WEBVTT - Fed Day, Jay Powell, Banks, and Crypto 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.520 --> 0:00:15.560 with essential market moving news. I'm the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.439 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:21.880 at Bloomberg dot com slash podcast. All right, let's get 0:00:21.880 --> 0:00:25.680 to these banks. That is clearly a big issue. We've 0:00:25.680 --> 0:00:28.400 got a nice little round table here because if I'm 0:00:28.440 --> 0:00:30.240 the feeder reserve, I got to deal with the banks. 0:00:30.480 --> 0:00:33.480 So let's talk to Alison Williams and Bloomberg Intelligence. Plus 0:00:33.520 --> 0:00:35.199 I got to, you know, talk interest rates. So now 0:00:35.240 --> 0:00:37.559 I gotta talk to Ira Jersey. He's actually in the 0:00:37.560 --> 0:00:41.519 Bloomberg studio, which is a rarity, John Tucker, I mean, 0:00:41.600 --> 0:00:44.599 and pretty a shot, so we'll take it. He's all, 0:00:44.720 --> 0:00:47.800 guest Blazer, did you see this? He's all, he's looking 0:00:48.680 --> 0:00:50.480 all right. So we've got Alison Williams covers the banks 0:00:50.680 --> 0:00:55.040 joining us. Phone Ira Jersey in studio. Allison, you know, 0:00:55.160 --> 0:00:57.840 we framed this discussion today with FED chairman j pal 0:00:57.960 --> 0:01:00.760 that he has to address not only interest rates, which 0:01:00.800 --> 0:01:02.520 is why we have ire here, but he's also got 0:01:02.520 --> 0:01:05.280 to talk about the banking sector and the Fed's role 0:01:05.440 --> 0:01:09.480 in monitoring and regulating it. What do you think he 0:01:09.600 --> 0:01:15.399 should say about the banks and the role of the FED. Well, 0:01:15.440 --> 0:01:18.319 I think it is I think it is tricky, and 0:01:18.360 --> 0:01:21.920 I think that you know, a lot of the questions uh, 0:01:22.400 --> 0:01:25.360 percolating and that I've kind of led to this, um 0:01:25.640 --> 0:01:28.520 do relate to market sentiment, and so you are seeing 0:01:28.600 --> 0:01:31.880 regulators sort of more pulling back and just pointing to, 0:01:32.480 --> 0:01:34.480 you know, the strong capital of the banks and sort 0:01:34.520 --> 0:01:40.000 of that as a broad picture. Um general, I think 0:01:40.040 --> 0:01:42.280 that and I'll let I'll let I always speak to 0:01:42.319 --> 0:01:46.920 what the FED does today, but you know, in general, 0:01:47.040 --> 0:01:49.280 I think for what the banks are really waiting for 0:01:49.480 --> 0:01:53.360 is an answer on deposit insurance and what can be 0:01:53.400 --> 0:01:56.240 done there. We're hearing a lot of politicians throwing around 0:01:56.320 --> 0:01:58.080 around a lot of different ideas, but I think we 0:01:58.120 --> 0:02:03.000 do need something sort of broad, perhaps temporary, to help 0:02:03.080 --> 0:02:07.480 stabilise sentiment, which is really the issue at this point. Well, Ira, 0:02:07.920 --> 0:02:09.360 come on in here and talk to us about that 0:02:09.400 --> 0:02:13.720 stabilizing sentiment piece. Alison, just reference twenty five basis points 0:02:13.720 --> 0:02:16.720 priced into the market. What does the pause look like 0:02:16.800 --> 0:02:19.000 in the bontod market. Well, if I think if the 0:02:19.080 --> 0:02:22.040 FED worred to pause, or as I suspect that they'll do, 0:02:22.080 --> 0:02:24.240 they'll hike twenty five basis points and hint that they 0:02:24.280 --> 0:02:27.919 may pause at the main meeting. Is I think as 0:02:27.919 --> 0:02:30.440 long as they're dovish enough, I think that for risk 0:02:30.440 --> 0:02:33.000 assets probably things are okay. But I agree with Alison, 0:02:33.360 --> 0:02:36.040 you know, the issue here is things like how do 0:02:36.080 --> 0:02:39.400 you quell deposit flight? Right, and raising interest rates actually 0:02:39.800 --> 0:02:42.160 doesn't hurt that one way or the other, except in 0:02:42.200 --> 0:02:44.400 so far as the way the financial system has been 0:02:44.400 --> 0:02:47.600 developed over the last couple of decades is that if 0:02:47.639 --> 0:02:50.800 banks don't offer a competitive interest rate on their deposits, 0:02:50.840 --> 0:02:53.680 on their CDs or whatever, people then do what happened 0:02:53.680 --> 0:02:55.280 over the last week and a half and they move 0:02:55.320 --> 0:02:58.400 their money into money market mutual funds which have market 0:02:58.440 --> 0:03:00.440 based yields. And now so with the so the FED 0:03:00.480 --> 0:03:03.920 actually hiking could actually, you know, enhance some of this 0:03:04.000 --> 0:03:07.160 deposit flight unless banks figure out a way to keep 0:03:07.200 --> 0:03:11.320 depositors in their in their firms. So I think it's 0:03:11.320 --> 0:03:13.239 a balancing act that the FED has to do today. 0:03:13.240 --> 0:03:16.359 And I think the J. Powell has to be dovish, 0:03:16.400 --> 0:03:20.080 and that the statement will probably take out a line 0:03:20.120 --> 0:03:23.280 that talks about that continued great hikes, like they won't 0:03:23.320 --> 0:03:26.639 promise basically that they're going to continue hiking. They could, right, 0:03:26.720 --> 0:03:28.960 but I think they have to take that out and 0:03:29.000 --> 0:03:32.960 give themselves more optionality. Alison, you know, the reality is 0:03:33.400 --> 0:03:35.800 for me, at least, it seems like in the past 0:03:35.840 --> 0:03:37.720 couple of weekends, I haven't come into work on Monday 0:03:37.760 --> 0:03:39.160 like we did back in two thousand and eight with 0:03:39.480 --> 0:03:43.320 another bank or handful of banks failing. The argument can 0:03:43.320 --> 0:03:45.920 certainly be made that this is kind of look, it 0:03:46.080 --> 0:03:49.200 is syncratic to a couple of institutions here, and that 0:03:49.280 --> 0:03:52.560 if others broadly had problems, we'd hear about it. By now, 0:03:53.600 --> 0:03:55.600 How are you thinking about a day to day as 0:03:55.960 --> 0:03:58.240 we kind of figure out that this may or may 0:03:58.280 --> 0:04:02.960 not be systemic? So I think, um, I mean, I 0:04:03.000 --> 0:04:07.160 think it's not systemic in the sense that, uh, you know, 0:04:07.240 --> 0:04:10.040 it's more it's more a clause. It's more sort of 0:04:10.960 --> 0:04:15.200 having things in common versus um, you know, one bank's 0:04:15.240 --> 0:04:19.560 downfall causing another bank's downfall. So credit tweets, for example, 0:04:19.960 --> 0:04:22.200 the issues there could have been systema because there are 0:04:22.200 --> 0:04:25.839 a lot of inter relationships, even though we we expect 0:04:26.040 --> 0:04:30.040 that the US banks manage those down significantly over time. UM, 0:04:30.279 --> 0:04:33.320 certainly there are inter relationships, especially to the other banks 0:04:33.360 --> 0:04:38.880 with the US banks. You know. The issue is just that, um, 0:04:38.960 --> 0:04:43.120 you know, this this setup could cause an issue if 0:04:43.160 --> 0:04:45.720 we continue to have this negative sentiment. And that's why 0:04:45.760 --> 0:04:48.400 I think you need more of a broad statement, right 0:04:48.440 --> 0:04:51.839 because you had uh, you know, we've had a few 0:04:51.880 --> 0:04:57.160 banks now, um that event that have failed. Everyone's watching 0:04:57.760 --> 0:05:02.119 a couple of more banks. But and those banks find 0:05:02.160 --> 0:05:04.919 their answers. You know, investors will continue, I think, to 0:05:05.000 --> 0:05:08.040 go onto the next and the next until there is 0:05:08.080 --> 0:05:13.800 some kind of stability, some kind of broad answer that 0:05:13.880 --> 0:05:16.960 that quells those fears. Well, Alison, I want to get 0:05:16.960 --> 0:05:20.640 your quick read on the PacWest story. This morning, they 0:05:20.680 --> 0:05:23.920 access that fed facility from US sixteen billion. They got 0:05:23.960 --> 0:05:27.320 about one point four billion financing from Atlas as well. 0:05:27.880 --> 0:05:29.760 A lot of people will worry that PacWest was the 0:05:29.800 --> 0:05:32.000 next shoe to drop. Are we in the clear now 0:05:32.040 --> 0:05:36.640 from that? I mean, you know, the thing that I 0:05:36.680 --> 0:05:40.960 think investors will focus on is that is the deposit flight. 0:05:41.640 --> 0:05:44.960 And so again I think we have a situation where 0:05:45.080 --> 0:05:48.520 one particular bank is coming out and talking about, you 0:05:48.560 --> 0:05:52.120 know that they've stabilized things, but people are focusing on 0:05:52.160 --> 0:05:57.279 the deposits, the past of those deposits, and again worried 0:05:57.279 --> 0:06:00.919 about what's happening at other banks, and there's not a 0:06:00.960 --> 0:06:06.800 lot of transparency. So I think that I think, again, 0:06:07.200 --> 0:06:10.280 you need something that that can kind of broadly stabilize 0:06:10.279 --> 0:06:12.720 that we're not going to continue to go you know, bank, 0:06:12.800 --> 0:06:17.400 my bank, right, my story? Right? Iver, what's the key 0:06:17.440 --> 0:06:21.640 thing that I'm not a FED watcher, thank goodness, But 0:06:21.720 --> 0:06:23.560 what's the one thing a non Fed watcher should be 0:06:23.600 --> 0:06:26.440 listening for today at two thirty? Yeah, I think well, 0:06:26.800 --> 0:06:29.960 so at two thirty, I think it's the um you know, 0:06:30.040 --> 0:06:35.360 how the tone of j Powell's comments around the banking crisis, right, So, 0:06:35.400 --> 0:06:39.320 how concerned is the FED that it could become systemic? Because, 0:06:39.360 --> 0:06:42.919 like Allison mentioned, you know, Credit Suite was potentially a 0:06:42.960 --> 0:06:45.120 systemic institution, right. The problem with two thousand and seven, 0:06:45.160 --> 0:06:47.120 two thousand and eight was that you had large financial 0:06:47.160 --> 0:06:50.400 institutions that were very interconnected. So far, at least, we 0:06:50.480 --> 0:06:52.920 haven't had you know, a lot of a big bank 0:06:52.960 --> 0:06:55.200 outside of Credit Suite that was very interconnected to the 0:06:55.240 --> 0:06:57.599 rest of the system, that could make the whole system collapse. 0:06:58.120 --> 0:07:00.400 But of course you get enough smaller institute that do 0:07:00.480 --> 0:07:03.120 that and suddenly become systemic. So I think it's how 0:07:03.160 --> 0:07:05.560 concerned is he and the more concerned he sounds, the 0:07:05.600 --> 0:07:09.279 more dovish that should be. And you should note then 0:07:09.360 --> 0:07:11.840 that maybe the FED is going to be done after 0:07:11.960 --> 0:07:15.200 today's hike. All right, great stuff. Really appreciate getting two 0:07:15.200 --> 0:07:17.800 of the smartest minds we've got in the building together 0:07:17.920 --> 0:07:20.920 at one time, Alison Williams, Senior Global Banks annalyst for 0:07:20.920 --> 0:07:24.280 Bloomberg Intelligence, and Ira Jersey, chief US interest rates strategists 0:07:24.600 --> 0:07:27.760 with Bloomberg Intelligence getting them together, And you know right 0:07:27.920 --> 0:07:30.200 we did that is because the FED is thinking they've 0:07:30.240 --> 0:07:32.800 got two mandates today, that's to deal with the banking 0:07:32.840 --> 0:07:36.400 issues and then obviously deal with the interest rates and inflation. 0:07:36.640 --> 0:07:38.280 And that's how we want to approach it. Right here, 0:07:40.520 --> 0:07:44.400 you're listening to the Team Cancer Live program Bloomberg Markets 0:07:44.440 --> 0:07:47.520 weekdays at ten am Eastern on Bloomberg dot Com, the 0:07:47.600 --> 0:07:50.280 I Heart Radio app, and the Bloomberg Business app, or 0:07:50.360 --> 0:07:55.840 listen on demand wherever you get your podcast. Consensus seems 0:07:55.840 --> 0:07:57.960 to be the Federal raised twenty five basis points. My 0:07:58.080 --> 0:08:01.840 question is, if it weren't for the bank in challenges 0:08:01.880 --> 0:08:04.720 out there in a market marketplace, the turmoil in some 0:08:04.760 --> 0:08:08.160 of these regional banks, would that change the Fed's behavior. 0:08:08.240 --> 0:08:11.040 Lets check in with one of our favorite FED watchers, 0:08:11.120 --> 0:08:13.800 Danielle d Martino Booth. She's a CEO and chief strategist 0:08:14.120 --> 0:08:17.200 for Quill Intelligence. She's also a former advisor at the 0:08:17.200 --> 0:08:20.000 Federserve Bank at Dallas, so she knows how they make 0:08:20.040 --> 0:08:23.280 the sauces down there at the FED. So, Danielle, do 0:08:23.320 --> 0:08:27.040 you think if it were not for the banking turmoil 0:08:27.080 --> 0:08:31.800 that the FED would maybe go fifty basis points here? No, 0:08:32.120 --> 0:08:35.760 I think that I think that the CPI report, I 0:08:35.800 --> 0:08:37.959 think that the inflation data had been a little bit 0:08:38.000 --> 0:08:41.120 hotter than what was expected. But on the flip side 0:08:41.120 --> 0:08:43.480 of that, I think that there's more evidence. Now we've 0:08:43.520 --> 0:08:46.960 got what eighty four percent of the US population is 0:08:47.000 --> 0:08:51.880 living in states with rising initial jobless claims. Uh, you know, 0:08:51.920 --> 0:08:55.640 that's that's a pretty that's it's it's a huge chunk 0:08:55.679 --> 0:08:59.920 of America. There's more a recognition among average working men 0:09:00.000 --> 0:09:03.160 and women that the labor cycle has turned. So I 0:09:03.200 --> 0:09:06.400 think that that in conjunction with inflation not being you know, 0:09:06.559 --> 0:09:09.960 super red hot, would have kept the FED at twenty 0:09:09.960 --> 0:09:12.040 five basis points. I actually think they're going as much 0:09:12.080 --> 0:09:15.360 as they wanted to go to day. Danielle, again, we 0:09:15.480 --> 0:09:18.000 got to talk about this kind of minority view in 0:09:18.040 --> 0:09:20.360 the markets, which is there may at the end of 0:09:20.360 --> 0:09:23.920 the day be a pause. Would a pause, although perhaps 0:09:23.960 --> 0:09:27.240 creating panic, be justified from an economic point of view. 0:09:29.000 --> 0:09:31.720 From an economic point of view, I think that a 0:09:31.800 --> 0:09:35.640 pause would be justified. I just said that, you know, 0:09:36.520 --> 0:09:39.200 eighty four percent of Americans live in states with rising 0:09:39.280 --> 0:09:43.040 jobless claims. But I think that at this point it 0:09:43.200 --> 0:09:45.520 would it would upset the markets. You've got a ninety 0:09:45.520 --> 0:09:49.440 percent probability going in of this twenty five basis points, 0:09:49.880 --> 0:09:53.200 and I think that it wouldn't supprise me to have 0:09:53.760 --> 0:09:57.240 Powell echo to a certain extent Christine Lagarde last week 0:09:57.280 --> 0:10:02.480 and say, you know, four guidances, bye bye, We're we're 0:10:02.559 --> 0:10:04.439 just going to try and take this on a day 0:10:04.440 --> 0:10:08.679 by day basis. Obviously, if systemic risk comes on glued, uh, 0:10:08.880 --> 0:10:12.280 you know, he will he will pause. But I think 0:10:12.360 --> 0:10:14.840 Powell's trying to fight a war on two fronts. I 0:10:14.840 --> 0:10:18.280 think he's trying to maintain tight monetary policy. I don't 0:10:18.280 --> 0:10:20.920 think it necessarily keeps him up at night that the 0:10:20.960 --> 0:10:27.120 credit cycles um underway, that bankruptcies are happening, that the 0:10:27.240 --> 0:10:31.360 risk is operators with the worst business models are are 0:10:31.480 --> 0:10:34.440 having to restructure. I think he's okay with that. I 0:10:34.440 --> 0:10:37.359 think he's okay with that being an outgrowth of his policy. 0:10:37.720 --> 0:10:40.720 The flip side of that is credit standards are tightening 0:10:41.000 --> 0:10:45.160 real quick here. So that's that that could be something 0:10:45.320 --> 0:10:49.200 that that that that should be staying his hand today 0:10:49.240 --> 0:10:51.800 because try and get try and get a cash out refinancing, 0:10:51.800 --> 0:10:53.480 try and get a car loan, try and get a 0:10:53.520 --> 0:10:57.360 commercial real estate loan. Good luck. So, Danielle, I just 0:10:57.440 --> 0:11:01.319 typed into my terminal d ots dots go. This is 0:11:01.360 --> 0:11:03.960 a FED meeting where we do get the dot thing right? 0:11:04.040 --> 0:11:05.640 Is that still a thing I need to pay attention to. 0:11:07.920 --> 0:11:10.640 I think that I think that the dots right now 0:11:10.679 --> 0:11:14.679 are more like you know, playing darts in the sense 0:11:14.720 --> 0:11:18.559 that given the magnitude I mean, we just watched one 0:11:18.600 --> 0:11:21.880 of the world's thirty largest banks go bye bye. Given 0:11:21.880 --> 0:11:26.360 the magnitude of the backdrop, I think the dots mean less. 0:11:26.880 --> 0:11:30.559 What I think people will be paying attention to, though, 0:11:31.320 --> 0:11:38.880 is when said leaders anticipate the first rate cut. If 0:11:38.920 --> 0:11:42.600 they all stand their ground, remember Leo Brainer's gone, She's 0:11:42.640 --> 0:11:45.000 not there in the room these last two days. If 0:11:45.040 --> 0:11:47.800 they all stand their ground, that we're not going to 0:11:47.840 --> 0:11:50.520 be that the Fed is not going to be lowering 0:11:50.559 --> 0:11:53.960 interest rates until twenty twenty four. I think that that 0:11:54.040 --> 0:11:57.800 will definitely raise an eyebrow or two. Danielle. You talked 0:11:57.800 --> 0:11:59.520 about the dots a little bit, but let's talk then 0:11:59.559 --> 0:12:01.880 about when it comes to kind of economic forecast, the 0:12:01.960 --> 0:12:05.520 GDP picture as well. I had an interview last week 0:12:05.880 --> 0:12:08.680 with the CEO of DHL and he said, look, the 0:12:08.760 --> 0:12:12.840 economy is still expanding. They're still hiring, they're still seeing 0:12:12.960 --> 0:12:16.760 volumes grow on a quarter by quarter basis. From a 0:12:16.960 --> 0:12:20.160 kind of GDP growth point of view, Danielle, the economy 0:12:20.200 --> 0:12:21.959 is still growing. Why is that such a bad thing. 0:12:23.679 --> 0:12:25.720 It's not a bad thing that the economy is still growing. 0:12:25.720 --> 0:12:27.920 The economy is about to have a full blown heart 0:12:27.920 --> 0:12:31.640 attack and stop growing, but it's not a bad thing 0:12:31.840 --> 0:12:35.960 that we still had economic output going into where we 0:12:36.000 --> 0:12:38.520 are today. But whether you're talking to people in logistics 0:12:38.640 --> 0:12:44.760 or trucking or industrial packaging. They have seen unlike the 0:12:44.800 --> 0:12:49.600 gentleman from DHL, they've seen a sudden stop in the economy. 0:12:49.760 --> 0:12:51.600 The New York said put out you guys had it 0:12:51.600 --> 0:12:53.280 on the terminal. Yesterday, the New York FD put out 0:12:53.320 --> 0:12:57.040 a new survey. People are getting rejected for credit left 0:12:57.080 --> 0:12:59.720 and right, whether it's trying to do a cash out refinancing, 0:12:59.800 --> 0:13:03.480 or get or get a car loan. So prior to 0:13:03.600 --> 0:13:07.120 even the banking crisis setting in, there were definitely signs 0:13:07.160 --> 0:13:10.600 in the economy of slowing or if nothing else, slowing 0:13:10.640 --> 0:13:15.080 to come. What is your call here on the labor market, 0:13:15.200 --> 0:13:18.120 because that's been one of the issues, Danielle, that a 0:13:18.160 --> 0:13:20.720 lot of folks are put pushing back on a recession scenario, 0:13:20.880 --> 0:13:24.120 saying you can't have a recession with this level of unemployment. 0:13:24.320 --> 0:13:28.439 What's your view there, Look, I think that I think 0:13:28.440 --> 0:13:33.199 that the labor market is is pushing out unequivocal evidence 0:13:33.360 --> 0:13:37.559 of how bad things are getting. A Walmart closes about 0:13:37.600 --> 0:13:40.600 once a week. They're clearly passed there. It's just usual 0:13:40.640 --> 0:13:43.360 business type of model. We have four hundred foot lockers 0:13:43.400 --> 0:13:45.320 announced that they were closing just a few days ago. 0:13:45.400 --> 0:13:49.280 So retail mcgeddon is picking up stream about steam and 0:13:49.320 --> 0:13:51.720 we're you know, we've just seen Amazon dot Com go 0:13:51.760 --> 0:13:55.120 through it's with its third round of layoffs one two three, 0:13:55.480 --> 0:13:59.040 So I mean, it's it's good to say, look look 0:13:59.040 --> 0:14:00.920 at the unemployment rate, it's still so low. Or look 0:14:00.920 --> 0:14:03.800 at unemployment claims, there's still still on a level basis, 0:14:03.840 --> 0:14:06.920 that's the case, But sixty seven percent of states have 0:14:07.080 --> 0:14:09.760 rising claims. Again, eighty four percent of the population lives 0:14:09.760 --> 0:14:12.360 in a state with rising claims on a year over 0:14:12.520 --> 0:14:17.280 year basis, So that's tangible. So you're talking about the 0:14:17.320 --> 0:14:20.040 labor market here. Should we be worried about the housing market? 0:14:20.080 --> 0:14:22.160 I still don't feel like a lot of people are 0:14:22.240 --> 0:14:26.040 raising the alarm bells when it comes to housing. You 0:14:26.080 --> 0:14:28.160 know how things a funny thing, right, because we had 0:14:28.160 --> 0:14:31.680 this dip in mortgage rates. Everybody rushed in in these 0:14:31.720 --> 0:14:35.240 months that are typically seasonally very weak December, January, February, 0:14:36.040 --> 0:14:38.480 and yet if you don't have an income, it's really 0:14:38.480 --> 0:14:41.720 hard to get a mortgage. And that is why I 0:14:41.760 --> 0:14:44.800 think it was critical to pay attention to the Federal 0:14:44.800 --> 0:14:47.880 Reserve's most recent Senior Loan Officer survey that said even 0:14:47.920 --> 0:14:51.360 for residential mortgages that lending standards were tightening, and you 0:14:51.400 --> 0:14:53.320 see that in the fact that the ten year treasury 0:14:53.400 --> 0:14:56.920 yield has come down but the thirty year fixed mortgage 0:14:57.000 --> 0:15:00.400 rate has gone up in the last ten days. That's 0:15:00.560 --> 0:15:06.800 telling you something about lender's willingness to extend credit into 0:15:06.840 --> 0:15:10.040 a housing market when they foresee trouble down the pipe, 0:15:10.080 --> 0:15:11.400 which is that's what you get when you have a 0:15:11.480 --> 0:15:16.240 labor cycle right, It's going to lead into intrastrate sensitive 0:15:16.240 --> 0:15:18.360 sectors and sectors where you have to have an income 0:15:18.440 --> 0:15:22.400 to get the financing to buy it. Danielle again, the 0:15:22.440 --> 0:15:24.960 release of the statement at two pm Wall Street time, 0:15:24.960 --> 0:15:28.680 and then the press commerce at two thirty. Is there 0:15:28.720 --> 0:15:31.960 a mistake that Chairman Pal could make today that's in 0:15:32.000 --> 0:15:33.480 the back of your mind that you're saying, boy, I 0:15:33.480 --> 0:15:35.600 hope he doesn't do this because that could be really 0:15:35.640 --> 0:15:40.120 bad for the markets. I think he needs to be 0:15:40.320 --> 0:15:44.360 unscripted today. I think he needs to not be so 0:15:44.480 --> 0:15:47.760 nervous at the podium that he's reading his answers. He 0:15:47.960 --> 0:15:52.080 has to come out and exude confidence at a time 0:15:52.240 --> 0:15:55.920 of a lot of people being really freaked out. He 0:15:56.000 --> 0:15:58.440 has to stand up and be a leader. And I 0:15:58.520 --> 0:16:00.720 think that that could be challenging for him because this 0:16:00.840 --> 0:16:05.080 is probably the hardest podium time he'll ever have in 0:16:05.120 --> 0:16:08.160 his entire life. But the last few meetings he's been 0:16:08.320 --> 0:16:11.680 very perfunctory reading his answers. I think he needs to 0:16:11.720 --> 0:16:13.960 be ready for what's going to be asked of him 0:16:14.240 --> 0:16:17.400 and be confident in his reply and say, we've got 0:16:17.440 --> 0:16:21.160 macroprudential solutions that we can attach to this financial banking 0:16:21.200 --> 0:16:23.720 type of crisis. It's burgeoning. We think we can handle this. 0:16:23.960 --> 0:16:25.840 At the same time, we think we can also run 0:16:25.880 --> 0:16:30.000 monetary policy on a separate track. We can wage a war, 0:16:31.280 --> 0:16:35.680 we can wage more, you know, on two fronts. Daniel, lastly, 0:16:35.800 --> 0:16:38.160 just about thirty seconds, based upon what we know today, 0:16:39.200 --> 0:16:41.760 is the banking turmoil systemic or not? Do we know? 0:16:43.200 --> 0:16:45.560 I don't think we know if the banking turmoil is systemic. 0:16:45.600 --> 0:16:50.000 I suspect that is, it is potentially systemic, because quietly 0:16:50.120 --> 0:16:52.960 First Republic, like Silicon Valley, has not been able to 0:16:53.040 --> 0:16:58.760 raise capital. So when we cross these rubicons, Uh, there's 0:16:58.840 --> 0:17:02.480 definitely something along with the system when banks cannot raise capital. 0:17:03.240 --> 0:17:05.680 All right, we'll have to see a busy, busy day today. 0:17:05.880 --> 0:17:08.000 We appreciate getting a few minutes of your time. You 0:17:08.040 --> 0:17:11.520 know you're busy. Danielle Danielle di Martino Booth CEO and 0:17:11.680 --> 0:17:15.639 chief strategists at Quill Intelligence. Some great stuff there. Follow 0:17:16.240 --> 0:17:18.960 her work. She's got a great Twitter game as well. 0:17:19.080 --> 0:17:21.760 I follow her on Twitter. Lots of good discussion there 0:17:22.359 --> 0:17:24.840 with Danielle and some of her colleagues. She was a 0:17:24.880 --> 0:17:26.919 former advisor at the Federal Reserve Bank of Dallas. So 0:17:26.960 --> 0:17:29.280 again we love talking to her about the FED critty 0:17:29.320 --> 0:17:32.640 because she knows kind of how inner workings go. Yeah, 0:17:32.680 --> 0:17:34.320 and when you have a FED meeting like today, it's 0:17:34.359 --> 0:17:36.360 good to check in with those folks. Yeah, It's nice 0:17:36.359 --> 0:17:38.639 to hear kind of how they go about thinking about 0:17:38.640 --> 0:17:40.679 this because I gotta say, Paul, you could not Paey 0:17:40.960 --> 0:17:42.879 to be an a condist at the Federal Reserve right now. 0:17:42.920 --> 0:17:45.439 This feels like quite literally being stuck between a rock 0:17:45.440 --> 0:17:47.040 and hard place. Yeah. So we'll have to see what 0:17:47.160 --> 0:17:49.320 we hear from the Federal Reserve later today, and of 0:17:49.359 --> 0:17:52.240 course we'll have full coverage of it. You're listening to 0:17:52.320 --> 0:17:55.680 the Tape cats a our live program Bloomberg Markets weekdays 0:17:55.720 --> 0:17:59.520 at ten am Eastern on Bloomberg Radio, in APT, Bloomberg 0:17:59.560 --> 0:18:02.160 dot Com and the Bloomberg Business app. You can also 0:18:02.200 --> 0:18:05.800 listen live on Amazon Alexa from our flagship New York station, 0:18:06.000 --> 0:18:11.919 jo Say Alexa play Bloomberg eleven thirty. One of our 0:18:12.000 --> 0:18:17.760 favorite topics to discuss is ETF exchange traded funds, so 0:18:17.880 --> 0:18:21.320 much so that we ask Katie Greifeld from Bloomberg News 0:18:21.359 --> 0:18:24.000 to join us here because she is the ETF boss 0:18:24.080 --> 0:18:26.720 here for Bloomberg News. She joins us here in a 0:18:26.760 --> 0:18:29.720 Bloomberg Interactive broker studio because we have a great guest 0:18:29.960 --> 0:18:33.280 to check out. Joanna Gayego's co founder of Bond Blocks, 0:18:33.359 --> 0:18:36.080 joins us here in our studio. Joanna, can you remind 0:18:36.119 --> 0:18:39.760 us again what you guys at Bondblocks do. What we 0:18:39.840 --> 0:18:42.520 do Bonblocks is fixed income ets. Yes, we're the only 0:18:42.560 --> 0:18:46.280 fixed income issuer that's one hundred percent focus on fixed income, 0:18:46.640 --> 0:18:49.760 and so we build out precision fixed income tools for investors. 0:18:50.359 --> 0:18:53.160 And let's talk about the year that fixed income ETFs 0:18:53.200 --> 0:18:56.080 are having, because my terminal is just booting up. But 0:18:56.359 --> 0:18:58.480 if you look at the flows year to date into 0:18:58.560 --> 0:19:03.040 the ETF universe, over all fixed income and equity ETFs 0:19:03.040 --> 0:19:05.600 are like neck and Neck. I think fixed income might 0:19:05.640 --> 0:19:09.239 have surpassed the flows into equities in the past day 0:19:09.320 --> 0:19:12.359 or so. Have to check. I can't remember the last 0:19:12.359 --> 0:19:15.560 time that happened when overall for the year more money 0:19:15.760 --> 0:19:18.919 was going into bonds. I mean, just speak to the 0:19:18.960 --> 0:19:21.520 appetite that we're seeing in the wrapper right now for 0:19:22.160 --> 0:19:24.840 fixed income. Yeah, it's very simple. It's because of what 0:19:24.920 --> 0:19:27.680 happened in twenty twenty two and yields being back. So 0:19:27.800 --> 0:19:29.840 people say bonds are back, and it makes sense. But 0:19:30.600 --> 0:19:33.679 what people need to consider is that total return is 0:19:33.720 --> 0:19:35.960 more important than ever in your portfolio. And so with 0:19:36.040 --> 0:19:38.520 yields having moved over four hundred and fifty bases points 0:19:38.520 --> 0:19:41.040 in twenty twenty two and you know will continue to rise, 0:19:41.320 --> 0:19:45.439 is what expectations call bonds are really important tool for 0:19:45.480 --> 0:19:49.240 twenty twenty three because it's probably the most simplest way 0:19:49.280 --> 0:19:52.520 to see return in your portfolio. And where is that 0:19:53.040 --> 0:19:55.400 return though, when you look across the curve, obviously we're 0:19:55.400 --> 0:19:59.480 seeing biblical volatility in the front end. But still I 0:19:59.600 --> 0:20:02.679 hear lot of calls that basically you just want to 0:20:02.720 --> 0:20:04.520 sit in cash. You want to sit in short of 0:20:04.520 --> 0:20:06.119 the shorter end of the yield curve. When you think 0:20:06.119 --> 0:20:10.200 about duration the curve and its totality. What's your thoughts. So, yes, 0:20:10.359 --> 0:20:13.080 in duration, which is a measure of interest rate risks, 0:20:13.200 --> 0:20:15.080 you are seeing a lot of flows in the short 0:20:15.200 --> 0:20:17.840 end because that there's less duration, there's less interest rate 0:20:17.920 --> 0:20:20.399 risk in something like a six month treasury or one 0:20:20.480 --> 0:20:24.040 year a treasury. That's just intuitive cash management use. You 0:20:24.040 --> 0:20:26.560 should be on the short end with zero risk, easy 0:20:26.640 --> 0:20:29.120 easy decision. But what we see and what we've done 0:20:29.160 --> 0:20:31.520 in fixed income is we've cut up parts of the 0:20:31.560 --> 0:20:34.000 credit and part of the risk spectrum of fixed income, 0:20:34.040 --> 0:20:37.479 so you can see different opportunities amongst those areas. And 0:20:37.520 --> 0:20:40.200 so what's really compelling is that if you look at 0:20:40.200 --> 0:20:43.680 things in high yield or even across IG you're not 0:20:43.800 --> 0:20:47.360 seeing spreads from that risk free rate that are different 0:20:47.520 --> 0:20:50.040 or very much or very much away from their non 0:20:50.080 --> 0:20:52.560 recession levels. So I think people have been waiting for 0:20:52.560 --> 0:20:55.360 like this massive bottom in fixed income before they come in. 0:20:55.800 --> 0:20:59.160 But with the yields increasing and doubling over the last year, 0:20:59.440 --> 0:21:02.040 you're seeing fourteen percent in triple c's, which is sort 0:21:02.080 --> 0:21:05.600 of the highest credit rating, highest credit risk you could 0:21:05.640 --> 0:21:08.879 have in high yield, all the way down to something 0:21:09.880 --> 0:21:12.400 like five hundred in something in a in a double 0:21:12.440 --> 0:21:15.160 B or a B. Those are normal levels, and so 0:21:15.280 --> 0:21:17.200 it's kind of one of those confounding things we're seeing 0:21:17.200 --> 0:21:19.359 in economic data where you're seeing a lot of demand, 0:21:19.440 --> 0:21:22.800 you're seeing low job, low unemployment, but you're also not 0:21:22.880 --> 0:21:25.280 seeing a lot of distress and high yield, and so 0:21:25.320 --> 0:21:28.280 we think there's a lot of interesting areas of risk 0:21:28.400 --> 0:21:31.600 to think about in fixed income. So I think it's yes, 0:21:31.680 --> 0:21:34.359 everyone is in on the short end, but we really 0:21:34.440 --> 0:21:37.280 don't think people are taking enough action and looking at 0:21:37.320 --> 0:21:40.560 the risk assets in fixed income, which are pretty straightforward 0:21:40.600 --> 0:21:44.120 given those yields for twenty twenty to be pretty brave 0:21:44.200 --> 0:21:45.959 though I don't know, to go into high yield right 0:21:46.000 --> 0:21:48.760 now doesn't say high risk, high reward. Yeah, it sounds 0:21:48.760 --> 0:21:51.160 like it's let the entire argument on those at one bonds, 0:21:51.200 --> 0:21:54.080 it's like, well they're super risky, but they could yield 0:21:54.080 --> 0:21:56.720 and juicy returns. That's sort of what bond box is about. 0:21:56.720 --> 0:21:59.200 We're about making sure that people can see those individual 0:21:59.200 --> 0:22:02.040 opportunities across the risk spectrum. So yeah, you don't have 0:22:02.080 --> 0:22:04.000 to take the full risk of triple c's, but it's 0:22:04.040 --> 0:22:06.439 there for you to compare and break out of what 0:22:06.480 --> 0:22:09.160 you're seeing in broad bet based thoughts about high yield 0:22:09.200 --> 0:22:12.520 like that, Yes, high yield is an exchange of risk 0:22:12.640 --> 0:22:16.200 and in return, but there are opportunities amongst them. We 0:22:16.280 --> 0:22:18.919 want people to see those in individual products. You know. 0:22:19.040 --> 0:22:21.440 With this banking turmoil, which is a term I'm most 0:22:21.440 --> 0:22:23.560 comfortable with as opposed to a crisis, what we are 0:22:23.600 --> 0:22:25.439 seeing as a lot of deposits come out of a 0:22:25.440 --> 0:22:28.160 lot of banks and the expectations to going to money 0:22:28.160 --> 0:22:31.400 market funds are going to maybe some bigger banks. Are 0:22:31.440 --> 0:22:34.960 you seeing that in your business and the fund flows, yes, okay, 0:22:35.000 --> 0:22:37.200 talking about that. So the short as Katie mentioned, the 0:22:37.320 --> 0:22:39.959 short end of the curve and products and ETFs are 0:22:39.920 --> 0:22:42.560 seeing a lot of flow. ETFs are interesting is that 0:22:42.560 --> 0:22:44.880 it allows an investor in and not have to reinvest 0:22:45.240 --> 0:22:47.720 their their short term cash or their strategy to cash. 0:22:47.760 --> 0:22:50.640 So um like a like a money market fund, you're 0:22:50.640 --> 0:22:53.719 going to be getting a yield that continues with you 0:22:53.920 --> 0:22:58.000 within the market. So ETFs are an alternative to deposits, 0:22:58.520 --> 0:23:00.639 but they are not locked up up. There's something you 0:23:00.680 --> 0:23:04.160 can withdraw on any day of the week and their 0:23:04.280 --> 0:23:06.879 yield is going to grow or contract with the market. 0:23:07.000 --> 0:23:09.520 So it's a very simple, convenient way to get access 0:23:09.560 --> 0:23:12.520 to treasury yields or short term risk. If I think 0:23:12.560 --> 0:23:15.239 about the past two weeks, one of the I don't know, 0:23:15.320 --> 0:23:17.160 I don't know how I want to describe it. One 0:23:17.160 --> 0:23:19.280 of the more interesting facts to me is that when 0:23:19.280 --> 0:23:22.280 you think about what happened at Silicon Valley Bank, at 0:23:22.280 --> 0:23:24.640 the end of the day, it was just duration risk. 0:23:24.680 --> 0:23:28.359 They were holding long dated treasuries, you know, government bonds. 0:23:28.400 --> 0:23:31.360 It's not like it was anything that's supposed to be risky, 0:23:31.480 --> 0:23:34.120 but it was duration risk. In the end. What are 0:23:34.160 --> 0:23:39.560 your clients thinking about when it comes to longer dated debt? Yeah, 0:23:39.640 --> 0:23:41.800 so if you want to take on duration, we actually 0:23:41.920 --> 0:23:44.800 wanted to solve this problem for investors. We wanted to 0:23:44.800 --> 0:23:47.320 put it on the label exactly how much interest rate 0:23:47.400 --> 0:23:50.440 risk you're taking in a treasury product, and so we 0:23:50.600 --> 0:23:54.560 created products that are duration targeted. So what we see 0:23:54.840 --> 0:23:59.080 the clients are generally in fixing portfolios. When you want 0:23:59.080 --> 0:24:01.919 to take on more risk, you're adding duration because of 0:24:01.960 --> 0:24:04.880 interest rate risk that's coming up. So what we see 0:24:04.960 --> 0:24:06.919 is obviously most of the flows are going into the 0:24:06.960 --> 0:24:09.320 shorter side on the interest rate side, because there's been 0:24:09.359 --> 0:24:12.439 expectations all year that there'd be increasing interest rate hikes, 0:24:12.800 --> 0:24:15.760 but with sort of the back and forth we've seen 0:24:15.800 --> 0:24:17.720 in the last few weeks, there is a view that 0:24:17.840 --> 0:24:20.359 interest rates may be coming down as soon as the 0:24:20.480 --> 0:24:22.800 end of the year or even very early in twenty 0:24:22.880 --> 0:24:26.080 twenty four, and so we are seeing people taking longer 0:24:26.160 --> 0:24:30.040 duration five to seven, even ten and twenty. I think 0:24:30.240 --> 0:24:32.280 having that precision to be able to see which your 0:24:32.280 --> 0:24:35.000 interest rate risk is is critical right now, and we 0:24:35.040 --> 0:24:38.600 actually launched those products so that people could more precisely 0:24:38.640 --> 0:24:41.800 put duration into their portfolio, even in the treasury space. Well, 0:24:41.800 --> 0:24:44.000 I like think you said more precisely, because I want 0:24:44.040 --> 0:24:46.240 to talk to specifically about not the bond market, but 0:24:46.320 --> 0:24:48.160 the vehicle through which you're investing in the bond market. 0:24:48.240 --> 0:24:51.880 Essentially ETFs as a product themselves. Given this kind of 0:24:52.640 --> 0:24:56.200 environment where liquidity in treasuries is a concern, perhaps not immediately, 0:24:56.200 --> 0:24:58.320 but it was a couple of months ago and might 0:24:58.359 --> 0:25:02.000 be again, our et then considered more attractive as kind 0:25:02.000 --> 0:25:03.760 of a tool to get your hands on them. They 0:25:03.880 --> 0:25:08.000 democratize access to our financial markets. They always have. They 0:25:08.119 --> 0:25:10.639 have been really important vehicles to source. I call it 0:25:10.680 --> 0:25:13.160 the first port of liquidity. It's like the first call 0:25:13.200 --> 0:25:15.080 it's where you can go to see where a market 0:25:15.160 --> 0:25:17.880 is trading, and in treasuries it's no different. And so 0:25:17.960 --> 0:25:20.040 the way that those markets function, they're very easy to 0:25:20.080 --> 0:25:22.800 access for all investors. It's not something that's exclusive to 0:25:22.880 --> 0:25:25.720 someone that's in an institution or doesn't know how, doesn't 0:25:25.760 --> 0:25:28.400 have a you know, a way to access the bonds directly. 0:25:28.800 --> 0:25:31.199 Anybody with a brokerage account and trade in ETF So 0:25:31.240 --> 0:25:35.040 they're a really important tool for liquidity for all investors. Joan, 0:25:35.200 --> 0:25:37.119 just real quick here, what do you expect from the 0:25:37.160 --> 0:25:39.760 Fed today? Well, the consensus, as you guys have been 0:25:39.760 --> 0:25:41.520 talking about the last few minutes, is that they are 0:25:41.560 --> 0:25:45.800 going to raise another another quarter point. I think what 0:25:45.880 --> 0:25:47.640 we really need to expect from the Fed is sort 0:25:47.640 --> 0:25:50.200 of what they say and how they're sort of responding 0:25:50.240 --> 0:25:53.040 to the stability and this line they're trying to balance 0:25:53.080 --> 0:25:56.520 between financial stability the economic data that has come in 0:25:56.520 --> 0:25:59.320 in this quarter, which is sort of our portfolio manager 0:25:59.440 --> 0:26:01.720 Elias Schwartz like to say, has been flashing red lights 0:26:01.720 --> 0:26:03.520 and green lights to the bond market. You don't know 0:26:03.600 --> 0:26:05.560 which which is going to happen on any given day. 0:26:05.640 --> 0:26:07.800 So what they say is going to be really important 0:26:07.800 --> 0:26:10.800 for us to understand next steps. But we need more trends, 0:26:10.880 --> 0:26:12.760 we need more data, and we'll have to see what 0:26:13.640 --> 0:26:16.600 the great stuff. Johanna, thank you so much for coming 0:26:16.640 --> 0:26:19.159 into our Bloomberg Get Interactive Broker Studio. Really appreciate that. 0:26:19.240 --> 0:26:22.399 Joanna Gayego's co founder of bond Blocks. She co found 0:26:22.400 --> 0:26:27.560 at Bondblocks in twenty twenty one. You're listening to the 0:26:27.640 --> 0:26:31.320 team Ken's our live program Bloomberg Markets weekdays at ten 0:26:31.400 --> 0:26:34.480 am Eastern on Bloomberg dot com, the r Heard radio 0:26:34.520 --> 0:26:37.280 app and the Bloomberg Business app. We're listening on demand 0:26:37.320 --> 0:26:42.320 wherever you get your podcast. You know what's doing well here? 0:26:42.560 --> 0:26:45.520 John just called it out. Bitcoin. It's up another one 0:26:45.520 --> 0:26:49.120 point nine percent today. It's you know, pushing twenty nine 0:26:49.119 --> 0:26:52.199 thousand on bitcoin. Where's Tom Keane with his bitdog right? 0:26:52.800 --> 0:26:56.800 You need it getting closer to that third leash thousand level. Also, Paul, 0:26:56.920 --> 0:26:59.720 if you look back and in a sense function over 0:26:59.760 --> 0:27:03.840 the past ten days, it's up close to thirty four percent. 0:27:04.119 --> 0:27:07.480 Admit of this big sella. Obviously we've seen banks rebound, 0:27:07.520 --> 0:27:11.040 but during this heightened volatility over the past few weeks, 0:27:11.440 --> 0:27:14.400 seeing bitcoin, what are the winners here? Exactly. So when 0:27:14.400 --> 0:27:16.160 I want to talk anything crypto, I want to talk 0:27:16.200 --> 0:27:20.840 with Mike McLoone senior macro strategist with Bloomberg in Intelligence. 0:27:22.320 --> 0:27:25.360 You know, Mike, what is going on with bitcoin here 0:27:25.440 --> 0:27:27.520 and does it relate at all to what we've been 0:27:27.520 --> 0:27:29.479 experienced our last couple of weeks with some of these 0:27:29.520 --> 0:27:34.640 regional banks born hey, Paul, Born of the last financial crisis. 0:27:34.680 --> 0:27:38.000 This financial crisis seems to be defining bitcoin, and it's 0:27:38.080 --> 0:27:40.480 quite impressive. I mean, I've been looking for an inflection 0:27:40.520 --> 0:27:43.199 point to bitcoin to be trading more like gold and 0:27:43.280 --> 0:27:46.480 long bonds, and it's happening. So one good example is 0:27:46.520 --> 0:27:49.040 Je mentioned bitcoins up about seventy three percent in the year. 0:27:49.080 --> 0:27:51.480 But part of this is what's been happening with that 0:27:51.560 --> 0:27:54.280 Great Scale Bitcoin Trust and GBTC. It just hit one 0:27:54.320 --> 0:27:56.840 hundred percent mark on the year today, and that's the 0:27:56.920 --> 0:28:00.560 litigation that might allow ETFs on the lane. But the 0:28:00.600 --> 0:28:04.040 macro is significant. People are seeing this as Okay, well, 0:28:04.080 --> 0:28:06.680 this is no one's project, no one's liability, no one's risk. 0:28:06.960 --> 0:28:10.000 Banks aren't involved, and we're seeing it as a bit 0:28:10.040 --> 0:28:13.440 of a flight to quality, flight to safety. It is 0:28:13.480 --> 0:28:15.760 a digital reserve asset and actually some of this is 0:28:15.760 --> 0:28:19.520 coming from this the crypto dollars, the stable coins which 0:28:19.520 --> 0:28:21.399 aren't being somewhat looked at it and so okay, so 0:28:21.440 --> 0:28:25.800 they have full reserves. That's quite impressive. So, Mike, has 0:28:25.960 --> 0:28:30.960 Bitcoin reached its inflection point versus stocks yet? And if not, 0:28:31.240 --> 0:28:34.439 what are you watching to gauge when that could potentially happen. 0:28:35.200 --> 0:28:37.919 I think it's happening right now, Jessin. That's you know, 0:28:38.040 --> 0:28:40.560 and we're seeing it in real time. But the key 0:28:40.600 --> 0:28:44.000 thing to think about is I'm worried about what Gina 0:28:44.040 --> 0:28:46.600 Martin Adams says. She's our equity stratis and she's been 0:28:46.680 --> 0:28:49.000 spot on. And when she says that the FED hiking 0:28:49.120 --> 0:28:51.440 is bad for equities and five percent tea bills is 0:28:51.440 --> 0:28:54.360 bad for equities, I expect that. So I fully expect 0:28:54.400 --> 0:28:56.480 after we yet today and the FED hikes into what's 0:28:56.520 --> 0:29:00.200 turning out to me a significant deflationary periody of look 0:29:00.240 --> 0:29:03.720 at banking and housing and commodities that we get that 0:29:03.800 --> 0:29:07.400 downturn inequities. Bitcoin will fall, but it is showing divergence trick. 0:29:07.440 --> 0:29:10.040 It's quite impressive, and it's doing it more than most 0:29:10.080 --> 0:29:12.680 of the other cryptos it's you know, it's that single 0:29:12.760 --> 0:29:17.560 thing like gold and like and T bonds where people 0:29:17.560 --> 0:29:20.200 are saying, okay, well, what's my risk here? There's no 0:29:20.200 --> 0:29:23.280 one to bail this out, which might be better, And 0:29:23.320 --> 0:29:26.600 so I think we're at that now. Also Bitcoin outperforming 0:29:26.680 --> 0:29:30.400 commodities as well. Right, Yes, I've enjoyed writing about that 0:29:30.440 --> 0:29:32.480 for quite a while. When people are talking about commoditis 0:29:32.480 --> 0:29:36.720 supercycle last year, Paul's I hear Paul giggling because I 0:29:36.840 --> 0:29:39.120 just pointed out the key facts about bitcoin is it's 0:29:39.240 --> 0:29:42.560 low and early days for adoption in his definable diminishing supply. 0:29:42.640 --> 0:29:44.400 Now you look what's happening to crude oil since last 0:29:44.440 --> 0:29:46.960 year when people were calling from one fifty, we're learning 0:29:47.000 --> 0:29:48.760 that crude oil is the world's none those one, world's 0:29:48.760 --> 0:29:51.200 most significant in commodity, but it's the world's most autoco 0:29:51.440 --> 0:29:54.680 correlated acid. It goes down because it goes up, and 0:29:54.720 --> 0:29:58.920 that's because it crushes that demand and brings on more supply. 0:29:59.280 --> 0:30:01.760 And to me, that's what's happening. People are realizing, well, 0:30:01.800 --> 0:30:05.840 this supercycle might be happening in bitcoin. So oil here 0:30:05.920 --> 0:30:08.320 I'm looking at wtat crude oil. At seventy we were 0:30:08.360 --> 0:30:12.720 below seventy today? Is this just you know, the marketplace 0:30:12.760 --> 0:30:16.040 saying I think we got to demand problem looking forward 0:30:16.120 --> 0:30:19.040 here it's all the above pots. I love how people 0:30:19.080 --> 0:30:21.600 making excuses those of us who really got you know, 0:30:21.640 --> 0:30:23.760 I was initially wrong last year and I said crudel 0:30:23.760 --> 0:30:26.120 is going back to fifty. I think it's getting there. 0:30:26.320 --> 0:30:28.360 And the key thing is it always does that. It 0:30:28.400 --> 0:30:30.520 looks very similar to what it did in nineteen ninety. 0:30:30.560 --> 0:30:32.560 I was in a trading pitst initially got all signs, 0:30:32.600 --> 0:30:34.480 but it went to forty, back to twenty, and then 0:30:34.520 --> 0:30:36.600 it took about fourteen years agave above that high. The 0:30:36.640 --> 0:30:39.880 difference is now the US is a net energy exporter. 0:30:39.960 --> 0:30:43.160 This has never happened, and we're seeing what normally happens 0:30:43.160 --> 0:30:45.800 in crude oil. It's the world's most autocorrelated acid when 0:30:45.800 --> 0:30:47.520 it goes up and makes it go down. But the 0:30:47.600 --> 0:30:50.360 key is the key thing at this similar stage in 0:30:50.400 --> 0:30:52.680 two thousand and eight, when we had that pump and 0:30:53.320 --> 0:30:57.000 the FED was aggressively easy. Now they're still tightening. And 0:30:57.080 --> 0:30:59.360 one thing I need to point out is back in 0:30:59.400 --> 0:31:01.680 two thousand and nine was the last time we had 0:31:02.000 --> 0:31:05.400 the worst than the most negative PPI Producer Price Index 0:31:05.400 --> 0:31:08.240 ever really driven by commodities. We are going towards that 0:31:08.280 --> 0:31:10.719 too when we get to July. July thirteenth says, when 0:31:10.720 --> 0:31:13.360 we're going to get June PPI, it's very likely going 0:31:13.400 --> 0:31:15.720 to be negative on a year over year basis because 0:31:15.760 --> 0:31:19.240 of plunging commodities in crudel. And that's not profound, that's 0:31:19.320 --> 0:31:21.160 just the way the math is going at the moment. 0:31:21.680 --> 0:31:24.320 And something I'm curious about because I've had sources talk 0:31:24.360 --> 0:31:26.880 about when they're specifically looking at equities, they don't want 0:31:26.880 --> 0:31:30.640 to see oil treading around fifty dollars. Again, when it 0:31:30.680 --> 0:31:33.720 comes to crypto, if you're seeing that happening in the 0:31:33.840 --> 0:31:36.520 crude markets, what do you think that means potentially for 0:31:36.640 --> 0:31:39.479 bitcoin if that would happen. Yeah, So I'm glad you 0:31:39.480 --> 0:31:41.200 mentioned that. This is part of been my premise to 0:31:41.240 --> 0:31:45.640 be bullish gold because I see what's happening in crudel 0:31:45.680 --> 0:31:49.320 and commodities is what is crudels an enduring bear market 0:31:49.320 --> 0:31:51.440 that bounced last year and it's tilting back towards that 0:31:51.480 --> 0:31:54.440 bear market, which means deflation. And you look at things 0:31:54.440 --> 0:31:57.240 like gold and bitcoin, they're enduring bull markets. They have 0:31:57.320 --> 0:32:00.280 dipped and probably tipping back towards bull markets. And for 0:32:00.480 --> 0:32:02.840 that tilt, you need the deflation to come back, and 0:32:02.880 --> 0:32:05.040 it's clearly going there. So let's look at one example 0:32:05.040 --> 0:32:09.720 for crudel is the benchmark for heat, electricity, and fertilizer 0:32:09.760 --> 0:32:12.120 in this country's natural gas. It's down eighty percent from 0:32:12.160 --> 0:32:14.360 last year's high. It's returned to his cost of production 0:32:14.400 --> 0:32:16.760 around two and I fully expect the same thing in 0:32:16.800 --> 0:32:19.080 crude oil, which is around forty to fifty dollars a barrel. 0:32:19.200 --> 0:32:20.959 Forty dollars or fifty dollars a barrel is the cost 0:32:21.080 --> 0:32:23.960 of production and the world's largest producer of crude oil 0:32:24.000 --> 0:32:26.800 and liquid fuels, and that's the US. And by the way, 0:32:26.960 --> 0:32:30.000 for our listeners, Mike made that call like when oil 0:32:30.040 --> 0:32:31.760 was at one hundred and twenty five dollars a barrel. 0:32:31.840 --> 0:32:34.840 So if you listen to Mike, you made some dough 0:32:34.920 --> 0:32:39.000 Ray me. Mike, you cover everything from crypto to pork bellies. 0:32:40.600 --> 0:32:43.560 What are you looking at now? What's getting your tension here? Well, 0:32:43.600 --> 0:32:46.720 obviously to be the macro is overwhelming, Paul, and I 0:32:46.760 --> 0:32:48.400 think that's what people are missing, the fact that the 0:32:48.480 --> 0:32:52.080 FED and DCB are still tightened versus all the forward 0:32:52.120 --> 0:32:56.480 looking measures. Aren't just plunging. Commodities aren't just falling, they're collapsing. 0:32:56.760 --> 0:32:59.320 The bloomer combany in next is down over twenty percent 0:32:59.360 --> 0:33:01.320 over the year of basis, and it's been we've had 0:33:01.320 --> 0:33:03.480 the history of since nineteen sixty. The FED is never 0:33:03.560 --> 0:33:06.320 tightened in that environment, Yet they still are. We see 0:33:06.320 --> 0:33:09.040 a housing market pinking, and now we have a banking crisis, 0:33:09.080 --> 0:33:11.800 and they're still pointing out lagging inflation. And I pointed 0:33:11.800 --> 0:33:13.520 out with PPI in July and the year of year 0:33:13.560 --> 0:33:15.600 is probably gonna be negative. So to me, that's a 0:33:15.680 --> 0:33:17.760 ten on a scale of everything one to ten and 0:33:17.880 --> 0:33:20.000 everything else is a five or lower. Just the fact 0:33:20.000 --> 0:33:22.760 that today we're talking about tightening when a year from now, 0:33:22.720 --> 0:33:24.560 I sally expect when we speak and we're gonna be 0:33:24.640 --> 0:33:27.400 talking about and during inflation partly sparked by the FED 0:33:27.560 --> 0:33:29.080 who just was a little bit too late on the 0:33:29.120 --> 0:33:32.520 inflation and then way too aggressive fighting it. And now 0:33:32.560 --> 0:33:34.880 it's way past I mean, the ship is turning and 0:33:34.880 --> 0:33:37.840 they're still tainting. Wow, all right, folks, what you just 0:33:38.000 --> 0:33:41.120 heard is an analyst on the top of his or 0:33:41.160 --> 0:33:43.880 her game for a couple of reasons. One, he knows 0:33:43.920 --> 0:33:47.600 his stuff, he does the work, he does the math. Second, 0:33:48.120 --> 0:33:51.360 he provides his opinions and his analysis with conviction. I 0:33:51.400 --> 0:33:54.840 mean what you just heard there was analysis, got conviction 0:33:54.880 --> 0:33:58.240 in his call. Yet conviction oil going forty to fifty one, 0:33:58.360 --> 0:34:00.880 twenty five, and we get conviction again whether we're talking 0:34:00.960 --> 0:34:04.120 pork bellies or crypto. So we're fortunate to have Mike 0:34:04.200 --> 0:34:07.360 McLoone with us. He's a sconce down in Miami, holding 0:34:07.400 --> 0:34:10.600 down the Bloomberg Intelligence, a Southern tier down there in Miami. 0:34:11.600 --> 0:34:14.160 You're listening to the take Ken's a our live program, 0:34:14.200 --> 0:34:18.160 Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, 0:34:18.320 --> 0:34:21.000 the tun In half, Bloomberg dot Com, and the Bloomberg 0:34:21.080 --> 0:34:24.160 Business alf. You can also listen live on Amazon Alexa 0:34:24.280 --> 0:34:27.560 from our flagship New York station, Just say Alexa play 0:34:27.640 --> 0:34:31.600 Bloomberg eleven thirty. I want to get to right to 0:34:31.640 --> 0:34:35.040 our next guest, Lisian Sanders, chief investment strategist at Charles 0:34:35.080 --> 0:34:37.680 Schwab Lizards a million ways a week ago here, and 0:34:37.680 --> 0:34:39.520 we'll certainly get to the fed. But I'd love to 0:34:39.560 --> 0:34:43.319 ask a veteran strategists such as yourself what do you 0:34:43.360 --> 0:34:46.760 make of the last two weeks with Silicon Valley Banks, 0:34:46.840 --> 0:34:49.919 Signature Bank, and some of these other California banks. What's 0:34:49.920 --> 0:34:53.399 your take? So my take is maybe broader than what's 0:34:53.400 --> 0:34:56.000 been the focus in the past couple of weeks. Yes, 0:34:56.120 --> 0:34:59.520 there is a crisis going on here in the banking system, 0:34:59.520 --> 0:35:02.440 but I think it's part parcel of a broader story 0:35:02.520 --> 0:35:05.759 about the end of the end of the era of 0:35:05.760 --> 0:35:09.480 easy money coming off the zero bound, the capital misallocation 0:35:09.640 --> 0:35:14.480 that occurred during that era, just ample liquidity and zero rates, 0:35:14.560 --> 0:35:17.680 and now I think we're sort of paying the piper. 0:35:17.880 --> 0:35:21.200 And there's just been so much concentration on the banking 0:35:21.280 --> 0:35:23.120 part of this. But I think this is a broader 0:35:23.160 --> 0:35:26.440 story of of you know, who's swimming naked when the 0:35:26.480 --> 0:35:29.399 liquidity tide goes out? Liz, I have to ask, how 0:35:29.480 --> 0:35:32.840 frustrating is it when the narratives keep changing in market 0:35:32.880 --> 0:35:37.960 pricing and also trying to position specifically around that. Well, yeah, 0:35:38.000 --> 0:35:41.279 it is frustrating. It's unique in terms of how rapidly 0:35:41.960 --> 0:35:46.120 not just information is changing, but the reaction function. But 0:35:46.280 --> 0:35:48.400 I'm not a trader, and I don't I don't advise 0:35:48.480 --> 0:35:52.480 short term traders, so we're not trying to kind of 0:35:52.520 --> 0:35:55.880 play every wiggle in here. That the lead into the 0:35:55.920 --> 0:36:00.279 FED meeting is extraordinary in terms of how dramatic the 0:36:00.400 --> 0:36:04.160 change in expectations have been from as recently as March eighth, 0:36:04.200 --> 0:36:08.240 an assumption of fifty by the FED or hikes between 0:36:08.280 --> 0:36:10.120 now and year end, you know, five to seven on 0:36:10.200 --> 0:36:13.440 the terminal rate, and now we're sub five. Still a 0:36:13.480 --> 0:36:17.960 bias toward twenty five. But even thinking that, maybe they pause. Yeah, 0:36:18.000 --> 0:36:20.560 So if you're if you're trying to trade around this stuff, 0:36:21.640 --> 0:36:26.319 good luck. But so liszt intantly having God, No, I 0:36:26.360 --> 0:36:27.879 was just gonna ask, you know, we've got the FED 0:36:27.920 --> 0:36:30.720 coming up later today, and this is a unique meeting 0:36:30.719 --> 0:36:34.000 for FED Chairman j Pals. He does have this kind 0:36:34.000 --> 0:36:37.480 of simmering banking turmoil out there in addition to his 0:36:37.640 --> 0:36:42.000 remit on inflation and everything. What would you like, What 0:36:42.080 --> 0:36:43.680 do you think he should do today? What do you 0:36:43.680 --> 0:36:47.920 think the message should be today? I think they should pause, 0:36:48.400 --> 0:36:51.600 but certainly the market is saying that they're not going to. 0:36:51.800 --> 0:36:56.360 It's eighty six percent chance of twenty five. My guests, though, 0:36:56.600 --> 0:37:00.560 is that if they hike, it'll be a a hike, 0:37:00.760 --> 0:37:04.520 or if they pause, it'll be a hawkish pause, and 0:37:04.680 --> 0:37:07.200 that just means I think if they if they hike, 0:37:07.239 --> 0:37:09.839 it's consistent with market expectations. They tend to go along 0:37:09.880 --> 0:37:13.640 with market expectations, but they will talk a lot about 0:37:13.680 --> 0:37:16.719 what their facilities are, that we have the tools that 0:37:16.920 --> 0:37:19.960 you know, we're probably closer to the end. Conversely, if 0:37:20.000 --> 0:37:23.040 they opt to pause, which would be against market expectations, 0:37:23.360 --> 0:37:26.520 I think the messaging might be more about our inflation 0:37:26.560 --> 0:37:29.359 fight may not be done. If things settle down in 0:37:29.400 --> 0:37:32.280 the financial system, hikes could be back on the table. 0:37:32.440 --> 0:37:35.279 So that's my best guests heading into what is a 0:37:35.400 --> 0:37:38.920 very tricky meeting. And Liz, everybody obviously has been talking 0:37:38.960 --> 0:37:41.279 about the dot plots that are quarterly we're going to 0:37:41.360 --> 0:37:44.319 get another update on those and the meeting plot back 0:37:44.360 --> 0:37:46.440 at that December meeting was five point one percent for 0:37:46.560 --> 0:37:50.200 twenty twenty three. But are you expecting, I mean, how 0:37:50.239 --> 0:37:53.360 are you expecting markets to respond to that, because obviously 0:37:53.440 --> 0:37:55.120 we won't just get them for this year, we'll get 0:37:55.120 --> 0:37:57.560 them for the next coming years as well. But what 0:37:57.600 --> 0:37:59.120 are you expecting to see there and how do you 0:37:59.160 --> 0:38:04.880 think market Frankly, markets shouldn't respond dramatically to the Summary 0:38:04.880 --> 0:38:07.239 of Economic Projections or the dots plot. There's not been 0:38:07.280 --> 0:38:10.240 a lot of accuracy in those, but it does represent 0:38:10.320 --> 0:38:13.160 a bit of a signal for me. The issue will 0:38:13.200 --> 0:38:17.840 be is there consistency in terms of the message within 0:38:17.920 --> 0:38:20.759 the Summary of Economic Projections. What might be odd to 0:38:20.800 --> 0:38:24.520 see and I think would be disconcerting is if the 0:38:25.320 --> 0:38:29.120 dots and suggests that rate cuts are very much on 0:38:29.160 --> 0:38:33.000 the table before year end, but it's not reflected in 0:38:33.040 --> 0:38:36.799 a deterioration in the economic projections. That I think would 0:38:36.840 --> 0:38:39.160 be a troubling message, which is, hey, we think we're 0:38:39.160 --> 0:38:41.400 going to be cutting rates, not because the economy is 0:38:41.440 --> 0:38:44.160 going to suffer, but you would infer that it meant 0:38:44.200 --> 0:38:47.680 we think the financial system problem is larger. If the 0:38:48.040 --> 0:38:54.480 economic growth expectations are weaker and inflation expectations are lower, 0:38:54.920 --> 0:38:57.920 and the FED suggests rate cuts might be on the table, 0:38:58.000 --> 0:39:00.319 I think that's a better broader message. So I think 0:39:00.320 --> 0:39:03.840 it's sort of the combination of what the SEP and 0:39:03.880 --> 0:39:07.359 the dots show, and I think that dissecting is going 0:39:07.400 --> 0:39:09.600 to be more important this time. What are you thinking 0:39:09.640 --> 0:39:12.600 in terms of any potential descents when it comes to 0:39:12.640 --> 0:39:14.760 the FED and whether or not they could raise questions 0:39:14.760 --> 0:39:16.839 as far as potentially, what do they see that maybe 0:39:16.840 --> 0:39:20.760 we aren't seeing right now? Yeah, that's you know, normally, 0:39:21.280 --> 0:39:24.479 particularly when it's you, it was unanimous that nobody pays 0:39:24.560 --> 0:39:27.120 much attention, and at times there might be a dissent 0:39:27.239 --> 0:39:29.840 or two and it doesn't tend to capture headlines. But clearly, 0:39:29.840 --> 0:39:33.840 in this environment, if it's say more than one off descent, 0:39:34.040 --> 0:39:36.960 I think that will garner attention. I would be surprised 0:39:36.960 --> 0:39:41.160 if if Powell gets asked about that, but to see 0:39:41.200 --> 0:39:44.040 that wouldn't surprise me. There's got to be uncertainty that 0:39:44.560 --> 0:39:49.520 leads to voting members having different perspectives on things. In fact, 0:39:49.560 --> 0:39:54.680 I'd be a bit more surprised if there was unanimity. Liz, 0:39:55.520 --> 0:39:59.360 how do you think Chairman Powell should respond to questions 0:39:59.360 --> 0:40:03.080 about banking turmoil out there, whether it's how it impacted 0:40:04.239 --> 0:40:06.600 the defense decision over the past couple of days, or 0:40:07.560 --> 0:40:11.239 how well or not well the bank did in terms 0:40:11.280 --> 0:40:14.120 of dealing with some of these banks are preventing some 0:40:14.160 --> 0:40:17.080 of these issues. How do you think he should respond? Well, 0:40:17.840 --> 0:40:21.839 I think he should stick with the facts and the 0:40:21.920 --> 0:40:24.520 data and not speculate too much. If it's on the 0:40:24.560 --> 0:40:29.719 basis of just his perspective on what happens. So I 0:40:30.040 --> 0:40:32.759 think he should talk about the take up at the 0:40:32.800 --> 0:40:36.520 discount window and maybe a sense of what that's going 0:40:36.520 --> 0:40:39.680 to look like when it's released on Thursday this week. 0:40:39.719 --> 0:40:42.000 I think that's become sort of the hot piece of 0:40:42.040 --> 0:40:44.120 news now that comes out. We were all obsessed with 0:40:44.160 --> 0:40:48.200 inflation data points. Now I think it's that weekly Thursday 0:40:48.280 --> 0:40:50.680 release of of how much borrowing is happening at the 0:40:50.719 --> 0:40:54.719 discount window. So I I you know, I'm sure he's 0:40:54.719 --> 0:40:57.239 going to try to offer suthing words that has the 0:40:57.320 --> 0:41:02.400 tools and the resources, but I would assume he's not 0:41:02.520 --> 0:41:06.920 going to provide over its speculation without a backed up 0:41:06.920 --> 0:41:09.440 by the data we all are in possession of and 0:41:09.520 --> 0:41:11.960 maybe a bit more from what the FED as all Right, 0:41:12.239 --> 0:41:15.279 So putting all this together, you know the FED, what 0:41:15.320 --> 0:41:17.680 we're dealing with in the banking system, where we are 0:41:17.719 --> 0:41:22.360 with economic growth. What is your call to Schwab investors 0:41:22.400 --> 0:41:26.719 these days about how they should be investing. Well, one 0:41:26.719 --> 0:41:30.080 of my lines that I've always used in Tupper times, 0:41:30.120 --> 0:41:32.239 a panic is not an investment strategy, and I think 0:41:32.280 --> 0:41:35.400 great times that that applies. I think we're actually seeing 0:41:35.920 --> 0:41:40.359 some perhaps rational action in the market. You know, there's 0:41:40.400 --> 0:41:42.800 been a lot of concern why haven't the equity market 0:41:42.920 --> 0:41:45.400 reflected this with more downside? But when you look at 0:41:45.440 --> 0:41:49.160 where leadership shifts have occurred, kind of up the cap spectrum, 0:41:49.600 --> 0:41:53.200 out the quality spectrum, the equity market may be sending 0:41:53.200 --> 0:41:56.360 a message that all right, the FED may stop tightening, 0:41:56.400 --> 0:41:59.120 but now banks are going to probably tighten. So small 0:41:59.120 --> 0:42:02.359 and regional bank take off take up where the Fed 0:42:02.520 --> 0:42:05.680 left off, and that has different implications depending on whether 0:42:06.080 --> 0:42:08.920 you have higher interest costs, do you have the cash flow? 0:42:09.440 --> 0:42:11.480 So I think that there's a sort of a factor 0:42:11.680 --> 0:42:16.200 story that we're trying to emphasize. What types of characteristics 0:42:16.200 --> 0:42:18.480 do you want to look for in companies within the 0:42:18.520 --> 0:42:22.279 equity market for this very unique period of time, as 0:42:22.760 --> 0:42:25.640 opposed to making a you know, all in, all out 0:42:26.640 --> 0:42:28.759 broad equities call. I think this is where you have 0:42:28.840 --> 0:42:32.160 to add a lot of specificity in terms of what 0:42:32.200 --> 0:42:35.600 you're screening for. For lack of a better term, All right, Lizianne, 0:42:35.640 --> 0:42:37.239 thank you so much for joining us. I know this 0:42:37.320 --> 0:42:40.040 is a busy, busy day for you, like it is 0:42:40.080 --> 0:42:43.120 for many folks in the marketplace. Lizian Saunders, she's a 0:42:43.160 --> 0:42:46.640 chief investment strategist for Charles Schwab. Just I think one 0:42:46.680 --> 0:42:50.440 of the very highly respected voices in the marketplace, and 0:42:50.640 --> 0:42:53.560 certainly Schwab has, you know, so many accounts out there, 0:42:53.640 --> 0:42:55.319 so many clients out there, that she has a big 0:42:55.360 --> 0:42:57.120 impact on a big part of the market. So we 0:42:57.160 --> 0:43:01.440 appreciate getting some of Lizze's time there. You're listening to 0:43:01.480 --> 0:43:04.960 the tape cans are live program Bloomberg Markets weekdays at 0:43:05.040 --> 0:43:09.280 ten am Eastern on Bloomberg Radio, tuning app, Bloomberg dot Com, 0:43:09.280 --> 0:43:12.040 and the Bloomberg Business App. You can also listen live 0:43:12.160 --> 0:43:15.200 on Amazon Alexa from our flagship New York station. Just 0:43:15.360 --> 0:43:20.480 say Alexa play Bloomberg eleven thirty. Let's bring on our 0:43:20.520 --> 0:43:22.640 next guests we're talking about we get some great guests hour. 0:43:22.680 --> 0:43:25.160 How about this this guy, Cam Harvey, professor of finance 0:43:25.239 --> 0:43:28.759 at the Duke University Fuqual School of Business. Disclosure, he 0:43:28.880 --> 0:43:31.840 was my professor. I took a couple of his classes, 0:43:31.920 --> 0:43:35.239 and there's lots of math in his classes, and I 0:43:35.280 --> 0:43:37.560 think that you got his khd from Chicago that might 0:43:37.600 --> 0:43:39.960 have something to do with it. But I'm just not 0:43:40.160 --> 0:43:42.360 that matthy of a guy. So there was a challenge 0:43:42.400 --> 0:43:45.120 for me, but I did make it through cam. There's 0:43:45.120 --> 0:43:47.120 a million things we could talk about here, the FED, 0:43:47.480 --> 0:43:49.480 the yield curve, but I want to start off with 0:43:49.640 --> 0:43:52.560 Silicon Valley Bank and some of these other banks on 0:43:52.600 --> 0:43:55.320 the West Coast. It's not every day we get bank runs. 0:43:56.080 --> 0:44:00.759 What do you make of it? So I make of it. 0:44:01.560 --> 0:44:05.440 There's a lot of blame to go around here. And 0:44:05.960 --> 0:44:11.359 Number one, this is a gross failure of regulatory supervision. 0:44:12.440 --> 0:44:17.399 So this is obviously a regulated bank, the state chartered bank, 0:44:17.760 --> 0:44:21.880 but regulated by the FED. But it's less than two 0:44:21.960 --> 0:44:25.239 hundred and fifty billion dollars, so they're not held to 0:44:25.280 --> 0:44:30.400 the same regulatory standard, for example, the stress test. But 0:44:30.719 --> 0:44:33.440 even if they had to do the stress test, they 0:44:33.440 --> 0:44:37.719 would have passed. So what's going on. It turns out 0:44:37.800 --> 0:44:43.080 that the regulator put together the stress test not realizing 0:44:43.239 --> 0:44:47.480 what is going to happen to the FED funds rate. 0:44:48.160 --> 0:44:52.480 So the extreme scenario that the FED gives the bank 0:44:53.280 --> 0:44:58.560 to stress test is not extreme enough. And it's it's 0:44:58.600 --> 0:45:05.520 the regulator, the FED, that actually creates this scenario outside 0:45:06.160 --> 0:45:10.680 of their own extreme scenario. So that is a failure. 0:45:12.360 --> 0:45:17.080 Now it's not just a regulatory failure. This is a 0:45:17.120 --> 0:45:20.840 regional bank, and it's also a bank that caters to 0:45:21.080 --> 0:45:25.560 a particular industry, and that means that your loan book 0:45:25.719 --> 0:45:31.400 is not and your clients are not diversified, both geographically 0:45:31.800 --> 0:45:35.200 and across industry. So that means that you need to 0:45:35.239 --> 0:45:39.160 be held to a higher risk standard. And the other 0:45:39.200 --> 0:45:43.000 thing is that it's kind of remarkable, and we can 0:45:43.040 --> 0:45:48.280 talk about this more that these banks, and Silicon Valley 0:45:48.280 --> 0:45:52.759 Bank in particular, doesn't seem to understand one of the 0:45:52.800 --> 0:45:57.279 most basic risk concepts. And Paul, I think this was 0:45:57.400 --> 0:46:02.480 Lecture three of Finance one oh one, and that's duration risk. 0:46:03.080 --> 0:46:06.640 So just because you buy a long dated tric rate 0:46:07.200 --> 0:46:10.000 doesn't mean it doesn't have any risk. It doesn't have 0:46:10.040 --> 0:46:14.000 a default risk, but it's got interest rate risk. So 0:46:14.680 --> 0:46:20.160 they didn't do any hedging. So banks can hedge, and 0:46:20.360 --> 0:46:24.840 it turns out that SVB in the past had hedged, 0:46:25.320 --> 0:46:29.080 but then they let the hedges expire they're too expensive. 0:46:30.320 --> 0:46:33.120 How systemic, if at all, do you think this is 0:46:33.200 --> 0:46:35.680 CAM or do you think this is more specific to 0:46:36.560 --> 0:46:38.759 SVB or maybe even just a handful of banks that 0:46:38.880 --> 0:46:43.359 that catered to that customer base. So the last time 0:46:43.400 --> 0:46:46.080 I was on we talked about the Eel curve, and 0:46:46.120 --> 0:46:50.480 the Oel curve is relevant for this particular situation because 0:46:50.600 --> 0:46:55.839 you think the usual banking model, you gather deposits and 0:46:56.160 --> 0:47:00.799 you're paying your depositors a short term interest rate savings rate, 0:47:01.640 --> 0:47:06.279 and then you lend some money out to companies and 0:47:06.360 --> 0:47:11.759 things like that, or you buy long dated treasuries. So 0:47:13.320 --> 0:47:17.960 what you're getting is, in terms of revenue, is a 0:47:18.080 --> 0:47:22.000 longer term rate and what you're paying is a shorter 0:47:22.160 --> 0:47:25.640 term rate. And that works great if the yield curve 0:47:25.680 --> 0:47:28.399 has got a positive slope, which meaning the long term 0:47:28.480 --> 0:47:31.560 rates are higher than short term rates. But when the 0:47:31.680 --> 0:47:36.040 yield curve inverts, that puts stress on the banking system 0:47:36.480 --> 0:47:38.600 because all of a sudden, what they have to pay 0:47:38.640 --> 0:47:43.560 out in savings deposits is high, and it could also 0:47:43.600 --> 0:47:47.600 be the case that the value of the liabilities changes. 0:47:48.239 --> 0:47:53.640 So this is the reason to actually do some hedging, 0:47:53.800 --> 0:47:58.960 but not all banks do the hedging. And because the 0:47:59.040 --> 0:48:02.759 Yeld curve inverse stresses the banks, it kind of makes 0:48:02.800 --> 0:48:06.960 sense that the FED should take that into account. So 0:48:07.160 --> 0:48:12.000 I'm very interested in reading the minutes of the FOM 0:48:12.040 --> 0:48:15.879 at C five years from now when they actually come 0:48:15.920 --> 0:48:21.520 out to see if they actually did their homework and say, oh, well, 0:48:21.560 --> 0:48:25.399 we're thinking of inverting theeal curve even more. How many 0:48:25.440 --> 0:48:31.160 banks does that put at risk? Okay, so I was 0:48:31.200 --> 0:48:33.920 going to ask you, because you're specifically bringing up the 0:48:34.040 --> 0:48:36.560 yield curve when you're looking at that, is it telling 0:48:36.640 --> 0:48:38.920 us or we headed into a big event? Or did 0:48:38.960 --> 0:48:42.920 the big event already happen? So, so think of it 0:48:42.960 --> 0:48:45.799 this way. The yeld curve's got information has been very 0:48:45.800 --> 0:48:51.279 accurate in terms of forecasting processions. It is something that 0:48:51.960 --> 0:48:58.040 precedes economic bad times. And you can the yeal curve 0:48:58.080 --> 0:49:01.080 has been inverted for quite a while now, and you 0:49:01.160 --> 0:49:04.520 can see some of the damage that is doing. So 0:49:04.600 --> 0:49:07.840 we went in like a year ago, our financial system 0:49:09.040 --> 0:49:13.319 was very robust, in very good shape, leverage less than 0:49:14.560 --> 0:49:18.719 it was, for example, before the global financial crisis. But 0:49:18.960 --> 0:49:24.640 once you start to engineer a yield curve inversion, it 0:49:24.719 --> 0:49:30.440 puts at risk the basic banking model and for those 0:49:30.480 --> 0:49:37.080 banks that are not sufficiently hedged, that puts them at risk. So, 0:49:37.760 --> 0:49:42.040 and this is exactly what's happened. So the FED, in 0:49:42.200 --> 0:49:47.160 taking these actions, has weakened the banking system. And again 0:49:47.480 --> 0:49:51.960 this is not just a regulatory problem. It's also a 0:49:51.960 --> 0:49:57.120 problem of moral hazard because these banks, well, why should 0:49:57.120 --> 0:50:01.640 we hedge. The Fed's going to bail us out. Yeah, 0:50:01.840 --> 0:50:03.840 that's kind of what it seems like at this point. 0:50:03.840 --> 0:50:06.360 But so now now you're the Federal Reserve, your j 0:50:06.480 --> 0:50:11.600 pal today at two o'clock, Cam, what do you do here? Okay, 0:50:11.600 --> 0:50:14.120 So the last time I was on your show was 0:50:14.200 --> 0:50:17.960 just before the previous announcement, where I said that they 0:50:17.960 --> 0:50:23.400 should stand down and pause and collect more data, and 0:50:23.640 --> 0:50:26.080 they did not do that. I considered that a mistake, 0:50:26.560 --> 0:50:30.560 and indeed that could have been the tipping point that 0:50:30.680 --> 0:50:35.240 hike to invert the OL curve just a little bit more, 0:50:35.719 --> 0:50:40.920 that that could have been the pivot point to push 0:50:41.000 --> 0:50:46.920 us into a potential serious banking crisis. So what I 0:50:46.960 --> 0:50:50.000 would like to do today if I was at the 0:50:50.040 --> 0:50:52.840 FED would be the cut twenty five base of points. 0:50:52.880 --> 0:50:56.359 I know that's not going to happen because it would 0:50:56.400 --> 0:51:01.359 be a sign of a panic of desperate measures. But 0:51:01.560 --> 0:51:04.080 the right thing to do, and I agree with Lisian 0:51:04.880 --> 0:51:09.160 who's on previously, is to stand down, to pause and 0:51:09.239 --> 0:51:13.279 say we need to collect more data. And really what 0:51:13.320 --> 0:51:16.719 this means is we need to collect the data that 0:51:16.840 --> 0:51:20.440 we should have collected last time and the time before 0:51:20.880 --> 0:51:24.799 to do the analysis of the banks to figure out 0:51:24.880 --> 0:51:30.160 what their risk actually is and how it was induced 0:51:30.520 --> 0:51:35.360 with the yeal curve inversion, and and is it the 0:51:35.400 --> 0:51:41.680 case that the equity in these banks, if we look 0:51:41.719 --> 0:51:45.760 at their assets and mark them to market, has taken 0:51:45.760 --> 0:51:49.359 a hit, potentially a two trillion dollars hit. There's an 0:51:49.400 --> 0:51:53.000 academic paper that suggests that there's hundreds of banks that 0:51:53.160 --> 0:51:57.160 could be underwater right now, and the FED needs to 0:51:57.200 --> 0:52:00.799 do that work. And that work includes not just looking 0:52:00.840 --> 0:52:05.440 at the balance sheet, but also looking at off balance sheet. 0:52:06.000 --> 0:52:09.520 So we need to know if for these companies are 0:52:09.560 --> 0:52:15.040 hedging and how they're hedging, so they should be hedging 0:52:15.440 --> 0:52:19.279 their interest rate risk, but we don't know. That's very 0:52:19.320 --> 0:52:23.959 opaque right now. The Fed, it's got four hundred PhD economists. 0:52:24.400 --> 0:52:28.080 They should give this high priority. All right, KEM, thank 0:52:28.120 --> 0:52:31.120 you so much. We appreciate it. Clear and concise as always, 0:52:31.640 --> 0:52:34.480 Cam Harvey. He's a professor of finance at the Duke 0:52:34.600 --> 0:52:39.440 University's Fuqua School of Business. I survived his classes. No 0:52:39.600 --> 0:52:41.759 walk in the park. You had to bring your a game, 0:52:42.480 --> 0:52:44.880 but the better for it, I think. Thanks for listening. 0:52:44.920 --> 0:52:48.399 To the Bloomberg Markets podcast. You can subscribe and listen 0:52:48.440 --> 0:52:52.720 to interviews with Apple Podcasts or whatever podcast platform you prefer. 0:52:53.120 --> 0:52:56.400 I'm Matt Miller. I'm on Twitter at Matt Miller nineteen 0:52:56.520 --> 0:52:59.120 seventy three and on ball Sweeney, I'm on Twitter at 0:52:59.200 --> 0:53:02.080 pt Sweeney. Before the podcast, you can always catch us 0:53:02.080 --> 0:53:03.480 worldwide at Bloomberg Radio