Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. I'm the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. All right, let's get
Speaker 1: to these banks. That is clearly a big issue. We've
Speaker 1: got a nice little round table here because if I'm
Speaker 1: the feeder reserve, I got to deal with the banks.
Speaker 1: So let's talk to Alison Williams and Bloomberg Intelligence. Plus
Speaker 1: I got to, you know, talk interest rates. So now
Speaker 1: I gotta talk to Ira Jersey. He's actually in the
Speaker 1: Bloomberg studio, which is a rarity, John Tucker, I mean,
Speaker 1: and pretty a shot, so we'll take it. He's all,
Speaker 1: guest Blazer, did you see this? He's all, he's looking
Speaker 1: all right. So we've got Alison Williams covers the banks
Speaker 1: joining us. Phone Ira Jersey in studio. Allison, you know,
Speaker 1: we framed this discussion today with FED chairman j pal
Speaker 1: that he has to address not only interest rates, which
Speaker 1: is why we have ire here, but he's also got
Speaker 1: to talk about the banking sector and the Fed's role
Speaker 1: in monitoring and regulating it. What do you think he
Speaker 1: should say about the banks and the role of the FED. Well,
Speaker 1: I think it is I think it is tricky, and
Speaker 1: I think that you know, a lot of the questions uh,
Speaker 1: percolating and that I've kind of led to this, um
Speaker 1: do relate to market sentiment, and so you are seeing
Speaker 1: regulators sort of more pulling back and just pointing to,
Speaker 1: you know, the strong capital of the banks and sort
Speaker 1: of that as a broad picture. Um general, I think
Speaker 1: that and I'll let I'll let I always speak to
Speaker 1: what the FED does today, but you know, in general,
Speaker 1: I think for what the banks are really waiting for
Speaker 1: is an answer on deposit insurance and what can be
Speaker 1: done there. We're hearing a lot of politicians throwing around
Speaker 1: around a lot of different ideas, but I think we
Speaker 1: do need something sort of broad, perhaps temporary, to help
Speaker 1: stabilise sentiment, which is really the issue at this point. Well, Ira,
Speaker 1: come on in here and talk to us about that
Speaker 1: stabilizing sentiment piece. Alison, just reference twenty five basis points
Speaker 1: priced into the market. What does the pause look like
Speaker 1: in the bontod market. Well, if I think if the
Speaker 1: FED worred to pause, or as I suspect that they'll do,
Speaker 1: they'll hike twenty five basis points and hint that they
Speaker 1: may pause at the main meeting. Is I think as
Speaker 1: long as they're dovish enough, I think that for risk
Speaker 1: assets probably things are okay. But I agree with Alison,
Speaker 1: you know, the issue here is things like how do
Speaker 1: you quell deposit flight? Right, and raising interest rates actually
Speaker 1: doesn't hurt that one way or the other, except in
Speaker 1: so far as the way the financial system has been
Speaker 1: developed over the last couple of decades is that if
Speaker 1: banks don't offer a competitive interest rate on their deposits,
Speaker 1: on their CDs or whatever, people then do what happened
Speaker 1: over the last week and a half and they move
Speaker 1: their money into money market mutual funds which have market
Speaker 1: based yields. And now so with the so the FED
Speaker 1: actually hiking could actually, you know, enhance some of this
Speaker 1: deposit flight unless banks figure out a way to keep
Speaker 1: depositors in their in their firms. So I think it's
Speaker 1: a balancing act that the FED has to do today.
Speaker 1: And I think the J. Powell has to be dovish,
Speaker 1: and that the statement will probably take out a line
Speaker 1: that talks about that continued great hikes, like they won't
Speaker 1: promise basically that they're going to continue hiking. They could, right,
Speaker 1: but I think they have to take that out and
Speaker 1: give themselves more optionality. Alison, you know, the reality is
Speaker 1: for me, at least, it seems like in the past
Speaker 1: couple of weekends, I haven't come into work on Monday
Speaker 1: like we did back in two thousand and eight with
Speaker 1: another bank or handful of banks failing. The argument can
Speaker 1: certainly be made that this is kind of look, it
Speaker 1: is syncratic to a couple of institutions here, and that
Speaker 1: if others broadly had problems, we'd hear about it. By now,
Speaker 1: How are you thinking about a day to day as
Speaker 1: we kind of figure out that this may or may
Speaker 1: not be systemic? So I think, um, I mean, I
Speaker 1: think it's not systemic in the sense that, uh, you know,
Speaker 1: it's more it's more a clause. It's more sort of
Speaker 1: having things in common versus um, you know, one bank's
Speaker 1: downfall causing another bank's downfall. So credit tweets, for example,
Speaker 1: the issues there could have been systema because there are
Speaker 1: a lot of inter relationships, even though we we expect
Speaker 1: that the US banks manage those down significantly over time. UM,
Speaker 1: certainly there are inter relationships, especially to the other banks
Speaker 1: with the US banks. You know. The issue is just that, um,
Speaker 1: you know, this this setup could cause an issue if
Speaker 1: we continue to have this negative sentiment. And that's why
Speaker 1: I think you need more of a broad statement, right
Speaker 1: because you had uh, you know, we've had a few
Speaker 1: banks now, um that event that have failed. Everyone's watching
Speaker 1: a couple of more banks. But and those banks find
Speaker 1: their answers. You know, investors will continue, I think, to
Speaker 1: go onto the next and the next until there is
Speaker 1: some kind of stability, some kind of broad answer that
Speaker 1: that quells those fears. Well, Alison, I want to get
Speaker 1: your quick read on the PacWest story. This morning, they
Speaker 1: access that fed facility from US sixteen billion. They got
Speaker 1: about one point four billion financing from Atlas as well.
Speaker 1: A lot of people will worry that PacWest was the
Speaker 1: next shoe to drop. Are we in the clear now
Speaker 1: from that? I mean, you know, the thing that I
Speaker 1: think investors will focus on is that is the deposit flight.
Speaker 1: And so again I think we have a situation where
Speaker 1: one particular bank is coming out and talking about, you
Speaker 1: know that they've stabilized things, but people are focusing on
Speaker 1: the deposits, the past of those deposits, and again worried
Speaker 1: about what's happening at other banks, and there's not a
Speaker 1: lot of transparency. So I think that I think, again,
Speaker 1: you need something that that can kind of broadly stabilize
Speaker 1: that we're not going to continue to go you know, bank,
Speaker 1: my bank, right, my story? Right? Iver, what's the key
Speaker 1: thing that I'm not a FED watcher, thank goodness, But
Speaker 1: what's the one thing a non Fed watcher should be
Speaker 1: listening for today at two thirty? Yeah, I think well,
Speaker 1: so at two thirty, I think it's the um you know,
Speaker 1: how the tone of j Powell's comments around the banking crisis, right, So,
Speaker 1: how concerned is the FED that it could become systemic? Because,
Speaker 1: like Allison mentioned, you know, Credit Suite was potentially a
Speaker 1: systemic institution, right. The problem with two thousand and seven,
Speaker 1: two thousand and eight was that you had large financial
Speaker 1: institutions that were very interconnected. So far, at least, we
Speaker 1: haven't had you know, a lot of a big bank
Speaker 1: outside of Credit Suite that was very interconnected to the
Speaker 1: rest of the system, that could make the whole system collapse.
Speaker 1: But of course you get enough smaller institute that do
Speaker 1: that and suddenly become systemic. So I think it's how
Speaker 1: concerned is he and the more concerned he sounds, the
Speaker 1: more dovish that should be. And you should note then
Speaker 1: that maybe the FED is going to be done after
Speaker 1: today's hike. All right, great stuff. Really appreciate getting two
Speaker 1: of the smartest minds we've got in the building together
Speaker 1: at one time, Alison Williams, Senior Global Banks annalyst for
Speaker 1: Bloomberg Intelligence, and Ira Jersey, chief US interest rates strategists
Speaker 1: with Bloomberg Intelligence getting them together, And you know right
Speaker 1: we did that is because the FED is thinking they've
Speaker 1: got two mandates today, that's to deal with the banking
Speaker 1: issues and then obviously deal with the interest rates and inflation.
Speaker 1: And that's how we want to approach it. Right here,
Speaker 1: you're listening to the Team Cancer Live program Bloomberg Markets
Speaker 1: weekdays at ten am Eastern on Bloomberg dot Com, the
Speaker 1: I Heart Radio app, and the Bloomberg Business app, or
Speaker 1: listen on demand wherever you get your podcast. Consensus seems
Speaker 1: to be the Federal raised twenty five basis points. My
Speaker 1: question is, if it weren't for the bank in challenges
Speaker 1: out there in a market marketplace, the turmoil in some
Speaker 1: of these regional banks, would that change the Fed's behavior.
Speaker 1: Lets check in with one of our favorite FED watchers,
Speaker 1: Danielle d Martino Booth. She's a CEO and chief strategist
Speaker 1: for Quill Intelligence. She's also a former advisor at the
Speaker 1: Federserve Bank at Dallas, so she knows how they make
Speaker 1: the sauces down there at the FED. So, Danielle, do
Speaker 1: you think if it were not for the banking turmoil
Speaker 1: that the FED would maybe go fifty basis points here? No,
Speaker 1: I think that I think that the CPI report, I
Speaker 1: think that the inflation data had been a little bit
Speaker 1: hotter than what was expected. But on the flip side
Speaker 1: of that, I think that there's more evidence. Now we've
Speaker 1: got what eighty four percent of the US population is
Speaker 1: living in states with rising initial jobless claims. Uh, you know,
Speaker 1: that's that's a pretty that's it's it's a huge chunk
Speaker 1: of America. There's more a recognition among average working men
Speaker 1: and women that the labor cycle has turned. So I
Speaker 1: think that that in conjunction with inflation not being you know,
Speaker 1: super red hot, would have kept the FED at twenty
Speaker 1: five basis points. I actually think they're going as much
Speaker 1: as they wanted to go to day. Danielle, again, we
Speaker 1: got to talk about this kind of minority view in
Speaker 1: the markets, which is there may at the end of
Speaker 1: the day be a pause. Would a pause, although perhaps
Speaker 1: creating panic, be justified from an economic point of view.
Speaker 1: From an economic point of view, I think that a
Speaker 1: pause would be justified. I just said that, you know,
Speaker 1: eighty four percent of Americans live in states with rising
Speaker 1: jobless claims. But I think that at this point it
Speaker 1: would it would upset the markets. You've got a ninety
Speaker 1: percent probability going in of this twenty five basis points,
Speaker 1: and I think that it wouldn't supprise me to have
Speaker 1: Powell echo to a certain extent Christine Lagarde last week
Speaker 1: and say, you know, four guidances, bye bye, We're we're
Speaker 1: just going to try and take this on a day
Speaker 1: by day basis. Obviously, if systemic risk comes on glued, uh,
Speaker 1: you know, he will he will pause. But I think
Speaker 1: Powell's trying to fight a war on two fronts. I
Speaker 1: think he's trying to maintain tight monetary policy. I don't
Speaker 1: think it necessarily keeps him up at night that the
Speaker 1: credit cycles um underway, that bankruptcies are happening, that the
Speaker 1: risk is operators with the worst business models are are
Speaker 1: having to restructure. I think he's okay with that. I
Speaker 1: think he's okay with that being an outgrowth of his policy.
Speaker 1: The flip side of that is credit standards are tightening
Speaker 1: real quick here. So that's that that could be something
Speaker 1: that that that that should be staying his hand today
Speaker 1: because try and get try and get a cash out refinancing,
Speaker 1: try and get a car loan, try and get a
Speaker 1: commercial real estate loan. Good luck. So, Danielle, I just
Speaker 1: typed into my terminal d ots dots go. This is
Speaker 1: a FED meeting where we do get the dot thing right?
Speaker 1: Is that still a thing I need to pay attention to.
Speaker 1: I think that I think that the dots right now
Speaker 1: are more like you know, playing darts in the sense
Speaker 1: that given the magnitude I mean, we just watched one
Speaker 1: of the world's thirty largest banks go bye bye. Given
Speaker 1: the magnitude of the backdrop, I think the dots mean less.
Speaker 1: What I think people will be paying attention to, though,
Speaker 1: is when said leaders anticipate the first rate cut. If
Speaker 1: they all stand their ground, remember Leo Brainer's gone, She's
Speaker 1: not there in the room these last two days. If
Speaker 1: they all stand their ground, that we're not going to
Speaker 1: be that the Fed is not going to be lowering
Speaker 1: interest rates until twenty twenty four. I think that that
Speaker 1: will definitely raise an eyebrow or two. Danielle. You talked
Speaker 1: about the dots a little bit, but let's talk then
Speaker 1: about when it comes to kind of economic forecast, the
Speaker 1: GDP picture as well. I had an interview last week
Speaker 1: with the CEO of DHL and he said, look, the
Speaker 1: economy is still expanding. They're still hiring, they're still seeing
Speaker 1: volumes grow on a quarter by quarter basis. From a
Speaker 1: kind of GDP growth point of view, Danielle, the economy
Speaker 1: is still growing. Why is that such a bad thing.
Speaker 1: It's not a bad thing that the economy is still growing.
Speaker 1: The economy is about to have a full blown heart
Speaker 1: attack and stop growing, but it's not a bad thing
Speaker 1: that we still had economic output going into where we
Speaker 1: are today. But whether you're talking to people in logistics
Speaker 1: or trucking or industrial packaging. They have seen unlike the
Speaker 1: gentleman from DHL, they've seen a sudden stop in the economy.
Speaker 1: The New York said put out you guys had it
Speaker 1: on the terminal. Yesterday, the New York FD put out
Speaker 1: a new survey. People are getting rejected for credit left
Speaker 1: and right, whether it's trying to do a cash out refinancing,
Speaker 1: or get or get a car loan. So prior to
Speaker 1: even the banking crisis setting in, there were definitely signs
Speaker 1: in the economy of slowing or if nothing else, slowing
Speaker 1: to come. What is your call here on the labor market,
Speaker 1: because that's been one of the issues, Danielle, that a
Speaker 1: lot of folks are put pushing back on a recession scenario,
Speaker 1: saying you can't have a recession with this level of unemployment.
Speaker 1: What's your view there, Look, I think that I think
Speaker 1: that the labor market is is pushing out unequivocal evidence
Speaker 1: of how bad things are getting. A Walmart closes about
Speaker 1: once a week. They're clearly passed there. It's just usual
Speaker 1: business type of model. We have four hundred foot lockers
Speaker 1: announced that they were closing just a few days ago.
Speaker 1: So retail mcgeddon is picking up stream about steam and
Speaker 1: we're you know, we've just seen Amazon dot Com go
Speaker 1: through it's with its third round of layoffs one two three,
Speaker 1: So I mean, it's it's good to say, look look
Speaker 1: at the unemployment rate, it's still so low. Or look
Speaker 1: at unemployment claims, there's still still on a level basis,
Speaker 1: that's the case, But sixty seven percent of states have
Speaker 1: rising claims. Again, eighty four percent of the population lives
Speaker 1: in a state with rising claims on a year over
Speaker 1: year basis, So that's tangible. So you're talking about the
Speaker 1: labor market here. Should we be worried about the housing market?
Speaker 1: I still don't feel like a lot of people are
Speaker 1: raising the alarm bells when it comes to housing. You
Speaker 1: know how things a funny thing, right, because we had
Speaker 1: this dip in mortgage rates. Everybody rushed in in these
Speaker 1: months that are typically seasonally very weak December, January, February,
Speaker 1: and yet if you don't have an income, it's really
Speaker 1: hard to get a mortgage. And that is why I
Speaker 1: think it was critical to pay attention to the Federal
Speaker 1: Reserve's most recent Senior Loan Officer survey that said even
Speaker 1: for residential mortgages that lending standards were tightening, and you
Speaker 1: see that in the fact that the ten year treasury
Speaker 1: yield has come down but the thirty year fixed mortgage
Speaker 1: rate has gone up in the last ten days. That's
Speaker 1: telling you something about lender's willingness to extend credit into
Speaker 1: a housing market when they foresee trouble down the pipe,
Speaker 1: which is that's what you get when you have a
Speaker 1: labor cycle right, It's going to lead into intrastrate sensitive
Speaker 1: sectors and sectors where you have to have an income
Speaker 1: to get the financing to buy it. Danielle again, the
Speaker 1: release of the statement at two pm Wall Street time,
Speaker 1: and then the press commerce at two thirty. Is there
Speaker 1: a mistake that Chairman Pal could make today that's in
Speaker 1: the back of your mind that you're saying, boy, I
Speaker 1: hope he doesn't do this because that could be really
Speaker 1: bad for the markets. I think he needs to be
Speaker 1: unscripted today. I think he needs to not be so
Speaker 1: nervous at the podium that he's reading his answers. He
Speaker 1: has to come out and exude confidence at a time
Speaker 1: of a lot of people being really freaked out. He
Speaker 1: has to stand up and be a leader. And I
Speaker 1: think that that could be challenging for him because this
Speaker 1: is probably the hardest podium time he'll ever have in
Speaker 1: his entire life. But the last few meetings he's been
Speaker 1: very perfunctory reading his answers. I think he needs to
Speaker 1: be ready for what's going to be asked of him
Speaker 1: and be confident in his reply and say, we've got
Speaker 1: macroprudential solutions that we can attach to this financial banking
Speaker 1: type of crisis. It's burgeoning. We think we can handle this.
Speaker 1: At the same time, we think we can also run
Speaker 1: monetary policy on a separate track. We can wage a war,
Speaker 1: we can wage more, you know, on two fronts. Daniel, lastly,
Speaker 1: just about thirty seconds, based upon what we know today,
Speaker 1: is the banking turmoil systemic or not? Do we know?
Speaker 1: I don't think we know if the banking turmoil is systemic.
Speaker 1: I suspect that is, it is potentially systemic, because quietly
Speaker 1: First Republic, like Silicon Valley, has not been able to
Speaker 1: raise capital. So when we cross these rubicons, Uh, there's
Speaker 1: definitely something along with the system when banks cannot raise capital.
Speaker 1: All right, we'll have to see a busy, busy day today.
Speaker 1: We appreciate getting a few minutes of your time. You
Speaker 1: know you're busy. Danielle Danielle di Martino Booth CEO and
Speaker 1: chief strategists at Quill Intelligence. Some great stuff there. Follow
Speaker 1: her work. She's got a great Twitter game as well.
Speaker 1: I follow her on Twitter. Lots of good discussion there
Speaker 1: with Danielle and some of her colleagues. She was a
Speaker 1: former advisor at the Federal Reserve Bank of Dallas. So
Speaker 1: again we love talking to her about the FED critty
Speaker 1: because she knows kind of how inner workings go. Yeah,
Speaker 1: and when you have a FED meeting like today, it's
Speaker 1: good to check in with those folks. Yeah, It's nice
Speaker 1: to hear kind of how they go about thinking about
Speaker 1: this because I gotta say, Paul, you could not Paey
Speaker 1: to be an a condist at the Federal Reserve right now.
Speaker 1: This feels like quite literally being stuck between a rock
Speaker 1: and hard place. Yeah. So we'll have to see what
Speaker 1: we hear from the Federal Reserve later today, and of
Speaker 1: course we'll have full coverage of it. You're listening to
Speaker 1: the Tape cats a our live program Bloomberg Markets weekdays
Speaker 1: at ten am Eastern on Bloomberg Radio, in APT, Bloomberg
Speaker 1: dot Com and the Bloomberg Business app. You can also
Speaker 1: listen live on Amazon Alexa from our flagship New York station,
Speaker 1: jo Say Alexa play Bloomberg eleven thirty. One of our
Speaker 1: favorite topics to discuss is ETF exchange traded funds, so
Speaker 1: much so that we ask Katie Greifeld from Bloomberg News
Speaker 1: to join us here because she is the ETF boss
Speaker 1: here for Bloomberg News. She joins us here in a
Speaker 1: Bloomberg Interactive broker studio because we have a great guest
Speaker 1: to check out. Joanna Gayego's co founder of Bond Blocks,
Speaker 1: joins us here in our studio. Joanna, can you remind
Speaker 1: us again what you guys at Bondblocks do. What we
Speaker 1: do Bonblocks is fixed income ets. Yes, we're the only
Speaker 1: fixed income issuer that's one hundred percent focus on fixed income,
Speaker 1: and so we build out precision fixed income tools for investors.
Speaker 1: And let's talk about the year that fixed income ETFs
Speaker 1: are having, because my terminal is just booting up. But
Speaker 1: if you look at the flows year to date into
Speaker 1: the ETF universe, over all fixed income and equity ETFs
Speaker 1: are like neck and Neck. I think fixed income might
Speaker 1: have surpassed the flows into equities in the past day
Speaker 1: or so. Have to check. I can't remember the last
Speaker 1: time that happened when overall for the year more money
Speaker 1: was going into bonds. I mean, just speak to the
Speaker 1: appetite that we're seeing in the wrapper right now for
Speaker 1: fixed income. Yeah, it's very simple. It's because of what
Speaker 1: happened in twenty twenty two and yields being back. So
Speaker 1: people say bonds are back, and it makes sense. But
Speaker 1: what people need to consider is that total return is
Speaker 1: more important than ever in your portfolio. And so with
Speaker 1: yields having moved over four hundred and fifty bases points
Speaker 1: in twenty twenty two and you know will continue to rise,
Speaker 1: is what expectations call bonds are really important tool for
Speaker 1: twenty twenty three because it's probably the most simplest way
Speaker 1: to see return in your portfolio. And where is that
Speaker 1: return though, when you look across the curve, obviously we're
Speaker 1: seeing biblical volatility in the front end. But still I
Speaker 1: hear lot of calls that basically you just want to
Speaker 1: sit in cash. You want to sit in short of
Speaker 1: the shorter end of the yield curve. When you think
Speaker 1: about duration the curve and its totality. What's your thoughts. So, yes,
Speaker 1: in duration, which is a measure of interest rate risks,
Speaker 1: you are seeing a lot of flows in the short
Speaker 1: end because that there's less duration, there's less interest rate
Speaker 1: risk in something like a six month treasury or one
Speaker 1: year a treasury. That's just intuitive cash management use. You
Speaker 1: should be on the short end with zero risk, easy
Speaker 1: easy decision. But what we see and what we've done
Speaker 1: in fixed income is we've cut up parts of the
Speaker 1: credit and part of the risk spectrum of fixed income,
Speaker 1: so you can see different opportunities amongst those areas. And
Speaker 1: so what's really compelling is that if you look at
Speaker 1: things in high yield or even across IG you're not
Speaker 1: seeing spreads from that risk free rate that are different
Speaker 1: or very much or very much away from their non
Speaker 1: recession levels. So I think people have been waiting for
Speaker 1: like this massive bottom in fixed income before they come in.
Speaker 1: But with the yields increasing and doubling over the last year,
Speaker 1: you're seeing fourteen percent in triple c's, which is sort
Speaker 1: of the highest credit rating, highest credit risk you could
Speaker 1: have in high yield, all the way down to something
Speaker 1: like five hundred in something in a in a double
Speaker 1: B or a B. Those are normal levels, and so
Speaker 1: it's kind of one of those confounding things we're seeing
Speaker 1: in economic data where you're seeing a lot of demand,
Speaker 1: you're seeing low job, low unemployment, but you're also not
Speaker 1: seeing a lot of distress and high yield, and so
Speaker 1: we think there's a lot of interesting areas of risk
Speaker 1: to think about in fixed income. So I think it's yes,
Speaker 1: everyone is in on the short end, but we really
Speaker 1: don't think people are taking enough action and looking at
Speaker 1: the risk assets in fixed income, which are pretty straightforward
Speaker 1: given those yields for twenty twenty to be pretty brave
Speaker 1: though I don't know, to go into high yield right
Speaker 1: now doesn't say high risk, high reward. Yeah, it sounds
Speaker 1: like it's let the entire argument on those at one bonds,
Speaker 1: it's like, well they're super risky, but they could yield
Speaker 1: and juicy returns. That's sort of what bond box is about.
Speaker 1: We're about making sure that people can see those individual
Speaker 1: opportunities across the risk spectrum. So yeah, you don't have
Speaker 1: to take the full risk of triple c's, but it's
Speaker 1: there for you to compare and break out of what
Speaker 1: you're seeing in broad bet based thoughts about high yield
Speaker 1: like that, Yes, high yield is an exchange of risk
Speaker 1: and in return, but there are opportunities amongst them. We
Speaker 1: want people to see those in individual products. You know.
Speaker 1: With this banking turmoil, which is a term I'm most
Speaker 1: comfortable with as opposed to a crisis, what we are
Speaker 1: seeing as a lot of deposits come out of a
Speaker 1: lot of banks and the expectations to going to money
Speaker 1: market funds are going to maybe some bigger banks. Are
Speaker 1: you seeing that in your business and the fund flows, yes, okay,
Speaker 1: talking about that. So the short as Katie mentioned, the
Speaker 1: short end of the curve and products and ETFs are
Speaker 1: seeing a lot of flow. ETFs are interesting is that
Speaker 1: it allows an investor in and not have to reinvest
Speaker 1: their their short term cash or their strategy to cash.
Speaker 1: So um like a like a money market fund, you're
Speaker 1: going to be getting a yield that continues with you
Speaker 1: within the market. So ETFs are an alternative to deposits,
Speaker 1: but they are not locked up up. There's something you
Speaker 1: can withdraw on any day of the week and their
Speaker 1: yield is going to grow or contract with the market.
Speaker 1: So it's a very simple, convenient way to get access
Speaker 1: to treasury yields or short term risk. If I think
Speaker 1: about the past two weeks, one of the I don't know,
Speaker 1: I don't know how I want to describe it. One
Speaker 1: of the more interesting facts to me is that when
Speaker 1: you think about what happened at Silicon Valley Bank, at
Speaker 1: the end of the day, it was just duration risk.
Speaker 1: They were holding long dated treasuries, you know, government bonds.
Speaker 1: It's not like it was anything that's supposed to be risky,
Speaker 1: but it was duration risk. In the end. What are
Speaker 1: your clients thinking about when it comes to longer dated debt? Yeah,
Speaker 1: so if you want to take on duration, we actually
Speaker 1: wanted to solve this problem for investors. We wanted to
Speaker 1: put it on the label exactly how much interest rate
Speaker 1: risk you're taking in a treasury product, and so we
Speaker 1: created products that are duration targeted. So what we see
Speaker 1: the clients are generally in fixing portfolios. When you want
Speaker 1: to take on more risk, you're adding duration because of
Speaker 1: interest rate risk that's coming up. So what we see
Speaker 1: is obviously most of the flows are going into the
Speaker 1: shorter side on the interest rate side, because there's been
Speaker 1: expectations all year that there'd be increasing interest rate hikes,
Speaker 1: but with sort of the back and forth we've seen
Speaker 1: in the last few weeks, there is a view that
Speaker 1: interest rates may be coming down as soon as the
Speaker 1: end of the year or even very early in twenty
Speaker 1: twenty four, and so we are seeing people taking longer
Speaker 1: duration five to seven, even ten and twenty. I think
Speaker 1: having that precision to be able to see which your
Speaker 1: interest rate risk is is critical right now, and we
Speaker 1: actually launched those products so that people could more precisely
Speaker 1: put duration into their portfolio, even in the treasury space. Well,
Speaker 1: I like think you said more precisely, because I want
Speaker 1: to talk to specifically about not the bond market, but
Speaker 1: the vehicle through which you're investing in the bond market.
Speaker 1: Essentially ETFs as a product themselves. Given this kind of
Speaker 1: environment where liquidity in treasuries is a concern, perhaps not immediately,
Speaker 1: but it was a couple of months ago and might
Speaker 1: be again, our et then considered more attractive as kind
Speaker 1: of a tool to get your hands on them. They
Speaker 1: democratize access to our financial markets. They always have. They
Speaker 1: have been really important vehicles to source. I call it
Speaker 1: the first port of liquidity. It's like the first call
Speaker 1: it's where you can go to see where a market
Speaker 1: is trading, and in treasuries it's no different. And so
Speaker 1: the way that those markets function, they're very easy to
Speaker 1: access for all investors. It's not something that's exclusive to
Speaker 1: someone that's in an institution or doesn't know how, doesn't
Speaker 1: have a you know, a way to access the bonds directly.
Speaker 1: Anybody with a brokerage account and trade in ETF So
Speaker 1: they're a really important tool for liquidity for all investors. Joan,
Speaker 1: just real quick here, what do you expect from the
Speaker 1: Fed today? Well, the consensus, as you guys have been
Speaker 1: talking about the last few minutes, is that they are
Speaker 1: going to raise another another quarter point. I think what
Speaker 1: we really need to expect from the Fed is sort
Speaker 1: of what they say and how they're sort of responding
Speaker 1: to the stability and this line they're trying to balance
Speaker 1: between financial stability the economic data that has come in
Speaker 1: in this quarter, which is sort of our portfolio manager
Speaker 1: Elias Schwartz like to say, has been flashing red lights
Speaker 1: and green lights to the bond market. You don't know
Speaker 1: which which is going to happen on any given day.
Speaker 1: So what they say is going to be really important
Speaker 1: for us to understand next steps. But we need more trends,
Speaker 1: we need more data, and we'll have to see what
Speaker 1: the great stuff. Johanna, thank you so much for coming
Speaker 1: into our Bloomberg Get Interactive Broker Studio. Really appreciate that.
Speaker 1: Joanna Gayego's co founder of bond Blocks. She co found
Speaker 1: at Bondblocks in twenty twenty one. You're listening to the
Speaker 1: team Ken's our live program Bloomberg Markets weekdays at ten
Speaker 1: am Eastern on Bloomberg dot com, the r Heard radio
Speaker 1: app and the Bloomberg Business app. We're listening on demand
Speaker 1: wherever you get your podcast. You know what's doing well here?
Speaker 1: John just called it out. Bitcoin. It's up another one
Speaker 1: point nine percent today. It's you know, pushing twenty nine
Speaker 1: thousand on bitcoin. Where's Tom Keane with his bitdog right?
Speaker 1: You need it getting closer to that third leash thousand level. Also, Paul,
Speaker 1: if you look back and in a sense function over
Speaker 1: the past ten days, it's up close to thirty four percent.
Speaker 1: Admit of this big sella. Obviously we've seen banks rebound,
Speaker 1: but during this heightened volatility over the past few weeks,
Speaker 1: seeing bitcoin, what are the winners here? Exactly. So when
Speaker 1: I want to talk anything crypto, I want to talk
Speaker 1: with Mike McLoone senior macro strategist with Bloomberg in Intelligence.
Speaker 1: You know, Mike, what is going on with bitcoin here
Speaker 1: and does it relate at all to what we've been
Speaker 1: experienced our last couple of weeks with some of these
Speaker 1: regional banks born hey, Paul, Born of the last financial crisis.
Speaker 1: This financial crisis seems to be defining bitcoin, and it's
Speaker 1: quite impressive. I mean, I've been looking for an inflection
Speaker 1: point to bitcoin to be trading more like gold and
Speaker 1: long bonds, and it's happening. So one good example is
Speaker 1: Je mentioned bitcoins up about seventy three percent in the year.
Speaker 1: But part of this is what's been happening with that
Speaker 1: Great Scale Bitcoin Trust and GBTC. It just hit one
Speaker 1: hundred percent mark on the year today, and that's the
Speaker 1: litigation that might allow ETFs on the lane. But the
Speaker 1: macro is significant. People are seeing this as Okay, well,
Speaker 1: this is no one's project, no one's liability, no one's risk.
Speaker 1: Banks aren't involved, and we're seeing it as a bit
Speaker 1: of a flight to quality, flight to safety. It is
Speaker 1: a digital reserve asset and actually some of this is
Speaker 1: coming from this the crypto dollars, the stable coins which
Speaker 1: aren't being somewhat looked at it and so okay, so
Speaker 1: they have full reserves. That's quite impressive. So, Mike, has
Speaker 1: Bitcoin reached its inflection point versus stocks yet? And if not,
Speaker 1: what are you watching to gauge when that could potentially happen.
Speaker 1: I think it's happening right now, Jessin. That's you know,
Speaker 1: and we're seeing it in real time. But the key
Speaker 1: thing to think about is I'm worried about what Gina
Speaker 1: Martin Adams says. She's our equity stratis and she's been
Speaker 1: spot on. And when she says that the FED hiking
Speaker 1: is bad for equities and five percent tea bills is
Speaker 1: bad for equities, I expect that. So I fully expect
Speaker 1: after we yet today and the FED hikes into what's
Speaker 1: turning out to me a significant deflationary periody of look
Speaker 1: at banking and housing and commodities that we get that
Speaker 1: downturn inequities. Bitcoin will fall, but it is showing divergence trick.
Speaker 1: It's quite impressive, and it's doing it more than most
Speaker 1: of the other cryptos it's you know, it's that single
Speaker 1: thing like gold and like and T bonds where people
Speaker 1: are saying, okay, well, what's my risk here? There's no
Speaker 1: one to bail this out, which might be better, And
Speaker 1: so I think we're at that now. Also Bitcoin outperforming
Speaker 1: commodities as well. Right, Yes, I've enjoyed writing about that
Speaker 1: for quite a while. When people are talking about commoditis
Speaker 1: supercycle last year, Paul's I hear Paul giggling because I
Speaker 1: just pointed out the key facts about bitcoin is it's
Speaker 1: low and early days for adoption in his definable diminishing supply.
Speaker 1: Now you look what's happening to crude oil since last
Speaker 1: year when people were calling from one fifty, we're learning
Speaker 1: that crude oil is the world's none those one, world's
Speaker 1: most significant in commodity, but it's the world's most autoco
Speaker 1: correlated acid. It goes down because it goes up, and
Speaker 1: that's because it crushes that demand and brings on more supply.
Speaker 1: And to me, that's what's happening. People are realizing, well,
Speaker 1: this supercycle might be happening in bitcoin. So oil here
Speaker 1: I'm looking at wtat crude oil. At seventy we were
Speaker 1: below seventy today? Is this just you know, the marketplace
Speaker 1: saying I think we got to demand problem looking forward
Speaker 1: here it's all the above pots. I love how people
Speaker 1: making excuses those of us who really got you know,
Speaker 1: I was initially wrong last year and I said crudel
Speaker 1: is going back to fifty. I think it's getting there.
Speaker 1: And the key thing is it always does that. It
Speaker 1: looks very similar to what it did in nineteen ninety.
Speaker 1: I was in a trading pitst initially got all signs,
Speaker 1: but it went to forty, back to twenty, and then
Speaker 1: it took about fourteen years agave above that high. The
Speaker 1: difference is now the US is a net energy exporter.
Speaker 1: This has never happened, and we're seeing what normally happens
Speaker 1: in crude oil. It's the world's most autocorrelated acid when
Speaker 1: it goes up and makes it go down. But the
Speaker 1: key is the key thing at this similar stage in
Speaker 1: two thousand and eight, when we had that pump and
Speaker 1: the FED was aggressively easy. Now they're still tightening. And
Speaker 1: one thing I need to point out is back in
Speaker 1: two thousand and nine was the last time we had
Speaker 1: the worst than the most negative PPI Producer Price Index
Speaker 1: ever really driven by commodities. We are going towards that
Speaker 1: too when we get to July. July thirteenth says, when
Speaker 1: we're going to get June PPI, it's very likely going
Speaker 1: to be negative on a year over year basis because
Speaker 1: of plunging commodities in crudel. And that's not profound, that's
Speaker 1: just the way the math is going at the moment.
Speaker 1: And something I'm curious about because I've had sources talk
Speaker 1: about when they're specifically looking at equities, they don't want
Speaker 1: to see oil treading around fifty dollars. Again, when it
Speaker 1: comes to crypto, if you're seeing that happening in the
Speaker 1: crude markets, what do you think that means potentially for
Speaker 1: bitcoin if that would happen. Yeah, So I'm glad you
Speaker 1: mentioned that. This is part of been my premise to
Speaker 1: be bullish gold because I see what's happening in crudel
Speaker 1: and commodities is what is crudels an enduring bear market
Speaker 1: that bounced last year and it's tilting back towards that
Speaker 1: bear market, which means deflation. And you look at things
Speaker 1: like gold and bitcoin, they're enduring bull markets. They have
Speaker 1: dipped and probably tipping back towards bull markets. And for
Speaker 1: that tilt, you need the deflation to come back, and
Speaker 1: it's clearly going there. So let's look at one example
Speaker 1: for crudel is the benchmark for heat, electricity, and fertilizer
Speaker 1: in this country's natural gas. It's down eighty percent from
Speaker 1: last year's high. It's returned to his cost of production
Speaker 1: around two and I fully expect the same thing in
Speaker 1: crude oil, which is around forty to fifty dollars a barrel.
Speaker 1: Forty dollars or fifty dollars a barrel is the cost
Speaker 1: of production and the world's largest producer of crude oil
Speaker 1: and liquid fuels, and that's the US. And by the way,
Speaker 1: for our listeners, Mike made that call like when oil
Speaker 1: was at one hundred and twenty five dollars a barrel.
Speaker 1: So if you listen to Mike, you made some dough
Speaker 1: Ray me. Mike, you cover everything from crypto to pork bellies.
Speaker 1: What are you looking at now? What's getting your tension here? Well,
Speaker 1: obviously to be the macro is overwhelming, Paul, and I
Speaker 1: think that's what people are missing, the fact that the
Speaker 1: FED and DCB are still tightened versus all the forward
Speaker 1: looking measures. Aren't just plunging. Commodities aren't just falling, they're collapsing.
Speaker 1: The bloomer combany in next is down over twenty percent
Speaker 1: over the year of basis, and it's been we've had
Speaker 1: the history of since nineteen sixty. The FED is never
Speaker 1: tightened in that environment, Yet they still are. We see
Speaker 1: a housing market pinking, and now we have a banking crisis,
Speaker 1: and they're still pointing out lagging inflation. And I pointed
Speaker 1: out with PPI in July and the year of year
Speaker 1: is probably gonna be negative. So to me, that's a
Speaker 1: ten on a scale of everything one to ten and
Speaker 1: everything else is a five or lower. Just the fact
Speaker 1: that today we're talking about tightening when a year from now,
Speaker 1: I sally expect when we speak and we're gonna be
Speaker 1: talking about and during inflation partly sparked by the FED
Speaker 1: who just was a little bit too late on the
Speaker 1: inflation and then way too aggressive fighting it. And now
Speaker 1: it's way past I mean, the ship is turning and
Speaker 1: they're still tainting. Wow, all right, folks, what you just
Speaker 1: heard is an analyst on the top of his or
Speaker 1: her game for a couple of reasons. One, he knows
Speaker 1: his stuff, he does the work, he does the math. Second,
Speaker 1: he provides his opinions and his analysis with conviction. I
Speaker 1: mean what you just heard there was analysis, got conviction
Speaker 1: in his call. Yet conviction oil going forty to fifty one,
Speaker 1: twenty five, and we get conviction again whether we're talking
Speaker 1: pork bellies or crypto. So we're fortunate to have Mike
Speaker 1: McLoone with us. He's a sconce down in Miami, holding
Speaker 1: down the Bloomberg Intelligence, a Southern tier down there in Miami.
Speaker 1: You're listening to the take Ken's a our live program,
Speaker 1: Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio,
Speaker 1: the tun In half, Bloomberg dot Com, and the Bloomberg
Speaker 1: Business alf. You can also listen live on Amazon Alexa
Speaker 1: from our flagship New York station, Just say Alexa play
Speaker 1: Bloomberg eleven thirty. I want to get to right to
Speaker 1: our next guest, Lisian Sanders, chief investment strategist at Charles
Speaker 1: Schwab Lizards a million ways a week ago here, and
Speaker 1: we'll certainly get to the fed. But I'd love to
Speaker 1: ask a veteran strategists such as yourself what do you
Speaker 1: make of the last two weeks with Silicon Valley Banks,
Speaker 1: Signature Bank, and some of these other California banks. What's
Speaker 1: your take? So my take is maybe broader than what's
Speaker 1: been the focus in the past couple of weeks. Yes,
Speaker 1: there is a crisis going on here in the banking system,
Speaker 1: but I think it's part parcel of a broader story
Speaker 1: about the end of the end of the era of
Speaker 1: easy money coming off the zero bound, the capital misallocation
Speaker 1: that occurred during that era, just ample liquidity and zero rates,
Speaker 1: and now I think we're sort of paying the piper.
Speaker 1: And there's just been so much concentration on the banking
Speaker 1: part of this. But I think this is a broader
Speaker 1: story of of you know, who's swimming naked when the
Speaker 1: liquidity tide goes out? Liz, I have to ask, how
Speaker 1: frustrating is it when the narratives keep changing in market
Speaker 1: pricing and also trying to position specifically around that. Well, yeah,
Speaker 1: it is frustrating. It's unique in terms of how rapidly
Speaker 1: not just information is changing, but the reaction function. But
Speaker 1: I'm not a trader, and I don't I don't advise
Speaker 1: short term traders, so we're not trying to kind of
Speaker 1: play every wiggle in here. That the lead into the
Speaker 1: FED meeting is extraordinary in terms of how dramatic the
Speaker 1: change in expectations have been from as recently as March eighth,
Speaker 1: an assumption of fifty by the FED or hikes between
Speaker 1: now and year end, you know, five to seven on
Speaker 1: the terminal rate, and now we're sub five. Still a
Speaker 1: bias toward twenty five. But even thinking that, maybe they pause. Yeah,
Speaker 1: So if you're if you're trying to trade around this stuff,
Speaker 1: good luck. But so liszt intantly having God, No, I
Speaker 1: was just gonna ask, you know, we've got the FED
Speaker 1: coming up later today, and this is a unique meeting
Speaker 1: for FED Chairman j Pals. He does have this kind
Speaker 1: of simmering banking turmoil out there in addition to his
Speaker 1: remit on inflation and everything. What would you like, What
Speaker 1: do you think he should do today? What do you
Speaker 1: think the message should be today? I think they should pause,
Speaker 1: but certainly the market is saying that they're not going to.
Speaker 1: It's eighty six percent chance of twenty five. My guests, though,
Speaker 1: is that if they hike, it'll be a a hike,
Speaker 1: or if they pause, it'll be a hawkish pause, and
Speaker 1: that just means I think if they if they hike,
Speaker 1: it's consistent with market expectations. They tend to go along
Speaker 1: with market expectations, but they will talk a lot about
Speaker 1: what their facilities are, that we have the tools that
Speaker 1: you know, we're probably closer to the end. Conversely, if
Speaker 1: they opt to pause, which would be against market expectations,
Speaker 1: I think the messaging might be more about our inflation
Speaker 1: fight may not be done. If things settle down in
Speaker 1: the financial system, hikes could be back on the table.
Speaker 1: So that's my best guests heading into what is a
Speaker 1: very tricky meeting. And Liz, everybody obviously has been talking
Speaker 1: about the dot plots that are quarterly we're going to
Speaker 1: get another update on those and the meeting plot back
Speaker 1: at that December meeting was five point one percent for
Speaker 1: twenty twenty three. But are you expecting, I mean, how
Speaker 1: are you expecting markets to respond to that, because obviously
Speaker 1: we won't just get them for this year, we'll get
Speaker 1: them for the next coming years as well. But what
Speaker 1: are you expecting to see there and how do you
Speaker 1: think market Frankly, markets shouldn't respond dramatically to the Summary
Speaker 1: of Economic Projections or the dots plot. There's not been
Speaker 1: a lot of accuracy in those, but it does represent
Speaker 1: a bit of a signal for me. The issue will
Speaker 1: be is there consistency in terms of the message within
Speaker 1: the Summary of Economic Projections. What might be odd to
Speaker 1: see and I think would be disconcerting is if the
Speaker 1: dots and suggests that rate cuts are very much on
Speaker 1: the table before year end, but it's not reflected in
Speaker 1: a deterioration in the economic projections. That I think would
Speaker 1: be a troubling message, which is, hey, we think we're
Speaker 1: going to be cutting rates, not because the economy is
Speaker 1: going to suffer, but you would infer that it meant
Speaker 1: we think the financial system problem is larger. If the
Speaker 1: economic growth expectations are weaker and inflation expectations are lower,
Speaker 1: and the FED suggests rate cuts might be on the table,
Speaker 1: I think that's a better broader message. So I think
Speaker 1: it's sort of the combination of what the SEP and
Speaker 1: the dots show, and I think that dissecting is going
Speaker 1: to be more important this time. What are you thinking
Speaker 1: in terms of any potential descents when it comes to
Speaker 1: the FED and whether or not they could raise questions
Speaker 1: as far as potentially, what do they see that maybe
Speaker 1: we aren't seeing right now? Yeah, that's you know, normally,
Speaker 1: particularly when it's you, it was unanimous that nobody pays
Speaker 1: much attention, and at times there might be a dissent
Speaker 1: or two and it doesn't tend to capture headlines. But clearly,
Speaker 1: in this environment, if it's say more than one off descent,
Speaker 1: I think that will garner attention. I would be surprised
Speaker 1: if if Powell gets asked about that, but to see
Speaker 1: that wouldn't surprise me. There's got to be uncertainty that
Speaker 1: leads to voting members having different perspectives on things. In fact,
Speaker 1: I'd be a bit more surprised if there was unanimity. Liz,
Speaker 1: how do you think Chairman Powell should respond to questions
Speaker 1: about banking turmoil out there, whether it's how it impacted
Speaker 1: the defense decision over the past couple of days, or
Speaker 1: how well or not well the bank did in terms
Speaker 1: of dealing with some of these banks are preventing some
Speaker 1: of these issues. How do you think he should respond? Well,
Speaker 1: I think he should stick with the facts and the
Speaker 1: data and not speculate too much. If it's on the
Speaker 1: basis of just his perspective on what happens. So I
Speaker 1: think he should talk about the take up at the
Speaker 1: discount window and maybe a sense of what that's going
Speaker 1: to look like when it's released on Thursday this week.
Speaker 1: I think that's become sort of the hot piece of
Speaker 1: news now that comes out. We were all obsessed with
Speaker 1: inflation data points. Now I think it's that weekly Thursday
Speaker 1: release of of how much borrowing is happening at the
Speaker 1: discount window. So I I you know, I'm sure he's
Speaker 1: going to try to offer suthing words that has the
Speaker 1: tools and the resources, but I would assume he's not
Speaker 1: going to provide over its speculation without a backed up
Speaker 1: by the data we all are in possession of and
Speaker 1: maybe a bit more from what the FED as all Right,
Speaker 1: So putting all this together, you know the FED, what
Speaker 1: we're dealing with in the banking system, where we are
Speaker 1: with economic growth. What is your call to Schwab investors
Speaker 1: these days about how they should be investing. Well, one
Speaker 1: of my lines that I've always used in Tupper times,
Speaker 1: a panic is not an investment strategy, and I think
Speaker 1: great times that that applies. I think we're actually seeing
Speaker 1: some perhaps rational action in the market. You know, there's
Speaker 1: been a lot of concern why haven't the equity market
Speaker 1: reflected this with more downside? But when you look at
Speaker 1: where leadership shifts have occurred, kind of up the cap spectrum,
Speaker 1: out the quality spectrum, the equity market may be sending
Speaker 1: a message that all right, the FED may stop tightening,
Speaker 1: but now banks are going to probably tighten. So small
Speaker 1: and regional bank take off take up where the Fed
Speaker 1: left off, and that has different implications depending on whether
Speaker 1: you have higher interest costs, do you have the cash flow?
Speaker 1: So I think that there's a sort of a factor
Speaker 1: story that we're trying to emphasize. What types of characteristics
Speaker 1: do you want to look for in companies within the
Speaker 1: equity market for this very unique period of time, as
Speaker 1: opposed to making a you know, all in, all out
Speaker 1: broad equities call. I think this is where you have
Speaker 1: to add a lot of specificity in terms of what
Speaker 1: you're screening for. For lack of a better term, All right, Lizianne,
Speaker 1: thank you so much for joining us. I know this
Speaker 1: is a busy, busy day for you, like it is
Speaker 1: for many folks in the marketplace. Lizian Saunders, she's a
Speaker 1: chief investment strategist for Charles Schwab. Just I think one
Speaker 1: of the very highly respected voices in the marketplace, and
Speaker 1: certainly Schwab has, you know, so many accounts out there,
Speaker 1: so many clients out there, that she has a big
Speaker 1: impact on a big part of the market. So we
Speaker 1: appreciate getting some of Lizze's time there. You're listening to
Speaker 1: the tape cans are live program Bloomberg Markets weekdays at
Speaker 1: ten am Eastern on Bloomberg Radio, tuning app, Bloomberg dot Com,
Speaker 1: and the Bloomberg Business App. You can also listen live
Speaker 1: on Amazon Alexa from our flagship New York station. Just
Speaker 1: say Alexa play Bloomberg eleven thirty. Let's bring on our
Speaker 1: next guests we're talking about we get some great guests hour.
Speaker 1: How about this this guy, Cam Harvey, professor of finance
Speaker 1: at the Duke University Fuqual School of Business. Disclosure, he
Speaker 1: was my professor. I took a couple of his classes,
Speaker 1: and there's lots of math in his classes, and I
Speaker 1: think that you got his khd from Chicago that might
Speaker 1: have something to do with it. But I'm just not
Speaker 1: that matthy of a guy. So there was a challenge
Speaker 1: for me, but I did make it through cam. There's
Speaker 1: a million things we could talk about here, the FED,
Speaker 1: the yield curve, but I want to start off with
Speaker 1: Silicon Valley Bank and some of these other banks on
Speaker 1: the West Coast. It's not every day we get bank runs.
Speaker 1: What do you make of it? So I make of it.
Speaker 1: There's a lot of blame to go around here. And
Speaker 1: Number one, this is a gross failure of regulatory supervision.
Speaker 1: So this is obviously a regulated bank, the state chartered bank,
Speaker 1: but regulated by the FED. But it's less than two
Speaker 1: hundred and fifty billion dollars, so they're not held to
Speaker 1: the same regulatory standard, for example, the stress test. But
Speaker 1: even if they had to do the stress test, they
Speaker 1: would have passed. So what's going on. It turns out
Speaker 1: that the regulator put together the stress test not realizing
Speaker 1: what is going to happen to the FED funds rate.
Speaker 1: So the extreme scenario that the FED gives the bank
Speaker 1: to stress test is not extreme enough. And it's it's
Speaker 1: the regulator, the FED, that actually creates this scenario outside
Speaker 1: of their own extreme scenario. So that is a failure.
Speaker 1: Now it's not just a regulatory failure. This is a
Speaker 1: regional bank, and it's also a bank that caters to
Speaker 1: a particular industry, and that means that your loan book
Speaker 1: is not and your clients are not diversified, both geographically
Speaker 1: and across industry. So that means that you need to
Speaker 1: be held to a higher risk standard. And the other
Speaker 1: thing is that it's kind of remarkable, and we can
Speaker 1: talk about this more that these banks, and Silicon Valley
Speaker 1: Bank in particular, doesn't seem to understand one of the
Speaker 1: most basic risk concepts. And Paul, I think this was
Speaker 1: Lecture three of Finance one oh one, and that's duration risk.
Speaker 1: So just because you buy a long dated tric rate
Speaker 1: doesn't mean it doesn't have any risk. It doesn't have
Speaker 1: a default risk, but it's got interest rate risk. So
Speaker 1: they didn't do any hedging. So banks can hedge, and
Speaker 1: it turns out that SVB in the past had hedged,
Speaker 1: but then they let the hedges expire they're too expensive.
Speaker 1: How systemic, if at all, do you think this is
Speaker 1: CAM or do you think this is more specific to
Speaker 1: SVB or maybe even just a handful of banks that
Speaker 1: that catered to that customer base. So the last time
Speaker 1: I was on we talked about the Eel curve, and
Speaker 1: the Oel curve is relevant for this particular situation because
Speaker 1: you think the usual banking model, you gather deposits and
Speaker 1: you're paying your depositors a short term interest rate savings rate,
Speaker 1: and then you lend some money out to companies and
Speaker 1: things like that, or you buy long dated treasuries. So
Speaker 1: what you're getting is, in terms of revenue, is a
Speaker 1: longer term rate and what you're paying is a shorter
Speaker 1: term rate. And that works great if the yield curve
Speaker 1: has got a positive slope, which meaning the long term
Speaker 1: rates are higher than short term rates. But when the
Speaker 1: yield curve inverts, that puts stress on the banking system
Speaker 1: because all of a sudden, what they have to pay
Speaker 1: out in savings deposits is high, and it could also
Speaker 1: be the case that the value of the liabilities changes.
Speaker 1: So this is the reason to actually do some hedging,
Speaker 1: but not all banks do the hedging. And because the
Speaker 1: Yeld curve inverse stresses the banks, it kind of makes
Speaker 1: sense that the FED should take that into account. So
Speaker 1: I'm very interested in reading the minutes of the FOM
Speaker 1: at C five years from now when they actually come
Speaker 1: out to see if they actually did their homework and say, oh, well,
Speaker 1: we're thinking of inverting theeal curve even more. How many
Speaker 1: banks does that put at risk? Okay, so I was
Speaker 1: going to ask you, because you're specifically bringing up the
Speaker 1: yield curve when you're looking at that, is it telling
Speaker 1: us or we headed into a big event? Or did
Speaker 1: the big event already happen? So, so think of it
Speaker 1: this way. The yeld curve's got information has been very
Speaker 1: accurate in terms of forecasting processions. It is something that
Speaker 1: precedes economic bad times. And you can the yeal curve
Speaker 1: has been inverted for quite a while now, and you
Speaker 1: can see some of the damage that is doing. So
Speaker 1: we went in like a year ago, our financial system
Speaker 1: was very robust, in very good shape, leverage less than
Speaker 1: it was, for example, before the global financial crisis. But
Speaker 1: once you start to engineer a yield curve inversion, it
Speaker 1: puts at risk the basic banking model and for those
Speaker 1: banks that are not sufficiently hedged, that puts them at risk. So,
Speaker 1: and this is exactly what's happened. So the FED, in
Speaker 1: taking these actions, has weakened the banking system. And again
Speaker 1: this is not just a regulatory problem. It's also a
Speaker 1: problem of moral hazard because these banks, well, why should
Speaker 1: we hedge. The Fed's going to bail us out. Yeah,
Speaker 1: that's kind of what it seems like at this point.
Speaker 1: But so now now you're the Federal Reserve, your j
Speaker 1: pal today at two o'clock, Cam, what do you do here? Okay,
Speaker 1: So the last time I was on your show was
Speaker 1: just before the previous announcement, where I said that they
Speaker 1: should stand down and pause and collect more data, and
Speaker 1: they did not do that. I considered that a mistake,
Speaker 1: and indeed that could have been the tipping point that
Speaker 1: hike to invert the OL curve just a little bit more,
Speaker 1: that that could have been the pivot point to push
Speaker 1: us into a potential serious banking crisis. So what I
Speaker 1: would like to do today if I was at the
Speaker 1: FED would be the cut twenty five base of points.
Speaker 1: I know that's not going to happen because it would
Speaker 1: be a sign of a panic of desperate measures. But
Speaker 1: the right thing to do, and I agree with Lisian
Speaker 1: who's on previously, is to stand down, to pause and
Speaker 1: say we need to collect more data. And really what
Speaker 1: this means is we need to collect the data that
Speaker 1: we should have collected last time and the time before
Speaker 1: to do the analysis of the banks to figure out
Speaker 1: what their risk actually is and how it was induced
Speaker 1: with the yeal curve inversion, and and is it the
Speaker 1: case that the equity in these banks, if we look
Speaker 1: at their assets and mark them to market, has taken
Speaker 1: a hit, potentially a two trillion dollars hit. There's an
Speaker 1: academic paper that suggests that there's hundreds of banks that
Speaker 1: could be underwater right now, and the FED needs to
Speaker 1: do that work. And that work includes not just looking
Speaker 1: at the balance sheet, but also looking at off balance sheet.
Speaker 1: So we need to know if for these companies are
Speaker 1: hedging and how they're hedging, so they should be hedging
Speaker 1: their interest rate risk, but we don't know. That's very
Speaker 1: opaque right now. The Fed, it's got four hundred PhD economists.
Speaker 1: They should give this high priority. All right, KEM, thank
Speaker 1: you so much. We appreciate it. Clear and concise as always,
Speaker 1: Cam Harvey. He's a professor of finance at the Duke
Speaker 1: University's Fuqua School of Business. I survived his classes. No
Speaker 1: walk in the park. You had to bring your a game,
Speaker 1: but the better for it, I think. Thanks for listening.
Speaker 1: To the Bloomberg Markets podcast. You can subscribe and listen
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Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen
Speaker 1: seventy three and on ball Sweeney, I'm on Twitter at
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
Speaker 1: worldwide at Bloomberg Radio