix.
Speaker 2: I mean, they've you know, made a big deal about
Speaker 2: We're going to do more live events.
Speaker 7: This is not a great start.
Speaker 1: And maybe the most ironic of them all Major League Baseball,
Speaker 1: and we already talked about that new pitch clock they
Speaker 1: rolled out when spring training began.
Speaker 15: Essentially all events in the game are going to have
Speaker 15: a clock on them, and batters and pitchers are going
Speaker 15: to have to comply with those requirements. Deliver pitches on time,
Speaker 15: get in the box on time, things like that, which
Speaker 15: we you know, think and hope is going to create
Speaker 15: a better pace of play, cut out some dead time,
Speaker 15: and really like highlight bring forward like the best parts
Speaker 15: of our game. Which is right, guy's playing the actual game,
Speaker 15: not just standing around fixing their bating lobes.
Speaker 1: But now it turns out that it has been so
Speaker 1: successful that fans don't have time to go get a beer,
Speaker 1: leading four teams to extend beer sales into the eighth inning.
Speaker 1: Philly's pitcher Matt Strom, is concerned about the fans.
Speaker 2: So now, with a faster paced game and me just
Speaker 2: being a man of common sense, if the game is
Speaker 2: going to finish quicker, what would we not move the
Speaker 2: beer sales back to the sixth inning to give our
Speaker 2: fans time sober, open trifle.
Speaker 1: Talk about unintended consequences. That does it for this episode
Speaker 1: of Wall Street Week. I'm David Weston. This is Bloomberg.
Speaker 1: See you next week.