Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.
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Speaker 3: What is around a table? And we were Silverman, no
Speaker 3: idea if you went to First Republic when Right Spot
Speaker 3: Congratulations had a disy strategy. OBBOUC Capital Markets. You've got
Speaker 3: a great phrase in your notes, Aman, wonderful to see
Speaker 3: you in person. By why you guys, you said this
Speaker 3: the paddling duck market.
Speaker 4: What's that?
Speaker 5: That's the market we're in right now. I mean, we
Speaker 5: got this chill, cool duck hanging out on the surface,
Speaker 5: furiously paddling underneath. And that's the equity volatility bid. You know,
Speaker 5: we don't see it in VIX headline. VIC is really low, right,
Speaker 5: but the reality is VIS call open interest, that demand
Speaker 5: for volatility going higher is at all time highs.
Speaker 2: I'm speaking when Nacim Tolb in I like three or
Speaker 2: four weeks, and we'll go to the tails immediately. And
Speaker 2: you make it real clear in your note that there's
Speaker 2: a tail irregularity here. Everybody's focused on the left tail.
Speaker 2: Tell me about the right A tale of optimism.
Speaker 5: Yeah, so the tale of optimism does not exist. You know,
Speaker 5: I've been visiting kind of clients in Europe and Canada,
Speaker 5: and the US consensus bearishness across the board. It's really
Speaker 5: overwhelmingly so. And so you get to this point where
Speaker 5: you have to ask, you know, the right tail is
Speaker 5: so underpriced. Is there a possibility of a congressional miracle?
Speaker 5: Who knows? But right now folks are pricing that this
Speaker 5: is going to be a very tumultuous debt ceiling if
Speaker 5: it at all comes in a little bit easier than
Speaker 5: we expect, that that right tail is very cheap.
Speaker 6: Woa.
Speaker 7: This is actually going against the consensus in a big way.
Speaker 7: People have come on the show again and again and said,
Speaker 7: nobody's pricing actually a debt ceiling debacle where you end
Speaker 7: up with some sort of default, except perhaps in the
Speaker 7: one month t bell market. Are you saying that's not true,
Speaker 7: that it's actually aggressively being priced in the equity world.
Speaker 5: Yeah, So here's the nuance, Lisa. What is happening is
Speaker 5: essentially the volvatility market is saying the tail has to
Speaker 5: wag the dog first, meaning we have to see action
Speaker 5: in the equity market, which means a draw down before
Speaker 5: we see some sort of action in congress. Does that
Speaker 5: mean an actual default, maybe not, but it's definitely going
Speaker 5: to be eleventh hour twenty eleven type style. And if
Speaker 5: you actually plot the VIX right now against what the
Speaker 5: VIX looked like in twenty eleven, it was right around
Speaker 5: here in twenty eleven, and then we saw that it
Speaker 5: peaked around fifty in August, and it sustainably was above thirty.
Speaker 5: And I think that's what these bets in the market
Speaker 5: are saying right now. They think we're going to get
Speaker 5: back there.
Speaker 7: I love this idea that the common the market is
Speaker 7: people not willing to make a move by selling what
Speaker 7: they own, but they're doing it all through derivatives. So,
Speaker 7: based on pairing those two, what is the most underpriced
Speaker 7: reality right now? Is it this upside surprise or is
Speaker 7: it something else?
Speaker 5: The most underpriced reality right now is the idea that
Speaker 5: this debt sealing situation actually gets resolved quicker and easier
Speaker 5: than we think. That is not what is being priced
Speaker 5: in the market. Folks are very very well prepared for
Speaker 5: a debacle, and so if we don't get it, it
Speaker 5: would be very interesting to see all these hedges roll off.
Speaker 5: You know, that is not being priced.
Speaker 3: So sometimes there's a big difference between ideas and execution,
Speaker 3: and it frustrates people at home, and you speak to
Speaker 3: those people, those people in the market. If I wanted
Speaker 3: to position for a so called up crash, your language
Speaker 3: the language other people use it as well, before I
Speaker 3: get the downdraft and the tension. Because ultimately we're acknowledging
Speaker 3: and you've alluded to it. Do you need to get
Speaker 3: the crisis before you get the solution, or get very
Speaker 3: close to the crisis before you get the solution. Can
Speaker 3: you talk to me about how you execute that trade.
Speaker 3: Do you wait to position to capture that upside when
Speaker 3: you start to see some of the drama take place,
Speaker 3: or can you position for it now?
Speaker 4: Yeah?
Speaker 5: You know, And that's the tricky part. I think right
Speaker 5: now it becomes Look, if we get the draw down right,
Speaker 5: so the market move happens a little bit, then that
Speaker 5: upcrash scenario becomes a little bit more expensive because we've
Speaker 5: already taken that down hit. So in some ways you
Speaker 5: do have to start placing it right now. The good
Speaker 5: news is it's relatively inexpensive. One of the reasons, and
Speaker 5: I've been saying this to investors, the reason VIX looks
Speaker 5: so low isn't because SMP puts are cheap. It's because
Speaker 5: SMP calls are cheap, and those are both weighted in
Speaker 5: the vis. That's part of the reason you see that
Speaker 5: being subdued. So if you own that right tail, just
Speaker 5: say owning SMP calls, you know that's inexpensive right now,
Speaker 5: and that would happen if you know, we get closer
Speaker 5: to that X state and actually there is a resolution.
Speaker 5: You know, Biden flies home and these folks get actually
Speaker 5: their feet on the ground and do something that would
Speaker 5: be quite interesting.
Speaker 2: Every crash in the hindsight is about opacity. I didn't
Speaker 2: see it coming. It was a mystery, the cliches, the
Speaker 2: shadows in that nineteen eighty seven, nineteen ninety eight, et cetera.
Speaker 2: What's the biggest mystery for you right now? Where's the
Speaker 2: dearth of information? To me?
Speaker 5: The most fragile part of this market, tom is this
Speaker 5: problem of breath. So one thing I looked at that
Speaker 5: I think is really interesting is if you just take
Speaker 5: S and P consensus price target on Apple right now,
Speaker 5: that that sharp ratio is negative on Apple, meaning you're
Speaker 5: actually better off in cash. If you assume expected rate
Speaker 5: of return of the S and P of the Apple
Speaker 5: price target, then you are an Apple. The breadth of
Speaker 5: the market is so heavily weighted and it's very fragile.
Speaker 2: Is that sharp ratio adjusted because of the velocity of
Speaker 2: the risk free rate? You know, had no risk free
Speaker 2: rate for three years, we have exactly doing it, and pop,
Speaker 2: there's the risk free rate tumbling. Do you have an
Speaker 2: accurate risk free rate?
Speaker 1: There's a belief.
Speaker 2: Do you have a belief institutionally in a risk free
Speaker 2: rate forward?
Speaker 5: Yeah, so we're assuming a risk free rate right now
Speaker 5: of just you know what we're getting on cash right now.
Speaker 5: So obviously that could go down. But if you just
Speaker 5: take from last year to this year, it going from
Speaker 5: about one percent to almost five percent across the board.
Speaker 5: Obviously all equity sharp rashes decline, but also your forward
Speaker 5: looking price targets are declining.
Speaker 7: I just want to follow up in one thing that
Speaker 7: you said, where you said it's very fragile because of
Speaker 7: a very very narrow depth. How much does that suggest
Speaker 7: to a downside shock versus an upside shock or does
Speaker 7: it not matter. It just suggests there will be a
Speaker 7: break one way or another. It will be significant.
Speaker 5: I think the biggest thing to watch right now is
Speaker 5: if the market decides that megacap tech is not a
Speaker 5: safe haven, because you could actually get financials ripping or
Speaker 5: industrials ripping, and it wouldn't matter on an S and
Speaker 5: P level. You could actually see the index level trade
Speaker 5: down right because the heavy weights are the ones selling off.
Speaker 5: And that's what I think is very interesting about this
Speaker 5: market is you could get that turn because maybe recession
Speaker 5: fears aren't as bad as expected, But the reality is
Speaker 5: the market's actually selling off.
Speaker 3: The action happens beneath the surface most crowded trades B
Speaker 3: of A. In the survey, what the indications short banks,
Speaker 3: long tech, top two traits, top two traits identified by
Speaker 3: people in that survey ex and.
Speaker 2: The lack of breadth is what the phrase I used,
Speaker 2: choiceset there's no choice set out there now. I could
Speaker 2: run a prospect to structured institutional portfolio, John, because you
Speaker 2: have to have X number of ideas in the portfolio,
Speaker 2: and there's not enough ideas out there right now.
Speaker 7: I just think this is fascinating, this idea that you
Speaker 7: could get a better than expected economics shift, whether it's
Speaker 7: the debt ceiling or whether it's data, and all of
Speaker 7: a sudden you end up with index level losses because
Speaker 7: everyone floods out of the very narrow range of stocks
Speaker 7: that have really been driving all the games.
Speaker 1: I mean, Amy's with us for the entire hour.
Speaker 2: We got to talk to about the scenario you're coming
Speaker 2: out of an edtheim in two point eight percent inflation.
Speaker 1: No one's prepared for them.
Speaker 3: Nobody told me about that.
Speaker 1: Face it is trying to suggest it.
Speaker 3: Amy, Thank you, thanks wonderful to say it. Griats a
Speaker 3: seal in person. I'my with Silver, theman that of BOMBC
Speaker 3: Capital Markets.
Speaker 2: Right now to drivers forward in Washington. If I was
Speaker 2: to say all this, it would be maybe Tom that's
Speaker 2: off the mark. But when Libby Cantrell writes about pearl
Speaker 2: clutching in Washington, you pay attention, and it's make a
Speaker 2: modo double A's and Tiffany's strands of pearls down there.
Speaker 1: I love how you do that pearl clutching in Washington.
Speaker 2: Is Margaret Smith the ghost of Margaret Chase Smith down
Speaker 2: there theears right now?
Speaker 8: Yeah? Yeah, I mean there. I think there there's been
Speaker 8: quite a lot of hysteria pearl clutching, if you will,
Speaker 8: regarding the dead ceiling. But you know our view, and
Speaker 8: I think to your or your earlier conversation, certainly the
Speaker 8: mood music is positive. We would argue the mo mune
Speaker 8: music has been actually quite positive for for quite a while.
Speaker 8: I think the contours of a deal are absolutely there.
Speaker 8: The details just to be filled in the fact that
Speaker 8: they have Silanda Young, Steve Richet Orcutty. These people are
Speaker 8: serious sort of adults in the room. They are going
Speaker 8: to be the president's proxy while he's in Japan. And
Speaker 8: you know, I wouldn't be surprised if we didn't see
Speaker 8: a deal by this weekend. I mean I think that
Speaker 8: the I think a deal is imminent. I actually don't
Speaker 8: think it's going to necessarily require uh, the equity market
Speaker 8: or equity evall like we've seen in previous dead ceiling.
Speaker 3: That seems to be the conclusion of so many people
Speaker 3: down Wall Street. You need to get close to a
Speaker 3: crisis before you get a solution. Why are you taking
Speaker 3: a slightly different well.
Speaker 8: I think, well, again, and John, I've just been looking
Speaker 8: at the political incentives here for several months, and nobody
Speaker 8: has any sort of political incentive to even get that
Speaker 8: close to default. I mean, if you look at sort
Speaker 8: of Speaker McCarthy's hand, I mean, he doesn't necessarily have
Speaker 8: a very strong hand going into these negotiations. He only
Speaker 8: has a four seat majority, meaning he can only actually
Speaker 8: just lose five members in order to to sort of
Speaker 8: stay along with this deal. And you know, I think
Speaker 8: very importantly here, your President Biden has been you know,
Speaker 8: now open to negotiation. So I think there's sort of
Speaker 8: the if you just sort of look at the kind
Speaker 8: of political landscape here, that the bottom line is that
Speaker 8: a deal will get done. And I think again, sort
Speaker 8: of in advance of the X state, and to Tom's
Speaker 8: earlier point, the X date is real here, and I
Speaker 8: think this is where Secretary Yellen has now kind of
Speaker 8: corroborated her earlier estimate of June first. I mean, tax
Speaker 8: re are quite weak, not only because of personal income taxes,
Speaker 8: but because of the sort of disaster zone dynamic, particularly
Speaker 8: in California, where a lot of folks are actually not
Speaker 8: having to file their taxes and so that is going
Speaker 8: to be delayed receipts to the government. So, you know,
Speaker 8: we think that the X state has to be taken seriously,
Speaker 8: and we think members of Congress are also taking it seriously.
Speaker 8: So all this is all a long way of saying
Speaker 8: that despite the pearl clutching, as one staffer said, passing
Speaker 8: the debt ceilings like passing a kidney stone. We all
Speaker 8: know what will pass. It's just a question how difficult
Speaker 8: it will be. Sorry for the graphic analogy such pretan
Speaker 8: but that is but that I think has been our
Speaker 8: operating assumption, and as the market's operating assumption right now
Speaker 8: as well.
Speaker 4: The peddling duck is going to pass.
Speaker 9: Gating sort of this morning has been quite something.
Speaker 7: One of the reasons why I love to speaking with you,
Speaker 7: Libya is because you have incredible experience working on Capitol Hill.
Speaker 7: You understand the political wranglings that go into getting this done.
Speaker 7: What do you think the contours of this deal will
Speaker 7: look like? What changes will really take place?
Speaker 8: Well, look, I think very importantly is sort of the
Speaker 8: semantics here. So President Biden will characterize this as a
Speaker 8: budget deal associated with fiscal twenty four spending, where Speaker
Speaker 8: McCarthy will characterize us as a debt seiling deal. I
Speaker 8: would say that's a distinction without a difference, and from
Speaker 8: a market's perspective, But what we're expecting is that there
Speaker 8: will be some recision of the COVID unspent COVID money.
Speaker 8: That's not very much, it's about forty fifty billion dollars,
Speaker 8: but it still kind of helps from a deficit perspective.
Speaker 8: We also expect some sort of downpayment energy permitting reform.
Speaker 8: That's something actually important both for Republicans and for Democrats,
Speaker 8: so that arguability could be a win for both. And
Speaker 8: then importantly some sort of spending caps. Now this is
Speaker 8: going to be where the devil's of the details, because,
Speaker 8: of course, if you remember twenty eleven, there was a
Speaker 8: Budget Control Act as it related to the debt ceiling,
Speaker 8: and the market sold off because they were expecting big
Speaker 8: spending cuts and sort of fears of recession and what
Speaker 8: have you. We do not expect significant spending cuts to
Speaker 8: be associated with this deal, but we could see a
Speaker 8: slower growth of spending and that could also help these
Speaker 8: budget these deficit forecasts.
Speaker 7: There just kind of an irony here. If the market
Speaker 7: is expecting latility and expecting to have to respond eventually
Speaker 7: and not expecting a deal, do you expect market volatility
Speaker 7: in response to a deal that you see as soon
Speaker 7: as this weekend?
Speaker 8: Well, look, I think that we have to talk about
Speaker 8: which market we're talking about, because of course the fixed
Speaker 8: income market, which where PIMCO manages most of its assets,
Speaker 8: has reacted right. There has been a dislocation in the
Speaker 8: treasury bill market. There's been a big risker version around
Speaker 8: the bills that have expired closer to the X day.
Speaker 8: We saw that in the auction most recently in terms
Speaker 8: of the yields, and so we already are seeing some
Speaker 8: dislocation in the fixed income market. But to the market
Speaker 8: that most people refer to, the equity market, and we
Speaker 8: haven't seen that, and actually we could see I think
Speaker 8: really a little bit of a relief rally as well,
Speaker 8: even from here, because some of this sort of anxiety
Speaker 8: and uncertainty I think has been priced in to a
Speaker 8: small extent, and I think of a deal is sooner
Speaker 8: than folks expect, is pulled forward. I actually think you
Speaker 8: could see a bit of a relief.
Speaker 2: Don't tell your work with a Pimcok call in Newport
Speaker 2: the idea that we're at a five percent general statement
Speaker 2: on short term paper, do you guys believe we're coming in?
Speaker 1: Yields will come in and.
Speaker 2: Frankly benefit Washington as well, where five percent becomes a
Speaker 2: three point eight percent shield.
Speaker 8: Yeah. So I think that you know, our view in
Speaker 8: general in terms of of the FED and the economy
Speaker 8: is that the threshold for the FED cut is going
Speaker 8: to be high. We think that the FED is going
Speaker 8: to have to see sustained economics and a sustained economic
Speaker 8: slow down before they before they start cutting. So I
Speaker 8: think we disagree a bit with where the market pricing is.
Speaker 8: And you know, even with CEO Jamie Diamond said today,
Speaker 8: with that said, though, we are expecting and I think
Speaker 8: you had Tiffany on your show yesterday, we are expecting
Speaker 8: a mild sort of slow down at the end of
Speaker 8: this year, at which point we do think the FED
Speaker 8: will likely respond. But again, the threshold for them to
Speaker 8: get off of you know, around five is or what
Speaker 8: have you, is going to be quite high. So they're
Speaker 8: going to have to see a sustained economic slow down.
Speaker 8: A couple of bad jobs numbers is probably not going.
Speaker 4: To do it.
Speaker 3: When was the last time we got today this sit
Speaker 3: around the table together? How many years?
Speaker 1: In the last two weeks.
Speaker 3: And just started to pick wonder back up. I've said
Speaker 3: that a few times this morning. It's happening.
Speaker 7: Getting back to the office. Are people getting back to
Speaker 7: the office there?
Speaker 8: I mean, we've been never left for a very long time.
Speaker 1: Ever left.
Speaker 8: We never laughed, Thank you, John, That is actually correct.
Speaker 4: Lilly Cantrell of Pimco.
Speaker 3: Debtlimit talks between President Biden and congressional leaders intensifying. Mike
Speaker 3: Schumacher of Weils Faker and the team have got this
Speaker 3: to say. At the moment, our economics team is skeptical
Speaker 3: that a sweeping debt seiling agreement will be reached over
Speaker 3: the next month to suspend the debt scening for one
Speaker 3: to two years. A short term punt, Tom, I think
Speaker 3: that's a kick the can that buys more time for
Speaker 3: an eventual sweeping agreement is the higher probability outcome in
Speaker 3: their view. Short version TK, We're going to be playing
Speaker 3: this game for a while. Maybe yeah, we're gonna have.
Speaker 2: To see a punt their giants American football. That's when
Speaker 2: you're down three downs in the fourth down, you.
Speaker 3: Can is that the guy that comes on just to
Speaker 3: kick the boat.
Speaker 1: Just to kick.
Speaker 2: They used to have a rule he could be hit
Speaker 2: by the people coming in, but now they have goals
Speaker 2: to protect them. OK.
Speaker 3: So you think he's good. He's just kicking the boat.
Speaker 1: Yeah, nice the punter.
Speaker 3: We called it Jemmy. Goalkeepers would love that job. They
Speaker 3: would ex Premier league goalkeepers would find that so easy.
Speaker 2: A CIS Sports report. It continues in this plot as well,
Speaker 2: saving us right now, Michael Schumacher joins his global ahead
Speaker 2: of macro strategy at Wells Fargo. The courage is defined
Speaker 2: in your research note, Mike, is that you are long duration.
Speaker 2: You're saying get out there, own bonds. Yields will move lower.
Speaker 2: Discuss given the debt ballet in Washington.
Speaker 10: Yeah, that's the only time it's tiresome. But it's not
Speaker 10: going away quickly in our view. Yeah, we still look
Speaker 10: for the market to panic a bit more. It's interesting,
Speaker 10: you can talk about the market, but it's really the
Speaker 10: markets here. So the treasury bill markets in full throat
Speaker 10: of panic mode right now, you've got yields on May
Speaker 10: bills that are low threes, yields on June bills that
Speaker 10: are called medium five. So an enormous gap there. But
Speaker 10: treasury bonds tenure treasury three to fifteen neighborhood. It's been
Speaker 10: there for a while. The equity market's sort of plugging along.
Speaker 10: Foreign exchange is puzzling to us. We think the end
Speaker 10: should be a big beneficiary. And oh, by the way,
Speaker 10: imply volatilities for currencies are low. So it seems like
Speaker 10: the treasury bill market at this point is the only
Speaker 10: one that's really panicking, and the rest are saying, ah,
Speaker 10: it'll get worked out, don't sweat it.
Speaker 2: What on a year basis is long duration? Is long
Speaker 2: duration five years? Or is it twelve years? Or dare
Speaker 2: I say it's an Austrian pre sought fifty years? What's
Speaker 2: long duration?
Speaker 10: Now we're not going to Austrian here. Let's keep it
Speaker 10: to call at the tenure and the reason I say that,
Speaker 10: certainly it's the benchmark. But when people want to move
Speaker 10: a lot of risk globally, that's where they go. They
Speaker 10: go to the tenure part of the US curve. Pretty consistently,
Speaker 10: tons of liquidity so you want to think about some
Speaker 10: numbers three point fifty two and change on the ten
Speaker 10: year yield right now, if things go really badly, if
Speaker 10: Elm and Luise can't figure out quite where the cliff
Speaker 10: is and go over it, maybe you're looking at three
Speaker 10: percent something like that. I certainly hope it doesn't happen,
Speaker 10: but it seems like it's pretty low cost right now
Speaker 10: to insure against that risk.
Speaker 7: I keep thinking about this paddling duck market that Amy
Speaker 7: with Silverman was talking about, because it seems very difficult
Speaker 7: to get our hands around with respect to the debt ceiling.
Speaker 7: And then some of these company profits that are coming out,
Speaker 7: these company earnings that are coming out as we get
Speaker 7: retail sales. I'm wondering if you could weigh in on
Speaker 7: Paul Donovan's point that companies are really expanding their profit
Speaker 7: margins and consumers are only just now starting to push back,
Speaker 7: and that that's a significant driver of inflation. How much
Speaker 7: is that really what you're seeing as well?
Speaker 10: Yeah, it's really interestingly soon. We think we characterize inflation
Speaker 10: right now as stubborn globally, you think about it country
Speaker 10: after country. Canadian data came in high yesterday recently Australia
Speaker 10: hiked surprise the markets. You look at the UK, inflation
Speaker 10: and data are pretty unpleasant, especially on the wage side.
Speaker 10: In the US, I'd make a similar argument. So, yes,
Speaker 10: inflation's come down as it come down nearly as quickly
Speaker 10: as the central bankers would like to see. No, And
Speaker 10: I think that's to your point that you still have
Speaker 10: pricing pressure for a lot of companies. What does it
Speaker 10: mean for markets? Means a lot of these rate cuts
Speaker 10: get priced out, and maybe some of the central banks
Speaker 10: have another hike. Maybe you see a few more surprises.
Speaker 10: But the idea of a lot of rate cuts doesn't
Speaker 10: make sense to us. Now I just said get long duration.
Speaker 10: It flies in the face of that argument, but it's
Speaker 10: really a timing thing. Long duration until the debt ceilings resolve,
Speaker 10: then you focus much more on inflation.
Speaker 7: How much shouldn't you actually just go into some of
Speaker 7: these companies though, with pricing power, If they're able to
Speaker 7: expand their margins, it doesn't really matter a lot of
Speaker 7: the other potential issues because they're still able to make
Speaker 7: bank because consumers aren't pushing back that much.
Speaker 10: I'm going to leave the more the earning discussion in
Speaker 10: why colleague Chris Harvey. But when you think about it
Speaker 10: from a macro perspective, it does point to more inflation
Speaker 10: as far as we're concerned. That's the big takeaway I've
Speaker 10: been focusing on recently.
Speaker 2: I looked like a where we are in May, and
Speaker 2: what it just simply comes down to is we're all
Speaker 2: baffled in a tight collared range. How do you know
Speaker 2: when the caller's over in which way a given vector goes.
Speaker 2: What's your experience on that?
Speaker 10: Yeah, we can see gap ye types of moves, Tom,
Speaker 10: We've seen it a few times this year, certainly around
Speaker 10: the Silicon Valley Bank. And I'll give you an example.
Speaker 10: So dollar yen was one thirty six exactly seven something
Speaker 10: like that on March eighth, call it went to one thirty.
Speaker 10: So call it a four to five percent move. That's
Speaker 10: a big move. Not as big as the type of
Speaker 10: move we had last year, but they were more secular.
Speaker 10: But something like that that happens in a week or
Speaker 10: two in a super liquid market, that tells me we
Speaker 10: fit the boiling point. We're not there yet. I think
Speaker 10: it could happen. I think those price points are probably
Speaker 10: about right, and so debt ceiling goes really astray. Yen
Speaker 10: moves another five percent, strengthening versus a dollar. That's the
Speaker 10: kind of thing.
Speaker 1: I look at.
Speaker 3: Finally got those results from TJX. Let's get to them.
Speaker 3: Thank you, sir as always on a bond market from
Speaker 3: wels Fanca, My Schumacher there.
Speaker 2: Michael Gapan joins us now ahead of the economics at
Speaker 2: Bank of America Securities. I like the idea of the
Speaker 2: last resort. They really don't want to cut rates. What
Speaker 2: does history tell us about when they do cut rates?
Speaker 9: History would tell you that the housing sector would bounce
Speaker 9: back quickly, all the sectors that have been in trouble
Speaker 9: recently would bounce back strongly. But history tells you the
Speaker 9: fed's cutting rates for a reason. They're either achieving their
Speaker 9: goals on the inflation side in this case, or there's
Speaker 9: been a stronger downturn in the economy and policy is
Speaker 9: shifting towards helping activity recover. So typically when the FED cuts,
Speaker 9: there's a reason for them to be cutting.
Speaker 7: They keep pushing back on market expectations for cuts. And
Speaker 7: Andrew Holland Horrice of City Group has kind of been
Speaker 7: out alone saying that this FED is completely underestimating how
Speaker 7: much the inflation is out there, and they need to
Speaker 7: keep hiking, even potentially in June. Do you see that
Speaker 7: as an increasing likelihood based in the data that we've
Speaker 7: been getting.
Speaker 9: Yes, we've been saying that a hike in June can't
Speaker 9: be fully ruled out. There's obviously a lot of hurdles
Speaker 9: we need to get over to make that decision. But
Speaker 9: I would still put a hike in June or July
Speaker 9: at kind of the thirty to forty percent range that
Speaker 9: the data on net is still pretty strong. The Fed
Speaker 9: has an upward bias, and if it probably needs to
Speaker 9: see two to three months worth of evidence to make
Speaker 9: that decision. June is a pause at the moment, But
Speaker 9: certainly I think you can you could get to a
Speaker 9: hike in June. I think you can certainly get to
Speaker 9: one in July if you felt you needed to.
Speaker 7: As Tom described this market and this economy as excruciating,
Speaker 7: he is not wrong. I'll give you an example. We
Speaker 7: get these retail earnings home goods clearly seeing a downdraft,
Speaker 7: people not buying home goods as much, whether it's Home
Speaker 7: Depot or TJ Max. But then if you look at makeup.
Speaker 7: If you look at food, if you look at services,
Speaker 7: that's all continuing to blossom. And even these companies pass
Speaker 7: along price increases. Can a rolling receps in different industries
Speaker 7: like this prolong the type of inflation that we have
Speaker 7: seen far beyond what people have currently expected.
Speaker 9: Yes, I think so that in the FED is we
Speaker 9: all know the Fed's not out there saying, oh, we
Speaker 9: need to engineer a recession to break the back of inflation. Right,
Speaker 9: They're saying we need to lean against the wind. So
Speaker 9: it's not all up to us, and so we're just
Speaker 9: trying to put policy in a quote modestly restrictive stance.
Speaker 9: That means you can get i think, rolling slow downs
Speaker 9: across certain parts of the economy where any downturn would
Speaker 9: look more, say you shaped than it would be shaped.
Speaker 9: And so you get a wide dispersion in the data
Speaker 9: where some spending on lodging, for example, looks like it's peaked,
Speaker 9: airlines are a bit mixed, but spending in things like
Speaker 9: cruise ships or travel abroad is still strong. So the
Speaker 9: reopening phases, the normalization of spending makes a lot of
Speaker 9: this data look really at odds at certain points in time.
Speaker 9: So it's possible you could you could see that continue
Speaker 9: for some time you.
Speaker 2: Study in school, Michael, that statistics for the modern age
Speaker 2: started about nineteen forty seven. And one of those series
Speaker 2: that we have in the Bloomberg and Sherman Greenspan loved
Speaker 2: it was he all in augmented unemployment rate, which is
Speaker 2: six point three percent right now. It's a gloomier statistic,
Speaker 2: and you know it speaks a lot to the tension
Speaker 2: of unemployment. We are two point two standard deviations to
Speaker 2: fully employed on that statistic going back sixty seventy years.
Speaker 2: It's a fully employed America, right, Yes, I mean statistically,
Speaker 2: statistically speaking, yes, why are we talking about cutting interest rates?
Speaker 2: I'm baffled by this.
Speaker 1: We're not.
Speaker 9: I don't think the feed is either. So I think
Speaker 9: you're you're in a situation where some sort of they
Speaker 9: land this right and you get a higher for longer outlook.
Speaker 9: But I think in general, the need or the desire
Speaker 9: or the want for cuts sooner than later is a
Speaker 9: little misplaced. There are certainly past to get those cuts.
Speaker 9: I'm just not sure they're as close to baseline as
Speaker 9: people are thinking.
Speaker 2: I mean, lista, what's so important here about the oddity
Speaker 2: of a pandemic and all the other dynamics we talk
Speaker 2: about all day. It's people like Michael Gaban with huge
Speaker 2: credibility and earned credibility, are looking at quote, other factors
Speaker 2: involved and we want your own power to fix our
Speaker 2: other factors involved, and he doesn't have the tools to
Speaker 2: do that. It sounds completely irresponsible.
Speaker 7: So there's that issue. And then there's also the other
Speaker 7: factors involved when it comes to the actual pricing and
Speaker 7: markets for rate cuts, which include most people saying probably
Speaker 7: they're not going to cut rights this year, but if
Speaker 7: there is some sort of crisis, you could get some
Speaker 7: pretty dramatic cuts. Is the economy that you're watching, with
Speaker 7: a labor market as tight as it is, with this
Speaker 7: feeling that consumers are continuing to be able to spend less,
Speaker 7: perhaps vulnerable to the shocks that people have been worried
Speaker 7: about all year long, and they're frustrated anxious.
Speaker 9: States, Well, the economy certainly has shown great resilience, and
Speaker 9: you're right, there's spillovers from debt limits, there's concerns about
Speaker 9: regional bank funding models and so forth, and yeah, those
Speaker 9: could propagate in ways that are very unhealthy for the economy.
Speaker 9: But that's unlikely. The data shows that the stress and
Speaker 9: the regional banks appears manageable. To your point, though, I'd
Speaker 9: also I'd just like to affirm or amplify what you said.
Speaker 9: The FED isn't here to fix everybody's problems, and FED
Speaker 9: hiking cycles cause pain in certain parts of the economy.
Speaker 1: That's true.
Speaker 9: That's been true in every tightening cycle, and you need
Speaker 9: that in order to bring inflation down. So in some
Speaker 9: ways we're a little bit bipolar. We know we want
Speaker 9: the FED to raise rates to moderate activity to bring
Speaker 9: inflation down. We all know that's good for the economy
Speaker 9: in the long run. But when the pain of that
Speaker 9: shows up, we all want the FED to run to
Speaker 9: the rescue and fix our own individual market. That's not
Speaker 9: what the Fed's there for.
Speaker 7: So I want to bring to you something that we
Speaker 7: heard yesterday from Austin Coolesby, who is talking about immaculate inflation.
Speaker 7: I said that people who try to talk down that
Speaker 7: concept of immaculate disinflation are perhaps fooling themselves because there
Speaker 7: was an immaculate inflation and so there, yes, there could
Speaker 7: be immaculate disinflation. That's actually part of what we're seeing
Speaker 7: what would you say to that.
Speaker 1: I'd say that's part of the story.
Speaker 9: So if you go back and you think that some
Speaker 9: of this was excess demand and some of it was
Speaker 9: a supply shock, the immaculate disinflation can come from cleaning
Speaker 9: up the supply, the adverse supply shocks and the resumption
Speaker 9: of normal supply. That should help bring inflation down on
Speaker 9: its own. But to Tom's point, the labor market is
Speaker 9: as tight as it's been in my lifetime. If the
Speaker 9: labor market's cooled down, it's cooled down from exceptionally hot
Speaker 9: to as tight as it was in the past prior
Speaker 9: cycle highs. So there, I think you know you're not
Speaker 9: going to It's unlikely to get immaculate disinflation when you're
Speaker 9: trying to reverse that. So it's a it's a mixed story.
Speaker 1: Michael.
Speaker 2: I want you to look at the global purview of
Speaker 2: of America, the great work that you and Ethan Harris
Speaker 2: are doing.
Speaker 1: And that is I see unsettlement.
Speaker 2: I see the Turkish election with Turkish lerier coming out
Speaker 2: obviously regularly with the uncertainty of two weeks. I see
Speaker 2: Argentina where the blue dollar Argentina pays. So is something
Speaker 2: you and I have never witnessed You've done this at
Speaker 2: the IMF as well. This morning we have Ecuador dissolving
Speaker 2: their parliament. There's just seemed to be that early nineteen
Speaker 2: ninety eight tension out there, little butterflies flapping, if you will,
Speaker 2: to use a worn out cliche.
Speaker 1: Do you sense that at Bank of America?
Speaker 9: Not yet. I would add maybe the election outcomes in Thailand,
Speaker 9: for example, is yes. I'm sorry, no, no, But it's
Speaker 9: a good point that there is a series of elections
Speaker 9: where there's been some surprises and still some momentum and
Speaker 9: populist candidates. The message there is still one of potential
Speaker 9: change and say an unsettled political environment. Obviously we have
Speaker 9: some of that still here at home, so I wouldn't
Speaker 9: say we're at that moment yet, but you're right there
Speaker 9: are undertones where some of the patterns day repeat what
Speaker 9: we had seen in the past thirty seconds.
Speaker 2: Is Jerome Powell's central banker to the world until all
Speaker 2: these butterflies out there with tensions.
Speaker 9: And realities, Whether he likes it or absolutely yes.
Speaker 2: I think it's a way under played, Lisa. I think
Speaker 2: you know the actions that we're looking at the United States,
Speaker 2: including tangentially this debt ballet.
Speaker 1: Were going through.
Speaker 7: Talk about well, Alicia Levine was talking about that if
Speaker 7: the Fed does hike rates in June, what happens to
Speaker 7: the dollar? And then how does that sort of disrupt
Speaker 7: the rest of the world in their economic policies, Because
Speaker 7: it's interesting.
Speaker 2: I mean doctor Gaban's entourage folks, they said he can't
Speaker 2: talk the dead ceiling.
Speaker 1: I mean when he came in, he just said, you know,
Speaker 1: it's not going there.
Speaker 9: Well, apparently it's like passing a kidney stone comment like that.
Speaker 3: That was perfect.
Speaker 2: Well, we've had a lots to do in law and order,
Speaker 2: We've done sports shows, and now we're doing Doctor Kildare. Yeah,
Speaker 2: I go so, Mike, Michael Gabon, thank you so much.
Speaker 2: Bank America securious. Christopher Merinack joins us right now. Chris,
Speaker 2: you know, it's an honor to have you on and
Speaker 2: thank you so much for your coverage here through this crisis.
Speaker 2: At the bottom line is we're all watching. This is
Speaker 2: theater you actually know these people. Let's talk about mister
Speaker 2: Shay in Signature Bank, which your shop covered as well.
Speaker 2: First of all, were you surprised they went down the tubes?
Speaker 11: I was surprised because I think that they had enough
Speaker 11: liquidity to stave off the first couple of days. I
Speaker 11: think that it was a challenge to understand how many
Speaker 11: more depositors we're going to be behind on that Monday, Tuesday,
Speaker 11: the thirteenth and fourteenth of March. So the reality is
Speaker 11: the regulators had little patience after seeing Silicon Valley failed
Speaker 11: at the previous Frida, so signature was a surprise, but
Speaker 11: at the end of the day there may have been
Speaker 11: more depositors lined up than we realized behind the scenes.
Speaker 2: I don't want to dwell on this because I just
Speaker 2: think it's theater and soap opera and that's not the
Speaker 2: purpose of this show. But there is a large part
Speaker 2: of America that would suggest the Senator from the Commonwealth
Speaker 2: of Massachusetts is onto something here that the suits and
Speaker 2: ties should return the bonuses should they.
Speaker 6: Well.
Speaker 11: In my opinion, the bonuses were made in twenty twenty
Speaker 11: two and twenty twenty one for just normal business. I
Speaker 11: think that there could be some penalty for the lack
Speaker 11: of contingency planning for liquidity. You know, banks elever twelve
Speaker 11: to one, and they just did not fathom that they
Speaker 11: would see these big concentrated deposits all walk out at
Speaker 11: the same time, and that I think was the mistake made,
Speaker 11: and there's too many securities invested in two longer term
Speaker 11: duration assets on the books at the end of the day,
Speaker 11: I think that it was a mistake on many fronts,
Speaker 11: including the regulators, so that there's a little bit of
Speaker 11: blame to go around everywhere.
Speaker 7: Chris, I'm looking right now at Western Alliance shares at
Speaker 7: more than eleven percent in pre market trading as people
Speaker 7: get a sense that deposits are coming in the door.
Speaker 7: They're reporting this now on a weekly basis because it's
Speaker 7: good news. Pack West shares also up about eleven percent.
Speaker 7: I understand that off a very low base, but still,
Speaker 7: do you think that this is right, that deposit strength
Speaker 7: in one bank really suggests stabilization in the entire regime.
Speaker 6: I think that's accurate.
Speaker 11: I mean, we have seen much more stable deposit flows
Speaker 11: from the weekly FED data all throughout this saga since March,
Speaker 11: so deposits are down four and a half percent year
Speaker 11: to date. We're down six and a half from the
Speaker 11: peak in twenty twenty two. The reality is we're normalizing
Speaker 11: in terms of deposits and funding mix in the industry.
Speaker 11: I don't really see big disintermediation. It's only a short
Speaker 11: term indicator that money market funds are up and deposits
Speaker 11: are down. We still have deposits, you know, twenty eight
Speaker 11: twenty nine percent higher today than they were at the
Speaker 11: end of twenty nineteen. I think there's the opportunity for
Speaker 11: deposits that left at Pack.
Speaker 6: West and left Western Alliance back.
Speaker 11: I think the market's trying to ascertain that, and I
Speaker 11: think there are positive days ahead for both of those companies.
Speaker 7: Let's say things have stabilized, Chris, you talk about the
Speaker 7: pretty massive distortion that occurred when you did see all
Speaker 7: of these deposits. I think trillions of dollars flood into
Speaker 7: the system all at once. There is a question of
Speaker 7: where those deposits were deployed. Was it commercial real estate?
Speaker 7: Was it loans to companies that might be faltering at
Speaker 7: this point? How much even if there is stabilization, there
Speaker 7: is still a very big problem on the books of
Speaker 7: some of these regional banks.
Speaker 11: So we really saw loans grow very little in twenty
Speaker 11: twenty and twenty twenty one. It was only a twenty
Speaker 11: two that loans started to grow and a lot of
Speaker 11: the growth came in mortgages, it came and seen eye loans,
Speaker 11: and it did common commercial real estate. But I think
Speaker 11: it's been very muted in terms of the pace of
Speaker 11: growth in the past year. So we've seen overall loans
Speaker 11: up about seventeen percent during this timeframe.
Speaker 6: And beginning to use the deposits.
Speaker 11: What I find really interesting is that loan to deposit
Speaker 11: ratios are seventy one percent today for the industry, up
Speaker 11: from sixty at the bottom, and that compares to a
Speaker 11: long term average since the early seventies of eighty two percent,
Speaker 11: and we were I think around seventy six seventy seven
Speaker 11: prior to.
Speaker 6: The pandemic, so we're still coming back.
Speaker 11: I don't think the leverage in the industry has anywhere
Speaker 11: near where it used to be.
Speaker 2: Chris sellside By, Outperform, Single, Best Buy, whatever the ballet
Speaker 2: is is up twenty up to thirty percent. You basically
Speaker 2: have a double or more than double on some of
Speaker 2: these selected.
Speaker 1: Banks right now.
Speaker 2: They're going to go into this year, next year, in
Speaker 2: the following year. Am I right is smaller institutions describe
Speaker 2: how their share price does a double off a bank
Speaker 2: that's going to be smaller than it was in twenty nineteen.
Speaker 11: Sure, so it starts tom at tangible book value. So
Speaker 11: if you look at tangible book at seventeen to eighteen
Speaker 11: dollars a pack, West, that company is trading at a
Speaker 11: willful price to book today.
Speaker 6: It can come back. We think book is actually going
Speaker 6: to rise.
Speaker 11: With retained earnings, so that ratio comes off of the
Speaker 11: twenty five to thirty percent level and heads towards fifty
Speaker 11: and then eventually sixty and seventy and Western Alliance is
Speaker 11: a slightly higher stock, but still at a discount the
Speaker 11: book by a pretty meaningful way.
Speaker 6: And that's why we could come back as well.
Speaker 11: This mirror is two thousand and nine when you had
Speaker 11: stocks like Fifth Third and the old sun Trust and
Speaker 11: Huntington Bank that are trading less than fifty percent of
Speaker 11: book and then they end up raising capital for TARP
Speaker 11: at a higher level, and then they traded much higher
Speaker 11: at the end of two thousand and nine.
Speaker 6: So you know, we've seen this movie before.
Speaker 11: The volatility is very high today, but it does work
Speaker 11: both ways, and we think banks are going just going
Speaker 11: to continue to put one foot in front of the
Speaker 11: other have a profitable second quarter, we think that the
Speaker 11: overall mark to marketing she is going to start to
Speaker 11: weaning slightly. It's not going to resolve itself all the
Speaker 11: way because the FED hasn't lowered rates yet, but it
Speaker 11: is getting better each quarter.
Speaker 1: Are they going to be smaller institutions or do they
Speaker 1: grow at some factor of American nominal GDP?
Speaker 6: Sure?
Speaker 11: So for the pack West and Western alliances, I think
Speaker 11: that they will shrink somewhat because the deposits are lower
Speaker 11: than they were at the end of March and certainly
Speaker 11: at the end of.
Speaker 6: Twenty twenty two.
Speaker 11: For the rest of the banks, I think you're going
Speaker 11: to see them more flat to growing at about one percent.
Speaker 11: I think that if we have a recession and GDP contracts,
Speaker 11: obviously I think you will see a little bit of.
Speaker 6: Contraction, but I think it's very modest.
Speaker 11: You know, the liquidity in the industry is very high,
Speaker 11: and it's better today than it was when this began
Speaker 11: in March. So I think the banks are in a
Speaker 11: really good spot, and I think there's still credit demand
Speaker 11: and inflation tends to be good for business because customers
Speaker 11: need to borrow more as they have a higher price
Speaker 11: level for their goods.
Speaker 6: And services.
Speaker 7: That's said, Chris, I do wonder, especially if you say
Speaker 7: you'd put some of the blame with the regulators, that
Speaker 7: they perhaps and I'm extrapolating here, I'm putting words in
Speaker 7: your mouth, so please feel free to correct me. They
Speaker 7: didn't stress test against a massive rise and rates to
Speaker 7: the same degree that a lot of people say that
Speaker 7: they should have. There is a question of whether you're
Speaker 7: going to see this delineation between the p and cs
Speaker 7: of the world, the US banks, the regions banks, the larger,
Speaker 7: the sort of mid size, larger midsized banks really move
Speaker 7: away from some of the others and leave the others
Speaker 7: in a bit more world of hurt.
Speaker 11: I disagree with that because I think there's lending opportunities
Speaker 11: all across the spectrum from community banks that serve their
Speaker 11: customers really well and are a key piece of the
Speaker 11: puzzle for giving advice. I think as you move up
Speaker 11: to mid size and larger companies they can do the same.
Speaker 11: All of these banks have good capital and good reserves.
Speaker 11: I think they could use more as we go through
Speaker 11: the cycle. I think some banks will raise capital to
Speaker 11: kind of create a sign of confidence, perhaps fill in
Speaker 11: the bucket from the unrealized security losses. But I think
Speaker 11: that can be done from a position of strength that
Speaker 11: doesn't have to be forced on these companies today. But
Speaker 11: I think you're still going to see them lend and
Speaker 11: still see them expand, and they're going to be ultra conservative.
Speaker 6: There's no question that there's a credit crunch today.
Speaker 11: I just think it's going to be a more measured approach,
Speaker 11: and overall leverage in the industry is very low today.
Speaker 2: Christopher Vernick, thank you so much, and thank you for
Speaker 2: the many appearances through this crisis.
Speaker 1: He's with Jennie Montgomery and Scott.
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