1 00:00:05,120 --> 00:00:07,119 Speaker 1: This is the Bloomberg Surveillance Podcast. 2 00:00:07,160 --> 00:00:11,080 Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. 3 00:00:11,280 --> 00:00:15,760 Speaker 2: Join us each day for insight from the best and economics, geopolitics, 4 00:00:15,760 --> 00:00:20,720 Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 5 00:00:20,960 --> 00:00:25,400 Speaker 2: Spotify and anywhere you get your podcasts, and always on 6 00:00:25,520 --> 00:00:29,880 Speaker 2: Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app. 7 00:00:30,080 --> 00:00:32,360 Speaker 3: What is around a table? And we were Silverman, no 8 00:00:32,479 --> 00:00:35,200 Speaker 3: idea if you went to First Republic when Right Spot 9 00:00:37,000 --> 00:00:40,199 Speaker 3: Congratulations had a disy strategy. OBBOUC Capital Markets. You've got 10 00:00:40,240 --> 00:00:42,520 Speaker 3: a great phrase in your notes, Aman, wonderful to see 11 00:00:42,520 --> 00:00:45,000 Speaker 3: you in person. By why you guys, you said this 12 00:00:45,159 --> 00:00:46,440 Speaker 3: the paddling duck market. 13 00:00:46,640 --> 00:00:47,040 Speaker 4: What's that? 14 00:00:47,960 --> 00:00:50,400 Speaker 5: That's the market we're in right now. I mean, we 15 00:00:50,520 --> 00:00:54,240 Speaker 5: got this chill, cool duck hanging out on the surface, 16 00:00:54,360 --> 00:00:58,320 Speaker 5: furiously paddling underneath. And that's the equity volatility bid. You know, 17 00:00:58,360 --> 00:01:01,040 Speaker 5: we don't see it in VIX headline. VIC is really low, right, 18 00:01:01,120 --> 00:01:04,080 Speaker 5: but the reality is VIS call open interest, that demand 19 00:01:04,120 --> 00:01:07,040 Speaker 5: for volatility going higher is at all time highs. 20 00:01:07,520 --> 00:01:10,160 Speaker 2: I'm speaking when Nacim Tolb in I like three or 21 00:01:10,200 --> 00:01:12,840 Speaker 2: four weeks, and we'll go to the tails immediately. And 22 00:01:12,880 --> 00:01:15,199 Speaker 2: you make it real clear in your note that there's 23 00:01:15,240 --> 00:01:18,520 Speaker 2: a tail irregularity here. Everybody's focused on the left tail. 24 00:01:18,800 --> 00:01:21,160 Speaker 2: Tell me about the right A tale of optimism. 25 00:01:21,760 --> 00:01:25,400 Speaker 5: Yeah, so the tale of optimism does not exist. You know, 26 00:01:25,680 --> 00:01:29,160 Speaker 5: I've been visiting kind of clients in Europe and Canada, 27 00:01:29,280 --> 00:01:33,160 Speaker 5: and the US consensus bearishness across the board. It's really 28 00:01:33,200 --> 00:01:37,840 Speaker 5: overwhelmingly so. And so you get to this point where 29 00:01:37,880 --> 00:01:39,760 Speaker 5: you have to ask, you know, the right tail is 30 00:01:39,800 --> 00:01:43,080 Speaker 5: so underpriced. Is there a possibility of a congressional miracle? 31 00:01:43,120 --> 00:01:46,560 Speaker 5: Who knows? But right now folks are pricing that this 32 00:01:46,640 --> 00:01:49,360 Speaker 5: is going to be a very tumultuous debt ceiling if 33 00:01:49,440 --> 00:01:52,160 Speaker 5: it at all comes in a little bit easier than 34 00:01:52,200 --> 00:01:54,480 Speaker 5: we expect, that that right tail is very cheap. 35 00:01:54,640 --> 00:01:54,800 Speaker 6: Woa. 36 00:01:54,920 --> 00:01:57,280 Speaker 7: This is actually going against the consensus in a big way. 37 00:01:57,320 --> 00:01:59,280 Speaker 7: People have come on the show again and again and said, 38 00:01:59,280 --> 00:02:02,880 Speaker 7: nobody's pricing actually a debt ceiling debacle where you end 39 00:02:02,960 --> 00:02:04,920 Speaker 7: up with some sort of default, except perhaps in the 40 00:02:05,120 --> 00:02:07,560 Speaker 7: one month t bell market. Are you saying that's not true, 41 00:02:07,600 --> 00:02:10,360 Speaker 7: that it's actually aggressively being priced in the equity world. 42 00:02:11,120 --> 00:02:14,560 Speaker 5: Yeah, So here's the nuance, Lisa. What is happening is 43 00:02:14,639 --> 00:02:18,120 Speaker 5: essentially the volvatility market is saying the tail has to 44 00:02:18,120 --> 00:02:20,880 Speaker 5: wag the dog first, meaning we have to see action 45 00:02:21,120 --> 00:02:24,520 Speaker 5: in the equity market, which means a draw down before 46 00:02:24,560 --> 00:02:27,200 Speaker 5: we see some sort of action in congress. Does that 47 00:02:27,240 --> 00:02:30,119 Speaker 5: mean an actual default, maybe not, but it's definitely going 48 00:02:30,160 --> 00:02:33,680 Speaker 5: to be eleventh hour twenty eleven type style. And if 49 00:02:33,680 --> 00:02:36,200 Speaker 5: you actually plot the VIX right now against what the 50 00:02:36,280 --> 00:02:38,400 Speaker 5: VIX looked like in twenty eleven, it was right around 51 00:02:38,480 --> 00:02:40,640 Speaker 5: here in twenty eleven, and then we saw that it 52 00:02:40,639 --> 00:02:44,560 Speaker 5: peaked around fifty in August, and it sustainably was above thirty. 53 00:02:44,560 --> 00:02:46,360 Speaker 5: And I think that's what these bets in the market 54 00:02:46,400 --> 00:02:48,000 Speaker 5: are saying right now. They think we're going to get 55 00:02:48,040 --> 00:02:48,399 Speaker 5: back there. 56 00:02:48,600 --> 00:02:50,800 Speaker 7: I love this idea that the common the market is 57 00:02:50,840 --> 00:02:53,000 Speaker 7: people not willing to make a move by selling what 58 00:02:53,040 --> 00:02:55,960 Speaker 7: they own, but they're doing it all through derivatives. So, 59 00:02:56,040 --> 00:02:59,160 Speaker 7: based on pairing those two, what is the most underpriced 60 00:02:59,200 --> 00:03:02,040 Speaker 7: reality right now? Is it this upside surprise or is 61 00:03:02,080 --> 00:03:02,720 Speaker 7: it something else? 62 00:03:03,360 --> 00:03:06,680 Speaker 5: The most underpriced reality right now is the idea that 63 00:03:06,720 --> 00:03:10,920 Speaker 5: this debt sealing situation actually gets resolved quicker and easier 64 00:03:10,960 --> 00:03:12,880 Speaker 5: than we think. That is not what is being priced 65 00:03:12,880 --> 00:03:15,960 Speaker 5: in the market. Folks are very very well prepared for 66 00:03:16,000 --> 00:03:18,440 Speaker 5: a debacle, and so if we don't get it, it 67 00:03:18,480 --> 00:03:21,079 Speaker 5: would be very interesting to see all these hedges roll off. 68 00:03:21,200 --> 00:03:22,320 Speaker 5: You know, that is not being priced. 69 00:03:22,360 --> 00:03:24,919 Speaker 3: So sometimes there's a big difference between ideas and execution, 70 00:03:25,280 --> 00:03:27,160 Speaker 3: and it frustrates people at home, and you speak to 71 00:03:27,160 --> 00:03:30,640 Speaker 3: those people, those people in the market. If I wanted 72 00:03:30,639 --> 00:03:33,240 Speaker 3: to position for a so called up crash, your language 73 00:03:33,240 --> 00:03:35,600 Speaker 3: the language other people use it as well, before I 74 00:03:35,640 --> 00:03:38,840 Speaker 3: get the downdraft and the tension. Because ultimately we're acknowledging 75 00:03:38,840 --> 00:03:40,320 Speaker 3: and you've alluded to it. Do you need to get 76 00:03:40,360 --> 00:03:42,120 Speaker 3: the crisis before you get the solution, or get very 77 00:03:42,120 --> 00:03:44,280 Speaker 3: close to the crisis before you get the solution. Can 78 00:03:44,320 --> 00:03:46,640 Speaker 3: you talk to me about how you execute that trade. 79 00:03:47,120 --> 00:03:50,640 Speaker 3: Do you wait to position to capture that upside when 80 00:03:50,680 --> 00:03:52,640 Speaker 3: you start to see some of the drama take place, 81 00:03:52,720 --> 00:03:53,880 Speaker 3: or can you position for it now? 82 00:03:54,760 --> 00:03:55,040 Speaker 4: Yeah? 83 00:03:55,160 --> 00:03:57,440 Speaker 5: You know, And that's the tricky part. I think right 84 00:03:57,480 --> 00:04:00,800 Speaker 5: now it becomes Look, if we get the draw down right, 85 00:04:00,800 --> 00:04:03,360 Speaker 5: so the market move happens a little bit, then that 86 00:04:03,440 --> 00:04:06,200 Speaker 5: upcrash scenario becomes a little bit more expensive because we've 87 00:04:06,240 --> 00:04:08,640 Speaker 5: already taken that down hit. So in some ways you 88 00:04:08,680 --> 00:04:10,720 Speaker 5: do have to start placing it right now. The good 89 00:04:10,760 --> 00:04:13,720 Speaker 5: news is it's relatively inexpensive. One of the reasons, and 90 00:04:13,960 --> 00:04:16,279 Speaker 5: I've been saying this to investors, the reason VIX looks 91 00:04:16,279 --> 00:04:19,919 Speaker 5: so low isn't because SMP puts are cheap. It's because 92 00:04:20,000 --> 00:04:22,480 Speaker 5: SMP calls are cheap, and those are both weighted in 93 00:04:22,520 --> 00:04:24,680 Speaker 5: the vis. That's part of the reason you see that 94 00:04:24,720 --> 00:04:27,320 Speaker 5: being subdued. So if you own that right tail, just 95 00:04:27,360 --> 00:04:30,840 Speaker 5: say owning SMP calls, you know that's inexpensive right now, 96 00:04:31,080 --> 00:04:33,359 Speaker 5: and that would happen if you know, we get closer 97 00:04:33,400 --> 00:04:35,279 Speaker 5: to that X state and actually there is a resolution. 98 00:04:35,400 --> 00:04:38,120 Speaker 5: You know, Biden flies home and these folks get actually 99 00:04:38,120 --> 00:04:39,960 Speaker 5: their feet on the ground and do something that would 100 00:04:40,000 --> 00:04:40,760 Speaker 5: be quite interesting. 101 00:04:41,080 --> 00:04:44,600 Speaker 2: Every crash in the hindsight is about opacity. I didn't 102 00:04:44,600 --> 00:04:47,080 Speaker 2: see it coming. It was a mystery, the cliches, the 103 00:04:47,120 --> 00:04:50,559 Speaker 2: shadows in that nineteen eighty seven, nineteen ninety eight, et cetera. 104 00:04:50,839 --> 00:04:53,080 Speaker 2: What's the biggest mystery for you right now? Where's the 105 00:04:53,160 --> 00:04:55,440 Speaker 2: dearth of information? To me? 106 00:04:55,640 --> 00:04:58,480 Speaker 5: The most fragile part of this market, tom is this 107 00:04:58,680 --> 00:05:01,800 Speaker 5: problem of breath. So one thing I looked at that 108 00:05:01,800 --> 00:05:04,039 Speaker 5: I think is really interesting is if you just take 109 00:05:04,680 --> 00:05:07,479 Speaker 5: S and P consensus price target on Apple right now, 110 00:05:07,960 --> 00:05:11,480 Speaker 5: that that sharp ratio is negative on Apple, meaning you're 111 00:05:11,520 --> 00:05:14,360 Speaker 5: actually better off in cash. If you assume expected rate 112 00:05:14,360 --> 00:05:16,599 Speaker 5: of return of the S and P of the Apple 113 00:05:16,640 --> 00:05:19,320 Speaker 5: price target, then you are an Apple. The breadth of 114 00:05:19,320 --> 00:05:22,480 Speaker 5: the market is so heavily weighted and it's very fragile. 115 00:05:22,600 --> 00:05:25,400 Speaker 2: Is that sharp ratio adjusted because of the velocity of 116 00:05:25,440 --> 00:05:27,480 Speaker 2: the risk free rate? You know, had no risk free 117 00:05:27,560 --> 00:05:30,559 Speaker 2: rate for three years, we have exactly doing it, and pop, 118 00:05:30,640 --> 00:05:33,600 Speaker 2: there's the risk free rate tumbling. Do you have an 119 00:05:33,640 --> 00:05:35,080 Speaker 2: accurate risk free rate? 120 00:05:35,640 --> 00:05:36,320 Speaker 1: There's a belief. 121 00:05:36,360 --> 00:05:38,840 Speaker 2: Do you have a belief institutionally in a risk free 122 00:05:38,920 --> 00:05:39,480 Speaker 2: rate forward? 123 00:05:39,960 --> 00:05:42,720 Speaker 5: Yeah, so we're assuming a risk free rate right now 124 00:05:42,760 --> 00:05:45,800 Speaker 5: of just you know what we're getting on cash right now. 125 00:05:45,839 --> 00:05:48,000 Speaker 5: So obviously that could go down. But if you just 126 00:05:48,080 --> 00:05:50,440 Speaker 5: take from last year to this year, it going from 127 00:05:50,440 --> 00:05:53,919 Speaker 5: about one percent to almost five percent across the board. 128 00:05:54,040 --> 00:05:57,680 Speaker 5: Obviously all equity sharp rashes decline, but also your forward 129 00:05:57,680 --> 00:05:59,080 Speaker 5: looking price targets are declining. 130 00:05:59,120 --> 00:06:00,440 Speaker 7: I just want to follow up in one thing that 131 00:06:00,480 --> 00:06:03,160 Speaker 7: you said, where you said it's very fragile because of 132 00:06:03,200 --> 00:06:06,839 Speaker 7: a very very narrow depth. How much does that suggest 133 00:06:06,880 --> 00:06:10,240 Speaker 7: to a downside shock versus an upside shock or does 134 00:06:10,279 --> 00:06:12,240 Speaker 7: it not matter. It just suggests there will be a 135 00:06:12,279 --> 00:06:14,680 Speaker 7: break one way or another. It will be significant. 136 00:06:15,080 --> 00:06:17,719 Speaker 5: I think the biggest thing to watch right now is 137 00:06:17,880 --> 00:06:20,919 Speaker 5: if the market decides that megacap tech is not a 138 00:06:20,960 --> 00:06:25,080 Speaker 5: safe haven, because you could actually get financials ripping or 139 00:06:25,120 --> 00:06:27,640 Speaker 5: industrials ripping, and it wouldn't matter on an S and 140 00:06:27,680 --> 00:06:30,320 Speaker 5: P level. You could actually see the index level trade 141 00:06:30,360 --> 00:06:33,240 Speaker 5: down right because the heavy weights are the ones selling off. 142 00:06:33,279 --> 00:06:35,039 Speaker 5: And that's what I think is very interesting about this 143 00:06:35,160 --> 00:06:38,680 Speaker 5: market is you could get that turn because maybe recession 144 00:06:38,720 --> 00:06:41,160 Speaker 5: fears aren't as bad as expected, But the reality is 145 00:06:41,200 --> 00:06:42,559 Speaker 5: the market's actually selling off. 146 00:06:42,640 --> 00:06:45,160 Speaker 3: The action happens beneath the surface most crowded trades B 147 00:06:45,240 --> 00:06:49,279 Speaker 3: of A. In the survey, what the indications short banks, 148 00:06:49,920 --> 00:06:53,120 Speaker 3: long tech, top two traits, top two traits identified by 149 00:06:53,120 --> 00:06:54,400 Speaker 3: people in that survey ex and. 150 00:06:54,320 --> 00:06:56,760 Speaker 2: The lack of breadth is what the phrase I used, 151 00:06:56,839 --> 00:06:59,839 Speaker 2: choiceset there's no choice set out there now. I could 152 00:07:00,279 --> 00:07:05,479 Speaker 2: run a prospect to structured institutional portfolio, John, because you 153 00:07:05,560 --> 00:07:08,680 Speaker 2: have to have X number of ideas in the portfolio, 154 00:07:08,839 --> 00:07:10,920 Speaker 2: and there's not enough ideas out there right now. 155 00:07:11,200 --> 00:07:13,120 Speaker 7: I just think this is fascinating, this idea that you 156 00:07:13,120 --> 00:07:16,160 Speaker 7: could get a better than expected economics shift, whether it's 157 00:07:16,200 --> 00:07:18,240 Speaker 7: the debt ceiling or whether it's data, and all of 158 00:07:18,280 --> 00:07:21,559 Speaker 7: a sudden you end up with index level losses because 159 00:07:21,560 --> 00:07:24,720 Speaker 7: everyone floods out of the very narrow range of stocks 160 00:07:24,720 --> 00:07:26,160 Speaker 7: that have really been driving all the games. 161 00:07:26,200 --> 00:07:27,840 Speaker 1: I mean, Amy's with us for the entire hour. 162 00:07:27,920 --> 00:07:29,960 Speaker 2: We got to talk to about the scenario you're coming 163 00:07:30,000 --> 00:07:32,480 Speaker 2: out of an edtheim in two point eight percent inflation. 164 00:07:32,800 --> 00:07:33,720 Speaker 1: No one's prepared for them. 165 00:07:33,800 --> 00:07:34,840 Speaker 3: Nobody told me about that. 166 00:07:36,440 --> 00:07:37,800 Speaker 1: Face it is trying to suggest it. 167 00:07:38,240 --> 00:07:40,160 Speaker 3: Amy, Thank you, thanks wonderful to say it. Griats a 168 00:07:40,160 --> 00:07:42,640 Speaker 3: seal in person. I'my with Silver, theman that of BOMBC 169 00:07:42,760 --> 00:07:44,040 Speaker 3: Capital Markets. 170 00:07:48,040 --> 00:07:51,080 Speaker 2: Right now to drivers forward in Washington. If I was 171 00:07:51,120 --> 00:07:53,640 Speaker 2: to say all this, it would be maybe Tom that's 172 00:07:53,640 --> 00:07:57,080 Speaker 2: off the mark. But when Libby Cantrell writes about pearl 173 00:07:57,120 --> 00:08:00,720 Speaker 2: clutching in Washington, you pay attention, and it's make a 174 00:08:00,800 --> 00:08:03,760 Speaker 2: modo double A's and Tiffany's strands of pearls down there. 175 00:08:03,800 --> 00:08:06,720 Speaker 1: I love how you do that pearl clutching in Washington. 176 00:08:06,840 --> 00:08:10,000 Speaker 2: Is Margaret Smith the ghost of Margaret Chase Smith down 177 00:08:10,040 --> 00:08:11,880 Speaker 2: there theears right now? 178 00:08:12,000 --> 00:08:14,440 Speaker 8: Yeah? Yeah, I mean there. I think there there's been 179 00:08:14,520 --> 00:08:18,320 Speaker 8: quite a lot of hysteria pearl clutching, if you will, 180 00:08:18,720 --> 00:08:21,120 Speaker 8: regarding the dead ceiling. But you know our view, and 181 00:08:21,200 --> 00:08:23,960 Speaker 8: I think to your or your earlier conversation, certainly the 182 00:08:24,000 --> 00:08:27,120 Speaker 8: mood music is positive. We would argue the mo mune 183 00:08:27,200 --> 00:08:29,920 Speaker 8: music has been actually quite positive for for quite a while. 184 00:08:30,800 --> 00:08:33,319 Speaker 8: I think the contours of a deal are absolutely there. 185 00:08:33,440 --> 00:08:36,200 Speaker 8: The details just to be filled in the fact that 186 00:08:36,240 --> 00:08:40,559 Speaker 8: they have Silanda Young, Steve Richet Orcutty. These people are 187 00:08:40,679 --> 00:08:43,560 Speaker 8: serious sort of adults in the room. They are going 188 00:08:43,600 --> 00:08:46,520 Speaker 8: to be the president's proxy while he's in Japan. And 189 00:08:47,080 --> 00:08:48,679 Speaker 8: you know, I wouldn't be surprised if we didn't see 190 00:08:48,679 --> 00:08:50,400 Speaker 8: a deal by this weekend. I mean I think that 191 00:08:50,480 --> 00:08:52,920 Speaker 8: the I think a deal is imminent. I actually don't 192 00:08:52,920 --> 00:08:56,319 Speaker 8: think it's going to necessarily require uh, the equity market 193 00:08:56,400 --> 00:08:59,480 Speaker 8: or equity evall like we've seen in previous dead ceiling. 194 00:08:59,600 --> 00:09:01,360 Speaker 3: That seems to be the conclusion of so many people 195 00:09:01,360 --> 00:09:03,080 Speaker 3: down Wall Street. You need to get close to a 196 00:09:03,120 --> 00:09:05,199 Speaker 3: crisis before you get a solution. Why are you taking 197 00:09:05,320 --> 00:09:06,280 Speaker 3: a slightly different well. 198 00:09:06,240 --> 00:09:08,240 Speaker 8: I think, well, again, and John, I've just been looking 199 00:09:08,240 --> 00:09:11,040 Speaker 8: at the political incentives here for several months, and nobody 200 00:09:11,080 --> 00:09:13,480 Speaker 8: has any sort of political incentive to even get that 201 00:09:13,559 --> 00:09:15,920 Speaker 8: close to default. I mean, if you look at sort 202 00:09:15,960 --> 00:09:19,080 Speaker 8: of Speaker McCarthy's hand, I mean, he doesn't necessarily have 203 00:09:19,160 --> 00:09:22,360 Speaker 8: a very strong hand going into these negotiations. He only 204 00:09:22,400 --> 00:09:25,480 Speaker 8: has a four seat majority, meaning he can only actually 205 00:09:25,559 --> 00:09:30,680 Speaker 8: just lose five members in order to to sort of 206 00:09:30,840 --> 00:09:34,319 Speaker 8: stay along with this deal. And you know, I think 207 00:09:34,400 --> 00:09:37,880 Speaker 8: very importantly here, your President Biden has been you know, 208 00:09:38,200 --> 00:09:40,559 Speaker 8: now open to negotiation. So I think there's sort of 209 00:09:40,640 --> 00:09:42,160 Speaker 8: the if you just sort of look at the kind 210 00:09:42,200 --> 00:09:46,200 Speaker 8: of political landscape here, that the bottom line is that 211 00:09:46,320 --> 00:09:49,000 Speaker 8: a deal will get done. And I think again, sort 212 00:09:49,000 --> 00:09:50,960 Speaker 8: of in advance of the X state, and to Tom's 213 00:09:51,000 --> 00:09:53,160 Speaker 8: earlier point, the X date is real here, and I 214 00:09:53,200 --> 00:09:56,040 Speaker 8: think this is where Secretary Yellen has now kind of 215 00:09:56,080 --> 00:09:59,720 Speaker 8: corroborated her earlier estimate of June first. I mean, tax 216 00:09:59,720 --> 00:10:03,120 Speaker 8: re are quite weak, not only because of personal income taxes, 217 00:10:03,160 --> 00:10:08,320 Speaker 8: but because of the sort of disaster zone dynamic, particularly 218 00:10:08,320 --> 00:10:10,120 Speaker 8: in California, where a lot of folks are actually not 219 00:10:10,200 --> 00:10:13,000 Speaker 8: having to file their taxes and so that is going 220 00:10:13,040 --> 00:10:15,400 Speaker 8: to be delayed receipts to the government. So, you know, 221 00:10:15,440 --> 00:10:17,240 Speaker 8: we think that the X state has to be taken seriously, 222 00:10:17,280 --> 00:10:19,439 Speaker 8: and we think members of Congress are also taking it seriously. 223 00:10:19,480 --> 00:10:21,240 Speaker 8: So all this is all a long way of saying 224 00:10:21,480 --> 00:10:25,160 Speaker 8: that despite the pearl clutching, as one staffer said, passing 225 00:10:25,240 --> 00:10:27,439 Speaker 8: the debt ceilings like passing a kidney stone. We all 226 00:10:27,480 --> 00:10:29,680 Speaker 8: know what will pass. It's just a question how difficult 227 00:10:29,720 --> 00:10:32,520 Speaker 8: it will be. Sorry for the graphic analogy such pretan 228 00:10:33,160 --> 00:10:35,160 Speaker 8: but that is but that I think has been our 229 00:10:35,240 --> 00:10:37,800 Speaker 8: operating assumption, and as the market's operating assumption right now 230 00:10:37,800 --> 00:10:38,120 Speaker 8: as well. 231 00:10:38,160 --> 00:10:39,720 Speaker 4: The peddling duck is going to pass. 232 00:10:39,800 --> 00:10:42,000 Speaker 9: Gating sort of this morning has been quite something. 233 00:10:42,160 --> 00:10:43,480 Speaker 7: One of the reasons why I love to speaking with you, 234 00:10:43,559 --> 00:10:46,560 Speaker 7: Libya is because you have incredible experience working on Capitol Hill. 235 00:10:46,559 --> 00:10:50,120 Speaker 7: You understand the political wranglings that go into getting this done. 236 00:10:50,360 --> 00:10:52,839 Speaker 7: What do you think the contours of this deal will 237 00:10:52,880 --> 00:10:55,400 Speaker 7: look like? What changes will really take place? 238 00:10:55,600 --> 00:10:57,720 Speaker 8: Well, look, I think very importantly is sort of the 239 00:10:57,720 --> 00:11:01,120 Speaker 8: semantics here. So President Biden will characterize this as a 240 00:11:01,120 --> 00:11:05,720 Speaker 8: budget deal associated with fiscal twenty four spending, where Speaker 241 00:11:05,760 --> 00:11:08,000 Speaker 8: McCarthy will characterize us as a debt seiling deal. I 242 00:11:08,000 --> 00:11:10,079 Speaker 8: would say that's a distinction without a difference, and from 243 00:11:10,080 --> 00:11:12,880 Speaker 8: a market's perspective, But what we're expecting is that there 244 00:11:12,920 --> 00:11:16,559 Speaker 8: will be some recision of the COVID unspent COVID money. 245 00:11:16,559 --> 00:11:19,240 Speaker 8: That's not very much, it's about forty fifty billion dollars, 246 00:11:19,280 --> 00:11:21,680 Speaker 8: but it still kind of helps from a deficit perspective. 247 00:11:22,240 --> 00:11:25,840 Speaker 8: We also expect some sort of downpayment energy permitting reform. 248 00:11:25,920 --> 00:11:28,920 Speaker 8: That's something actually important both for Republicans and for Democrats, 249 00:11:28,960 --> 00:11:31,280 Speaker 8: so that arguability could be a win for both. And 250 00:11:31,320 --> 00:11:34,040 Speaker 8: then importantly some sort of spending caps. Now this is 251 00:11:34,040 --> 00:11:36,640 Speaker 8: going to be where the devil's of the details, because, 252 00:11:37,120 --> 00:11:39,560 Speaker 8: of course, if you remember twenty eleven, there was a 253 00:11:39,559 --> 00:11:42,480 Speaker 8: Budget Control Act as it related to the debt ceiling, 254 00:11:42,679 --> 00:11:45,040 Speaker 8: and the market sold off because they were expecting big 255 00:11:45,080 --> 00:11:47,720 Speaker 8: spending cuts and sort of fears of recession and what 256 00:11:47,760 --> 00:11:50,719 Speaker 8: have you. We do not expect significant spending cuts to 257 00:11:50,720 --> 00:11:53,240 Speaker 8: be associated with this deal, but we could see a 258 00:11:53,320 --> 00:11:56,120 Speaker 8: slower growth of spending and that could also help these 259 00:11:56,200 --> 00:11:57,600 Speaker 8: budget these deficit forecasts. 260 00:11:57,600 --> 00:11:59,240 Speaker 7: There just kind of an irony here. If the market 261 00:11:59,320 --> 00:12:02,640 Speaker 7: is expecting latility and expecting to have to respond eventually 262 00:12:02,720 --> 00:12:05,400 Speaker 7: and not expecting a deal, do you expect market volatility 263 00:12:05,440 --> 00:12:07,200 Speaker 7: in response to a deal that you see as soon 264 00:12:07,240 --> 00:12:07,800 Speaker 7: as this weekend? 265 00:12:08,760 --> 00:12:10,760 Speaker 8: Well, look, I think that we have to talk about 266 00:12:10,760 --> 00:12:13,120 Speaker 8: which market we're talking about, because of course the fixed 267 00:12:13,160 --> 00:12:17,280 Speaker 8: income market, which where PIMCO manages most of its assets, 268 00:12:16,960 --> 00:12:20,599 Speaker 8: has reacted right. There has been a dislocation in the 269 00:12:20,640 --> 00:12:23,520 Speaker 8: treasury bill market. There's been a big risker version around 270 00:12:23,559 --> 00:12:26,120 Speaker 8: the bills that have expired closer to the X day. 271 00:12:26,200 --> 00:12:29,440 Speaker 8: We saw that in the auction most recently in terms 272 00:12:29,520 --> 00:12:31,440 Speaker 8: of the yields, and so we already are seeing some 273 00:12:31,559 --> 00:12:35,360 Speaker 8: dislocation in the fixed income market. But to the market 274 00:12:35,440 --> 00:12:37,640 Speaker 8: that most people refer to, the equity market, and we 275 00:12:37,679 --> 00:12:40,320 Speaker 8: haven't seen that, and actually we could see I think 276 00:12:40,559 --> 00:12:42,400 Speaker 8: really a little bit of a relief rally as well, 277 00:12:42,440 --> 00:12:44,960 Speaker 8: even from here, because some of this sort of anxiety 278 00:12:45,000 --> 00:12:47,360 Speaker 8: and uncertainty I think has been priced in to a 279 00:12:47,400 --> 00:12:49,800 Speaker 8: small extent, and I think of a deal is sooner 280 00:12:49,840 --> 00:12:52,200 Speaker 8: than folks expect, is pulled forward. I actually think you 281 00:12:52,200 --> 00:12:54,440 Speaker 8: could see a bit of a relief. 282 00:12:54,600 --> 00:12:57,000 Speaker 2: Don't tell your work with a Pimcok call in Newport 283 00:12:57,040 --> 00:12:59,959 Speaker 2: the idea that we're at a five percent general statement 284 00:13:00,080 --> 00:13:03,200 Speaker 2: on short term paper, do you guys believe we're coming in? 285 00:13:03,280 --> 00:13:04,439 Speaker 1: Yields will come in and. 286 00:13:04,400 --> 00:13:07,800 Speaker 2: Frankly benefit Washington as well, where five percent becomes a 287 00:13:07,880 --> 00:13:09,720 Speaker 2: three point eight percent shield. 288 00:13:09,880 --> 00:13:11,800 Speaker 8: Yeah. So I think that you know, our view in 289 00:13:11,880 --> 00:13:14,600 Speaker 8: general in terms of of the FED and the economy 290 00:13:14,840 --> 00:13:17,959 Speaker 8: is that the threshold for the FED cut is going 291 00:13:18,000 --> 00:13:20,240 Speaker 8: to be high. We think that the FED is going 292 00:13:20,280 --> 00:13:24,480 Speaker 8: to have to see sustained economics and a sustained economic 293 00:13:24,559 --> 00:13:27,719 Speaker 8: slow down before they before they start cutting. So I 294 00:13:27,760 --> 00:13:30,760 Speaker 8: think we disagree a bit with where the market pricing is. 295 00:13:30,840 --> 00:13:34,840 Speaker 8: And you know, even with CEO Jamie Diamond said today, 296 00:13:35,559 --> 00:13:37,560 Speaker 8: with that said, though, we are expecting and I think 297 00:13:37,600 --> 00:13:40,520 Speaker 8: you had Tiffany on your show yesterday, we are expecting 298 00:13:40,640 --> 00:13:42,960 Speaker 8: a mild sort of slow down at the end of 299 00:13:43,000 --> 00:13:45,360 Speaker 8: this year, at which point we do think the FED 300 00:13:45,400 --> 00:13:48,240 Speaker 8: will likely respond. But again, the threshold for them to 301 00:13:48,280 --> 00:13:50,240 Speaker 8: get off of you know, around five is or what 302 00:13:50,320 --> 00:13:52,679 Speaker 8: have you, is going to be quite high. So they're 303 00:13:52,720 --> 00:13:55,680 Speaker 8: going to have to see a sustained economic slow down. 304 00:13:55,920 --> 00:13:58,520 Speaker 8: A couple of bad jobs numbers is probably not going. 305 00:13:58,360 --> 00:13:58,600 Speaker 4: To do it. 306 00:13:58,640 --> 00:14:00,439 Speaker 3: When was the last time we got today this sit 307 00:14:00,480 --> 00:14:02,719 Speaker 3: around the table together? How many years? 308 00:14:02,960 --> 00:14:04,839 Speaker 1: In the last two weeks. 309 00:14:04,400 --> 00:14:06,720 Speaker 3: And just started to pick wonder back up. I've said 310 00:14:06,720 --> 00:14:08,280 Speaker 3: that a few times this morning. It's happening. 311 00:14:08,840 --> 00:14:10,800 Speaker 7: Getting back to the office. Are people getting back to 312 00:14:10,840 --> 00:14:11,440 Speaker 7: the office there? 313 00:14:11,720 --> 00:14:15,120 Speaker 8: I mean, we've been never left for a very long time. 314 00:14:16,679 --> 00:14:17,120 Speaker 1: Ever left. 315 00:14:17,160 --> 00:14:19,520 Speaker 8: We never laughed, Thank you, John, That is actually correct. 316 00:14:20,600 --> 00:14:31,960 Speaker 4: Lilly Cantrell of Pimco. 317 00:14:32,760 --> 00:14:36,160 Speaker 3: Debtlimit talks between President Biden and congressional leaders intensifying. Mike 318 00:14:36,200 --> 00:14:38,400 Speaker 3: Schumacher of Weils Faker and the team have got this 319 00:14:38,480 --> 00:14:41,040 Speaker 3: to say. At the moment, our economics team is skeptical 320 00:14:41,240 --> 00:14:43,680 Speaker 3: that a sweeping debt seiling agreement will be reached over 321 00:14:43,720 --> 00:14:46,120 Speaker 3: the next month to suspend the debt scening for one 322 00:14:46,200 --> 00:14:49,120 Speaker 3: to two years. A short term punt, Tom, I think 323 00:14:49,120 --> 00:14:51,240 Speaker 3: that's a kick the can that buys more time for 324 00:14:51,280 --> 00:14:55,320 Speaker 3: an eventual sweeping agreement is the higher probability outcome in 325 00:14:55,360 --> 00:14:57,800 Speaker 3: their view. Short version TK, We're going to be playing 326 00:14:57,800 --> 00:14:59,960 Speaker 3: this game for a while. Maybe yeah, we're gonna have. 327 00:14:59,920 --> 00:15:02,880 Speaker 2: To see a punt their giants American football. That's when 328 00:15:02,880 --> 00:15:05,080 Speaker 2: you're down three downs in the fourth down, you. 329 00:15:05,120 --> 00:15:06,600 Speaker 3: Can is that the guy that comes on just to 330 00:15:06,680 --> 00:15:07,320 Speaker 3: kick the boat. 331 00:15:07,240 --> 00:15:07,640 Speaker 1: Just to kick. 332 00:15:07,640 --> 00:15:12,320 Speaker 2: They used to have a rule he could be hit 333 00:15:12,400 --> 00:15:14,400 Speaker 2: by the people coming in, but now they have goals 334 00:15:14,440 --> 00:15:15,120 Speaker 2: to protect them. OK. 335 00:15:15,320 --> 00:15:17,880 Speaker 3: So you think he's good. He's just kicking the boat. 336 00:15:18,280 --> 00:15:19,720 Speaker 1: Yeah, nice the punter. 337 00:15:19,960 --> 00:15:23,000 Speaker 3: We called it Jemmy. Goalkeepers would love that job. They 338 00:15:23,040 --> 00:15:25,680 Speaker 3: would ex Premier league goalkeepers would find that so easy. 339 00:15:25,880 --> 00:15:29,040 Speaker 2: A CIS Sports report. It continues in this plot as well, 340 00:15:29,320 --> 00:15:31,960 Speaker 2: saving us right now, Michael Schumacher joins his global ahead 341 00:15:31,960 --> 00:15:35,160 Speaker 2: of macro strategy at Wells Fargo. The courage is defined 342 00:15:35,200 --> 00:15:38,320 Speaker 2: in your research note, Mike, is that you are long duration. 343 00:15:38,520 --> 00:15:42,240 Speaker 2: You're saying get out there, own bonds. Yields will move lower. 344 00:15:42,560 --> 00:15:46,040 Speaker 2: Discuss given the debt ballet in Washington. 345 00:15:48,520 --> 00:15:50,880 Speaker 10: Yeah, that's the only time it's tiresome. But it's not 346 00:15:50,960 --> 00:15:53,640 Speaker 10: going away quickly in our view. Yeah, we still look 347 00:15:53,680 --> 00:15:55,720 Speaker 10: for the market to panic a bit more. It's interesting, 348 00:15:55,800 --> 00:15:58,560 Speaker 10: you can talk about the market, but it's really the 349 00:15:58,720 --> 00:16:01,400 Speaker 10: markets here. So the treasury bill markets in full throat 350 00:16:01,400 --> 00:16:03,800 Speaker 10: of panic mode right now, you've got yields on May 351 00:16:03,840 --> 00:16:06,720 Speaker 10: bills that are low threes, yields on June bills that 352 00:16:06,760 --> 00:16:10,280 Speaker 10: are called medium five. So an enormous gap there. But 353 00:16:10,560 --> 00:16:13,800 Speaker 10: treasury bonds tenure treasury three to fifteen neighborhood. It's been 354 00:16:13,800 --> 00:16:16,400 Speaker 10: there for a while. The equity market's sort of plugging along. 355 00:16:16,760 --> 00:16:19,040 Speaker 10: Foreign exchange is puzzling to us. We think the end 356 00:16:19,040 --> 00:16:21,560 Speaker 10: should be a big beneficiary. And oh, by the way, 357 00:16:21,640 --> 00:16:24,520 Speaker 10: imply volatilities for currencies are low. So it seems like 358 00:16:24,520 --> 00:16:27,080 Speaker 10: the treasury bill market at this point is the only 359 00:16:27,080 --> 00:16:29,840 Speaker 10: one that's really panicking, and the rest are saying, ah, 360 00:16:29,960 --> 00:16:31,400 Speaker 10: it'll get worked out, don't sweat it. 361 00:16:31,560 --> 00:16:35,120 Speaker 2: What on a year basis is long duration? Is long 362 00:16:35,200 --> 00:16:39,520 Speaker 2: duration five years? Or is it twelve years? Or dare 363 00:16:39,560 --> 00:16:42,320 Speaker 2: I say it's an Austrian pre sought fifty years? What's 364 00:16:42,440 --> 00:16:43,040 Speaker 2: long duration? 365 00:16:45,160 --> 00:16:47,040 Speaker 10: Now we're not going to Austrian here. Let's keep it 366 00:16:47,080 --> 00:16:49,080 Speaker 10: to call at the tenure and the reason I say that, 367 00:16:49,560 --> 00:16:51,680 Speaker 10: certainly it's the benchmark. But when people want to move 368 00:16:51,680 --> 00:16:53,760 Speaker 10: a lot of risk globally, that's where they go. They 369 00:16:53,800 --> 00:16:56,520 Speaker 10: go to the tenure part of the US curve. Pretty consistently, 370 00:16:56,920 --> 00:16:59,520 Speaker 10: tons of liquidity so you want to think about some 371 00:16:59,600 --> 00:17:01,600 Speaker 10: numbers three point fifty two and change on the ten 372 00:17:01,640 --> 00:17:04,359 Speaker 10: year yield right now, if things go really badly, if 373 00:17:04,400 --> 00:17:06,719 Speaker 10: Elm and Luise can't figure out quite where the cliff 374 00:17:06,760 --> 00:17:08,800 Speaker 10: is and go over it, maybe you're looking at three 375 00:17:08,840 --> 00:17:11,320 Speaker 10: percent something like that. I certainly hope it doesn't happen, 376 00:17:11,400 --> 00:17:13,960 Speaker 10: but it seems like it's pretty low cost right now 377 00:17:14,000 --> 00:17:15,120 Speaker 10: to insure against that risk. 378 00:17:15,480 --> 00:17:18,040 Speaker 7: I keep thinking about this paddling duck market that Amy 379 00:17:18,040 --> 00:17:21,800 Speaker 7: with Silverman was talking about, because it seems very difficult 380 00:17:21,800 --> 00:17:24,199 Speaker 7: to get our hands around with respect to the debt ceiling. 381 00:17:24,240 --> 00:17:26,600 Speaker 7: And then some of these company profits that are coming out, 382 00:17:26,640 --> 00:17:28,600 Speaker 7: these company earnings that are coming out as we get 383 00:17:28,600 --> 00:17:31,320 Speaker 7: retail sales. I'm wondering if you could weigh in on 384 00:17:31,400 --> 00:17:35,760 Speaker 7: Paul Donovan's point that companies are really expanding their profit 385 00:17:35,840 --> 00:17:39,160 Speaker 7: margins and consumers are only just now starting to push back, 386 00:17:39,200 --> 00:17:42,080 Speaker 7: and that that's a significant driver of inflation. How much 387 00:17:42,160 --> 00:17:44,080 Speaker 7: is that really what you're seeing as well? 388 00:17:46,560 --> 00:17:49,400 Speaker 10: Yeah, it's really interestingly soon. We think we characterize inflation 389 00:17:49,480 --> 00:17:52,600 Speaker 10: right now as stubborn globally, you think about it country 390 00:17:52,640 --> 00:17:56,720 Speaker 10: after country. Canadian data came in high yesterday recently Australia 391 00:17:56,800 --> 00:17:59,879 Speaker 10: hiked surprise the markets. You look at the UK, inflation 392 00:18:00,040 --> 00:18:02,639 Speaker 10: and data are pretty unpleasant, especially on the wage side. 393 00:18:02,760 --> 00:18:05,640 Speaker 10: In the US, I'd make a similar argument. So, yes, 394 00:18:05,720 --> 00:18:08,399 Speaker 10: inflation's come down as it come down nearly as quickly 395 00:18:08,440 --> 00:18:10,879 Speaker 10: as the central bankers would like to see. No, And 396 00:18:10,960 --> 00:18:13,000 Speaker 10: I think that's to your point that you still have 397 00:18:13,119 --> 00:18:15,119 Speaker 10: pricing pressure for a lot of companies. What does it 398 00:18:15,160 --> 00:18:17,440 Speaker 10: mean for markets? Means a lot of these rate cuts 399 00:18:17,440 --> 00:18:19,960 Speaker 10: get priced out, and maybe some of the central banks 400 00:18:19,960 --> 00:18:22,400 Speaker 10: have another hike. Maybe you see a few more surprises. 401 00:18:22,440 --> 00:18:25,520 Speaker 10: But the idea of a lot of rate cuts doesn't 402 00:18:25,560 --> 00:18:27,960 Speaker 10: make sense to us. Now I just said get long duration. 403 00:18:28,040 --> 00:18:30,080 Speaker 10: It flies in the face of that argument, but it's 404 00:18:30,119 --> 00:18:33,400 Speaker 10: really a timing thing. Long duration until the debt ceilings resolve, 405 00:18:33,720 --> 00:18:35,360 Speaker 10: then you focus much more on inflation. 406 00:18:35,560 --> 00:18:37,560 Speaker 7: How much shouldn't you actually just go into some of 407 00:18:37,560 --> 00:18:39,679 Speaker 7: these companies though, with pricing power, If they're able to 408 00:18:39,720 --> 00:18:42,879 Speaker 7: expand their margins, it doesn't really matter a lot of 409 00:18:42,880 --> 00:18:46,120 Speaker 7: the other potential issues because they're still able to make 410 00:18:46,160 --> 00:18:48,120 Speaker 7: bank because consumers aren't pushing back that much. 411 00:18:51,040 --> 00:18:53,200 Speaker 10: I'm going to leave the more the earning discussion in 412 00:18:53,240 --> 00:18:55,199 Speaker 10: why colleague Chris Harvey. But when you think about it 413 00:18:55,200 --> 00:18:57,720 Speaker 10: from a macro perspective, it does point to more inflation 414 00:18:57,800 --> 00:18:59,719 Speaker 10: as far as we're concerned. That's the big takeaway I've 415 00:18:59,760 --> 00:19:00,959 Speaker 10: been focusing on recently. 416 00:19:02,200 --> 00:19:05,520 Speaker 2: I looked like a where we are in May, and 417 00:19:05,680 --> 00:19:07,720 Speaker 2: what it just simply comes down to is we're all 418 00:19:07,760 --> 00:19:11,240 Speaker 2: baffled in a tight collared range. How do you know 419 00:19:11,440 --> 00:19:15,000 Speaker 2: when the caller's over in which way a given vector goes. 420 00:19:15,040 --> 00:19:16,479 Speaker 2: What's your experience on that? 421 00:19:19,400 --> 00:19:21,600 Speaker 10: Yeah, we can see gap ye types of moves, Tom, 422 00:19:21,600 --> 00:19:23,760 Speaker 10: We've seen it a few times this year, certainly around 423 00:19:23,800 --> 00:19:26,160 Speaker 10: the Silicon Valley Bank. And I'll give you an example. 424 00:19:26,200 --> 00:19:29,760 Speaker 10: So dollar yen was one thirty six exactly seven something 425 00:19:29,840 --> 00:19:32,600 Speaker 10: like that on March eighth, call it went to one thirty. 426 00:19:32,720 --> 00:19:35,680 Speaker 10: So call it a four to five percent move. That's 427 00:19:35,760 --> 00:19:37,720 Speaker 10: a big move. Not as big as the type of 428 00:19:37,720 --> 00:19:39,960 Speaker 10: move we had last year, but they were more secular. 429 00:19:40,280 --> 00:19:42,119 Speaker 10: But something like that that happens in a week or 430 00:19:42,119 --> 00:19:44,720 Speaker 10: two in a super liquid market, that tells me we 431 00:19:44,760 --> 00:19:46,840 Speaker 10: fit the boiling point. We're not there yet. I think 432 00:19:46,880 --> 00:19:49,359 Speaker 10: it could happen. I think those price points are probably 433 00:19:49,400 --> 00:19:53,160 Speaker 10: about right, and so debt ceiling goes really astray. Yen 434 00:19:53,240 --> 00:19:56,119 Speaker 10: moves another five percent, strengthening versus a dollar. That's the 435 00:19:56,160 --> 00:19:56,680 Speaker 10: kind of thing. 436 00:19:56,600 --> 00:19:57,000 Speaker 1: I look at. 437 00:19:57,280 --> 00:19:59,640 Speaker 3: Finally got those results from TJX. Let's get to them. 438 00:20:00,280 --> 00:20:02,080 Speaker 3: Thank you, sir as always on a bond market from 439 00:20:02,119 --> 00:20:04,040 Speaker 3: wels Fanca, My Schumacher there. 440 00:20:07,720 --> 00:20:10,399 Speaker 2: Michael Gapan joins us now ahead of the economics at 441 00:20:10,440 --> 00:20:13,879 Speaker 2: Bank of America Securities. I like the idea of the 442 00:20:13,960 --> 00:20:17,840 Speaker 2: last resort. They really don't want to cut rates. What 443 00:20:17,920 --> 00:20:21,560 Speaker 2: does history tell us about when they do cut rates? 444 00:20:22,680 --> 00:20:25,800 Speaker 9: History would tell you that the housing sector would bounce 445 00:20:25,840 --> 00:20:28,119 Speaker 9: back quickly, all the sectors that have been in trouble 446 00:20:28,200 --> 00:20:32,280 Speaker 9: recently would bounce back strongly. But history tells you the 447 00:20:32,320 --> 00:20:35,360 Speaker 9: fed's cutting rates for a reason. They're either achieving their 448 00:20:35,400 --> 00:20:39,040 Speaker 9: goals on the inflation side in this case, or there's 449 00:20:39,080 --> 00:20:41,879 Speaker 9: been a stronger downturn in the economy and policy is 450 00:20:41,920 --> 00:20:46,280 Speaker 9: shifting towards helping activity recover. So typically when the FED cuts, 451 00:20:46,320 --> 00:20:49,080 Speaker 9: there's a reason for them to be cutting. 452 00:20:49,359 --> 00:20:52,360 Speaker 7: They keep pushing back on market expectations for cuts. And 453 00:20:52,359 --> 00:20:54,040 Speaker 7: Andrew Holland Horrice of City Group has kind of been 454 00:20:54,040 --> 00:20:56,800 Speaker 7: out alone saying that this FED is completely underestimating how 455 00:20:56,840 --> 00:20:58,560 Speaker 7: much the inflation is out there, and they need to 456 00:20:58,640 --> 00:21:01,560 Speaker 7: keep hiking, even potentially in June. Do you see that 457 00:21:01,640 --> 00:21:04,040 Speaker 7: as an increasing likelihood based in the data that we've 458 00:21:04,040 --> 00:21:04,520 Speaker 7: been getting. 459 00:21:04,640 --> 00:21:07,119 Speaker 9: Yes, we've been saying that a hike in June can't 460 00:21:07,119 --> 00:21:09,880 Speaker 9: be fully ruled out. There's obviously a lot of hurdles 461 00:21:09,880 --> 00:21:13,080 Speaker 9: we need to get over to make that decision. But 462 00:21:13,280 --> 00:21:15,639 Speaker 9: I would still put a hike in June or July 463 00:21:15,800 --> 00:21:18,680 Speaker 9: at kind of the thirty to forty percent range that 464 00:21:18,760 --> 00:21:22,080 Speaker 9: the data on net is still pretty strong. The Fed 465 00:21:22,119 --> 00:21:25,159 Speaker 9: has an upward bias, and if it probably needs to 466 00:21:25,200 --> 00:21:27,760 Speaker 9: see two to three months worth of evidence to make 467 00:21:27,800 --> 00:21:31,280 Speaker 9: that decision. June is a pause at the moment, But 468 00:21:31,520 --> 00:21:33,720 Speaker 9: certainly I think you can you could get to a 469 00:21:33,800 --> 00:21:35,919 Speaker 9: hike in June. I think you can certainly get to 470 00:21:35,960 --> 00:21:37,919 Speaker 9: one in July if you felt you needed to. 471 00:21:38,440 --> 00:21:41,520 Speaker 7: As Tom described this market and this economy as excruciating, 472 00:21:41,720 --> 00:21:44,000 Speaker 7: he is not wrong. I'll give you an example. We 473 00:21:44,040 --> 00:21:47,080 Speaker 7: get these retail earnings home goods clearly seeing a downdraft, 474 00:21:47,160 --> 00:21:49,199 Speaker 7: people not buying home goods as much, whether it's Home 475 00:21:49,240 --> 00:21:51,600 Speaker 7: Depot or TJ Max. But then if you look at makeup. 476 00:21:51,600 --> 00:21:53,359 Speaker 7: If you look at food, if you look at services, 477 00:21:53,400 --> 00:21:57,040 Speaker 7: that's all continuing to blossom. And even these companies pass 478 00:21:57,080 --> 00:22:01,480 Speaker 7: along price increases. Can a rolling receps in different industries 479 00:22:01,560 --> 00:22:04,560 Speaker 7: like this prolong the type of inflation that we have 480 00:22:04,640 --> 00:22:07,560 Speaker 7: seen far beyond what people have currently expected. 481 00:22:07,880 --> 00:22:10,280 Speaker 9: Yes, I think so that in the FED is we 482 00:22:10,359 --> 00:22:12,280 Speaker 9: all know the Fed's not out there saying, oh, we 483 00:22:12,320 --> 00:22:16,119 Speaker 9: need to engineer a recession to break the back of inflation. Right, 484 00:22:16,119 --> 00:22:18,800 Speaker 9: They're saying we need to lean against the wind. So 485 00:22:18,840 --> 00:22:21,639 Speaker 9: it's not all up to us, and so we're just 486 00:22:21,680 --> 00:22:24,800 Speaker 9: trying to put policy in a quote modestly restrictive stance. 487 00:22:25,320 --> 00:22:28,560 Speaker 9: That means you can get i think, rolling slow downs 488 00:22:28,600 --> 00:22:31,720 Speaker 9: across certain parts of the economy where any downturn would 489 00:22:31,720 --> 00:22:34,760 Speaker 9: look more, say you shaped than it would be shaped. 490 00:22:34,920 --> 00:22:38,160 Speaker 9: And so you get a wide dispersion in the data 491 00:22:38,160 --> 00:22:41,920 Speaker 9: where some spending on lodging, for example, looks like it's peaked, 492 00:22:41,960 --> 00:22:45,960 Speaker 9: airlines are a bit mixed, but spending in things like 493 00:22:46,080 --> 00:22:49,600 Speaker 9: cruise ships or travel abroad is still strong. So the 494 00:22:49,640 --> 00:22:53,760 Speaker 9: reopening phases, the normalization of spending makes a lot of 495 00:22:53,760 --> 00:22:57,359 Speaker 9: this data look really at odds at certain points in time. 496 00:22:57,440 --> 00:22:59,719 Speaker 9: So it's possible you could you could see that continue 497 00:22:59,720 --> 00:23:00,800 Speaker 9: for some time you. 498 00:23:00,800 --> 00:23:03,560 Speaker 2: Study in school, Michael, that statistics for the modern age 499 00:23:03,560 --> 00:23:06,280 Speaker 2: started about nineteen forty seven. And one of those series 500 00:23:06,320 --> 00:23:08,880 Speaker 2: that we have in the Bloomberg and Sherman Greenspan loved 501 00:23:08,880 --> 00:23:11,960 Speaker 2: it was he all in augmented unemployment rate, which is 502 00:23:12,000 --> 00:23:15,840 Speaker 2: six point three percent right now. It's a gloomier statistic, 503 00:23:15,880 --> 00:23:18,159 Speaker 2: and you know it speaks a lot to the tension 504 00:23:18,200 --> 00:23:23,760 Speaker 2: of unemployment. We are two point two standard deviations to 505 00:23:23,920 --> 00:23:29,520 Speaker 2: fully employed on that statistic going back sixty seventy years. 506 00:23:29,600 --> 00:23:33,680 Speaker 2: It's a fully employed America, right, Yes, I mean statistically, 507 00:23:33,880 --> 00:23:38,520 Speaker 2: statistically speaking, yes, why are we talking about cutting interest rates? 508 00:23:38,680 --> 00:23:39,880 Speaker 2: I'm baffled by this. 509 00:23:40,080 --> 00:23:40,399 Speaker 1: We're not. 510 00:23:42,040 --> 00:23:44,200 Speaker 9: I don't think the feed is either. So I think 511 00:23:44,400 --> 00:23:47,560 Speaker 9: you're you're in a situation where some sort of they 512 00:23:47,720 --> 00:23:50,320 Speaker 9: land this right and you get a higher for longer outlook. 513 00:23:51,359 --> 00:23:54,760 Speaker 9: But I think in general, the need or the desire 514 00:23:55,000 --> 00:23:58,040 Speaker 9: or the want for cuts sooner than later is a 515 00:23:58,080 --> 00:24:00,959 Speaker 9: little misplaced. There are certainly past to get those cuts. 516 00:24:01,400 --> 00:24:04,080 Speaker 9: I'm just not sure they're as close to baseline as 517 00:24:04,119 --> 00:24:04,840 Speaker 9: people are thinking. 518 00:24:04,920 --> 00:24:07,480 Speaker 2: I mean, lista, what's so important here about the oddity 519 00:24:07,480 --> 00:24:10,200 Speaker 2: of a pandemic and all the other dynamics we talk 520 00:24:10,240 --> 00:24:13,600 Speaker 2: about all day. It's people like Michael Gaban with huge 521 00:24:13,600 --> 00:24:18,679 Speaker 2: credibility and earned credibility, are looking at quote, other factors 522 00:24:18,720 --> 00:24:21,679 Speaker 2: involved and we want your own power to fix our 523 00:24:21,760 --> 00:24:24,600 Speaker 2: other factors involved, and he doesn't have the tools to 524 00:24:24,640 --> 00:24:26,640 Speaker 2: do that. It sounds completely irresponsible. 525 00:24:26,680 --> 00:24:29,040 Speaker 7: So there's that issue. And then there's also the other 526 00:24:29,119 --> 00:24:31,480 Speaker 7: factors involved when it comes to the actual pricing and 527 00:24:31,560 --> 00:24:34,800 Speaker 7: markets for rate cuts, which include most people saying probably 528 00:24:34,800 --> 00:24:36,880 Speaker 7: they're not going to cut rights this year, but if 529 00:24:36,880 --> 00:24:38,919 Speaker 7: there is some sort of crisis, you could get some 530 00:24:38,960 --> 00:24:42,879 Speaker 7: pretty dramatic cuts. Is the economy that you're watching, with 531 00:24:42,960 --> 00:24:45,159 Speaker 7: a labor market as tight as it is, with this 532 00:24:45,280 --> 00:24:50,000 Speaker 7: feeling that consumers are continuing to be able to spend less, 533 00:24:50,240 --> 00:24:53,119 Speaker 7: perhaps vulnerable to the shocks that people have been worried 534 00:24:53,119 --> 00:24:56,000 Speaker 7: about all year long, and they're frustrated anxious. 535 00:24:55,640 --> 00:25:00,159 Speaker 9: States, Well, the economy certainly has shown great resilience, and 536 00:25:00,200 --> 00:25:04,879 Speaker 9: you're right, there's spillovers from debt limits, there's concerns about 537 00:25:05,040 --> 00:25:08,440 Speaker 9: regional bank funding models and so forth, and yeah, those 538 00:25:08,520 --> 00:25:12,119 Speaker 9: could propagate in ways that are very unhealthy for the economy. 539 00:25:12,160 --> 00:25:16,520 Speaker 9: But that's unlikely. The data shows that the stress and 540 00:25:16,680 --> 00:25:20,600 Speaker 9: the regional banks appears manageable. To your point, though, I'd 541 00:25:20,600 --> 00:25:23,240 Speaker 9: also I'd just like to affirm or amplify what you said. 542 00:25:23,400 --> 00:25:27,480 Speaker 9: The FED isn't here to fix everybody's problems, and FED 543 00:25:27,560 --> 00:25:30,680 Speaker 9: hiking cycles cause pain in certain parts of the economy. 544 00:25:30,680 --> 00:25:31,160 Speaker 1: That's true. 545 00:25:31,200 --> 00:25:35,320 Speaker 9: That's been true in every tightening cycle, and you need 546 00:25:35,320 --> 00:25:37,640 Speaker 9: that in order to bring inflation down. So in some 547 00:25:37,680 --> 00:25:40,640 Speaker 9: ways we're a little bit bipolar. We know we want 548 00:25:40,640 --> 00:25:42,960 Speaker 9: the FED to raise rates to moderate activity to bring 549 00:25:43,000 --> 00:25:45,320 Speaker 9: inflation down. We all know that's good for the economy 550 00:25:45,320 --> 00:25:48,239 Speaker 9: in the long run. But when the pain of that 551 00:25:48,359 --> 00:25:50,040 Speaker 9: shows up, we all want the FED to run to 552 00:25:50,080 --> 00:25:52,879 Speaker 9: the rescue and fix our own individual market. That's not 553 00:25:52,920 --> 00:25:53,760 Speaker 9: what the Fed's there for. 554 00:25:54,119 --> 00:25:56,159 Speaker 7: So I want to bring to you something that we 555 00:25:56,240 --> 00:26:00,520 Speaker 7: heard yesterday from Austin Coolesby, who is talking about immaculate inflation. 556 00:26:00,680 --> 00:26:03,679 Speaker 7: I said that people who try to talk down that 557 00:26:03,800 --> 00:26:08,000 Speaker 7: concept of immaculate disinflation are perhaps fooling themselves because there 558 00:26:08,040 --> 00:26:10,600 Speaker 7: was an immaculate inflation and so there, yes, there could 559 00:26:10,600 --> 00:26:13,240 Speaker 7: be immaculate disinflation. That's actually part of what we're seeing 560 00:26:13,400 --> 00:26:14,439 Speaker 7: what would you say to that. 561 00:26:14,680 --> 00:26:16,040 Speaker 1: I'd say that's part of the story. 562 00:26:16,480 --> 00:26:18,520 Speaker 9: So if you go back and you think that some 563 00:26:18,560 --> 00:26:20,560 Speaker 9: of this was excess demand and some of it was 564 00:26:20,600 --> 00:26:24,960 Speaker 9: a supply shock, the immaculate disinflation can come from cleaning 565 00:26:25,040 --> 00:26:27,800 Speaker 9: up the supply, the adverse supply shocks and the resumption 566 00:26:27,920 --> 00:26:31,639 Speaker 9: of normal supply. That should help bring inflation down on 567 00:26:31,680 --> 00:26:34,800 Speaker 9: its own. But to Tom's point, the labor market is 568 00:26:34,920 --> 00:26:37,680 Speaker 9: as tight as it's been in my lifetime. If the 569 00:26:37,760 --> 00:26:42,199 Speaker 9: labor market's cooled down, it's cooled down from exceptionally hot 570 00:26:42,560 --> 00:26:45,399 Speaker 9: to as tight as it was in the past prior 571 00:26:45,520 --> 00:26:49,199 Speaker 9: cycle highs. So there, I think you know you're not 572 00:26:49,240 --> 00:26:54,280 Speaker 9: going to It's unlikely to get immaculate disinflation when you're 573 00:26:54,280 --> 00:26:56,800 Speaker 9: trying to reverse that. So it's a it's a mixed story. 574 00:26:57,080 --> 00:26:57,399 Speaker 1: Michael. 575 00:26:57,440 --> 00:27:00,320 Speaker 2: I want you to look at the global purview of 576 00:27:00,320 --> 00:27:02,560 Speaker 2: of America, the great work that you and Ethan Harris 577 00:27:02,600 --> 00:27:03,400 Speaker 2: are doing. 578 00:27:03,520 --> 00:27:05,080 Speaker 1: And that is I see unsettlement. 579 00:27:05,119 --> 00:27:07,760 Speaker 2: I see the Turkish election with Turkish lerier coming out 580 00:27:07,800 --> 00:27:11,040 Speaker 2: obviously regularly with the uncertainty of two weeks. I see 581 00:27:11,160 --> 00:27:14,399 Speaker 2: Argentina where the blue dollar Argentina pays. So is something 582 00:27:14,400 --> 00:27:16,720 Speaker 2: you and I have never witnessed You've done this at 583 00:27:16,720 --> 00:27:20,120 Speaker 2: the IMF as well. This morning we have Ecuador dissolving 584 00:27:20,160 --> 00:27:23,960 Speaker 2: their parliament. There's just seemed to be that early nineteen 585 00:27:24,119 --> 00:27:28,920 Speaker 2: ninety eight tension out there, little butterflies flapping, if you will, 586 00:27:28,960 --> 00:27:30,520 Speaker 2: to use a worn out cliche. 587 00:27:30,720 --> 00:27:32,760 Speaker 1: Do you sense that at Bank of America? 588 00:27:33,000 --> 00:27:36,240 Speaker 9: Not yet. I would add maybe the election outcomes in Thailand, 589 00:27:36,240 --> 00:27:39,320 Speaker 9: for example, is yes. I'm sorry, no, no, But it's 590 00:27:39,359 --> 00:27:41,840 Speaker 9: a good point that there is a series of elections 591 00:27:41,840 --> 00:27:44,879 Speaker 9: where there's been some surprises and still some momentum and 592 00:27:44,960 --> 00:27:48,720 Speaker 9: populist candidates. The message there is still one of potential 593 00:27:48,800 --> 00:27:53,480 Speaker 9: change and say an unsettled political environment. Obviously we have 594 00:27:53,560 --> 00:27:55,359 Speaker 9: some of that still here at home, so I wouldn't 595 00:27:55,359 --> 00:27:57,720 Speaker 9: say we're at that moment yet, but you're right there 596 00:27:57,720 --> 00:28:01,280 Speaker 9: are undertones where some of the patterns day repeat what 597 00:28:01,320 --> 00:28:03,119 Speaker 9: we had seen in the past thirty seconds. 598 00:28:03,200 --> 00:28:05,520 Speaker 2: Is Jerome Powell's central banker to the world until all 599 00:28:05,600 --> 00:28:08,040 Speaker 2: these butterflies out there with tensions. 600 00:28:07,600 --> 00:28:12,560 Speaker 9: And realities, Whether he likes it or absolutely yes. 601 00:28:12,440 --> 00:28:14,640 Speaker 2: I think it's a way under played, Lisa. I think 602 00:28:14,760 --> 00:28:17,280 Speaker 2: you know the actions that we're looking at the United States, 603 00:28:17,480 --> 00:28:20,560 Speaker 2: including tangentially this debt ballet. 604 00:28:20,200 --> 00:28:20,920 Speaker 1: Were going through. 605 00:28:21,080 --> 00:28:23,600 Speaker 7: Talk about well, Alicia Levine was talking about that if 606 00:28:23,600 --> 00:28:26,760 Speaker 7: the Fed does hike rates in June, what happens to 607 00:28:26,840 --> 00:28:28,920 Speaker 7: the dollar? And then how does that sort of disrupt 608 00:28:28,920 --> 00:28:31,560 Speaker 7: the rest of the world in their economic policies, Because 609 00:28:31,560 --> 00:28:32,080 Speaker 7: it's interesting. 610 00:28:32,119 --> 00:28:34,760 Speaker 2: I mean doctor Gaban's entourage folks, they said he can't 611 00:28:34,760 --> 00:28:35,600 Speaker 2: talk the dead ceiling. 612 00:28:35,600 --> 00:28:37,320 Speaker 1: I mean when he came in, he just said, you know, 613 00:28:37,960 --> 00:28:38,760 Speaker 1: it's not going there. 614 00:28:38,880 --> 00:28:46,200 Speaker 9: Well, apparently it's like passing a kidney stone comment like that. 615 00:28:46,200 --> 00:28:47,680 Speaker 3: That was perfect. 616 00:28:47,760 --> 00:28:50,640 Speaker 2: Well, we've had a lots to do in law and order, 617 00:28:50,720 --> 00:28:54,920 Speaker 2: We've done sports shows, and now we're doing Doctor Kildare. Yeah, 618 00:28:54,960 --> 00:28:57,560 Speaker 2: I go so, Mike, Michael Gabon, thank you so much. 619 00:28:57,720 --> 00:29:12,360 Speaker 2: Bank America securious. Christopher Merinack joins us right now. Chris, 620 00:29:12,400 --> 00:29:14,040 Speaker 2: you know, it's an honor to have you on and 621 00:29:14,080 --> 00:29:16,760 Speaker 2: thank you so much for your coverage here through this crisis. 622 00:29:17,160 --> 00:29:19,760 Speaker 2: At the bottom line is we're all watching. This is 623 00:29:19,880 --> 00:29:23,920 Speaker 2: theater you actually know these people. Let's talk about mister 624 00:29:24,040 --> 00:29:27,680 Speaker 2: Shay in Signature Bank, which your shop covered as well. 625 00:29:27,960 --> 00:29:31,480 Speaker 2: First of all, were you surprised they went down the tubes? 626 00:29:33,560 --> 00:29:36,080 Speaker 11: I was surprised because I think that they had enough 627 00:29:36,120 --> 00:29:40,719 Speaker 11: liquidity to stave off the first couple of days. I 628 00:29:40,760 --> 00:29:43,480 Speaker 11: think that it was a challenge to understand how many 629 00:29:43,480 --> 00:29:47,440 Speaker 11: more depositors we're going to be behind on that Monday, Tuesday, 630 00:29:47,520 --> 00:29:51,080 Speaker 11: the thirteenth and fourteenth of March. So the reality is 631 00:29:51,080 --> 00:29:55,160 Speaker 11: the regulators had little patience after seeing Silicon Valley failed 632 00:29:55,160 --> 00:29:58,840 Speaker 11: at the previous Frida, so signature was a surprise, but 633 00:29:59,040 --> 00:30:00,720 Speaker 11: at the end of the day there may have been 634 00:30:00,720 --> 00:30:03,360 Speaker 11: more depositors lined up than we realized behind the scenes. 635 00:30:03,440 --> 00:30:05,040 Speaker 2: I don't want to dwell on this because I just 636 00:30:05,080 --> 00:30:07,120 Speaker 2: think it's theater and soap opera and that's not the 637 00:30:07,160 --> 00:30:10,640 Speaker 2: purpose of this show. But there is a large part 638 00:30:10,640 --> 00:30:13,400 Speaker 2: of America that would suggest the Senator from the Commonwealth 639 00:30:13,480 --> 00:30:16,760 Speaker 2: of Massachusetts is onto something here that the suits and 640 00:30:16,840 --> 00:30:20,320 Speaker 2: ties should return the bonuses should they. 641 00:30:21,960 --> 00:30:22,120 Speaker 6: Well. 642 00:30:22,160 --> 00:30:25,000 Speaker 11: In my opinion, the bonuses were made in twenty twenty 643 00:30:25,000 --> 00:30:27,680 Speaker 11: two and twenty twenty one for just normal business. I 644 00:30:27,720 --> 00:30:30,320 Speaker 11: think that there could be some penalty for the lack 645 00:30:30,360 --> 00:30:33,960 Speaker 11: of contingency planning for liquidity. You know, banks elever twelve 646 00:30:34,040 --> 00:30:36,040 Speaker 11: to one, and they just did not fathom that they 647 00:30:36,040 --> 00:30:39,040 Speaker 11: would see these big concentrated deposits all walk out at 648 00:30:39,080 --> 00:30:42,160 Speaker 11: the same time, and that I think was the mistake made, 649 00:30:42,200 --> 00:30:45,840 Speaker 11: and there's too many securities invested in two longer term 650 00:30:45,920 --> 00:30:49,320 Speaker 11: duration assets on the books at the end of the day, 651 00:30:49,640 --> 00:30:52,720 Speaker 11: I think that it was a mistake on many fronts, 652 00:30:52,760 --> 00:30:55,200 Speaker 11: including the regulators, so that there's a little bit of 653 00:30:55,280 --> 00:30:56,720 Speaker 11: blame to go around everywhere. 654 00:30:57,080 --> 00:30:59,720 Speaker 7: Chris, I'm looking right now at Western Alliance shares at 655 00:30:59,720 --> 00:31:03,240 Speaker 7: more than eleven percent in pre market trading as people 656 00:31:03,480 --> 00:31:06,120 Speaker 7: get a sense that deposits are coming in the door. 657 00:31:06,160 --> 00:31:08,320 Speaker 7: They're reporting this now on a weekly basis because it's 658 00:31:08,360 --> 00:31:11,480 Speaker 7: good news. Pack West shares also up about eleven percent. 659 00:31:11,480 --> 00:31:13,760 Speaker 7: I understand that off a very low base, but still, 660 00:31:14,120 --> 00:31:17,280 Speaker 7: do you think that this is right, that deposit strength 661 00:31:17,400 --> 00:31:21,920 Speaker 7: in one bank really suggests stabilization in the entire regime. 662 00:31:23,480 --> 00:31:24,400 Speaker 6: I think that's accurate. 663 00:31:24,440 --> 00:31:27,200 Speaker 11: I mean, we have seen much more stable deposit flows 664 00:31:27,240 --> 00:31:30,560 Speaker 11: from the weekly FED data all throughout this saga since March, 665 00:31:30,680 --> 00:31:33,320 Speaker 11: so deposits are down four and a half percent year 666 00:31:33,400 --> 00:31:35,200 Speaker 11: to date. We're down six and a half from the 667 00:31:35,240 --> 00:31:38,800 Speaker 11: peak in twenty twenty two. The reality is we're normalizing 668 00:31:38,880 --> 00:31:41,960 Speaker 11: in terms of deposits and funding mix in the industry. 669 00:31:42,240 --> 00:31:45,120 Speaker 11: I don't really see big disintermediation. It's only a short 670 00:31:45,200 --> 00:31:47,960 Speaker 11: term indicator that money market funds are up and deposits 671 00:31:48,000 --> 00:31:50,719 Speaker 11: are down. We still have deposits, you know, twenty eight 672 00:31:50,800 --> 00:31:53,640 Speaker 11: twenty nine percent higher today than they were at the 673 00:31:53,720 --> 00:31:56,720 Speaker 11: end of twenty nineteen. I think there's the opportunity for 674 00:31:56,800 --> 00:31:58,360 Speaker 11: deposits that left at Pack. 675 00:31:58,280 --> 00:32:00,520 Speaker 6: West and left Western Alliance back. 676 00:32:00,680 --> 00:32:03,560 Speaker 11: I think the market's trying to ascertain that, and I 677 00:32:03,560 --> 00:32:06,200 Speaker 11: think there are positive days ahead for both of those companies. 678 00:32:06,320 --> 00:32:08,920 Speaker 7: Let's say things have stabilized, Chris, you talk about the 679 00:32:08,920 --> 00:32:12,080 Speaker 7: pretty massive distortion that occurred when you did see all 680 00:32:12,120 --> 00:32:15,080 Speaker 7: of these deposits. I think trillions of dollars flood into 681 00:32:15,120 --> 00:32:17,280 Speaker 7: the system all at once. There is a question of 682 00:32:17,320 --> 00:32:20,880 Speaker 7: where those deposits were deployed. Was it commercial real estate? 683 00:32:21,120 --> 00:32:24,160 Speaker 7: Was it loans to companies that might be faltering at 684 00:32:24,160 --> 00:32:27,520 Speaker 7: this point? How much even if there is stabilization, there 685 00:32:27,560 --> 00:32:30,040 Speaker 7: is still a very big problem on the books of 686 00:32:30,080 --> 00:32:31,240 Speaker 7: some of these regional banks. 687 00:32:32,520 --> 00:32:35,680 Speaker 11: So we really saw loans grow very little in twenty 688 00:32:35,720 --> 00:32:37,880 Speaker 11: twenty and twenty twenty one. It was only a twenty 689 00:32:37,920 --> 00:32:40,480 Speaker 11: two that loans started to grow and a lot of 690 00:32:40,520 --> 00:32:43,360 Speaker 11: the growth came in mortgages, it came and seen eye loans, 691 00:32:43,400 --> 00:32:45,440 Speaker 11: and it did common commercial real estate. But I think 692 00:32:45,480 --> 00:32:48,400 Speaker 11: it's been very muted in terms of the pace of 693 00:32:48,440 --> 00:32:51,880 Speaker 11: growth in the past year. So we've seen overall loans 694 00:32:51,960 --> 00:32:55,840 Speaker 11: up about seventeen percent during this timeframe. 695 00:32:55,400 --> 00:32:57,080 Speaker 6: And beginning to use the deposits. 696 00:32:57,080 --> 00:32:59,280 Speaker 11: What I find really interesting is that loan to deposit 697 00:32:59,360 --> 00:33:02,479 Speaker 11: ratios are seventy one percent today for the industry, up 698 00:33:02,560 --> 00:33:05,200 Speaker 11: from sixty at the bottom, and that compares to a 699 00:33:05,280 --> 00:33:08,520 Speaker 11: long term average since the early seventies of eighty two percent, 700 00:33:09,000 --> 00:33:11,720 Speaker 11: and we were I think around seventy six seventy seven 701 00:33:11,840 --> 00:33:12,360 Speaker 11: prior to. 702 00:33:12,320 --> 00:33:14,480 Speaker 6: The pandemic, so we're still coming back. 703 00:33:14,680 --> 00:33:17,160 Speaker 11: I don't think the leverage in the industry has anywhere 704 00:33:17,160 --> 00:33:18,040 Speaker 11: near where it used to be. 705 00:33:18,720 --> 00:33:23,719 Speaker 2: Chris sellside By, Outperform, Single, Best Buy, whatever the ballet 706 00:33:23,800 --> 00:33:26,760 Speaker 2: is is up twenty up to thirty percent. You basically 707 00:33:26,800 --> 00:33:29,040 Speaker 2: have a double or more than double on some of 708 00:33:29,080 --> 00:33:30,400 Speaker 2: these selected. 709 00:33:29,920 --> 00:33:31,160 Speaker 1: Banks right now. 710 00:33:32,000 --> 00:33:34,040 Speaker 2: They're going to go into this year, next year, in 711 00:33:34,080 --> 00:33:39,000 Speaker 2: the following year. Am I right is smaller institutions describe 712 00:33:39,560 --> 00:33:43,240 Speaker 2: how their share price does a double off a bank 713 00:33:43,560 --> 00:33:46,480 Speaker 2: that's going to be smaller than it was in twenty nineteen. 714 00:33:47,640 --> 00:33:50,320 Speaker 11: Sure, so it starts tom at tangible book value. So 715 00:33:50,400 --> 00:33:52,840 Speaker 11: if you look at tangible book at seventeen to eighteen 716 00:33:52,880 --> 00:33:56,520 Speaker 11: dollars a pack, West, that company is trading at a 717 00:33:56,560 --> 00:33:58,160 Speaker 11: willful price to book today. 718 00:33:57,960 --> 00:33:59,840 Speaker 6: It can come back. We think book is actually going 719 00:33:59,880 --> 00:34:00,680 Speaker 6: to rise. 720 00:34:00,760 --> 00:34:04,160 Speaker 11: With retained earnings, so that ratio comes off of the 721 00:34:04,480 --> 00:34:07,240 Speaker 11: twenty five to thirty percent level and heads towards fifty 722 00:34:07,240 --> 00:34:10,680 Speaker 11: and then eventually sixty and seventy and Western Alliance is 723 00:34:10,680 --> 00:34:13,200 Speaker 11: a slightly higher stock, but still at a discount the 724 00:34:13,200 --> 00:34:14,520 Speaker 11: book by a pretty meaningful way. 725 00:34:14,560 --> 00:34:16,839 Speaker 6: And that's why we could come back as well. 726 00:34:17,560 --> 00:34:19,879 Speaker 11: This mirror is two thousand and nine when you had 727 00:34:19,880 --> 00:34:22,160 Speaker 11: stocks like Fifth Third and the old sun Trust and 728 00:34:22,239 --> 00:34:25,080 Speaker 11: Huntington Bank that are trading less than fifty percent of 729 00:34:25,120 --> 00:34:27,520 Speaker 11: book and then they end up raising capital for TARP 730 00:34:27,560 --> 00:34:29,920 Speaker 11: at a higher level, and then they traded much higher 731 00:34:29,920 --> 00:34:31,200 Speaker 11: at the end of two thousand and nine. 732 00:34:31,280 --> 00:34:33,520 Speaker 6: So you know, we've seen this movie before. 733 00:34:33,880 --> 00:34:36,600 Speaker 11: The volatility is very high today, but it does work 734 00:34:36,640 --> 00:34:38,359 Speaker 11: both ways, and we think banks are going just going 735 00:34:38,400 --> 00:34:39,759 Speaker 11: to continue to put one foot in front of the 736 00:34:39,840 --> 00:34:43,040 Speaker 11: other have a profitable second quarter, we think that the 737 00:34:43,400 --> 00:34:46,680 Speaker 11: overall mark to marketing she is going to start to 738 00:34:46,680 --> 00:34:49,360 Speaker 11: weaning slightly. It's not going to resolve itself all the 739 00:34:49,360 --> 00:34:51,319 Speaker 11: way because the FED hasn't lowered rates yet, but it 740 00:34:51,360 --> 00:34:52,840 Speaker 11: is getting better each quarter. 741 00:34:53,040 --> 00:34:56,239 Speaker 1: Are they going to be smaller institutions or do they 742 00:34:56,320 --> 00:34:59,720 Speaker 1: grow at some factor of American nominal GDP? 743 00:35:01,040 --> 00:35:01,360 Speaker 6: Sure? 744 00:35:01,480 --> 00:35:04,200 Speaker 11: So for the pack West and Western alliances, I think 745 00:35:04,239 --> 00:35:07,480 Speaker 11: that they will shrink somewhat because the deposits are lower 746 00:35:07,520 --> 00:35:09,360 Speaker 11: than they were at the end of March and certainly 747 00:35:09,360 --> 00:35:09,960 Speaker 11: at the end of. 748 00:35:09,920 --> 00:35:10,680 Speaker 6: Twenty twenty two. 749 00:35:11,080 --> 00:35:12,759 Speaker 11: For the rest of the banks, I think you're going 750 00:35:12,800 --> 00:35:15,880 Speaker 11: to see them more flat to growing at about one percent. 751 00:35:16,360 --> 00:35:19,239 Speaker 11: I think that if we have a recession and GDP contracts, 752 00:35:19,239 --> 00:35:21,319 Speaker 11: obviously I think you will see a little bit of. 753 00:35:21,280 --> 00:35:23,560 Speaker 6: Contraction, but I think it's very modest. 754 00:35:24,000 --> 00:35:26,439 Speaker 11: You know, the liquidity in the industry is very high, 755 00:35:26,520 --> 00:35:29,160 Speaker 11: and it's better today than it was when this began 756 00:35:29,239 --> 00:35:31,239 Speaker 11: in March. So I think the banks are in a 757 00:35:31,320 --> 00:35:33,360 Speaker 11: really good spot, and I think there's still credit demand 758 00:35:33,440 --> 00:35:37,040 Speaker 11: and inflation tends to be good for business because customers 759 00:35:37,120 --> 00:35:40,399 Speaker 11: need to borrow more as they have a higher price 760 00:35:40,480 --> 00:35:41,200 Speaker 11: level for their goods. 761 00:35:41,200 --> 00:35:41,760 Speaker 6: And services. 762 00:35:41,840 --> 00:35:43,960 Speaker 7: That's said, Chris, I do wonder, especially if you say 763 00:35:43,960 --> 00:35:45,680 Speaker 7: you'd put some of the blame with the regulators, that 764 00:35:45,719 --> 00:35:47,880 Speaker 7: they perhaps and I'm extrapolating here, I'm putting words in 765 00:35:47,920 --> 00:35:49,600 Speaker 7: your mouth, so please feel free to correct me. They 766 00:35:49,600 --> 00:35:52,640 Speaker 7: didn't stress test against a massive rise and rates to 767 00:35:52,680 --> 00:35:54,080 Speaker 7: the same degree that a lot of people say that 768 00:35:54,120 --> 00:35:56,200 Speaker 7: they should have. There is a question of whether you're 769 00:35:56,200 --> 00:35:58,160 Speaker 7: going to see this delineation between the p and cs 770 00:35:58,200 --> 00:36:01,680 Speaker 7: of the world, the US banks, the regions banks, the larger, 771 00:36:01,719 --> 00:36:06,399 Speaker 7: the sort of mid size, larger midsized banks really move 772 00:36:06,440 --> 00:36:08,960 Speaker 7: away from some of the others and leave the others 773 00:36:09,040 --> 00:36:11,359 Speaker 7: in a bit more world of hurt. 774 00:36:12,760 --> 00:36:15,399 Speaker 11: I disagree with that because I think there's lending opportunities 775 00:36:15,400 --> 00:36:18,640 Speaker 11: all across the spectrum from community banks that serve their 776 00:36:18,640 --> 00:36:22,560 Speaker 11: customers really well and are a key piece of the 777 00:36:22,600 --> 00:36:25,440 Speaker 11: puzzle for giving advice. I think as you move up 778 00:36:25,440 --> 00:36:27,560 Speaker 11: to mid size and larger companies they can do the same. 779 00:36:28,200 --> 00:36:30,880 Speaker 11: All of these banks have good capital and good reserves. 780 00:36:31,080 --> 00:36:33,000 Speaker 11: I think they could use more as we go through 781 00:36:33,000 --> 00:36:35,200 Speaker 11: the cycle. I think some banks will raise capital to 782 00:36:35,280 --> 00:36:38,240 Speaker 11: kind of create a sign of confidence, perhaps fill in 783 00:36:38,440 --> 00:36:41,080 Speaker 11: the bucket from the unrealized security losses. But I think 784 00:36:41,120 --> 00:36:43,120 Speaker 11: that can be done from a position of strength that 785 00:36:43,160 --> 00:36:45,759 Speaker 11: doesn't have to be forced on these companies today. But 786 00:36:45,840 --> 00:36:47,360 Speaker 11: I think you're still going to see them lend and 787 00:36:47,360 --> 00:36:50,440 Speaker 11: still see them expand, and they're going to be ultra conservative. 788 00:36:50,480 --> 00:36:52,560 Speaker 6: There's no question that there's a credit crunch today. 789 00:36:52,760 --> 00:36:55,400 Speaker 11: I just think it's going to be a more measured approach, 790 00:36:55,440 --> 00:36:58,680 Speaker 11: and overall leverage in the industry is very low today. 791 00:36:58,920 --> 00:37:01,000 Speaker 2: Christopher Vernick, thank you so much, and thank you for 792 00:37:01,040 --> 00:37:03,480 Speaker 2: the many appearances through this crisis. 793 00:37:03,520 --> 00:37:05,720 Speaker 1: He's with Jennie Montgomery and Scott. 794 00:37:06,080 --> 00:37:09,920 Speaker 2: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and 795 00:37:10,040 --> 00:37:14,239 Speaker 2: anywhere else you get your podcasts. Listen live every weekday 796 00:37:14,520 --> 00:37:18,000 Speaker 2: starting at seven am Eastern on Bloomberg dot Com, the 797 00:37:18,160 --> 00:37:22,120 Speaker 2: iHeartRadio app, tune In, and the Bloomberg Business app. 798 00:37:22,560 --> 00:37:24,360 Speaker 1: You can watch us live on. 799 00:37:24,400 --> 00:37:29,160 Speaker 2: Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks for listening. 800 00:37:29,640 --> 00:37:32,440 Speaker 1: I'm Tom Keen, and this is Bloomberg