Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 1: the Bloomberg Terminal and the Bloomberg Business app. Tourston slockholding
Speaker 1: court at Deutsche Bank for years. He's a chief economist
Speaker 1: at a Rising Apollo. Torston, thank you so much for
Speaker 1: joining this morning. What's the operative theory right now for
Speaker 1: a FED Let's say they're restrictive, some would say they're
Speaker 1: super restrictive. Underlying that is a need to turn at
Speaker 1: some point. What's the theory they have right now to
Speaker 1: get ready to turn out quarters up meeting zone.
Speaker 2: Well, that's a very good question, and I think the
Speaker 2: answer to that is it's all about the dual mandate.
Speaker 2: That for a long long time they've been focusing on
Speaker 2: the inflation part of the dual mandate because it was
Speaker 2: very clear that inflation was and still is at levels
Speaker 2: that are too high for their comfort. I do think
Speaker 2: that the narrative, both for the FED and also for
Speaker 2: markets will now begin to change towards growth or towards employment.
Speaker 2: In other words, what are the reasons why we're still
Speaker 2: having this strong economy? And if the lack of effects
Speaker 2: of monetary policy that they have spoken about for so long,
Speaker 2: where it takes twelve to eighteen months to slow the
Speaker 2: economy down, well, the lacked effects of Fed hikes will
Speaker 2: eventually begin to slow things down. We're already seeing that
Speaker 2: across all indicators, and we should expect that also to
Speaker 2: happen over the coming quarters.
Speaker 3: Son, how do you explain jobless claims coming in lower
Speaker 3: than expected? How do you explain other metrics of wage
Speaker 3: growth continuing to remain robust.
Speaker 2: Yeah, so, in that sense, there's still a very strong
Speaker 2: label market. Everagej ob earning last Friday went up, and
Speaker 2: this label market, obviously in jobless claims still looking relatively tight,
Speaker 2: would certainly also get the Fed to say, well, we
Speaker 2: still need to hike rate more and still tighter monetary
Speaker 2: policy is needed.
Speaker 3: But at this point, if you see companies, whether it's Delta,
Speaker 3: whether it's PEPSI, whether it's a number of the others
Speaker 3: that are seeing profit margins expand with their input prices
Speaker 3: coming down more than what they can charge consumers.
Speaker 4: You have people who are employed.
Speaker 3: At what point does it become a virtuous cycle that
Speaker 3: offsets any pain of those rate hikes.
Speaker 2: Well, and also at this point, as you also talk
Speaker 2: a lot about the housing market is beginning to recover,
Speaker 2: traffic or prospective buyers is going up. You look, existing
Speaker 2: home sales is going up, New home sales is going up.
Speaker 2: Home build their confidence, home bio confidence. Even the number
Speaker 2: of office receiveder sole property is also going up. That
Speaker 2: bidding walls are coming back. And remember housing makes up
Speaker 2: forty percent of the CPI. So the risk is if
Speaker 2: we start with core CPI, which was at four point eight,
Speaker 2: that's still just way too high for their comfort. So
Speaker 2: that's why for them it's still the hawkish communication saying
Speaker 2: both on the inflation side and on the growth side,
Speaker 2: on the employment side of the dual mandate, we just
Speaker 2: got to keep making sure that we don't have an
Speaker 2: economy that continues to look overheated on a number of
Speaker 2: different fronts.
Speaker 1: I want to look at the larger of the miss
Speaker 1: standpoint that America is fully employed. This is in theegeis
Speaker 1: off the jobs report five six, eight days ago, and
Speaker 1: this is the employment as compared to population ratio of
Speaker 1: prime age people in America. It is a full recovery
Speaker 1: mode and particularly back on literally back on regression, back
Speaker 1: on trend. That's got to be the most optimistic chart
Speaker 1: for politicians in America.
Speaker 2: Well, and that's why the debate for the FIT is probably, well,
Speaker 2: do we need to solten the label market? As you know,
Speaker 2: different FMC members are putting different weight on this. Do
Speaker 2: we need to solvet in the label market to get
Speaker 2: inflation to come down? I mean, let's not forget inflation. Today,
Speaker 2: Core CPI was at four point eight. We are nowhere
Speaker 2: near the two percent target where they wanted to be.
Speaker 2: And with that backdrop, of course, they will continue to
Speaker 2: say we just got to keep going because we still
Speaker 2: have way too high inflation.
Speaker 3: One less understood aspect of FED policy is not just
Speaker 3: what happens when you raise rates to the pace they have,
Speaker 3: but what happens when you hold them for a prolonged
Speaker 3: period of time, especially as companies have already refinanced and
Speaker 3: aren't really capturing a lot of the higher yields that
Speaker 3: are being charged out there by investors.
Speaker 4: When does that bite? When does that scenario change?
Speaker 5: Yeah?
Speaker 2: No, The very important answer to that is that this
Speaker 2: is exactly the crystallization of the transmission making. This of
Speaker 2: monetary policy. Where is it showing up? And the answer
Speaker 2: to your question leads, that's showing up in a number
Speaker 2: of different places. You are beginning to see the linguity
Speaker 2: rates for auto loans going up, the linguagy rates for
Speaker 2: credit cards are going up. You beginning to see the
Speaker 2: default rates for corporates on high yield going up. Loans
Speaker 2: also see default rates going up, so across the board,
Speaker 2: both for consumers and for corporates. The conclusion is that
Speaker 2: default cycle has started, so it is biting. It's just
Speaker 2: not showing up at the macro level quite yet. But
Speaker 2: it's very clear that the effects of monetary policy are
Speaker 2: showing up in the background and it will eventually begin
Speaker 2: to slow things down.
Speaker 1: Lisa, this employment to population primate, this is the core
Speaker 1: of America. The success of a decade twenty ten, off
Speaker 1: of the terrible financial crisis, moving to seventy five percent employed,
Speaker 1: up to eighty percent employed. Granted, there's a lot of
Speaker 1: people not in that number that are unemployed. A pandemic
Speaker 1: that was worse than the financial crisis. We've rebounded back
Speaker 1: and we burst through where we were in the autumn
Speaker 1: of two thousand and nineteen. It's a fully employed America
Speaker 1: of the people that are employable.
Speaker 3: Well, and this becomes sort of the question what could
Speaker 3: change that scenario, which is why we're wondering about transmission mechanism.
Speaker 3: If you don't see that, you're saying, we do see
Speaker 3: a default cycle that is starting. However, at the same time,
Speaker 3: some of these companies were sort of destined to default
Speaker 3: to while back and are now just sort of being
Speaker 3: washed out.
Speaker 4: What do you see this cycle looking like eventually? When
Speaker 4: do you start to see some of those lag effects
Speaker 4: taking effect.
Speaker 2: Well, one way to do that is on my Bloomberg
Speaker 2: scream to type shok and try to give a shock
Speaker 2: to the fitfunds rate five percent is points higher. What
Speaker 2: is the profile for GDP over the next several years
Speaker 2: if you do raise the Fed funds rate by five
Speaker 2: percent is points in a very short period of time.
Speaker 2: And the answer is that it takes three, four or
Speaker 2: five quarters before you get the maximum impact. So in
Speaker 2: other ways, let's talk about this as what happened to
Speaker 2: the lack of effects of monetary policy. Inflation is coming down,
Speaker 2: but what about growth? And I think the narrative will
Speaker 2: now shift away from saying inflation looks better, the trend
Speaker 2: is better. We're still at a high level. But what
Speaker 2: about this idea that when we step on the brakes
Speaker 2: you will see monetary posts you're having a negative impact
Speaker 2: on consumption, on capic spinning. And that's exactly what we're seeing.
Speaker 2: You see same store retail sales is coming down. You're
Speaker 2: seeing cape spending coming down. The fault rates are going up,
Speaker 2: the linguity rates are going up. It is beginning to bite,
Speaker 2: as you're saying, Lisa in the background. So we will
Speaker 2: and should still expect to see over the next slevel
Speaker 2: quarters a continued slow down. This is what the Fed wants.
Speaker 2: This is the whole reason why they're raising interest rates
Speaker 2: to get the economy to continue to slow down.
Speaker 1: That's worked out well. You know, I got fourteen ways
Speaker 1: to go here in our two hour conversation, but I've
Speaker 1: got to drive towards the arch overlay here, which you
Speaker 1: say about it, Apollo, And I'm going to go to
Speaker 1: Paul Romer, the great growth economists, the great economists thinking
Speaker 1: about technology. Are we just fooling ourselves in that there's
Speaker 1: a technology technological overlay where the halves of all incomes
Speaker 1: are benefiting from technology, and there's a whole other loudite
Speaker 1: part of society that's not participating.
Speaker 2: Well, at least on the AI front. It's certainly something
Speaker 2: that's small happening in financial markets than out there, and
Speaker 2: they're really con what.
Speaker 1: About out in the real economy. I'm thinking about your
Speaker 1: Germany flat on its back right now.
Speaker 2: No, well, the bottom line is still that the Europeans definitely,
Speaker 2: of course experiencing some hitwinds as a result of the
Speaker 2: AI boom that we're seeing in the US at the moment. Unfortunately,
Speaker 2: we're not quite seeing that in the productivity data as
Speaker 2: we speak, but you're right, over time, this will certainly
Speaker 2: be something that helps. I don't think this matters so
Speaker 2: much for the business side in the NIEM and for
Speaker 2: the FAT, but I do think that it does matter
Speaker 2: for discussions about the potential growth rate of the US economy.
Speaker 3: It's quickly here you were talking about how as inflation
Speaker 3: comes down, that's when you start to see profits come
Speaker 3: revenues come down. Is this sort of the unspoken reality
Speaker 3: that actually inflation was positive for companies increase their revenues
Speaker 3: and allowed the growth.
Speaker 6: Oh.
Speaker 2: Absolutely, this is spot on, because inflation is not only
Speaker 2: about output prices, it's also input prices. In other words,
Speaker 2: things that are sold when you have high inflation could
Speaker 2: have wider profit margins. But the cost of production we're
Speaker 2: also very elevated. And if all that comes down is
Speaker 2: not only helping in terms of lower cost of production,
Speaker 2: it's also going to squeeze margins.
Speaker 3: I keep thinking Tom about what Torristen Slock just said,
Speaker 3: and we heard a similar kind of discussion from Tony
Speaker 3: Dwyer that when revenues come in, that is when it
Speaker 3: is a game changer.
Speaker 4: And perhaps one of the.
Speaker 3: Most unstated, understated and also misunderstood aspects of inflation was
Speaker 3: how much boosted companies revenues? How much boosted and all
Speaker 3: of a sudden, when you start to see inflation come
Speaker 3: in and revenues don't increase the same kind of levels,
Speaker 3: then how much do you see a resetting back to
Speaker 3: a normal type of assam Sure you impute.
Speaker 1: The inflation in the system. The giant Phil Couray value
Speaker 1: investor pioneer in New York lived to be one hundred
Speaker 1: and four whatever. Nominal GDP is the great misguest right now,
Speaker 1: isn't it?
Speaker 2: Absolutely? And what's really critical about this is that equities
Speaker 2: trade on nominal data. Bonds and rates traits on real data.
Speaker 1: Stop the show, guys, frame that give that to every
Speaker 1: show this week, say it again. Nominal GDP matters.
Speaker 2: Because what matters phenomenal earnings in this in P five hundred,
Speaker 2: which has grown six percent annually for the last forty years,
Speaker 2: is all about nominal variables and normal GDP, nominal revenue.
Speaker 2: Everything is mentioned in normal terms. So when facing comes down,
Speaker 2: you should also expect the bond market to look at
Speaker 2: that and say, well, that's not for us. That's what's
Speaker 2: happening in equities, whereas bond markets will say it's all
Speaker 2: about what's happening on the real side, meaning on the
Speaker 2: volume on the unit side.
Speaker 1: Turston, thank you so much, greatly, greatly appreciate this today
Speaker 1: with Apollo as well, the hallmark of the show has
Speaker 1: always been to keep score. We take careful care with
Speaker 1: those that get it wrong. We really pay attention to
Speaker 1: those that get it right. There is no surprise to
Speaker 1: anyone over the decades to know, with a longer timeframe,
Speaker 1: a longer perspective, the gentleman from Yale once again has
Speaker 1: nailed it. Edward Yard Danny joines this, President of your
Speaker 1: Danny Research. What were you thinking, not the third week
Speaker 1: of October the low, but let me say, the first
Speaker 1: week of October, the hysteria there, the gloom. How are
Speaker 1: you framing out the optimism that got this realized?
Speaker 7: I watch sentiment in the equity market very carefully, and
Speaker 7: there's something called the investors Intelligence old Bear ratio, And
Speaker 7: in mid October it got down to zero point six
Speaker 7: to zero, which is as depressed as it was in
Speaker 7: March of twenty two thousand and nine. And I was thinking,
Speaker 7: surely things aren't anywhere near as bad as they were
Speaker 7: back then. And I've also been in of the view
Speaker 7: that we're not going to have a economy wide recession.
Speaker 7: I would have the view that we've been in a
Speaker 7: rolling recession. So it all kind of came together for
Speaker 7: me by the end of October, and I said, you know,
Speaker 7: I think October twelfth was low.
Speaker 8: Do you think we can carry on beating up low expectations?
Speaker 7: Well, the problem now is that there's too many bulls.
Speaker 7: You know, we've nothing to fear, but fearless investors, we
Speaker 7: don't really have enough. I mean, the technical sentiment picture
Speaker 7: isn't that that good because there just aren't enough pessimists
Speaker 7: out there. But the problem is, the fundamentals are really good.
Speaker 5: You know.
Speaker 7: I think everybody's swung around from worrying about an economy
Speaker 7: wide recession to sort of embracing a disinflationary soft landing.
Speaker 7: And you know, we'll see what happens with the PPI,
Speaker 7: but you know, we could have a trifecta of really
Speaker 7: great numbers. Expected inflation on Monday was lower than the next,
Speaker 7: and the CPI was great, and I think the PPI
Speaker 7: is going to be very good as well. So disinflation
Speaker 7: is here.
Speaker 8: Well bank and ex validates some of the optimism I think.
Speaker 7: So I think we are going to see a continuation,
Speaker 7: as you've pointed out, of an increase in loan loss reserves.
Speaker 7: The Fed actually puts out a weekly series on that
Speaker 7: for large banks and small banks. For the large banks
Speaker 7: is actually up sixteen percent on a year over year basis,
Speaker 7: So there could be some disappointment on earnings from that perspective,
Speaker 7: but much depends on the economy. If people embrace the
Speaker 7: view that the economy continue to grow, then credit quality
Speaker 7: is not going to be that big an issue and
Speaker 7: they may be able to within a few quarters just
Speaker 7: to reduce those loan loss reserves, and suddenly the profits
Speaker 7: are looking pretty good again.
Speaker 3: Months ago, you were talking about forty five hundred. How
Speaker 3: high have you gone in terms of s and p FO.
Speaker 7: Yeah, I've actually I'm going to raise you by one hundred.
Speaker 7: I've been talking about forty six hundred. But what's the difference.
Speaker 7: You know, it's been a bull market since October twelfth,
Speaker 7: and the problem with forty six hundred is roughly close
Speaker 7: to that. That's my year end target, and it looked
Speaker 7: delusional earlier this year, I have to admit, but it's
Speaker 7: worked out awfully well. We're only, what you know, one
Speaker 7: hundred and fifty points away from them, maybe less than that.
Speaker 7: So let's get to forty six hundred and then ask
Speaker 7: me again. But I'll probably raise it to forty eight hundred,
Speaker 7: depending on how things are shaping up.
Speaker 3: How profit margins fit into this. Because we were speaking
Speaker 3: earlier about the likelihood where we could see a shifting
Speaker 3: narrative there, especially if revenues come in the way that
Speaker 3: Tony Dwyer was talking about, do you see things differently?
Speaker 7: Well, we have had a earnings recession, a very mild one.
Speaker 7: It looks like earnings are going to be down about
Speaker 7: eight percent on a year over year basis during the
Speaker 7: second quarter, and that should be the worst of it,
Speaker 7: and then we start to progressively see better comparisons than
Speaker 7: a positive comparison by the fourth quarter. Interestingly, this earnings
Speaker 7: recession hasn't been attributable to revenues. Revenues for us P
Speaker 7: five hundred are at an all time record high, so clearly
Speaker 7: it's been the profit margin. So the profit margin has
Speaker 7: been getting squeezed for the past year or so. But
Speaker 7: I see signs in weekly data that we monitor, looking
Speaker 7: at forward earnings and forward revenues, that suggests that analysts
Speaker 7: are seeing signs that revenues are that profit margins are bottoming.
Speaker 1: I look at your Denny at the past here, and
Speaker 1: it's so easy to go back and do some analog
Speaker 1: with ten years ago or forty years ago. The fact is,
Speaker 1: when you know, we first knew your Denny at CJ. Lawrence,
Speaker 1: you were with lu Rukaiser talking about the public and
Speaker 1: individual stocks. Now we are overwhelmed with index fund investment
Speaker 1: and ETF investment. How does that change the dynamics of
Speaker 1: the market, optimistically or negatively given these new instruments.
Speaker 7: Well, it's very frustrating for individual investors and certainly for
Speaker 7: institutional investors that we're taught that diversification is an important
Speaker 7: aspect of managing a portfolio, and suddenly we have the
Speaker 7: megacap eight stocks that accounts for twenty seven percent of
Speaker 7: the S and P five hundred. So you know, if
Speaker 7: you don't have twenty seven percent of your portfolio those stocks,
Speaker 7: you've been underperforming. So it's a lot of pressure to
Speaker 7: you know, play that game, to you know, continue to
Speaker 7: buy into that group of stocks. But it is what
Speaker 7: it is. These are great companies and they're I think
Speaker 7: it all really started, you know, with when Facebook realized
Speaker 7: that the stock was getting the hammered. They said, well,
Speaker 7: we can show everybody just how much we really make.
Speaker 7: All we got to do is cut our expenses and
Speaker 7: that's easy enough, and that's what a lot of them did.
Speaker 7: And then the AI think, so.
Speaker 1: What's the theme for twelve ands forward? What's the next
Speaker 1: theme for corporate America to perform?
Speaker 7: Well, my theme is I tend to focus on longer
Speaker 7: term themes. My theme is the Roaring twenty twenties, which
Speaker 7: again looked quite delusional over the past few years. But
Speaker 7: the decade isn't over and there's still time for it
Speaker 7: to run, and I think it. I think technological innovation
Speaker 7: is going to make a big difference.
Speaker 1: Johnny, there's the pandemic of nineteen eighteen, nineteen nineteen, yea
Speaker 1: boom right into the roaring.
Speaker 8: You coined the term bond vigilantes. Can you offer us
Speaker 8: your analysis on the bond market right now Treasury specifically.
Speaker 7: Well, it's interesting how well the bond market's been doing
Speaker 7: in an environment where the FED has been raising short
Speaker 7: term raise quite aggressively, and in an environment where we
Speaker 7: have quantitative tightening where they're actually letting their securities mature.
Speaker 7: There's clearly been a tremendous demand for bonds. I think
Speaker 7: a lot of it is there's a tremendous funel liquidity
Speaker 7: out there still. I know people have focused on M
Speaker 7: two and have had a dumish scenario because M two
Speaker 7: has been declining, but two is still about a trillion
Speaker 7: dollars above its pre pandemic trend line. Demand deposits are
Speaker 7: also something more than that. Actually, M two has never
Speaker 7: been more liquid.
Speaker 8: Is there an obvious relationship at the moment between how
Speaker 8: treasuries performed and what equities have been doing?
Speaker 7: Yeah?
Speaker 8: What is it?
Speaker 7: Well? I think you know, last year they were both
Speaker 7: doing horribly. It was something we hadn't seen in quite
Speaker 7: some time. Now, I think both ascid classes have done
Speaker 7: quite well. I mean, you know, the bonds have at
Speaker 7: least earned you the coupon. They haven't really hurt you.
Speaker 7: I'm looking at the bonds to I think the bonds
Speaker 7: peaked at four point two percent on October twenty fourth.
Speaker 7: I believe last year a lot of good things happened
Speaker 7: in October of last year, and so I think the
Speaker 7: bonds are okay. And I think stocks still have upside,
Speaker 7: especially in the laggers like financials and industrials.
Speaker 8: So you think even if the FED sticks AT's say
Speaker 8: five point fifty and just holds it, that this equity
Speaker 8: market it's okay.
Speaker 7: Well, you know, the fans have been kind of telling
Speaker 7: different stories. When an individual FED officials have been talking,
Speaker 7: they've been awfully hawkish. But when they get together and
Speaker 7: put together there's summary of economic projections. They've been very reasonable.
Speaker 7: They said, look, we want to get it up to
Speaker 7: a restrictive level. I think they're there. The banking crisis
Speaker 7: I think demonstrated that they're there. It's restrictive enough, and
Speaker 7: I think they want to keep it there. I never
Speaker 7: was in that camp that believe that the FED was
Speaker 7: going to lower industry, so I took them at their word.
Speaker 7: I think they could declare mission accomplished, except that's the jinks.
Speaker 7: So it's better that they don't do that and that
Speaker 7: they continue to talk about Well, I hope they don't.
Speaker 7: You know, victory laps are jinx is. You know, there
Speaker 7: you go. I've had a few of those in my career,
Speaker 7: only to be wrong that almost the next time.
Speaker 1: That's our theme. This morning, when you weren't here, they
Speaker 1: were busting my jobs about victory labs.
Speaker 8: Well, we won't call this a victory lap for you,
Speaker 8: but certainly so fast. Don't do that so fast, so
Speaker 8: good that it's going to see you, Thank you, thank you, sir.
Speaker 8: At any of any research.
Speaker 1: My experience is people listen when Alan Ruskins speaks. He
Speaker 1: has the privilege of working with David folkerts Landau and
Speaker 1: putting together Holistic Global Research for Deutsche Bank. They're chief
Speaker 1: and national strategist. Joins us on what I'm calling from
Speaker 1: Steve England or a game changer Thursday. How much did
Speaker 1: the game change yesterday, Alan Ruskin? With disinflation codified in
Speaker 1: the United.
Speaker 6: States, whether disinflation was codified, but things did certainly change
Speaker 6: substantially in the FX market. We've been entrenched in this
Speaker 6: incredibly narrow range really.
Speaker 9: For most of this year.
Speaker 6: Euro dollar in particular, it's seemingly capped at one ten nineteen.
Speaker 6: I think once we broke that level, it's opened the
Speaker 6: floodgates in a way, and the dollars on the defensive
Speaker 6: pretty much against all currency. So it's codified a change,
Speaker 6: as it were in the FX market, Tom.
Speaker 1: I looked at a very fancy regression of the blended
Speaker 1: dxynx back twenty years and certainly off the Great Financial
Speaker 1: event of two thousand and eight. I can look for
Speaker 1: further eight percent dollar weakness. Do you see that kind
Speaker 1: of scale to go further with dollar weakness?
Speaker 6: Tom I, do you know when you look at these
Speaker 6: big dollar cycles, you know, historically we used to have,
Speaker 6: you know, sort of six or seven years of updollar
Speaker 6: uptick and then nine you know, maybe even ten years
Speaker 6: of dollar famine.
Speaker 9: As it were.
Speaker 6: This last cycle got broken up a little bit because
Speaker 6: of COVID in particular, and we had a bit of
Speaker 6: a longer uptick. But the downticks, the down cycles are
Speaker 6: typically in the order of about twenty five percent down
Speaker 6: on the trade weighted index. So we've probably gone maybe
Speaker 6: a quarter of the way through a typical down cycle.
Speaker 6: So even if we have, you know, half a cycle,
Speaker 6: we could certainly get that eight percent that you suggest,
Speaker 6: and it could be substantially more than that.
Speaker 4: When is fundamental growth matter?
Speaker 3: Again, Alan, I mean, we're talking about the raid hiking cycle,
Speaker 3: we're talking about inflation, but it also is a question
Speaker 3: of fundamental economic strength that the US seems to be displaying,
Speaker 3: even as Europe faces a lot of headway and potentially
Speaker 3: more rate hikes into weakness.
Speaker 6: Yeah, you know, the way I look at it, Lisa,
Speaker 6: is that there's a continuum where you think in terms
Speaker 6: of strong growth, a sort of no landing situation, then
Speaker 6: a soft landing story where you could even have a
Speaker 6: recession but it's a shallow recession, or you could have
Speaker 6: you know, really amounts to a hard landing where the
Speaker 6: FED pushes to the point where something really breaks at
Speaker 6: the moment. In that continuum, you've shifted towards more of
Speaker 6: that sort of soft landing arena with the FED pivoting
Speaker 6: in twenty twenty four. And that's the worst scenario as
Speaker 6: far as the dollar is concerned, because risk tradees are okay,
Speaker 6: and bonds in general like it, equities like it, but
Speaker 6: the dollar really doesn't like that scenario. So dollar tends
Speaker 6: to do poorly against G ten because of the fat pivot,
Speaker 6: and it doesn't do well against EM because risk usually
Speaker 6: is trading okay as well.
Speaker 3: And to that point, allan I'm thinking about typical cycles
Speaker 3: from the dollar does worse. Usually that is a risk
Speaker 3: on scenario, risk on in emerging markets, risk on around
Speaker 3: the world, a sense of growth. How does that dovetail
Speaker 3: into the potential weakness and greater weakness in other non
Speaker 3: US areas at a time when the US is actually
Speaker 3: shockingly resilient and showing a much faster pace of disinflation.
Speaker 6: Yeah, you know, I think we are certainly looking at
Speaker 6: the US being one of the slowest major economies in
Speaker 6: terms of GDP growth for twenty twenty four. The UK
Speaker 6: will probably utu US on a GDP Q four Q
Speaker 6: four basis for twenty twenty four, but the US is
Speaker 6: pretty much up there. So we're not seeing and do
Speaker 6: not expect that other economies will quite match the degree
Speaker 6: of slowing that we anticipate for the first half of
Speaker 6: twenty twenty four.
Speaker 9: Obviously that doesn't materialize.
Speaker 6: That gives the dollar a little bit more of a
Speaker 6: boost because you're not going to get the rate cuts
Speaker 6: that we're expecting for twenty twenty four all.
Speaker 1: And where's a tradable pair here. I mean, it's one
Speaker 1: thing to say, you know, Euro higher, but where's the
Speaker 1: opportunity here, the big figure trade that you would suggest
Speaker 1: for Deutsche Bank clients.
Speaker 6: Yeah, you know, I think if you want, you know,
Speaker 6: sort of a soup up euro trade, then you know.
Speaker 9: I like the Norwegian chron particularly.
Speaker 6: I think it's grossly undervalued by every metric that we
Speaker 6: look at, PPP, dB fear. I can you know, throw
Speaker 6: our acronyms global and they will tell you the same
Speaker 6: story that the Norwegian Krona is grossly undervalue. So you know,
Speaker 6: in a world where you know, sort of high betas
Speaker 6: are trading, okay, the Norwegian Krona has got a long
Speaker 6: way to ghost.
Speaker 1: I mean, you got Norway. There is that an oil
Speaker 1: play where it's just simply a linked into a Deutsche
Speaker 1: Bank recovery in the price of oil given better times,
Speaker 1: given better global demand.
Speaker 6: No, I think it's a it's more of a high
Speaker 6: beta euro trade.
Speaker 9: Really.
Speaker 6: It's got drawn down and pulled down a little bit
Speaker 6: by the Swedish Prona, which is you know, had its
Speaker 6: own set of problem that don't necessarily relate closely to Norway.
Speaker 6: But you know it's getting tagged along. But no, I know,
Speaker 6: I see this really as a europlay, but with a
Speaker 6: high beta currency that's extremely undervalued.
Speaker 1: Ell and I featured at the top today the absolute
Speaker 1: shock of a peso comfortable twenty one twenty and imagine
Speaker 1: Mexican peso strengthening through seventeen. I didn't frame that. How
Speaker 1: how can that happen? How does Mexico improve from here
Speaker 1: to fifteen or a fourteen level?
Speaker 6: Yeah, and I think people have been playing the Mexico
Speaker 6: trade now for a couple of years, and you just
Speaker 6: saw a little bit of a squeeze because you know
Speaker 6: a lot of people were long Mexico versus the yen
Speaker 6: and the yen side of things squeeze quite badly.
Speaker 9: Look, I think the.
Speaker 6: Mexican fundamentals have been remarkably resilient for you know, a
Speaker 6: couple of reasons. One, it's under bank as such, and
Speaker 6: there's very little leverage in the system, so that when
Speaker 6: rates go up, the Mexican economy does prove pretty resilient.
Speaker 9: And then I think there's a structural story and a structural.
Speaker 6: Play whereby people are relocating close to shoring, as it were,
Speaker 6: to the US and away from Asia and China in particular.
Speaker 6: So I think those elements are still there. The data
Speaker 6: still looks okay. When the trade accounts start to deteriorate,
Speaker 6: we know and we'll get the much strongest signal that
Speaker 6: the Mexican peso is more significantly overvalued. At the moment,
Speaker 6: it looks overvalued on a real exchange right basis, but
Speaker 6: we don't really see it in the trade data.
Speaker 3: We're speaking with Alan Ruskin of Deutsche Bank. At a
Speaker 3: time when the dollar is the strongest going back more
Speaker 3: than a year, you could see the euro ascendant and
Speaker 3: the possibility, as Allen projects, out of one twenty euro.
Speaker 3: Good luck to all of those European vacations that everyone's
Speaker 3: trying to clock in right now.
Speaker 4: I'm wondering out from.
Speaker 3: Your perspective, how much of a boost this will give
Speaker 3: US businesses, international businesses that have suffered with a strong
Speaker 3: dollar in terms of their sales overseas. Does this in
Speaker 3: some ways give a headwind to US growth down the line,
Speaker 3: in a sort of on the margins level.
Speaker 9: Yeah, I think Lisa, you hit the he used the
Speaker 9: right word. At the margins.
Speaker 6: This is going to be helpful for US corporations, helpful
Speaker 6: for exports, helpful for the.
Speaker 9: Equity market as well.
Speaker 6: So you know, we've got some constructive elements there. Experts
Speaker 6: have held up quite well in the grand scheme of
Speaker 6: things in the US a relative to other countries, so
Speaker 6: you know this is going to.
Speaker 9: Be a further boost.
Speaker 6: I think there's some very helpful things happening in US manufacturing.
Speaker 6: The defense industries obviously doing extremely well.
Speaker 9: You've had this relocation.
Speaker 6: In terms of semiconductor plants back to the US. You know,
Speaker 6: you've got some very helpful elements there. So I think
Speaker 6: this is you know, this is all the more good
Speaker 6: news as far as the resilience that you were speaking
Speaker 6: about earlier.
Speaker 8: Six days of dollars against the U right ureret dot
Speaker 8: on one eleven sixty seven and I'm risking at Deutsche
Speaker 8: Bank there on the FX market.
Speaker 1: Erica Njerian joins us in a large cap banks and
Speaker 1: consumer finance expert here at UBS. Erica just a general
Speaker 1: question to begin the discussion, what will you look for
Speaker 1: in the beginning of the press releases tomorrow into Monday
Speaker 1: into Tuesday. What is the theme the tendency you will
Speaker 1: look for?
Speaker 5: So there are really three things that I'm going.
Speaker 4: To look for.
Speaker 5: First, is capital, like it or not. A lot of
Speaker 5: investors are laser focused on capital and how banks are
Speaker 5: building capital, not just because the rules are getting tougher,
Speaker 5: but also because there continues to be uncertainty in the
Speaker 5: economy in terms of the outlook, no matter what the
Speaker 5: Maco print are saying. You know. The second thing I'm
Speaker 5: going to look at is net interest income and how
Speaker 5: deposit costs and deposit growth or trending, although a lot
Speaker 5: of investors are thinking that we are in the late
Speaker 5: innings of that being a catalyst and negative catalysts for
Speaker 5: the stocks. And the third thing I'm going to look
Speaker 5: for is any signs that credit is deteriorating underneath the surface.
Speaker 5: As you know, as the all three of you know,
Speaker 5: the market is very sensitive for any hiccups and commercial real.
Speaker 4: Estate, and so those are really the.
Speaker 5: Top three things I'm going to look for in Friday.
Speaker 1: How do you wait your large cap world with the
Speaker 1: super regionals, the regionals and the svv P like the
Speaker 1: smaller banks that are out there, what's the level of
Speaker 1: importance of the next three or four days versus everything
Speaker 1: else in bank earning season.
Speaker 5: Well, I'll say that it's probably an even more pivotal
Speaker 5: time for the regional banks, particularly the super regional banks
Speaker 5: that are within the scope of the bar speech with
Speaker 5: regards to new regulation. So I think that JP Morgan
Speaker 5: b of a Well City Group, Morgan Goldman, you know,
Speaker 5: those are institutions that have gone through the first iteration
Speaker 5: of the rule change when we went through the Basil
Speaker 5: three framework and put on these new capital rules and
Speaker 5: new liquidity rules sort of post two thousand and eight.
Speaker 5: So we have clear evidence that they've been able to
Speaker 5: survive and thrive under that regime. I think the super
Speaker 5: regionals are in a different spot where regulatory rules are
Speaker 5: getting much stricter for them, and so they sort of
Speaker 5: have to balance and tell their investors how they're going
Speaker 5: to deal with that. Are they going to continue lending,
Speaker 5: are they going to pause buy back for longer?
Speaker 4: How are they going to grow capital?
Speaker 5: The good news is that the Bar speech is indicating
Speaker 5: that these super regional banks do have a lot of
Speaker 5: time before these tighter capital rules become final.
Speaker 3: There is a question, of course, also around some of
Speaker 3: the largest banks. Goldman Sachs in particular has been guiding
Speaker 3: down its guidance pretty aggressively and with a break from
Speaker 3: some of its past practices in terms of not giving
Speaker 3: intra intra earnings guidance. This is likely to become the
Speaker 3: worst quarter since David Solomon became the CEO. This according
Speaker 3: to Mike Mayo over at Wells Fargo, what are you
Speaker 3: expecting and why the negative kind of results that we're expecting.
Speaker 5: So, Lisa, not to defer your question, I actually don't
Speaker 5: cover Goldman Sachs, but given the vagaries of you know,
Speaker 5: trading volatility and investment banking volatility in the quarter, you know,
Speaker 5: a lot of the banks have been you know, giving
Speaker 5: mid quarter updates but also saying that a lot can
Speaker 5: change over the you know, over the next few.
Speaker 3: Weeks going forward, What is going to be the main
Speaker 3: pressure that you're looking for. Is it going to be
Speaker 3: loan losses, loan loss reserves at the big banks. Is
Speaker 3: it going to be interest margins. Is it going to
Speaker 3: be how much the deposit beta is increasing as they
Speaker 3: try to compete for deposits.
Speaker 4: That's a great question.
Speaker 5: I think that because the bank failailures put deposit costs
Speaker 5: and deposit growth in the spotlight, it feels like that
Speaker 5: is already priced into the stocks in terms of further pain,
Speaker 5: and I think the CPI print gives bank stocks some
Speaker 5: relief as we can see the light at the end
Speaker 5: of the proverbial tunnel. In terms of FED tightening, you know,
Speaker 5: I think the one thing and the bar speech was
Speaker 5: pretty much down to fairway, so to speak, with regards
Speaker 5: to what the market is expecting for further regulatory tightening.
Speaker 5: I think the biggest, biggest hurdle for investors in terms
Speaker 5: of you know, buying stocks, buying bank stocks here despite
Speaker 5: the valuation, is that specter of credit. And so I
Speaker 5: think that's really the one thing that everybody's look looking
Speaker 5: over their shoulder and saying, is it really time to
Speaker 5: buy bank stocks, because I don't know what's going to
Speaker 5: happen in the economy, and maybe the last thing I
Speaker 5: really want to do is own bank stocks into a downturn.
Speaker 1: Erica, very quickly out of time. But what's the single
Speaker 1: best buy right now? We're going into earning season. We're
Speaker 1: gonna tape this, play it back on Thursday. What's the
Speaker 1: single best buy among the.
Speaker 9: Big banks Bank of America.
Speaker 1: I thought, Okay, that was short and brief. Thank you
Speaker 1: Walter having me for a sing sing.
Speaker 8: Assumes you were up against the clock some Yeah, that's
Speaker 8: the right thing today.
Speaker 9: Yes, thank you, Thank you, Erica.
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Speaker 9: Would you think