1 00:00:01,440 --> 00:00:05,320 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 2 00:00:05,400 --> 00:00:08,079 Speaker 1: weekdays at ten am Eastern on Apple car Playing and 3 00:00:08,240 --> 00:00:11,119 Speaker 1: broud Otto with the Bloomberg Business app. Listen on demand 4 00:00:11,160 --> 00:00:15,520 Speaker 1: wherever you get your podcasts, or watch us live on YouTube. 5 00:00:17,200 --> 00:00:21,600 Speaker 2: One of the other earnings news Emily was Boeing. They 6 00:00:21,600 --> 00:00:25,000 Speaker 2: put out some good numbers for their quarter, but they 7 00:00:25,040 --> 00:00:28,160 Speaker 2: pulled their guidance because there's a lot of questions as 8 00:00:28,240 --> 00:00:30,360 Speaker 2: to what the regulators are going to ask them to 9 00:00:30,360 --> 00:00:32,199 Speaker 2: do about some of their aircraft and some of their 10 00:00:32,200 --> 00:00:36,000 Speaker 2: delivery capabilities and things like that. Pulling guidance is to 11 00:00:36,040 --> 00:00:38,519 Speaker 2: me a big, big deal, right be stock three. 12 00:00:38,960 --> 00:00:41,839 Speaker 3: It seems like it's working for the investors. They say, 13 00:00:41,960 --> 00:00:43,760 Speaker 3: we're going to pull the guidance, We're going to focus 14 00:00:43,760 --> 00:00:46,160 Speaker 3: on safety, and that was enough to bring the stock 15 00:00:46,200 --> 00:00:46,800 Speaker 3: up three percent. 16 00:00:46,840 --> 00:00:48,839 Speaker 2: All right, So let's bring in somebody who actually does 17 00:00:48,840 --> 00:00:51,440 Speaker 2: his stuff for a living. George Ferguson. He's a senior aerospace, 18 00:00:51,800 --> 00:00:55,160 Speaker 2: defense and Airlines analyst for Bloomberg Intelligence. He's been following 19 00:00:55,200 --> 00:00:59,680 Speaker 2: Boeing for decades. He knows what he's talking about here. George, First, uh, 20 00:01:00,280 --> 00:01:02,320 Speaker 2: give us your takeaway from the quarter, and then second, 21 00:01:02,320 --> 00:01:05,560 Speaker 2: I guess, more importantly, is what's behind their decision to 22 00:01:05,560 --> 00:01:06,200 Speaker 2: pull their guidance. 23 00:01:06,240 --> 00:01:09,440 Speaker 4: Do you think, yeah, so thanks for having me on 24 00:01:09,480 --> 00:01:13,520 Speaker 4: as usual. So I thought that the quarter's numbers looked yeah, 25 00:01:13,560 --> 00:01:16,039 Speaker 4: you know, pretty much in line with what we expected, 26 00:01:16,080 --> 00:01:19,120 Speaker 4: maybe a little bit better. Commercial airplane. Some of the 27 00:01:19,160 --> 00:01:22,200 Speaker 4: cash flow generation was a little bit better, a lot 28 00:01:22,240 --> 00:01:26,000 Speaker 4: of it from deposits, you know that they're getting from 29 00:01:26,240 --> 00:01:29,240 Speaker 4: airplanes as they move through production. So I wouldn't call 30 00:01:29,240 --> 00:01:31,400 Speaker 4: that sort of I mean, it's good cashflow. What I 31 00:01:31,440 --> 00:01:34,080 Speaker 4: wouldn't call it super high quality, right, like when you're 32 00:01:34,120 --> 00:01:38,119 Speaker 4: generating a lot of cash from your core operations. Their 33 00:01:38,840 --> 00:01:43,600 Speaker 4: their global services business had some very nice margins, even 34 00:01:43,640 --> 00:01:47,200 Speaker 4: better than we expected, and that's been a star performer. 35 00:01:47,200 --> 00:01:50,800 Speaker 4: It's good to see that holding up. But yeah, I 36 00:01:50,800 --> 00:01:54,240 Speaker 4: think the real story here is about going forward. How 37 00:01:54,280 --> 00:01:57,520 Speaker 4: they how they you know, nip these quality problems in 38 00:01:57,560 --> 00:02:00,720 Speaker 4: the bud. And so I do think that as I 39 00:02:00,760 --> 00:02:04,560 Speaker 4: think about it more, sort of pulling back guidance, I 40 00:02:04,600 --> 00:02:07,480 Speaker 4: think that indicates that management is ready to do whatever 41 00:02:07,560 --> 00:02:11,560 Speaker 4: it takes to get these quality problems in hand. And so, 42 00:02:11,720 --> 00:02:14,040 Speaker 4: you know, my senses, maybe they think, look, we you know, 43 00:02:14,080 --> 00:02:16,560 Speaker 4: we may not want to be holding to an exact 44 00:02:16,639 --> 00:02:19,720 Speaker 4: number of airplanes in twenty twenty four as we dig 45 00:02:19,800 --> 00:02:23,720 Speaker 4: through our manufacturing process and through the supply chain processes 46 00:02:23,760 --> 00:02:27,040 Speaker 4: and make sure that we're getting a quality airplane out 47 00:02:27,120 --> 00:02:30,960 Speaker 4: the door every single time. So if pulling guidance is 48 00:02:30,960 --> 00:02:34,160 Speaker 4: all about that and the efforts around that at what 49 00:02:34,200 --> 00:02:37,760 Speaker 4: it's going to take, and focusing again on quality over 50 00:02:38,360 --> 00:02:41,920 Speaker 4: just management management metrics, I think that could be a 51 00:02:42,040 --> 00:02:45,200 Speaker 4: very very good sign. You know, again the management team 52 00:02:45,280 --> 00:02:48,520 Speaker 4: is crystal focused on this is what we have to do. 53 00:02:49,120 --> 00:02:51,919 Speaker 3: How different is that? Then? Oh? Sorry, go ahead, no, 54 00:02:52,000 --> 00:02:53,560 Speaker 3: go ahead? Sorry, Well I was going to say, how 55 00:02:53,560 --> 00:02:56,440 Speaker 3: different is that than what the company has already been 56 00:02:56,520 --> 00:03:00,280 Speaker 3: doing for the last few years? Were they not is 57 00:03:00,320 --> 00:03:04,920 Speaker 3: focused on quality and safety beforehand? Like? How much of 58 00:03:04,960 --> 00:03:08,400 Speaker 3: this is truly a turnaround and a change for Boeing? 59 00:03:08,880 --> 00:03:12,000 Speaker 4: So I think I think the business has just materially changed. 60 00:03:12,040 --> 00:03:16,880 Speaker 4: I was at an aerospace defense conference last week, and 61 00:03:17,360 --> 00:03:19,040 Speaker 4: you know, I didn't need the conference to tell me this, 62 00:03:19,120 --> 00:03:21,800 Speaker 4: but I was surprised that it was persistent and that 63 00:03:22,080 --> 00:03:24,880 Speaker 4: and what I heard from people at the conference over 64 00:03:24,919 --> 00:03:30,000 Speaker 4: and over again is that finding employees an employee turnover 65 00:03:30,200 --> 00:03:32,440 Speaker 4: is still a problem in this industry. It's still a 66 00:03:32,480 --> 00:03:35,040 Speaker 4: problem now, you know. I think that the higher you 67 00:03:35,120 --> 00:03:38,440 Speaker 4: up in the tiers, like a Boeing or an RTX 68 00:03:38,600 --> 00:03:41,400 Speaker 4: or a GE, it's easier to retain employees because you 69 00:03:41,440 --> 00:03:44,520 Speaker 4: provide great benefit packages. Everybody wants to be there. But 70 00:03:44,640 --> 00:03:46,880 Speaker 4: even they have had a lot of turnover, and so 71 00:03:47,000 --> 00:03:50,480 Speaker 4: I think pre pandemic you could you could potentially fall 72 00:03:50,520 --> 00:03:53,040 Speaker 4: back on the thought and in the manufacturing process of 73 00:03:53,080 --> 00:03:56,520 Speaker 4: Boeing that you had very, very seasoned folks on the 74 00:03:56,600 --> 00:03:59,520 Speaker 4: line that have been well trained, seen years in and 75 00:03:59,600 --> 00:04:02,040 Speaker 4: years out of the business, and we're always going to 76 00:04:02,120 --> 00:04:04,600 Speaker 4: get it done right. But I think with the amount 77 00:04:04,600 --> 00:04:07,160 Speaker 4: of turnover they've had, they really need to go back 78 00:04:07,200 --> 00:04:11,680 Speaker 4: and rethink, you know, how they supervise the line, how 79 00:04:11,680 --> 00:04:15,000 Speaker 4: they train the employees, and they have to create more 80 00:04:15,000 --> 00:04:18,440 Speaker 4: stability by investing in those people. And so I think 81 00:04:18,680 --> 00:04:21,480 Speaker 4: this business has materially changed since the pandemic. I will 82 00:04:21,520 --> 00:04:24,560 Speaker 4: also say that, you know, Boling has been sort of 83 00:04:24,600 --> 00:04:27,600 Speaker 4: pushing this outsourcing of the business again. They were doing 84 00:04:27,640 --> 00:04:30,240 Speaker 4: this pre pandemic, and this is all about, you know, 85 00:04:30,279 --> 00:04:32,200 Speaker 4: they want to sort of turn it into the auto industry. 86 00:04:32,480 --> 00:04:35,360 Speaker 4: Where you outsource subcomponents, you bring it together and rent 87 00:04:35,400 --> 00:04:38,480 Speaker 4: and you put together an airplane. And that's turned the 88 00:04:38,520 --> 00:04:42,400 Speaker 4: supply chain into a much bigger, you know, portion of 89 00:04:42,400 --> 00:04:45,480 Speaker 4: of what you're doing. And it's global as well, right 90 00:04:45,520 --> 00:04:48,440 Speaker 4: You're making some of these doors in Malaysia. Things are 91 00:04:48,440 --> 00:04:51,280 Speaker 4: coming from all over the world into renting to turn 92 00:04:51,279 --> 00:04:54,000 Speaker 4: into an airplane. And I think that's making it more 93 00:04:54,040 --> 00:04:57,440 Speaker 4: difficult to keep track of the supply chain and the 94 00:04:57,520 --> 00:04:59,960 Speaker 4: quality and the supply chain and what folks are doing 95 00:05:00,040 --> 00:05:02,279 Speaker 4: went down at those factories, and so I think it's 96 00:05:02,320 --> 00:05:04,200 Speaker 4: materially changed. That's the problem. 97 00:05:04,400 --> 00:05:06,120 Speaker 2: So, George, and that sounds like a problem to me 98 00:05:06,200 --> 00:05:10,920 Speaker 2: that was probably decades in the making, i e. You know, 99 00:05:11,000 --> 00:05:14,040 Speaker 2: going more to subcontractors and and you know, as part 100 00:05:14,080 --> 00:05:19,599 Speaker 2: of globalization. Perhaps is there a sense that this is 101 00:05:19,640 --> 00:05:23,720 Speaker 2: a really a long term fix that investors should not 102 00:05:23,760 --> 00:05:27,039 Speaker 2: expect anything months. Maybe it's going to take years here. 103 00:05:28,080 --> 00:05:29,520 Speaker 4: Well, So, I mean, I don't think they're going to 104 00:05:29,520 --> 00:05:32,840 Speaker 4: stop production. I do think they're going to dig through 105 00:05:32,839 --> 00:05:36,400 Speaker 4: the supply chain, you know, sort of hopefully methodically and 106 00:05:36,680 --> 00:05:39,520 Speaker 4: figure out where there could be sources of problem. But 107 00:05:39,680 --> 00:05:42,160 Speaker 4: I think what it means is that you're just not 108 00:05:42,200 --> 00:05:44,920 Speaker 4: going to see potentially the margin and the cash flow 109 00:05:44,960 --> 00:05:47,680 Speaker 4: out of this business that you saw a pre pandemic 110 00:05:48,120 --> 00:05:52,159 Speaker 4: for years. While they spend more money and more time 111 00:05:52,200 --> 00:05:54,080 Speaker 4: and invest in people and go down and make sure 112 00:05:54,120 --> 00:05:57,200 Speaker 4: that everything works. Some stuff may need to be reconsolidated 113 00:05:57,240 --> 00:06:00,680 Speaker 4: back at sub tier suppliers or even Boeing if they 114 00:06:00,720 --> 00:06:02,920 Speaker 4: can't get comfortable that they're going to get the quality 115 00:06:02,920 --> 00:06:05,159 Speaker 4: out of it. I think it drags. Like I said 116 00:06:05,160 --> 00:06:08,240 Speaker 4: in Earnings cash Generation two or years from now. 117 00:06:08,320 --> 00:06:11,240 Speaker 2: At the same time, what I hear from you and 118 00:06:11,279 --> 00:06:14,040 Speaker 2: from others in the airline businesses, there's a big demand 119 00:06:14,120 --> 00:06:16,400 Speaker 2: for new aircraft out there, So how do they balance 120 00:06:16,640 --> 00:06:18,640 Speaker 2: maybe slowing down the line a little bit with the 121 00:06:18,640 --> 00:06:21,560 Speaker 2: fact that their customers need more and more of their product. 122 00:06:21,960 --> 00:06:24,479 Speaker 4: So I think it hurts. I think you'd like to 123 00:06:24,520 --> 00:06:28,240 Speaker 4: be breaking to higher build rates. Now air Bus will 124 00:06:28,560 --> 00:06:31,080 Speaker 4: and Airbus will get market share, but I think in 125 00:06:31,120 --> 00:06:33,760 Speaker 4: the long term if you don't, if you don't fix 126 00:06:33,800 --> 00:06:39,400 Speaker 4: the quality problem here, you'll lose long term share and competitiveness, 127 00:06:39,040 --> 00:06:41,679 Speaker 4: and that would be really, really bad. 128 00:06:42,400 --> 00:06:45,480 Speaker 3: What does this mean for Boeing stock price, Because, like 129 00:06:45,520 --> 00:06:48,560 Speaker 3: we said, it's up today, but you compare it to Airbus. 130 00:06:48,839 --> 00:06:53,080 Speaker 3: It's underperforming on a year basis by thirty three percentage 131 00:06:53,240 --> 00:06:57,160 Speaker 3: points Boeing versus Airbus. So is this enough to bring 132 00:06:57,200 --> 00:07:01,560 Speaker 3: investors new money into Boeing or is Airbus still going 133 00:07:01,560 --> 00:07:02,920 Speaker 3: to be the outperformer here? 134 00:07:03,600 --> 00:07:05,800 Speaker 4: So I mean, I think you know, Boeing investors are 135 00:07:05,839 --> 00:07:07,440 Speaker 4: going to have to take the long view here, right, 136 00:07:07,520 --> 00:07:12,640 Speaker 4: because again I don't see any quick fix, you know, 137 00:07:12,840 --> 00:07:16,800 Speaker 4: quick leaping to much higher build rates, much better cash generation, 138 00:07:16,840 --> 00:07:18,840 Speaker 4: because I think they need to invest back in their business. 139 00:07:19,320 --> 00:07:22,880 Speaker 4: Airbus apparent doesn't apparently have this problem. I think more 140 00:07:22,880 --> 00:07:25,800 Speaker 4: of the supply chain is still in house at Airbus 141 00:07:26,000 --> 00:07:28,880 Speaker 4: or at least better controlled, And so I think you're 142 00:07:28,880 --> 00:07:30,600 Speaker 4: going to see that air Bus is going to perform 143 00:07:31,040 --> 00:07:32,200 Speaker 4: fundamentally better here. 144 00:07:32,600 --> 00:07:35,000 Speaker 2: Is there regulatory risk here for Boeing? Is there any 145 00:07:35,040 --> 00:07:38,080 Speaker 2: sense that? I don't know, Washington, I'm not sure which 146 00:07:38,120 --> 00:07:40,520 Speaker 2: agency would say, Hey, we're going to be kind of 147 00:07:41,120 --> 00:07:43,400 Speaker 2: paying a lot more attention to you guys, forcing you 148 00:07:43,480 --> 00:07:45,320 Speaker 2: slowly your line down, anything like that. 149 00:07:46,160 --> 00:07:48,320 Speaker 4: I definitely right. THEFA has already said they're going to 150 00:07:48,400 --> 00:07:53,160 Speaker 4: increase their oversight of Boeing and the suppliers. You know, look, 151 00:07:53,200 --> 00:07:55,640 Speaker 4: in a perfect world, you wouldn't want to have these 152 00:07:55,680 --> 00:07:58,760 Speaker 4: quality problems, and you'd like to be filling out less paperwork. 153 00:07:58,800 --> 00:08:01,000 Speaker 4: You can make your business more fit. They're just not 154 00:08:01,040 --> 00:08:03,240 Speaker 4: going to get that here. We could all understand. The 155 00:08:03,320 --> 00:08:07,520 Speaker 4: FAA's reputation has been hurt as well, so they are 156 00:08:07,560 --> 00:08:09,880 Speaker 4: going to have more regulatory oversight and that will be 157 00:08:09,880 --> 00:08:10,280 Speaker 4: a drag. 158 00:08:10,520 --> 00:08:12,600 Speaker 2: All right, George, thanks so much for joining us. We 159 00:08:12,640 --> 00:08:15,840 Speaker 2: appreciate that. As always, George Ferguson, he covers the airspace companies, 160 00:08:16,720 --> 00:08:19,960 Speaker 2: the defense companies, and the airlines companies, that whole ecosystem. 161 00:08:20,560 --> 00:08:23,920 Speaker 2: That's where George's investment research focus is and so he's 162 00:08:23,960 --> 00:08:27,160 Speaker 2: our go to person on Boeing, the other airspace companies, 163 00:08:27,160 --> 00:08:30,200 Speaker 2: and then the ultimate customers, the airlines. And then you 164 00:08:30,240 --> 00:08:32,360 Speaker 2: know what we hear from the airlines is traffic's back. 165 00:08:33,200 --> 00:08:36,240 Speaker 2: We need new planes, we need more planes, we need 166 00:08:36,240 --> 00:08:39,440 Speaker 2: more fishing planes. And that's good news for the air 167 00:08:39,559 --> 00:08:41,520 Speaker 2: you know, the Boeings of the world and the airbuses 168 00:08:41,520 --> 00:08:44,200 Speaker 2: of the world. But as George was suggesting, probably top 169 00:08:44,240 --> 00:08:46,440 Speaker 2: of order for Boeing is to kind of get their 170 00:08:47,240 --> 00:08:50,280 Speaker 2: quality issues addressed, you know, as quickly as possible, because 171 00:08:50,320 --> 00:08:52,920 Speaker 2: that's in the long term health of the company. 172 00:08:53,440 --> 00:08:57,319 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 173 00:08:57,400 --> 00:09:01,320 Speaker 1: weekdays at ten am Eastern on Applecarb and royd Otto 174 00:09:01,360 --> 00:09:04,120 Speaker 1: with the Bloomberg Business App. You can also listen live 175 00:09:04,200 --> 00:09:07,400 Speaker 1: on Amazon Alexa from our flagship New York station, Just 176 00:09:07,440 --> 00:09:11,640 Speaker 1: Say Alexa playing Bloomberg eleven thirty The. 177 00:09:11,679 --> 00:09:15,000 Speaker 2: New York Community Bank surprise loss here cut the dividend 178 00:09:15,080 --> 00:09:17,320 Speaker 2: stocks down thirty five percent. Let's break it down with 179 00:09:17,600 --> 00:09:21,080 Speaker 2: Herman chen Herman Chenn follows the regional banks for Bloomberg 180 00:09:21,080 --> 00:09:23,840 Speaker 2: Intelligency joints US live here in our studio here in 181 00:09:23,840 --> 00:09:27,360 Speaker 2: our New York City headquarters. Herman, what happened at New 182 00:09:27,440 --> 00:09:28,240 Speaker 2: York Community Bank? 183 00:09:28,840 --> 00:09:31,800 Speaker 5: New York Community So if we go back to what 184 00:09:31,880 --> 00:09:34,280 Speaker 5: happened in March and April of last year, they were 185 00:09:34,320 --> 00:09:38,040 Speaker 5: the bank that bought the assets and deposits from Signature Bank, 186 00:09:38,440 --> 00:09:41,800 Speaker 5: so they became a much larger institution, cleared that one 187 00:09:41,880 --> 00:09:44,760 Speaker 5: hundred billion dollar threshold, which is like a step up 188 00:09:44,760 --> 00:09:49,480 Speaker 5: in regulations. Now it seems like they're a bit cautious 189 00:09:49,600 --> 00:09:53,240 Speaker 5: with that step up in regulations and the upcoming stress test, 190 00:09:53,600 --> 00:09:57,320 Speaker 5: so they're cutting the dividend, reducing loans, trying to shore 191 00:09:57,360 --> 00:10:00,880 Speaker 5: up their liquidian capital, and then on top of everything 192 00:10:00,920 --> 00:10:03,560 Speaker 5: else that I just talked about that they posted some 193 00:10:03,640 --> 00:10:07,040 Speaker 5: weaker asset quality. So there's questions of on if they're 194 00:10:07,080 --> 00:10:11,079 Speaker 5: going to see more loan losses in apartment lending and 195 00:10:11,200 --> 00:10:13,280 Speaker 5: office lending in twenty twenty four. 196 00:10:13,840 --> 00:10:16,360 Speaker 3: What do we know so far about why they're so 197 00:10:16,800 --> 00:10:20,520 Speaker 3: uncertain about this credit quality outlook? 198 00:10:20,960 --> 00:10:26,000 Speaker 5: Yeah, so your community is largely an apartment lender in 199 00:10:26,040 --> 00:10:29,280 Speaker 5: the New York City area rent controlled rent stabilized apartments, 200 00:10:29,360 --> 00:10:35,400 Speaker 5: so those buildings are affected by recent New York rent 201 00:10:35,480 --> 00:10:41,080 Speaker 5: rules that cap how much you can charge to your tenants. 202 00:10:41,480 --> 00:10:43,200 Speaker 5: On top of that, you have higher interest rates, so 203 00:10:43,240 --> 00:10:46,640 Speaker 5: it squeezes the landlords and there's a lot of refinancing 204 00:10:46,720 --> 00:10:49,679 Speaker 5: risk ahead. So they posted a big loss there in 205 00:10:49,720 --> 00:10:52,960 Speaker 5: the fourth quarter, and there's questions ahead. They have about 206 00:10:53,000 --> 00:10:55,920 Speaker 5: four percent of their loans in office exposure, so that's 207 00:10:56,400 --> 00:10:59,760 Speaker 5: a bit a touch higher than the median in our coverage, 208 00:11:00,360 --> 00:11:04,120 Speaker 5: So there are some credit quality concerns ahead, and they've 209 00:11:04,160 --> 00:11:07,320 Speaker 5: built their reserves pretty much in line with peers in 210 00:11:07,400 --> 00:11:09,880 Speaker 5: the fourth quarter to address that. 211 00:11:10,520 --> 00:11:13,080 Speaker 2: I'm looking at the Spider s and P Regional Banking 212 00:11:13,160 --> 00:11:16,080 Speaker 2: et f kr E. Is the tickets off three point 213 00:11:16,480 --> 00:11:20,200 Speaker 2: four or five percent today on this news presumably? How 214 00:11:20,280 --> 00:11:22,920 Speaker 2: much is this a New York community bank problem versus 215 00:11:22,960 --> 00:11:26,200 Speaker 2: maybe a wider regional bank problem. 216 00:11:26,280 --> 00:11:29,360 Speaker 5: Yeah, so New your Community is really the last of 217 00:11:29,440 --> 00:11:32,079 Speaker 5: the larger regional banks to report their fourth quarter earnings, 218 00:11:32,640 --> 00:11:36,240 Speaker 5: and pretty much across the board of their larger peers, 219 00:11:36,280 --> 00:11:41,800 Speaker 5: everybody was actually pretty sangling about twenty twenty four credit quality. 220 00:11:41,920 --> 00:11:46,079 Speaker 5: So this seems more of a New York community specific 221 00:11:46,160 --> 00:11:50,199 Speaker 5: issue of needing to shore up their balance sheet and 222 00:11:50,240 --> 00:11:54,080 Speaker 5: facing a blip on their credit quality that they need to, 223 00:11:54,320 --> 00:11:57,840 Speaker 5: you know, and still some more confidence in the market ahead. 224 00:11:59,120 --> 00:12:00,840 Speaker 3: Do you think someone's going to ask a question to 225 00:12:00,880 --> 00:12:03,800 Speaker 3: Powell about this today or do the reporters already have 226 00:12:03,920 --> 00:12:05,360 Speaker 3: their questions planned out now? 227 00:12:05,480 --> 00:12:08,320 Speaker 2: That would be a good one, because it's certainly topable. 228 00:12:08,520 --> 00:12:11,280 Speaker 3: Yeah, I mean, what would the Fed? How would you 229 00:12:11,320 --> 00:12:13,920 Speaker 3: expect your own Powell to react to a question on 230 00:12:14,360 --> 00:12:16,560 Speaker 3: like does this signal more weakness? 231 00:12:16,720 --> 00:12:19,440 Speaker 5: Yeah? I'd assume he would say something to the fact 232 00:12:19,440 --> 00:12:22,319 Speaker 5: that the banking industry is resilient and you've seen stability 233 00:12:22,320 --> 00:12:26,320 Speaker 5: and deposits and strong credit quality for the industry and 234 00:12:26,360 --> 00:12:29,760 Speaker 5: near community specifically had an issue with the fourth quarter, 235 00:12:29,800 --> 00:12:31,240 Speaker 5: But I would say overall. 236 00:12:31,480 --> 00:12:31,560 Speaker 6: The. 237 00:12:33,080 --> 00:12:36,360 Speaker 5: Banking sector has been really strong and resilient ever since 238 00:12:36,400 --> 00:12:40,120 Speaker 5: that March in April turmoil and stabilize the posits, increase 239 00:12:40,160 --> 00:12:44,640 Speaker 5: their capital. The larger ones are shoring up capital and 240 00:12:44,640 --> 00:12:47,719 Speaker 5: liquidy ahead of tougher rules. So it makes for a 241 00:12:47,800 --> 00:12:50,079 Speaker 5: much sound and safer system. 242 00:12:50,320 --> 00:12:52,600 Speaker 2: So where are we, like, how would you characterize the 243 00:12:52,640 --> 00:12:56,360 Speaker 2: industry in terms of getting to where it needs to 244 00:12:56,640 --> 00:13:00,960 Speaker 2: be in terms of their balance sheets, their credit quality, 245 00:13:01,200 --> 00:13:02,800 Speaker 2: you know, because it was such a shock I guess 246 00:13:02,800 --> 00:13:04,400 Speaker 2: a year ago when we had some of those regional 247 00:13:04,400 --> 00:13:05,480 Speaker 2: banks kind of hit. 248 00:13:05,760 --> 00:13:11,600 Speaker 5: Yeah. So ever since that March in April time frame, 249 00:13:12,240 --> 00:13:15,720 Speaker 5: a lot of the banks have been defensive in nature. 250 00:13:15,800 --> 00:13:21,479 Speaker 5: They've pulled back on lending, they've exited some loan portfolios, 251 00:13:21,640 --> 00:13:28,280 Speaker 5: exited relationships that weren't profitable, just been very conservative with 252 00:13:28,320 --> 00:13:31,640 Speaker 5: how they lend and how they operate. So they've had 253 00:13:31,960 --> 00:13:36,840 Speaker 5: three quarters of conservatism that they've built up, built up 254 00:13:36,840 --> 00:13:40,800 Speaker 5: their reserves. So they've done a very good job of 255 00:13:40,960 --> 00:13:45,959 Speaker 5: addressing some of these issues and after aside from what's 256 00:13:45,960 --> 00:13:48,600 Speaker 5: happening today with New York Community. I think the market's 257 00:13:48,640 --> 00:13:51,880 Speaker 5: been pretty receptive to the actions that the bank management 258 00:13:51,920 --> 00:13:54,440 Speaker 5: teams have done over the course of the past three quarters. 259 00:13:55,040 --> 00:13:57,319 Speaker 2: And where are we just in terms of, you know, 260 00:13:57,400 --> 00:14:00,439 Speaker 2: kind of I don't know, kind of repairing the earning 261 00:14:00,720 --> 00:14:02,960 Speaker 2: capability of these banks, because that's kind of what you 262 00:14:03,000 --> 00:14:04,920 Speaker 2: told us all along, that this was going to be 263 00:14:05,000 --> 00:14:08,000 Speaker 2: more of a challenge from the earnings power of these 264 00:14:08,040 --> 00:14:10,200 Speaker 2: regional banks as they deal with higher rates and so 265 00:14:10,240 --> 00:14:10,480 Speaker 2: on and so. 266 00:14:10,679 --> 00:14:13,880 Speaker 5: Right, So we're getting towards sort of the end of 267 00:14:14,800 --> 00:14:20,240 Speaker 5: the weakness in the top line. The pause in rate 268 00:14:20,320 --> 00:14:24,760 Speaker 5: hikes last year has helped shore up the pace of 269 00:14:24,800 --> 00:14:28,600 Speaker 5: depositive repricing. So the margins, the negatives margins for the 270 00:14:28,600 --> 00:14:32,080 Speaker 5: banks are starting to stabilize a bit. And we're hoping 271 00:14:32,280 --> 00:14:37,120 Speaker 5: that once rate cuts start materializing the industry in the 272 00:14:37,120 --> 00:14:39,680 Speaker 5: back half of the year, expecting a resurgence and lending 273 00:14:39,960 --> 00:14:44,400 Speaker 5: and improving top line performance and improving earnings. But really 274 00:14:44,440 --> 00:14:46,960 Speaker 5: all of this is predicated on if we get the 275 00:14:47,040 --> 00:14:48,960 Speaker 5: rate cuts and if we get a soft landing. 276 00:14:49,720 --> 00:14:52,880 Speaker 3: How our investors supposed to be thinking about the dividend 277 00:14:52,920 --> 00:14:55,640 Speaker 3: cut for New York Community banks, slashing the payout to 278 00:14:55,680 --> 00:14:59,280 Speaker 3: shareholders to five cents from an expected seventeen. 279 00:15:00,480 --> 00:15:04,600 Speaker 5: Yes, So that's that's an interesting thing because Near Community 280 00:15:04,720 --> 00:15:09,800 Speaker 5: has historically prided themselves on having a strong dividend, had 281 00:15:09,840 --> 00:15:13,440 Speaker 5: a lot of insider ownership of the bank, and so 282 00:15:13,520 --> 00:15:17,320 Speaker 5: the dividend was very key to them and to their shareholders. 283 00:15:17,360 --> 00:15:20,680 Speaker 5: They do skew a little bit historically to a retail 284 00:15:21,000 --> 00:15:23,800 Speaker 5: investor base as well. So this was a decision that 285 00:15:24,200 --> 00:15:28,040 Speaker 5: the CEO said they didn't take lightly and it was 286 00:15:28,160 --> 00:15:33,960 Speaker 5: more of another step to build capital ahead of, you know, 287 00:15:34,080 --> 00:15:37,240 Speaker 5: the tougher regulations. They're pointing to a CT one ratio 288 00:15:37,280 --> 00:15:40,160 Speaker 5: of ten percent versus the current nine point two percent, 289 00:15:40,320 --> 00:15:45,560 Speaker 5: So earnings generation and the slashing of the dividend could 290 00:15:45,600 --> 00:15:47,360 Speaker 5: help them get there by the end of next year. 291 00:15:47,640 --> 00:15:49,880 Speaker 2: So I'm looking again at that Spider s and p 292 00:15:50,360 --> 00:15:53,760 Speaker 2: Regional Bank ETF up thirty two thirty three percent from 293 00:15:53,800 --> 00:15:56,480 Speaker 2: I guess the recent lows I guess back in October 294 00:15:57,680 --> 00:15:59,960 Speaker 2: is that but that they haven't retraced at all. I mean, 295 00:16:00,480 --> 00:16:02,800 Speaker 2: when you talk to investors, do they still think, Hey, 296 00:16:02,800 --> 00:16:05,800 Speaker 2: with a FED that's likely to cut rates in twenty 297 00:16:05,840 --> 00:16:08,040 Speaker 2: twenty four, there's still room to go with some of 298 00:16:08,080 --> 00:16:08,760 Speaker 2: these names. 299 00:16:09,080 --> 00:16:15,840 Speaker 5: Yeah, it does. There's stocks have rebounded about thirty percent. 300 00:16:15,960 --> 00:16:19,080 Speaker 5: As you mentioned before, there's some upside if we get 301 00:16:19,080 --> 00:16:21,400 Speaker 5: that loan growth in the back half of the year. 302 00:16:21,480 --> 00:16:24,600 Speaker 5: So that's what the manager teams seem to be pretty 303 00:16:24,640 --> 00:16:28,920 Speaker 5: optimistic about. They talked about building you know, loan pipelines 304 00:16:29,360 --> 00:16:33,120 Speaker 5: and so that all of these anecdotes seem to be 305 00:16:33,200 --> 00:16:37,080 Speaker 5: positive that lending, which is pretty much flat over the 306 00:16:37,120 --> 00:16:39,720 Speaker 5: past couple quarters, can really start picking up again once 307 00:16:40,600 --> 00:16:43,880 Speaker 5: interest rates get lower. So that's the upside. The downside 308 00:16:43,960 --> 00:16:48,080 Speaker 5: is do we get a downturn and credit quality and 309 00:16:48,200 --> 00:16:51,200 Speaker 5: do rates sort of you know, stay higher for longer. 310 00:16:51,240 --> 00:16:53,760 Speaker 5: So that's that's where we are today with the push 311 00:16:53,840 --> 00:16:54,920 Speaker 5: pull of the blow and bear. 312 00:16:55,080 --> 00:16:57,480 Speaker 2: And what are the banks, what are the management teams? 313 00:16:57,480 --> 00:17:01,280 Speaker 2: What have you been saying about their expectation for credit 314 00:17:01,320 --> 00:17:03,120 Speaker 2: quality of the next twelve to eighteen months. Are they 315 00:17:03,160 --> 00:17:05,280 Speaker 2: taking higher reserves or have they already done that? 316 00:17:05,720 --> 00:17:08,480 Speaker 5: They are taking reserves, but it's been pretty measured. So 317 00:17:08,960 --> 00:17:13,679 Speaker 5: loan losses have pretty are they continue to normalize, so 318 00:17:13,760 --> 00:17:17,840 Speaker 5: they've been pretty low ever since the pandemic period. With 319 00:17:17,880 --> 00:17:21,320 Speaker 5: all the stimulus that was slashing around the economy, and 320 00:17:21,359 --> 00:17:25,560 Speaker 5: now they're pretty much back to pre pandemic levels, which 321 00:17:25,600 --> 00:17:30,040 Speaker 5: were still low by historical standards, So they've been taking 322 00:17:30,080 --> 00:17:32,440 Speaker 5: this time to build up their reserves a little bit 323 00:17:32,440 --> 00:17:35,760 Speaker 5: more due to some of the issues that have are 324 00:17:35,800 --> 00:17:38,720 Speaker 5: facing the industry, like you know, concerns about office, commercial 325 00:17:38,760 --> 00:17:43,480 Speaker 5: real estate, and leverage lending and apartment lending. So those 326 00:17:43,480 --> 00:17:45,600 Speaker 5: are sort of like the hot button places we've. 327 00:17:45,400 --> 00:17:47,240 Speaker 2: Been seen or I guess we ask you this way, 328 00:17:47,280 --> 00:17:51,760 Speaker 2: have we seen a regional bank cut their I guess office, 329 00:17:52,400 --> 00:17:54,320 Speaker 2: you know, right down their office portfolio. Have you seen 330 00:17:54,320 --> 00:17:54,720 Speaker 2: that yet? 331 00:17:54,880 --> 00:17:59,160 Speaker 5: We've seen reserves increase, So there's a pretty big there's 332 00:17:59,160 --> 00:18:02,480 Speaker 5: a wide range in the reserve level. So the most 333 00:18:02,480 --> 00:18:06,560 Speaker 5: conservative are banks like US Bank Corporate Citizens that have 334 00:18:06,600 --> 00:18:09,240 Speaker 5: a ten percent reserve, and then on the other end 335 00:18:09,320 --> 00:18:11,080 Speaker 5: of the spectrum, there's some that have only like a 336 00:18:11,080 --> 00:18:14,399 Speaker 5: four percent reserve. So there's a lot of questions of 337 00:18:14,920 --> 00:18:16,840 Speaker 5: how this all will shake out over. 338 00:18:16,760 --> 00:18:19,240 Speaker 2: The few years. I don't know. I think this commercial 339 00:18:19,240 --> 00:18:21,600 Speaker 2: real estate, particularly the office thing. When we start seeing 340 00:18:21,680 --> 00:18:25,240 Speaker 2: trades happen like just a random office building in midtown 341 00:18:25,280 --> 00:18:28,720 Speaker 2: Third Avenue trade, I don't know what the hairspur it's 342 00:18:29,359 --> 00:18:31,119 Speaker 2: it's still vacant. I know, I mean, I don't know 343 00:18:31,119 --> 00:18:32,800 Speaker 2: what these haircuts are going to be. And again Barry Stern, 344 00:18:32,920 --> 00:18:35,240 Speaker 2: like who knows from real estate. Yesterday he's saying he 345 00:18:35,280 --> 00:18:38,800 Speaker 2: thinks that haircuts are going to be huge, like fifty percent. 346 00:18:39,080 --> 00:18:40,399 Speaker 2: You know, I don't know. I have to see, and 347 00:18:40,400 --> 00:18:42,280 Speaker 2: I wonder how the bank's react to that. Herman Chan, 348 00:18:42,359 --> 00:18:44,560 Speaker 2: thank you so much for that. We appreciate Hermit Chan. 349 00:18:44,800 --> 00:18:48,560 Speaker 2: He covers the regional banks for Bloomberg Intelligence, so he's 350 00:18:48,560 --> 00:18:51,919 Speaker 2: been extraordinary helpful to us on as we kind of 351 00:18:51,920 --> 00:18:53,320 Speaker 2: deal with some of these regional banks and some of 352 00:18:53,359 --> 00:18:55,959 Speaker 2: the challenges that they are facing. 353 00:18:56,720 --> 00:19:01,240 Speaker 1: You're listening to the Bloomberg Intelligence podcast just live weekdays 354 00:19:01,240 --> 00:19:04,280 Speaker 1: at ten am Eastern on focarplaying enroud Otto with the 355 00:19:04,280 --> 00:19:08,200 Speaker 1: Bloomberg Business app. Listen on demand wherever you get your podcasts, 356 00:19:08,440 --> 00:19:10,800 Speaker 1: or watch us live on YouTube. 357 00:19:12,119 --> 00:19:15,960 Speaker 2: The markets are certainly pricing in a dubbish twenty twenty 358 00:19:15,960 --> 00:19:17,960 Speaker 2: four in terms of rates. Le's chick in with somebody 359 00:19:17,960 --> 00:19:20,200 Speaker 2: who actually gets paid to do this stuff. Glenn Smith, 360 00:19:20,359 --> 00:19:25,919 Speaker 2: Chief Investment Officer, g DS Wealth Management, Flower Mound, Texas. 361 00:19:26,200 --> 00:19:29,320 Speaker 2: Glenn Smith, thanks for joining us here. Where's flower Mound, Texas. 362 00:19:31,119 --> 00:19:33,959 Speaker 7: Absolutely, we're about ten ten miles north of Dallas. 363 00:19:34,240 --> 00:19:34,520 Speaker 3: Nice. 364 00:19:34,560 --> 00:19:38,280 Speaker 2: See just say greater Dallas. I mean, you know, flower. 365 00:19:38,000 --> 00:19:41,840 Speaker 7: Are actually nice? Are there flowers on the mound? You know, 366 00:19:41,880 --> 00:19:43,399 Speaker 7: there actually is a flower mound. 367 00:19:43,920 --> 00:19:46,600 Speaker 8: It's very small, it's seven acres, but there's definitely a 368 00:19:46,640 --> 00:19:47,240 Speaker 8: flower mound. 369 00:19:47,359 --> 00:19:49,160 Speaker 2: Awesome, check it out next time. That All right, Glenn, 370 00:19:49,160 --> 00:19:50,960 Speaker 2: what are we doing here with this Fed? We're gonna 371 00:19:51,000 --> 00:19:54,400 Speaker 2: hear from them later this afternoon. The market certainly says, hey, 372 00:19:54,400 --> 00:19:56,399 Speaker 2: twenty twenty four is going to be your rate cuts. 373 00:19:56,600 --> 00:19:58,520 Speaker 2: How are you guys kind of pricing that? 374 00:19:58,600 --> 00:19:58,760 Speaker 4: In? 375 00:20:00,440 --> 00:20:02,560 Speaker 8: Absolutely, we think that the FED is going to talk 376 00:20:02,600 --> 00:20:05,080 Speaker 8: about how resilient and strong the economy is. 377 00:20:05,800 --> 00:20:07,200 Speaker 7: Consumers are doing really good. 378 00:20:07,600 --> 00:20:10,399 Speaker 8: We have inflation dropping not quite at their target of 379 00:20:10,440 --> 00:20:12,600 Speaker 8: two percent, but we're at two point nine. We have 380 00:20:12,640 --> 00:20:16,520 Speaker 8: an employment numbers very very low, and I think they 381 00:20:16,520 --> 00:20:19,120 Speaker 8: can be a little bit patient here. I don't think 382 00:20:19,160 --> 00:20:23,280 Speaker 8: they want to lower rates before they actually need to. 383 00:20:24,280 --> 00:20:27,240 Speaker 8: In the seventies, obviously we had Arthur Burns do that 384 00:20:27,760 --> 00:20:31,600 Speaker 8: and then what happened is inflation was persistent, and I 385 00:20:31,600 --> 00:20:33,240 Speaker 8: think they want to do this right the first time, 386 00:20:33,280 --> 00:20:35,720 Speaker 8: and because of that, We think rate cuts won't start 387 00:20:35,800 --> 00:20:38,040 Speaker 8: until June of this year, and we will have three 388 00:20:38,119 --> 00:20:41,600 Speaker 8: rate cuts every other FED meeting in twenty twenty four. 389 00:20:42,359 --> 00:20:45,720 Speaker 3: Glenn, how are you thinking about the market reaction to 390 00:20:45,920 --> 00:20:48,359 Speaker 3: the FED today, Because, like John was saying a little 391 00:20:48,359 --> 00:20:51,040 Speaker 3: bit earlier, we already have the two year down eleven 392 00:20:51,080 --> 00:20:55,520 Speaker 3: basis points today, So what do we need to move 393 00:20:55,760 --> 00:20:59,439 Speaker 3: yields even lower? And if Powell is an ultra dubbish, 394 00:20:59,520 --> 00:21:05,320 Speaker 3: does that mean that we actually see yields reverse higher today? 395 00:21:05,480 --> 00:21:06,919 Speaker 7: No? I don't think so. 396 00:21:07,240 --> 00:21:11,280 Speaker 8: I think the economy is very strong and that's what's 397 00:21:11,280 --> 00:21:13,960 Speaker 8: giving them a little bit of a mulligan here for 398 00:21:14,080 --> 00:21:18,040 Speaker 8: rates not to go up. We think that that he's 399 00:21:18,080 --> 00:21:20,240 Speaker 8: got they have a little bit of of of margin 400 00:21:20,280 --> 00:21:22,800 Speaker 8: for air because the economy is economy is so strong 401 00:21:22,880 --> 00:21:23,280 Speaker 8: right now. 402 00:21:24,560 --> 00:21:29,840 Speaker 7: I don't I don't anticipate rates changing changing until until 403 00:21:29,920 --> 00:21:32,360 Speaker 7: later in the year when inflation, when inflation comes down 404 00:21:32,400 --> 00:21:32,640 Speaker 7: a bit. 405 00:21:34,640 --> 00:21:36,560 Speaker 2: All right, So Glenn, what do we do here? I mean, 406 00:21:37,680 --> 00:21:40,680 Speaker 2: Emily Grafair, she's long those magnificence in seven stocks. She's 407 00:21:40,680 --> 00:21:43,359 Speaker 2: been laughing all the way to the bank. Other folks 408 00:21:43,400 --> 00:21:45,280 Speaker 2: like Matt Winkler and me, we were not so smart, 409 00:21:45,359 --> 00:21:47,560 Speaker 2: so we weren't long those stocks. What do we do 410 00:21:47,640 --> 00:21:49,480 Speaker 2: here in twenty twenty four if we've missed some of 411 00:21:49,480 --> 00:21:50,600 Speaker 2: those big tech names. 412 00:21:51,720 --> 00:21:53,040 Speaker 7: I think the Magnificent seven. 413 00:21:53,119 --> 00:21:55,840 Speaker 8: If you if you own them and you're not overweighted them, 414 00:21:55,840 --> 00:21:56,840 Speaker 8: you want to maintain them. 415 00:21:56,840 --> 00:21:58,720 Speaker 7: But I don't think this is a great entry point. 416 00:21:58,760 --> 00:22:01,560 Speaker 8: I think there's other sectors out there, whether it's financials, 417 00:22:02,520 --> 00:22:05,320 Speaker 8: whether it's it's energy stocks. 418 00:22:05,960 --> 00:22:09,600 Speaker 7: Specifically in financials, we really like JP Morgan right now. 419 00:22:10,000 --> 00:22:14,120 Speaker 8: If rates do stay elevated, we have the interest margins 420 00:22:14,119 --> 00:22:16,600 Speaker 8: that will be phenomenal for them and continue to give 421 00:22:16,640 --> 00:22:19,919 Speaker 8: them mornings. And if rates are cut in June, like 422 00:22:20,000 --> 00:22:24,439 Speaker 8: we anticipate, the mortgage activity should pick up. JP Morgan 423 00:22:24,520 --> 00:22:27,879 Speaker 8: had a bit of a downer in terms of investment 424 00:22:28,280 --> 00:22:30,159 Speaker 8: investment bank in the last couple of years, and we 425 00:22:30,160 --> 00:22:32,400 Speaker 8: think that's going to turn around from in twenty twenty four. 426 00:22:33,320 --> 00:22:35,480 Speaker 7: What about on the energy go ahead? 427 00:22:35,520 --> 00:22:39,720 Speaker 3: Sorry, I was going to ask about multi asset portfolios 428 00:22:39,760 --> 00:22:43,359 Speaker 3: because you're chief investment officer, So how are you balancing 429 00:22:43,640 --> 00:22:46,880 Speaker 3: stocks and bonds and sixty forty this year? If it's 430 00:22:46,920 --> 00:22:49,800 Speaker 3: not all big tech, how are you thinking about the 431 00:22:49,840 --> 00:22:52,400 Speaker 3: whole portfolio construction for twenty twenty five. 432 00:22:52,400 --> 00:22:56,359 Speaker 8: Sure, in terms of duration, what we've been doing for 433 00:22:56,560 --> 00:23:00,280 Speaker 8: twenty to starting round twenty twenty two, we shortened toation 434 00:23:01,240 --> 00:23:06,920 Speaker 8: in shorter term treasuries and bonds in corporate and excuse me, 435 00:23:07,040 --> 00:23:10,760 Speaker 8: treasuries and corporates. Just lately in the last sixty days 436 00:23:10,760 --> 00:23:13,640 Speaker 8: we've been increased in the duration anticipation of interest rates, 437 00:23:13,720 --> 00:23:18,400 Speaker 8: dropping from different ETFs that are money mark like bonds 438 00:23:19,280 --> 00:23:22,840 Speaker 8: into longer term durations. In terms of the overall portfolio, 439 00:23:24,000 --> 00:23:28,840 Speaker 8: we think it's important to look at different sectors other. 440 00:23:28,680 --> 00:23:30,560 Speaker 7: Than just the magnificent at seven. 441 00:23:31,280 --> 00:23:37,000 Speaker 8: You want to be diversified in different parts of the economy, Well, you're. 442 00:23:36,880 --> 00:23:39,119 Speaker 2: Down there in Dallas for worth. You have to have 443 00:23:39,160 --> 00:23:41,320 Speaker 2: a call on energy. What's you call on energy here? 444 00:23:42,760 --> 00:23:48,320 Speaker 8: Absolutely, we love Diamondback Energy. Diamondback Energy is a premium 445 00:23:48,320 --> 00:23:51,800 Speaker 8: basin developer. They have over four hundred and seventy six 446 00:23:51,840 --> 00:23:54,640 Speaker 8: thousand acres eight thousand drilling locations. 447 00:23:55,400 --> 00:23:56,840 Speaker 7: What makes them unique. 448 00:23:57,119 --> 00:24:00,840 Speaker 8: Is that their price of profitability per barrel is only 449 00:24:00,840 --> 00:24:04,240 Speaker 8: fifty dollars a barrel, unlike many of its competitors. We 450 00:24:04,520 --> 00:24:08,120 Speaker 8: think the valuations are much more attractive than a even 451 00:24:08,160 --> 00:24:09,160 Speaker 8: a ne Exxon Mobile. 452 00:24:09,240 --> 00:24:13,560 Speaker 7: The cash flow has been amazing. They have lower operating 453 00:24:13,640 --> 00:24:14,760 Speaker 7: expenses than its piers. 454 00:24:14,800 --> 00:24:17,200 Speaker 8: They've consistently paid a dividend and we think that will 455 00:24:17,240 --> 00:24:19,320 Speaker 8: continue for foreseeable future. 456 00:24:20,000 --> 00:24:21,840 Speaker 2: All Right, I'm just looking at the map here. You 457 00:24:21,880 --> 00:24:25,040 Speaker 2: guys are right next to the Texas Motor Speedway, which 458 00:24:25,080 --> 00:24:27,280 Speaker 2: I helped finance back in the day. That is a 459 00:24:27,320 --> 00:24:30,800 Speaker 2: monster speedway. You laughed, But we may. We just raised 460 00:24:30,800 --> 00:24:32,199 Speaker 2: a ton of equity of a ton of debt. We 461 00:24:32,240 --> 00:24:35,440 Speaker 2: built Texas Motor Speedway, Las Vegas Motor Speedway. 462 00:24:35,600 --> 00:24:35,800 Speaker 7: Deal. 463 00:24:35,880 --> 00:24:36,880 Speaker 1: Were you not involved? 464 00:24:37,000 --> 00:24:39,800 Speaker 2: We were active back in the day. Now can you 465 00:24:40,040 --> 00:24:42,920 Speaker 2: can you water ski on Grapeview Lake. 466 00:24:44,800 --> 00:24:47,280 Speaker 8: And grape Vine Lake? Absolutely, not only grape Vine Lake 467 00:24:47,400 --> 00:24:51,520 Speaker 8: but Lewisville Lake. Those are two nice, massive lakes. I'm 468 00:24:51,560 --> 00:24:54,200 Speaker 8: originally from northern California, so this was different. 469 00:24:54,080 --> 00:24:55,200 Speaker 7: Differents in California. 470 00:24:56,440 --> 00:24:59,439 Speaker 2: Grapevine Lake. Yeah cool, all right, very good, appreciate it. 471 00:25:00,080 --> 00:25:02,879 Speaker 2: Getting a sense here what's happening on these markets. Glenn Smith, 472 00:25:03,080 --> 00:25:07,240 Speaker 2: Chief investment Officer, GDS Wealth Management, Flower Mount, Texas. It's 473 00:25:07,320 --> 00:25:09,119 Speaker 2: just north of Fort Worth. Fortworth is one of my 474 00:25:09,200 --> 00:25:11,919 Speaker 2: favorite towns. Like I'll stay in Fort Worth as opposed 475 00:25:11,960 --> 00:25:14,000 Speaker 2: to Dallas and drive to meetings in Dallas. 476 00:25:14,040 --> 00:25:15,320 Speaker 3: I haven't heard anywhere about that. 477 00:25:15,800 --> 00:25:16,200 Speaker 1: Dallas. 478 00:25:16,280 --> 00:25:19,959 Speaker 2: It's a real cowboy town, like Dallas is chic. You 479 00:25:20,000 --> 00:25:23,520 Speaker 2: know you're at Fort Worth, you feel like you're in Texas. 480 00:25:23,560 --> 00:25:25,440 Speaker 2: Cowboys and stuff like that. I love Fort Worth. 481 00:25:25,440 --> 00:25:26,040 Speaker 3: It's great town. 482 00:25:27,560 --> 00:25:31,440 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 483 00:25:31,520 --> 00:25:35,040 Speaker 1: weekdays at ten am Eastern on applecar Play and Android 484 00:25:35,080 --> 00:25:37,840 Speaker 1: Auto with the Bloomberg Business App. You can also listen 485 00:25:37,960 --> 00:25:41,080 Speaker 1: live on Amazon Alexa from our flagship New York station 486 00:25:41,440 --> 00:25:45,400 Speaker 1: just say Alexa playing Bloomberg eleven thirty. 487 00:25:46,080 --> 00:25:47,600 Speaker 2: When I went to LA, when I was on the 488 00:25:47,640 --> 00:25:50,639 Speaker 2: side side Emily as a sell side equity analyst, my 489 00:25:50,720 --> 00:25:53,000 Speaker 2: salesman would say, you have to come to LA at 490 00:25:53,080 --> 00:25:55,080 Speaker 2: least twice, preferably three times a year. And when you 491 00:25:55,119 --> 00:25:57,960 Speaker 2: go there, you see Capital Group and you see TCW. 492 00:25:58,040 --> 00:26:00,320 Speaker 2: If you don't get those two meetings, don't and go 493 00:26:00,400 --> 00:26:02,600 Speaker 2: because those are the lockdown meanings you get now. When 494 00:26:02,600 --> 00:26:05,359 Speaker 2: I went to TCW and these fancy offices in downtown LA, 495 00:26:05,440 --> 00:26:07,560 Speaker 2: which I can still see here on the Zoom call 496 00:26:07,600 --> 00:26:11,560 Speaker 2: with mister Purdy, I avoided the fixed income floor desperately 497 00:26:11,600 --> 00:26:13,240 Speaker 2: I just went right to the equity floor because they're 498 00:26:13,320 --> 00:26:15,320 Speaker 2: much more fun there. Steve Perdy joins us. He's co 499 00:26:15,359 --> 00:26:19,240 Speaker 2: head of Global Credit at TCW Fixed Income. You guys 500 00:26:19,240 --> 00:26:21,400 Speaker 2: do math. I don't like math, Steve, so that's why 501 00:26:21,440 --> 00:26:24,760 Speaker 2: I stayed with your colleagues on the equity floor. I 502 00:26:24,840 --> 00:26:27,040 Speaker 2: got to get the house call here for TCW. What 503 00:26:27,080 --> 00:26:29,080 Speaker 2: are you guys doing in the fixed income market this year? 504 00:26:29,200 --> 00:26:31,440 Speaker 2: There are actually some positive returns in twenty twenty three 505 00:26:31,480 --> 00:26:32,280 Speaker 2: for you guys. 506 00:26:33,280 --> 00:26:35,080 Speaker 6: Yeah, there are. And thanks, first of all, thanks so 507 00:26:35,119 --> 00:26:36,800 Speaker 6: much for having me, really appreciate it, and glad that 508 00:26:36,800 --> 00:26:38,880 Speaker 6: you've been to our offices. And we'll welcome you guys 509 00:26:38,920 --> 00:26:43,480 Speaker 6: in January anytime. Yes, you know, let's start. The big 510 00:26:43,520 --> 00:26:46,919 Speaker 6: picture for us is we think that inflation has peaked, 511 00:26:47,320 --> 00:26:50,000 Speaker 6: which means that the rate cycle has peaked. And you 512 00:26:50,080 --> 00:26:51,879 Speaker 6: got to give the Fed a lot of credit for 513 00:26:51,880 --> 00:26:55,560 Speaker 6: what they've done. Now, the question is from here, how 514 00:26:55,640 --> 00:26:59,720 Speaker 6: quickly will they be reducing rates and buy how much quantum? 515 00:27:00,040 --> 00:27:01,639 Speaker 6: And we think today is a bit of a non event, 516 00:27:02,280 --> 00:27:05,840 Speaker 6: But we do think overall the economy is slowing and 517 00:27:05,880 --> 00:27:08,280 Speaker 6: that's the real story. We think the Fed's got to 518 00:27:08,280 --> 00:27:10,000 Speaker 6: get ahead of it, but we're seeing a lot of 519 00:27:10,040 --> 00:27:13,000 Speaker 6: breadcrumbs and what we're hearing from companies that the slowing 520 00:27:13,040 --> 00:27:15,000 Speaker 6: economy might be getting a little bit away from the 521 00:27:15,040 --> 00:27:17,040 Speaker 6: Fed and need to be very aware of that. 522 00:27:18,240 --> 00:27:21,800 Speaker 3: So we've been asking everyone today, what do you think 523 00:27:21,880 --> 00:27:24,720 Speaker 3: Powell is going to actually talk about in his pressor 524 00:27:24,800 --> 00:27:26,840 Speaker 3: is there anything that he could say that could move 525 00:27:26,840 --> 00:27:28,400 Speaker 3: the markets today? 526 00:27:29,680 --> 00:27:32,359 Speaker 6: Yeah, I think everyone agrees and we're with consensus that 527 00:27:32,400 --> 00:27:34,960 Speaker 6: nothing is actually going to happen from a rate move perspective, 528 00:27:35,200 --> 00:27:37,320 Speaker 6: but it's really going to be about his outlook and 529 00:27:37,400 --> 00:27:40,399 Speaker 6: how caukish that feels. And we think they'll probably remove 530 00:27:40,520 --> 00:27:42,720 Speaker 6: some of the language, some of the language to give 531 00:27:42,760 --> 00:27:47,640 Speaker 6: themselves runway to begin the rate decline. But we don't 532 00:27:47,640 --> 00:27:50,359 Speaker 6: think today is a big day. What's interesting is to 533 00:27:50,400 --> 00:27:53,960 Speaker 6: watch is how quickly the economy is slowing. And the 534 00:27:54,320 --> 00:27:58,480 Speaker 6: results from this quarter thus far have been overall pretty positive, 535 00:27:59,440 --> 00:28:02,440 Speaker 6: but we do think we're seeing some signs of deceleration 536 00:28:02,880 --> 00:28:04,800 Speaker 6: and we hope that he speaks to that in his 537 00:28:04,880 --> 00:28:05,639 Speaker 6: Q and A today. 538 00:28:06,600 --> 00:28:09,720 Speaker 2: Hey, Steve, you guys are talking about a slowing economy 539 00:28:09,760 --> 00:28:12,600 Speaker 2: out there. I'd love to get that kind of surprises, 540 00:28:13,000 --> 00:28:15,040 Speaker 2: I guess given that background, I was kind of surprised 541 00:28:15,080 --> 00:28:17,639 Speaker 2: in twenty twenty three to see high yield was the 542 00:28:17,640 --> 00:28:21,119 Speaker 2: best performing fixed income sector out there. How do you 543 00:28:21,119 --> 00:28:24,560 Speaker 2: guys think about high yield versus investment grade in twenty 544 00:28:24,600 --> 00:28:25,240 Speaker 2: twenty four. 545 00:28:26,240 --> 00:28:28,040 Speaker 6: Yeah, it was. It was a bar and burder every 546 00:28:28,119 --> 00:28:31,240 Speaker 6: year in high yield last year, and I think one, 547 00:28:31,320 --> 00:28:34,439 Speaker 6: people are probably expecting the economy to slow in a 548 00:28:34,440 --> 00:28:38,080 Speaker 6: more dramatic fashion that it actually did. That's one. The 549 00:28:38,120 --> 00:28:40,880 Speaker 6: second thing is the triple C cohort, and there's a 550 00:28:40,920 --> 00:28:43,720 Speaker 6: couple of sectors in there, really cruise lines being the 551 00:28:43,720 --> 00:28:47,480 Speaker 6: most dramatic, which came into the year at very low prices, 552 00:28:48,080 --> 00:28:50,800 Speaker 6: and as we have this kind of remediation and the 553 00:28:50,840 --> 00:28:54,200 Speaker 6: peaking of rates, people stepping back into the asset class 554 00:28:54,600 --> 00:28:57,920 Speaker 6: really drove out performance there. You know, we're now sitting 555 00:28:57,920 --> 00:29:00,400 Speaker 6: at about you know, three hundred and twenty basis points 556 00:29:00,440 --> 00:29:03,760 Speaker 6: over the treasury. That's within the top court dial of 557 00:29:03,840 --> 00:29:07,320 Speaker 6: tightness over the last ten years. So our perspective is 558 00:29:07,360 --> 00:29:10,080 Speaker 6: that credit spreads on the high yield side, even more 559 00:29:10,160 --> 00:29:12,440 Speaker 6: dramatically on the IG side, are going to have to 560 00:29:12,520 --> 00:29:14,600 Speaker 6: widen throughout the course of the year. So we think 561 00:29:14,600 --> 00:29:16,600 Speaker 6: you're supposed to a little bit underweight high yield and 562 00:29:16,640 --> 00:29:19,280 Speaker 6: wait for a better time to enter that asset class. 563 00:29:19,880 --> 00:29:23,680 Speaker 3: What about the fact that we might see a lot 564 00:29:23,720 --> 00:29:27,760 Speaker 3: of debt maturing in twenty twenty four, In twenty twenty 565 00:29:27,760 --> 00:29:29,720 Speaker 3: five and twenty six, I talked to a number of 566 00:29:29,760 --> 00:29:32,680 Speaker 3: fund managers who say, this is really a cause for concern. 567 00:29:33,000 --> 00:29:36,160 Speaker 3: These companies that locked in low rates now all of 568 00:29:36,200 --> 00:29:40,520 Speaker 3: a sudden have to adjust to a much higher level 569 00:29:40,560 --> 00:29:43,479 Speaker 3: of interest, and that's going to cause some kind of 570 00:29:43,560 --> 00:29:46,040 Speaker 3: economic trouble that's going to then trickle down to the 571 00:29:46,040 --> 00:29:48,920 Speaker 3: rest of the economy. How are you thinking about debt 572 00:29:48,920 --> 00:29:53,320 Speaker 3: refinancing specifically for these ig corporates. 573 00:29:53,480 --> 00:29:56,480 Speaker 6: Well, I'll pivot back to what you guys were talking 574 00:29:56,480 --> 00:29:58,440 Speaker 6: about home ownership. I'm sorry that you don't have a home, 575 00:29:58,480 --> 00:30:01,800 Speaker 6: because those who do have your mortgages have locked in 576 00:30:01,880 --> 00:30:04,800 Speaker 6: a very low rate for a very long period of time, 577 00:30:05,240 --> 00:30:08,040 Speaker 6: and that is the luxurious position that investment grade companies 578 00:30:08,240 --> 00:30:11,400 Speaker 6: find themselves in. The average tenor is kind of ten 579 00:30:11,480 --> 00:30:13,880 Speaker 6: years plus, and so they've got a lot of time 580 00:30:13,960 --> 00:30:17,520 Speaker 6: to wait and adjust this new rate environment. High yield 581 00:30:17,560 --> 00:30:20,959 Speaker 6: companies on average have about three years until they have 582 00:30:21,040 --> 00:30:23,920 Speaker 6: to kind of climb that maturity wall that you are mentioning, 583 00:30:24,440 --> 00:30:27,200 Speaker 6: and it is a challenge for certain of them. On 584 00:30:27,280 --> 00:30:30,320 Speaker 6: the leverage loan market, they have to reprice their balance 585 00:30:30,320 --> 00:30:33,360 Speaker 6: sheet every month or three months, and we're seeing a 586 00:30:33,400 --> 00:30:37,680 Speaker 6: lot more distress there as managers simply weren't prepared to 587 00:30:37,720 --> 00:30:40,680 Speaker 6: pay an additional two hundred or three hundred basis points 588 00:30:41,200 --> 00:30:43,840 Speaker 6: just to operate their business. And let's remember that when 589 00:30:43,880 --> 00:30:46,800 Speaker 6: your cost of capital goes up, that doesn't impact your 590 00:30:46,840 --> 00:30:49,320 Speaker 6: business at all. That's not marketing, that's not a new 591 00:30:49,360 --> 00:30:52,560 Speaker 6: property that you're spending for, that's not new employees. It's 592 00:30:52,560 --> 00:30:55,120 Speaker 6: just the same business that cost you more to run 593 00:30:55,240 --> 00:30:58,200 Speaker 6: every day, and that's going to be a challenge. We 594 00:30:58,280 --> 00:31:01,200 Speaker 6: think people are taking advantage this new issue boom in 595 00:31:01,280 --> 00:31:04,160 Speaker 6: January while the markets are open to rush in and 596 00:31:04,200 --> 00:31:07,239 Speaker 6: try to kick out those maturities. But it's really a 597 00:31:07,280 --> 00:31:10,480 Speaker 6: show me story by each individual credit over the next 598 00:31:10,520 --> 00:31:13,080 Speaker 6: few years as they try to digest how to pay 599 00:31:13,200 --> 00:31:15,960 Speaker 6: more money and how they're going to manage their businesses 600 00:31:16,240 --> 00:31:17,400 Speaker 6: given that additional burden. 601 00:31:17,840 --> 00:31:20,320 Speaker 2: Hey, Steve, how do you feel about credit quality out there? 602 00:31:20,320 --> 00:31:22,800 Speaker 2: If your house call is for a recession. I'm guessing 603 00:31:22,800 --> 00:31:25,200 Speaker 2: you're asking your analyst to kind of, you know, kind 604 00:31:25,200 --> 00:31:26,680 Speaker 2: of sharpen their pencils and take a look at the 605 00:31:26,760 --> 00:31:28,840 Speaker 2: ratios and so on and so forth. How do you 606 00:31:28,840 --> 00:31:30,240 Speaker 2: feel about credit quality out there? 607 00:31:31,560 --> 00:31:34,160 Speaker 6: You know, the management teams thus far have done a 608 00:31:34,200 --> 00:31:39,200 Speaker 6: really excellent job. During the pandemic, we saw balance sheets 609 00:31:39,280 --> 00:31:42,480 Speaker 6: actually get into a much better place personal balance sheets 610 00:31:42,520 --> 00:31:45,280 Speaker 6: as an aside, people paid down credit cards, they weren't 611 00:31:45,280 --> 00:31:48,640 Speaker 6: going out as much. Corporates didn't go on big M 612 00:31:48,720 --> 00:31:50,960 Speaker 6: and A booms. Instead, they try to say, it's a 613 00:31:51,000 --> 00:31:54,400 Speaker 6: cautious environment, I want to bring down my leverage because 614 00:31:54,400 --> 00:31:56,000 Speaker 6: we don't what the world's going to look like. So 615 00:31:56,040 --> 00:31:58,200 Speaker 6: it all feels pretty good. So when you think of 616 00:31:58,600 --> 00:32:01,800 Speaker 6: near term defaults or a spike into fault rates, we 617 00:32:01,840 --> 00:32:04,440 Speaker 6: don't see that happening in the near term. But what 618 00:32:04,520 --> 00:32:07,120 Speaker 6: we do see is credit spreads right now are kind 619 00:32:07,160 --> 00:32:10,920 Speaker 6: of pricing perfection, and we don't think that's a reasonable 620 00:32:10,960 --> 00:32:14,200 Speaker 6: case given what we're seeing. And so the other thing 621 00:32:14,280 --> 00:32:17,560 Speaker 6: we're hearing from management teams as our analyst, as you said, 622 00:32:17,560 --> 00:32:20,760 Speaker 6: are kind of put plugging into their models every day, 623 00:32:20,800 --> 00:32:23,440 Speaker 6: is the numbers are fine, but the outlook feels a 624 00:32:23,440 --> 00:32:25,840 Speaker 6: little bit more concerning, and now we're starting to see 625 00:32:25,920 --> 00:32:28,239 Speaker 6: job losses roll through. I mean every day we come 626 00:32:28,240 --> 00:32:30,960 Speaker 6: into our Bloomberg screens and see a blinking red number 627 00:32:30,960 --> 00:32:34,720 Speaker 6: across the top. Yesterday was ups with twelve thousand employees. 628 00:32:35,480 --> 00:32:38,200 Speaker 6: That is a good signal that companies are not as 629 00:32:38,280 --> 00:32:40,959 Speaker 6: bullish about the future as what they are now, and 630 00:32:41,000 --> 00:32:42,160 Speaker 6: we think that's problematic. 631 00:32:43,160 --> 00:32:46,160 Speaker 2: So, you know, you guys just about a year ago, 632 00:32:46,360 --> 00:32:48,080 Speaker 2: you guys being the folks in California, we're kind of 633 00:32:48,160 --> 00:32:51,200 Speaker 2: ground zero on some of these regional bank challenges here 634 00:32:51,240 --> 00:32:53,120 Speaker 2: and we just got another reminder today with New York 635 00:32:53,120 --> 00:32:56,400 Speaker 2: Community Bank. How do you guys think about the banking 636 00:32:56,400 --> 00:32:57,760 Speaker 2: sector of the financials here today. 637 00:32:59,360 --> 00:33:02,440 Speaker 6: Yeah, it's kind of an old story that's come back 638 00:33:02,480 --> 00:33:05,880 Speaker 6: to light this morning. First of all, so are there 639 00:33:06,000 --> 00:33:09,360 Speaker 6: lingering effects of the regional bank crisis? First, I'll talk 640 00:33:09,360 --> 00:33:12,600 Speaker 6: with the good news. The FED reacted quickly and what 641 00:33:12,640 --> 00:33:16,320 Speaker 6: they did with Signature Bank and SVB really they deserve 642 00:33:16,400 --> 00:33:18,440 Speaker 6: to be commended for that because it put a floor 643 00:33:18,880 --> 00:33:23,280 Speaker 6: quickly under deposit flight, which was critical. Now. It also 644 00:33:23,360 --> 00:33:25,360 Speaker 6: showed us by the way that the large banks, that 645 00:33:25,760 --> 00:33:28,840 Speaker 6: globally systemic banks are the safest place you could possibly be, 646 00:33:29,280 --> 00:33:31,680 Speaker 6: and we continue to believe that as an investment thesis. 647 00:33:32,400 --> 00:33:35,240 Speaker 6: Shifting back to the regional banks, the real crux of 648 00:33:35,240 --> 00:33:39,120 Speaker 6: the matter here is commercial real estate, and it's very 649 00:33:39,160 --> 00:33:42,760 Speaker 6: difficult as an outside investor to get really granular views 650 00:33:43,320 --> 00:33:46,400 Speaker 6: asset by asset on what type of commercial real estate 651 00:33:46,880 --> 00:33:50,040 Speaker 6: they portfolios they have. And I think when Community Bank 652 00:33:50,080 --> 00:33:53,280 Speaker 6: bought the Signature Bank portfolio, they had to get their 653 00:33:53,360 --> 00:33:55,760 Speaker 6: arms around that exposure. We've learned today there might be 654 00:33:55,800 --> 00:33:58,600 Speaker 6: more problems in that commercial real estate and particularly the 655 00:33:58,640 --> 00:34:02,640 Speaker 6: office sector, and they had envisioned when they purchased those assets. 656 00:34:02,960 --> 00:34:05,840 Speaker 6: So we think this is not a brand news story. 657 00:34:06,120 --> 00:34:09,960 Speaker 6: It's simply this delayed, rolling impact of the commercial real 658 00:34:10,040 --> 00:34:12,560 Speaker 6: estate issue flowing through the retail banks. 659 00:34:12,760 --> 00:34:12,960 Speaker 7: Yeah. 660 00:34:12,960 --> 00:34:16,280 Speaker 2: We had Barry Sternlick, chairman and CEE of Starward Capital 661 00:34:16,320 --> 00:34:19,239 Speaker 2: on Bloomer Television yesterday. He was talking about, you know, 662 00:34:19,239 --> 00:34:22,400 Speaker 2: he thinks the nut might be, you know, a trillion 663 00:34:22,640 --> 00:34:25,759 Speaker 2: dollars of a risk, their value at risk and the 664 00:34:25,800 --> 00:34:29,080 Speaker 2: commercial rules they particularly the office space, and so that 665 00:34:29,200 --> 00:34:31,080 Speaker 2: is a big issue. And if that's the case, then 666 00:34:31,080 --> 00:34:33,040 Speaker 2: that's going to have some pain for a lot of folks. Steve, 667 00:34:33,040 --> 00:34:35,440 Speaker 2: Thanks so much for joining us here. Really appreciate getting 668 00:34:35,760 --> 00:34:39,760 Speaker 2: your time. Steve Perty's co head of Global Credit at TCW. 669 00:34:39,960 --> 00:34:42,680 Speaker 2: Some real smart folks out there at TCW, both on 670 00:34:42,719 --> 00:34:46,000 Speaker 2: the equity and fixed income side, and again kind of 671 00:34:46,040 --> 00:34:48,200 Speaker 2: the base case for TCW. On the fixed income folks, 672 00:34:48,280 --> 00:34:51,520 Speaker 2: the credit guys, they think of recessions coming, so they're 673 00:34:51,680 --> 00:34:55,480 Speaker 2: kind of positioning their portfolio accordingly, kind of underweight high yield, 674 00:34:55,520 --> 00:34:57,560 Speaker 2: a little bit more on the investment grade, and focusing 675 00:34:57,600 --> 00:35:00,279 Speaker 2: on the balance sheet. So that is certainly a take there. 676 00:35:01,760 --> 00:35:05,640 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 677 00:35:05,719 --> 00:35:09,240 Speaker 1: weekdays at ten am Eastern on applecar Play and Android 678 00:35:09,280 --> 00:35:12,040 Speaker 1: Auto with the Bloomberg Business App. You can also listen 679 00:35:12,160 --> 00:35:15,280 Speaker 1: live on Amazon Alexa from our flagship New York station, 680 00:35:15,640 --> 00:35:20,600 Speaker 1: Just say Alexa play Bloomberg eleven thirty. 681 00:35:20,680 --> 00:35:23,440 Speaker 2: D day Today the safoon will a full coverage of that. 682 00:35:23,640 --> 00:35:25,480 Speaker 2: People on expecting a whole lot here, but maybe a 683 00:35:25,480 --> 00:35:30,040 Speaker 2: little body language about maybe when they'll think about cutting rates. 684 00:35:30,840 --> 00:35:33,560 Speaker 2: Let's check in with a pro here, Christina Hooper. She's 685 00:35:33,600 --> 00:35:39,120 Speaker 2: a chief global markets strategist a little firm called Invesco. Christina, 686 00:35:39,560 --> 00:35:43,080 Speaker 2: I guess the consensus is don't look for really anything today, 687 00:35:43,160 --> 00:35:45,440 Speaker 2: But is it too much to ask for maybe a 688 00:35:45,480 --> 00:35:48,680 Speaker 2: little body language on what the Fed's thinking about future 689 00:35:48,760 --> 00:35:50,000 Speaker 2: rake tuts, what are you looking for? 690 00:35:51,200 --> 00:35:53,719 Speaker 9: Well, we might get a little more than body language. 691 00:35:53,800 --> 00:35:57,839 Speaker 9: I think chir Powell tends to be fairly candid in 692 00:35:57,960 --> 00:36:01,239 Speaker 9: the Q and A session, and if he doesn't necessarily 693 00:36:01,280 --> 00:36:04,600 Speaker 9: want to be, it tends to come out. However, I 694 00:36:04,640 --> 00:36:08,799 Speaker 9: do believe there is a very distinct goal of the 695 00:36:08,840 --> 00:36:11,080 Speaker 9: FED right now, which is to keep a lid on 696 00:36:11,320 --> 00:36:15,239 Speaker 9: easing financial conditions, and so I think he will try 697 00:36:15,239 --> 00:36:17,600 Speaker 9: to err on the side of hawkishness. But I do 698 00:36:17,640 --> 00:36:20,120 Speaker 9: think we'll get some glimmers of hope during the Q 699 00:36:20,239 --> 00:36:20,440 Speaker 9: and A. 700 00:36:21,320 --> 00:36:23,800 Speaker 3: What do you make of some of the more recent 701 00:36:24,239 --> 00:36:28,800 Speaker 3: data that we've seen. You look at Employment cost Index 702 00:36:28,840 --> 00:36:32,120 Speaker 3: increasing at a slower pace than expected ADP. These were 703 00:36:32,120 --> 00:36:35,640 Speaker 3: both today coming in a little bit lower than expected. 704 00:36:35,719 --> 00:36:38,840 Speaker 3: How is Powell going to be thinking about these signs 705 00:36:38,960 --> 00:36:41,279 Speaker 3: that the labor market is softening. 706 00:36:43,080 --> 00:36:46,520 Speaker 9: I think they will matter to the FED because it 707 00:36:46,640 --> 00:36:49,400 Speaker 9: tells the FED this mosaic of data we've seen is 708 00:36:49,440 --> 00:36:51,600 Speaker 9: that we are still very much on the D train, 709 00:36:51,920 --> 00:36:54,279 Speaker 9: And by the D train, I mean the disinflation train. 710 00:36:55,120 --> 00:36:58,600 Speaker 9: In particular, the employment cost Index is a very I 711 00:36:58,640 --> 00:37:02,359 Speaker 9: think has historically been a rather accurate gauge, and it's 712 00:37:02,400 --> 00:37:04,400 Speaker 9: one the FED relies on to get a sense of 713 00:37:04,480 --> 00:37:08,680 Speaker 9: total compensation. So that's important. We know that the FED 714 00:37:08,760 --> 00:37:11,440 Speaker 9: does react to the data. I go back to June 715 00:37:11,440 --> 00:37:15,400 Speaker 9: of twenty twenty two, when they had messaged before the 716 00:37:15,440 --> 00:37:17,680 Speaker 9: meeting that they would only hike fifty basis points, but 717 00:37:17,680 --> 00:37:20,440 Speaker 9: then they hiked seventy five basis points, and Chair Powell 718 00:37:20,480 --> 00:37:25,120 Speaker 9: pointed to two data points CPI and Michigan Consumer Inflation 719 00:37:25,200 --> 00:37:29,400 Speaker 9: Expectations as pushing them to do seventy five instead. So 720 00:37:29,719 --> 00:37:34,560 Speaker 9: clearly data matters, and these data points continue to tell 721 00:37:34,600 --> 00:37:35,920 Speaker 9: that same story. 722 00:37:36,600 --> 00:37:38,440 Speaker 2: You know, one of the many reasons we like speaking 723 00:37:38,520 --> 00:37:41,719 Speaker 2: to Christine Hooper is that she liked me, is a 724 00:37:41,760 --> 00:37:42,800 Speaker 2: fan of cracker barrel. 725 00:37:43,200 --> 00:37:43,799 Speaker 7: How about that? 726 00:37:44,440 --> 00:37:46,360 Speaker 2: You know, you got to be right up there front. 727 00:37:46,880 --> 00:37:49,480 Speaker 2: I saw that in one of your notes here, Christina. So, Christina, 728 00:37:49,520 --> 00:37:53,160 Speaker 2: given that backdrop, given that backdrop of the Fed's going 729 00:37:53,200 --> 00:37:55,120 Speaker 2: to be cutting rates, We're not sure when, but we 730 00:37:55,200 --> 00:37:57,399 Speaker 2: got a pretty good conviction that they're gonna be cutting 731 00:37:57,440 --> 00:38:00,400 Speaker 2: rates this year. What's your kind of how are you 732 00:38:00,680 --> 00:38:03,800 Speaker 2: allocating capital these days? What are you telling your portfolio managers, 733 00:38:03,800 --> 00:38:05,719 Speaker 2: What are you hearing from your pms? How are you 734 00:38:05,760 --> 00:38:08,759 Speaker 2: guys trying to position yourselves well? 735 00:38:08,800 --> 00:38:11,680 Speaker 9: First, Paul, I should say that I don't think it 736 00:38:11,760 --> 00:38:14,799 Speaker 9: matters whether the FED starts cutting in March or at 737 00:38:14,840 --> 00:38:17,839 Speaker 9: the April thirtieth May first meeting. I do think we're 738 00:38:17,880 --> 00:38:21,560 Speaker 9: going to see more cuts than the FED has suggested 739 00:38:21,600 --> 00:38:24,520 Speaker 9: there will be in its December dot plot, So that's 740 00:38:24,560 --> 00:38:28,440 Speaker 9: sort of the background. What I would anticipate is that 741 00:38:28,480 --> 00:38:31,719 Speaker 9: we do see an economic slowdown, what I'll call a 742 00:38:31,840 --> 00:38:36,000 Speaker 9: bumpier landing in the first half of the year. You 743 00:38:36,040 --> 00:38:38,360 Speaker 9: can't have the kind of aggressive tightening we've had without 744 00:38:38,400 --> 00:38:41,359 Speaker 9: some economic damage, but not a recession, And I think 745 00:38:41,360 --> 00:38:43,160 Speaker 9: it's going to be really brief, and that we'll have 746 00:38:43,480 --> 00:38:46,799 Speaker 9: a reacceleration sometime in the back half of the year. 747 00:38:47,640 --> 00:38:52,120 Speaker 9: Markets tend to discount what they anticipate to happen with 748 00:38:52,160 --> 00:38:54,560 Speaker 9: the economy, so I think what we're likely going to 749 00:38:54,600 --> 00:38:57,920 Speaker 9: see in coming months is a stock market that is 750 00:38:58,000 --> 00:39:01,399 Speaker 9: discounting that back half for covering. So I do think 751 00:39:01,400 --> 00:39:03,239 Speaker 9: we're going to see some broadening. I think we're going 752 00:39:03,280 --> 00:39:05,719 Speaker 9: to see small caps performing better, We're going to see 753 00:39:05,719 --> 00:39:09,440 Speaker 9: cyclicals performing better, and I do believe the US dollar 754 00:39:09,640 --> 00:39:13,480 Speaker 9: will resume its weakening, which should be a positive or 755 00:39:13,760 --> 00:39:15,840 Speaker 9: asset classes outside of the US. 756 00:39:16,200 --> 00:39:19,080 Speaker 3: Okay, So broadening out in the equity market, what about 757 00:39:19,120 --> 00:39:21,920 Speaker 3: on the fixed income side, where are you seeing the 758 00:39:21,920 --> 00:39:26,479 Speaker 3: most risk reward If we do get this slow down, 759 00:39:26,560 --> 00:39:29,440 Speaker 3: but a brief US economic slow down. 760 00:39:30,440 --> 00:39:34,799 Speaker 9: I think investment grade credit is that sweet spot because 761 00:39:35,000 --> 00:39:37,640 Speaker 9: we are going to see something of a slowdown, will 762 00:39:37,680 --> 00:39:41,480 Speaker 9: want quality, and I think it will benefit from an 763 00:39:41,600 --> 00:39:44,439 Speaker 9: environment in which we're likely to see rates come down 764 00:39:44,480 --> 00:39:46,960 Speaker 9: over the course of the year. So there's a lot 765 00:39:46,960 --> 00:39:48,360 Speaker 9: of opportunities in fixed income. 766 00:39:48,400 --> 00:39:50,520 Speaker 2: I have to say, yeah, I said that kind of 767 00:39:50,520 --> 00:39:53,760 Speaker 2: the same thing, same time last year, and then investment 768 00:39:53,800 --> 00:39:57,799 Speaker 2: grade just ripped last year. I'm sorry, high yield ripped 769 00:39:57,880 --> 00:40:03,920 Speaker 2: last year. You think about high yield versus investment grade, Well. 770 00:40:03,760 --> 00:40:09,160 Speaker 9: High yield certainly is attractive, but I don't see it 771 00:40:09,239 --> 00:40:13,160 Speaker 9: as attractive as ig right now. However, that could change 772 00:40:13,239 --> 00:40:16,799 Speaker 9: if we get a softer landing than I anticipate and 773 00:40:16,880 --> 00:40:19,880 Speaker 9: we see a stronger reacceleration in the back half of 774 00:40:19,920 --> 00:40:22,360 Speaker 9: the year. That should be a real positive. For high yield. 775 00:40:23,200 --> 00:40:25,400 Speaker 3: What do you make of the New York Community Bank 776 00:40:25,640 --> 00:40:29,600 Speaker 3: news this morning? Maybe we could just get your initial 777 00:40:29,640 --> 00:40:34,080 Speaker 3: reaction to what this means for credit quality and the 778 00:40:34,080 --> 00:40:37,360 Speaker 3: regional banking sector from here, Well. 779 00:40:37,200 --> 00:40:39,879 Speaker 9: I think we have to ask ourselves whenever we see 780 00:40:40,000 --> 00:40:44,280 Speaker 9: a situation like this, is this contained or is this contagious? 781 00:40:44,600 --> 00:40:47,719 Speaker 9: And as far as I know, based on what we've 782 00:40:47,719 --> 00:40:50,239 Speaker 9: heard this far, it seems like it is very much 783 00:40:50,320 --> 00:40:56,520 Speaker 9: a contained situation, not that I think far less significant 784 00:40:56,560 --> 00:41:00,120 Speaker 9: than what we saw last spring. But of course we're 785 00:41:00,120 --> 00:41:01,960 Speaker 9: going to have to stay on top of this as 786 00:41:02,520 --> 00:41:06,759 Speaker 9: the news on folds and information on folds, and of 787 00:41:06,800 --> 00:41:09,640 Speaker 9: course more earnings come out for other regional banks. 788 00:41:10,239 --> 00:41:12,600 Speaker 2: So Christina, on the equity side this year, you know, 789 00:41:12,600 --> 00:41:15,040 Speaker 2: we're just about to finish out a pretty solid January 790 00:41:15,120 --> 00:41:18,080 Speaker 2: to the market after a really good twenty three. What 791 00:41:18,120 --> 00:41:20,439 Speaker 2: are the sectors that you guys are spending the most 792 00:41:20,440 --> 00:41:23,520 Speaker 2: time on these days in terms of opportunities. 793 00:41:24,400 --> 00:41:28,960 Speaker 9: Well, we continue to see opportunity in technology. I think 794 00:41:29,040 --> 00:41:33,640 Speaker 9: technology as a long duration asset class is sensitive to 795 00:41:34,160 --> 00:41:37,360 Speaker 9: long rates and so it should benefit from an environment 796 00:41:37,400 --> 00:41:40,920 Speaker 9: in which rates are falling. I also think tech is 797 00:41:42,080 --> 00:41:45,280 Speaker 9: more defensive it has become a more defensive asset class 798 00:41:45,280 --> 00:41:48,000 Speaker 9: in recent years, so it's going to hold up, in 799 00:41:48,040 --> 00:41:54,320 Speaker 9: my opinion, relatively well despite some of the recent disappointments 800 00:41:54,360 --> 00:41:59,799 Speaker 9: around earnings announcements. But where we're focused as well is 801 00:42:00,080 --> 00:42:04,799 Speaker 9: the cyclicals. Those are areas of real opportunity, especially if 802 00:42:04,800 --> 00:42:07,719 Speaker 9: we see a nice bounce back in the back half 803 00:42:07,760 --> 00:42:10,880 Speaker 9: of this year. We're also seeing a significant amount of 804 00:42:10,920 --> 00:42:15,560 Speaker 9: investment legislation like the Chips Act is having an impact 805 00:42:15,680 --> 00:42:20,000 Speaker 9: in cyclical areas of the economy, so that is a 806 00:42:20,080 --> 00:42:21,200 Speaker 9: real focus for us. 807 00:42:21,400 --> 00:42:23,680 Speaker 2: All right, very good, as always, Christina Hooper. We always 808 00:42:23,680 --> 00:42:26,000 Speaker 2: appreciate getting a few minutes of your time. Christina Hooper 809 00:42:26,120 --> 00:42:29,560 Speaker 2: is the chief Global market Strategist at Investco. 810 00:42:29,840 --> 00:42:34,360 Speaker 1: This is the Bloomberg Intelligence Podcast, available on Apples, Spotify, 811 00:42:34,560 --> 00:42:37,759 Speaker 1: and anywhere else you'll get your podcasts. 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