Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always I'm Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Michael Wilson
Speaker 1: joins us now. He's Chief US Equity Strategists in CIO
Speaker 1: at Morgan Stanley. Of course, many of you are in
Speaker 1: Global Wall Street hang on every word if you agree
Speaker 1: or disagree. Mike, I see a massive polarity in the
Speaker 1: equity markets right now. It's a select group of halves
Speaker 1: in everybody else dragging along looking for the next narrative.
Speaker 1: Am I right on that polarity? Yeah, that's right to
Speaker 1: the Tom. I mean, you know, you guys are talking
Speaker 1: about the bondom markets volatility here recently, we've been focused
Speaker 1: on that too. We think that, you know, the bottom
Speaker 1: market is sort of jumping ahead of what the FED
Speaker 1: is saying, and that's the first time we've really seen
Speaker 1: that in quite a while meaning that the bottom market
Speaker 1: is somewhat you know, dismissing the feed stop plot, which
Speaker 1: I find interesting because I think the equity market may
Speaker 1: start to do that too. And it's already happening under
Speaker 1: the circus as you alluded to, meaning small cap stocks
Speaker 1: and anything that's sort of viewed as lower quality or
Speaker 1: will have challenging it needs capital availability is being punished,
Speaker 1: and then we're left with the twenty stocks kind of
Speaker 1: carrying today. I mean the twenty stocks carrying today screams
Speaker 1: the roll up I've been talking about for six seven,
Speaker 1: eight months with the interest rate regime that you studied
Speaker 1: at Michigan a few years back. With that said, is
Speaker 1: it a return to what you and I knew years
Speaker 1: ago or is this a new higher interest rate regime
Speaker 1: for the stock market? Well, I think it's a little
Speaker 1: bit of both. I think what it really is it's
Speaker 1: just a much less predictable world. And this has been
Speaker 1: our theme for the last couple of years, is that
Speaker 1: we're entering a period of higher economic volatility. Right. The
Speaker 1: last twenty years has been a world of repression where
Speaker 1: you know, all of these metrics were somewhat predictable, and
Speaker 1: that's you know, that's for companies, that's for the FED itself,
Speaker 1: that's for investors. And now we're entering a world where
Speaker 1: it's just not as predictable, and that means higher risk premiums,
Speaker 1: whether we're talking about credit, whether we're talking about term
Speaker 1: premium in the bomb market, or we're talking about equity
Speaker 1: risk premium. In our view, you know, I think people
Speaker 1: are operating as if we're going to go back to
Speaker 1: that predictable world, and that's I think misplaced. A lot
Speaker 1: of people have been reading your prognostications of lower earning
Speaker 1: multiples for week after week after week, the latest from you.
Speaker 1: Given the events of the past few weeks, we think
Speaker 1: guidence is looking more and more unrealistic, and equity markets
Speaker 1: are at greater risk of pricing in much lower estimates
Speaker 1: ahead of any hard data changes. Mike, given that you've
Speaker 1: been saying this for a while, and given the fact
Speaker 1: that we have content I need to see resilience in
Speaker 1: equities that refuse to go down, how do you push
Speaker 1: back and say you guys are going to wake up.
Speaker 1: It might not be yet even if we get disappointing earnings,
Speaker 1: but you will, well, look, we try to navigate that
Speaker 1: inside the equity market, right, So, I mean last year
Speaker 1: we saw a pretty big degradation and multiples, but as
Speaker 1: we pointed out again today, all that was due to
Speaker 1: higher interest rates. None of it was due to higher
Speaker 1: risk premium, which is the part of the multiple that is,
Speaker 1: you know, pricing in what growth is going to be. Now,
Speaker 1: I would push back on the pushback, which is that
Speaker 1: the market is starting to revalue or devalue. What I
Speaker 1: would say the companies that are most at risk of
Speaker 1: missing estimates, as I mentioned earlier, you know, lower quality companies,
Speaker 1: more cyclical companies, smaller cap companies that are going to
Speaker 1: have a hard time with you know, what's going on
Speaker 1: in the regional banking system. So it is happening, it's
Speaker 1: just you know, it takes a little bit longer, and everybody,
Speaker 1: you know, kind of focuses on the SMP five hundred
Speaker 1: or maybe NASHDAC one hundred as these kind of you know,
Speaker 1: ashons of safety. And that's true until it's not. Well, Okay,
Speaker 1: so let's talk about the repricing. Last year we were
Speaker 1: talking about big tech, and this year the repricing has
Speaker 1: been in the opposite direction. I'm looking right now at meta.
Speaker 1: Facebook shares up more than seventy one percent so far
Speaker 1: year to date, Apple shares up more than twenty percent.
Speaker 1: I mean, basically, pick your pick your poison, and it's
Speaker 1: up dramatically. How do you push back against this, against
Speaker 1: the recoveries of the names that supposedly we're going to
Speaker 1: come out to pressure in a higher rate world. Well,
Speaker 1: I think you said it right. I mean, these companies
Speaker 1: took their punishment last year because they were, you know,
Speaker 1: part of the tip of the spear in terms of
Speaker 1: you know, valu wishes out of bounds when when rates
Speaker 1: went up, they took it first. And you could argue
Speaker 1: that a lot of those groups are you know, stocks
Speaker 1: and sectors that they're in our intercession already right there.
Speaker 1: That's the area we are seeing layoffs. That's the area
Speaker 1: we are seeing retrenchment on costs. And I think the
Speaker 1: I think the debate now, Lisa, is have those companies
Speaker 1: cut costs and got and in front of it enough
Speaker 1: where they can now see earnings growth again. I think
Speaker 1: there's some appetite for that view. That's not argue. Argue
Speaker 1: is that there's going to be probably be more cost
Speaker 1: cutting in that space because the malinvestment was just so egregious,
Speaker 1: and the over earning was even worse. So I think
Speaker 1: it's just going to be kind of a drip, drip drip.
Speaker 1: You know. My suspicion is markets tend to figure this
Speaker 1: out ahead of the actual numbers coming down. And because
Speaker 1: the bomb market just repriced itself overnight, we think that
Speaker 1: risk pretty equity market is elevated now more than it's
Speaker 1: been for the last six or twelve months. Mike, You've
Speaker 1: been labeled to bear, and I know what it is
Speaker 1: to be labeled to bear. Then people think that everything
Speaker 1: they say is barish, no matter what I'm just saying,
Speaker 1: even when potentially you do get constructive. Are there any
Speaker 1: areas that you think have sufficiently repriced where you're starting
Speaker 1: to see opportunity? Well, look, I mean financials have started
Speaker 1: to reprice in a meaningful way, you know, and now
Speaker 1: all of these companies are going to have problems, you
Speaker 1: know that we're seeing in some of these So yeah,
Speaker 1: I think it's happening. I Mean, the other thing I
Speaker 1: would just point out is that, you know, financials tend
Speaker 1: to lead the overall market, but that's one area for sure.
Speaker 1: Some of the retail and some of the consumer areas
Speaker 1: of repriced. It's been repricing for years. You know, we
Speaker 1: just added a name to our fresh money by listening
Speaker 1: as a retailer. So you know, I think these there
Speaker 1: are definitely areas and markets go through these periods with
Speaker 1: it's called a rolling bear market, rolling reception. We've we've
Speaker 1: kind of I think came out with that view a
Speaker 1: few years ago and now people have used it. But yeah,
Speaker 1: that's the way it works. And you know, we're looking
Speaker 1: for opportunities now at the stock level, but at the
Speaker 1: index level, it just does not look attracted to us.
Speaker 1: Mike Wilson. The thing that's different this time around is
Speaker 1: the pile of money and what's called private equity. Private markets.
Speaker 1: Can they be a catalyst for not like Milken years ago,
Speaker 1: but can they be a catalyst for a roll up
Speaker 1: of all these troubled companies. Well, look, I mean, first
Speaker 1: of all, I don't think there's that many, you know,
Speaker 1: troubled companies. I think we have a situation where evaluations
Speaker 1: are out of bounds and we need to correct that.
Speaker 1: I absolutely think there's ton of cash out there where
Speaker 1: there's private or public money, public money, the meeting asset owners,
Speaker 1: it can come in at the right price, and it will.
Speaker 1: So whatever we're going to get here in the next
Speaker 1: three to six months in terms of finally resetting evaluation
Speaker 1: appropriately getting estimates down, I don't think we're going to
Speaker 1: stay at very very low price levels for a very
Speaker 1: long time. We're not in the camp that we're in
Speaker 1: a secular structural bearer market. This is a cyclical bearer market.
Speaker 1: It has some completion to it. And your question is
Speaker 1: really around is there enough cash and investable funds out
Speaker 1: there to kind of, you know, stabilize things. And I
Speaker 1: think the answer is absolutely yes. Okay, Mike Wilson, thank
Speaker 1: you for the brief this morning, hugely valuable. He is,
Speaker 1: of course, with Morgan Stanley Lisa Hornby ahead of US
Speaker 1: multisector fixed income at shoulders joining us now. Lisa, I
Speaker 1: want to get your sense of what's changed. Have we
Speaker 1: gotten enough stability in the lack of news over the
Speaker 1: weekend to go risk on today? I think possibly temporarily.
Speaker 1: I think there's a bit of a sigh of relief
Speaker 1: that you know, Deutsche Bank amongst others are still standing
Speaker 1: this Monday morning. I don't think we're quite out of
Speaker 1: the woods. Yet you know, I guess part of it
Speaker 1: is there's a bit of a sentiment swing. Everybody has
Speaker 1: gotten super bearish, and you know, rates rallied really really aggressively,
Speaker 1: and everything seems to be a little bit calmer right now.
Speaker 1: So there's probably a bit of a technical now pointing
Speaker 1: towards the positive direction. That being said, I mean, our
Speaker 1: position has always been that when the FED tightens aggressively,
Speaker 1: it exposes the excess leverage the risk in the system,
Speaker 1: and that is going to cause things to break, and
Speaker 1: we've certainly had an element of that. It feels like
Speaker 1: people are having a sort of this polar experience. It's
Speaker 1: either a bipolar experience where it's either the banks are collapsing,
Speaker 1: We're all going straight back to zero and everyone's going
Speaker 1: to just basically hide under their mattresses, or else the
Speaker 1: banks are going to be fine, and then the FED
Speaker 1: eases and then everything's also going to be amazing. It
Speaker 1: seems like both narratives are kind of coming to a
Speaker 1: four right now at a time when by necessity, the
Speaker 1: FED is going to tighten credit conditions in a way
Speaker 1: that we'll have to hurt. So at what point have
Speaker 1: we priced that into the credit spreads, it still are
Speaker 1: below traditional recessionary levels. I think the point you make
Speaker 1: is just highlights how much uncertainty there is in the
Speaker 1: market and how much potential volatility there is to come.
Speaker 1: I mean, we could look at what's discounted for the
Speaker 1: end of the year in terms of FED rate hikes
Speaker 1: and say the markets pricing in give or take a
Speaker 1: hundred basis points excuse me of rate cuts by the
Speaker 1: end of the year, or we could say, well, that's
Speaker 1: actually fifty percent of the market. I thinks there's two
Speaker 1: hundred basis points of rate cuts and the rest who
Speaker 1: think things are unchanged. You know, there's a huge gap
Speaker 1: you'ge spread in the views out there, and I think
Speaker 1: ultimately what that means is you need to be compensated
Speaker 1: more to take risk. You need more risk premium embedded
Speaker 1: in markets, not less. Lisa and SEFA level one, there's
Speaker 1: a point where you passed and I didn't. Accounting asset
Speaker 1: liabil of our bonds are accounted for, and the heart
Speaker 1: of the matter to me, and the magnitude of the
Speaker 1: rate move we've had is held to maturity accounting. Do
Speaker 1: you atroeders have any transparency or vision of the true
Speaker 1: state of held to maturity debt in this crisis or
Speaker 1: is it unknown on a Monday. Well, you're asking me
Speaker 1: to drawback on a few years here at CFA level one.
Speaker 1: But you know, are the big banks certainly are are
Speaker 1: regulated to a different degree than some of the smaller
Speaker 1: regionals that have become known in the headlines more recently.
Speaker 1: And certainly the size of those books were larger in
Speaker 1: our view than those of the major the USG SIPs
Speaker 1: and even some of the larger US regionals. There's there's
Speaker 1: a threshold for when those books need to actually be
Speaker 1: marked to marketed and when they don't on what needs
Speaker 1: to be reported in terms of unrealized losses. So you know,
Speaker 1: I guess the bottom line for US is you have
Speaker 1: to know what you own, and you have to know
Speaker 1: what those on the books of those types of issuers.
Speaker 1: And this is where credit analysts really come into the
Speaker 1: four because this is the type of environment where things
Speaker 1: like that are exposed, and we've certainly seen that over
Speaker 1: the last three weeks. I look, Lisa at the opportunity
Speaker 1: for issues here. We saw genormous healthcare issuance last week.
Speaker 1: Do you and Schroeder's think we'll see a lot of
Speaker 1: issues out there. I mean there's certainly the last couple
Speaker 1: of weeks there's been almost there's been a very very
Speaker 1: light um, So we do think that there's a lot
Speaker 1: of pent up issuance waiting to come. Markets stay like this,
Speaker 1: I think we'll see a good deal of issuance. It's
Speaker 1: interesting some of the healthcare issues that you mentioned actually
Speaker 1: have performed quite well despite all of the volatility, So
Speaker 1: it does show that there's still a bid for for
Speaker 1: defensive healthcare pharma type names. I think that that does
Speaker 1: tell you something about how the market's going to respond
Speaker 1: to future issuance as well, which dislocation over the past
Speaker 1: couple of weeks, were you taking advantage of Lisa, I
Speaker 1: know that you think that perhaps you need to have
Speaker 1: a greater risk premium, But are there any areas where
Speaker 1: there's enough baked in that you think this is an
Speaker 1: attractive moment? Oh? Absolutely. I mean we were fairly defensive
Speaker 1: coming into this, and so there has been opportunity in
Speaker 1: our view and agency mortgages, there's some opportunity, and I
Speaker 1: think in the banking sector, you know, some of the
Speaker 1: higher rated senior us G sibs, I think that we've
Speaker 1: seen some opportunity there over the last couple of weeks,
Speaker 1: particularly in the more fraught moments, some of the higher
Speaker 1: quality industrials, the more defensive names as I as I
Speaker 1: alluded to with healthcare, there's you know, the whole market
Speaker 1: has cheapened. The whole market isn't worse worth less, there's
Speaker 1: certainly diamonds in the rough, if you will, and so
Speaker 1: it's about spotting those for in our view right now,
Speaker 1: you still want to air on the more defensive side.
Speaker 1: Generally speaking, we still think there's more volatility to come in,
Speaker 1: probably in credit spreads. You know, we might be in
Speaker 1: for a little bit of a tactical bounce. As we
Speaker 1: said here, more market feels a little bit firmer today
Speaker 1: and certainly people have gotten off sides and whipside with
Speaker 1: these moves. But there's absolutely opportunity emerging. Harby, thank you
Speaker 1: so much. Now we go to the Atlantic, to the
Speaker 1: northern climbs of Maine and Gerard Cassidy, he's been such
Speaker 1: an advantage to us with RBC capital markets on the banks.
Speaker 1: Is it all quiet on the Cassidy front today, Girard?
Speaker 1: I mean, are we beyond the crisis. I don't buy
Speaker 1: it for a minute, Tom. I think the quiet the
Speaker 1: crisis has really quieted down, and I think as the
Speaker 1: deposit flight has pretty much I think we're going to
Speaker 1: find by the end of this week and slowed down
Speaker 1: to a trickle. You know, the numbers came out as
Speaker 1: you probably saw it late last week, and the deposit
Speaker 1: outflow from the smaller banks was not that material. That
Speaker 1: was less than two percent. It was far less than
Speaker 1: I think some of the folks were thinking. And therefore
Speaker 1: it is calming down. And you saw, of course that
Speaker 1: Silicon Valley. The FDAC was able to sell that over
Speaker 1: the weekend to First Citizens. So both of the failed
Speaker 1: banks have now been sold to private banks or banks
Speaker 1: that are publicly traded. So we're moving in the right direction.
Speaker 1: Isn't the all clear signal? Tom? Probably not, but we're
Speaker 1: getting darn close. Do you think Tar, that the calls
Speaker 1: for deposit insurance at a more generalized scale were overblown
Speaker 1: over the past few weeks, that the need for that
Speaker 1: kind of backstop and certainty was overstated. Lisa, thank you
Speaker 1: for saying that. I couldn't agree with you more. I
Speaker 1: think what people are finding out is that most depositors
Speaker 1: have confidence in their banks. And that being said, when
Speaker 1: you break down the size of our banks less than
Speaker 1: one hundred million in assets or less than ten billion
Speaker 1: in assets, the majority of those deposits in those banks
Speaker 1: are already insured by the government because they're less than
Speaker 1: two d and fifty thousand dollars. That doesn't mean they
Speaker 1: may not look at a revision of lifting up the
Speaker 1: deposit insurance levels at some point. But I think it
Speaker 1: was to your point, overblown over and that was part
Speaker 1: of this whole problem was Unfortunately it's spread like wildfire
Speaker 1: on social media, and I think that's one of the
Speaker 1: biggest issues that has to be addressed as we go forward.
Speaker 1: So there's a conflation here. On one hand, you have
Speaker 1: the potential for bank runs, right, and that was something
Speaker 1: that really spurred the immediate kind of concern. But then
Speaker 1: there's this question of just deposit flight that a lot
Speaker 1: of people are withdrawing their money from banking accounts just
Speaker 1: generally in order to go into money market funds and
Speaker 1: other higher interest paying rates. And this is the issue
Speaker 1: because you're seeing small banks, according to the data, loose deposit.
Speaker 1: It's a much faster clip than larger banks. So at
Speaker 1: what point is that the real problem. It's a profitability problem,
Speaker 1: and it's a competition problem as well as a lending one.
Speaker 1: I would say that the mix is changing to your point,
Speaker 1: When you look at the data from the Federal Reserve,
Speaker 1: you'll notice that something what they referred to as other deposits,
Speaker 1: which are generally the non interest bearing or low interest
Speaker 1: bearing deposits, have falling more aggressively. Both of the large
Speaker 1: banks and small banks since Race have started to go higher.
Speaker 1: What they've replaced that with, though, is time deposits, So
Speaker 1: CDs that you know, Tom might remember back in the
Speaker 1: eighty you could get a CD for you know, thirteen
Speaker 1: percent twelve months. Those those types of instruments are coming back,
Speaker 1: and believe it or not, at least back in the
Speaker 1: nineteen eighties, fifty percent of bank funding was with CDs.
Speaker 1: As at the fourth quarter it was less than ten percent.
Speaker 1: So the mix is changing. What I remember about the
Speaker 1: nineteen eighties Gerard Cassidy is you had a haircut and
Speaker 1: a beard like Bob seeger. That's what I really remember there,
Speaker 1: you know. Well, the smartest tweet this weekend was from
Speaker 1: the Giant or Chicago Jim Bianco where he said, look,
Speaker 1: it's a five percent world. Everybody get over it. How
Speaker 1: does the profitability of the RBC capital market stocks you follow,
Speaker 1: how does the profitability change in Bianco's five percent world?
Speaker 1: Tommy really comes down to, once again, the mix of deposits.
Speaker 1: And for the banks who've been working very hard and diligently,
Speaker 1: you know, for the last twenty years and growing those
Speaker 1: cheap core consumer deposits, the five percent world is very profitable.
Speaker 1: What investors they know now but six months ago people
Speaker 1: who weren't looking at the right side of a bank's
Speaker 1: balance sheet that was fifteen years ago when rates will higher.
Speaker 1: But when you have checking account deposits of consumers and
Speaker 1: they're basically the consumers operating account, banks don't need to
Speaker 1: paint the interest on it because the benefits they're giving
Speaker 1: to the consumer are obviously the ease of use and
Speaker 1: as well as making payments, et cetera. So the point is,
Speaker 1: in a five percent world, if you have the right
Speaker 1: deposit mix, like a Brain Morning and over a Bank America,
Speaker 1: this is very positible for a company like that. Let's
Speaker 1: get a window here into the world. The Cuts wrote
Speaker 1: world a securities analysis in banking. Keith Horowitz is City
Speaker 1: Group Gerrid. I mean, you know Keith works suspect. We
Speaker 1: all know that he goes out and he puts a
Speaker 1: bye today on M and T a Buffalo the best
Speaker 1: run bank in America. I'm not out of tooralizing there, Girard.
Speaker 1: You've got a moonshot on MTB. What will be the
Speaker 1: catalyst for Horowitz is strong By and you're strong By
Speaker 1: on MTB to work out how do you get the
Speaker 1: moonshot on a Buffalo bank? Exactly for that reason time
Speaker 1: you want the slow growth, steady eddies are that are
Speaker 1: funded by these cheap cored deposits. Mnt IS probably has
Speaker 1: one of the best deposit bases. They have the Grandma
Speaker 1: and Grandpa deposit up in Watertown, New York that has
Speaker 1: five thousand dollars in it. That money's not moving to
Speaker 1: Marcus and as a result, they don't need to pay
Speaker 1: up for it. But second, you also have a company
Speaker 1: that never extended its duration like its peers in its
Speaker 1: securities portfolio, and therefore they're earning far more in that portfolio.
Speaker 1: And then third you might remember Tom they close on
Speaker 1: the People's acquisition just over a year ago and the
Speaker 1: cost savings from that acquisition will also drive earnings, so
Speaker 1: they have three drivers. And then lastly, they have one
Speaker 1: of the few banks that has excess capital. They've been
Speaker 1: a great steward of shareholders capital and then going to
Speaker 1: return the access capital through buybacks. We got to leave it.
Speaker 1: They're hugely beneficial. Lisa's right now to buy ticket on Fortress.
Speaker 1: Wilmer's right now. Gerard Cassidy with RBC Capital marks right
Speaker 1: now joining us Torsten Slack, chief economist Apollo Global Management.
Speaker 1: I really want to emphasize that Torston, with his work
Speaker 1: at Deutsche Bank over the years and of course at
Speaker 1: OECD in Paris, gives a global view to the US trauma.
Speaker 1: Right now. You are known for one paragraph, one chart.
Speaker 1: What's the one paragraph, the one chart that matters for
Speaker 1: Tuesday morning? Well, what matters the most really at the
Speaker 1: moment is, as Lisa was just saying, the uncertainty about
Speaker 1: what is the behavioral reaction going to be in the
Speaker 1: regional banks and the banking sects are more broadly as
Speaker 1: a result of what we're seeing at the moment, Because
Speaker 1: everything we're seeing on our Bloomberg screens tells you that,
Speaker 1: oh maybe this is just the modest tightening in financial conditions.
Speaker 1: Maybe the f OS bank funding car spread is out
Speaker 1: about forty fifty basis points. But what we don't know
Speaker 1: is the second order effect, name what is the behavioral
Speaker 1: change going to be in terms of lending standards. Is
Speaker 1: it going to be harder to get a loan, to
Speaker 1: buy a car, to buy a house, to buy commercary estate,
Speaker 1: to buy anything for consumers and for corporates. And as
Speaker 1: a result of that, it is really still a bit
Speaker 1: unknown exactly how deep this is going to be. Well, okay,
Speaker 1: I get the idea there's unknowns here, But to me
Speaker 1: what we may end up is not only maybe not
Speaker 1: a worry about concentration of banking, but you know what,
Speaker 1: We're going to clear the market, remove the people that
Speaker 1: couldn't make it from zero to five percent, and we'll
Speaker 1: be stronger after the fact. Is that the Apollo view, No,
Speaker 1: so they of course outlook here is mainly driven by
Speaker 1: the uncertainty about what is the response going to be
Speaker 1: in terms of how much title lending consistent conditions will be.
Speaker 1: So if you look at the quantitative response in terms
Speaker 1: of pricing, I can see that on my Bluemberg screen,
Speaker 1: and that clearly shows that financial conditions are tighter and
Speaker 1: borrowing cost and funding costs for banks are higher. But
Speaker 1: if you then start to do small regressions and think about, well,
Speaker 1: what does the tightening in lending standards that we saw
Speaker 1: in twenty twenty, which is where the frayes spread is,
Speaker 1: if that corresponds to what we're seeing today, then you
Speaker 1: might have more coming in terms of effectively be a
Speaker 1: higher fait funds rate relative to what we have seen
Speaker 1: in the data. He's the only guy I know that
Speaker 1: actually understands the BTMM screen. I mean, that's what he's
Speaker 1: talking there with fr aois the sofur s o fr
Speaker 1: which Iris says is the new library. It's all Greek
Speaker 1: to me, but there it is. This is the issue
Speaker 1: though for central bankers. They don't know how much additional
Speaker 1: tightening is being sort of implied into the market through
Speaker 1: a tightening and landing standards, And so if they're in
Speaker 1: the dark as well, if they don't have a clear
Speaker 1: sense of this, and the actual data that we're getting
Speaker 1: keeps on being strong, what's to stop them from continuing
Speaker 1: to hike in spite of all of the naysayers in
Speaker 1: the market that's screaming for rate cuts. You're absolutely right.
Speaker 1: I mean, the whole situation here is a function of
Speaker 1: data dependency. The data dependency if you say I only
Speaker 1: look at the incoming data, then you are by definition
Speaker 1: backward looking. So if, of course there's a lot of
Speaker 1: uncertainty about what's coming in the future, and you don't
Speaker 1: know how to quantify that, and no one knows that
Speaker 1: at this point we all have to guess what are
Speaker 1: the implications of this, then the risks are motilded to
Speaker 1: the downside. But what they're fit and the ECB and
Speaker 1: all central banks around the world are not waiting for.
Speaker 1: Is this going to slow down the data? Jobless claims
Speaker 1: going to go up every Thursday for the coming weeks.
Speaker 1: Will we also see nonfun payrolls begin to slow down.
Speaker 1: We've already seen durable goods and capics begin to slow down.
Speaker 1: But the bottom line is that we already had a
Speaker 1: slow downcoming because of the lack defects of fit hikes.
Speaker 1: Now we're adding onto that a banking crisis, and that
Speaker 1: of course increases the risks that this lowdown is going
Speaker 1: to be fastest. Is it fair to call what we
Speaker 1: have experienced a banking crisis, and this is really a
Speaker 1: question that people are trying to wrestle with. Or a
Speaker 1: time when we seem to see stability and there are
Speaker 1: certain specific banks that had specific risks that blew up
Speaker 1: and now we see ongoing sense of resilience. Is it
Speaker 1: fair to call it a banking crisis it's going to
Speaker 1: materially tighten lending conditions. Well, it's fair in the sense
Speaker 1: that we have seen bank runs, and a bank run
Speaker 1: is normally the number one characteristic of a banking crisis.
Speaker 1: But what is very unusual is that this banking crisis
Speaker 1: is not like normal banking crisis. A normal banking crisis,
Speaker 1: it's because of credit lasses on the a liquid part
Speaker 1: of books. Now we're actually seeing lasses not on the
Speaker 1: credit side, but on the most liquid side of banks books,
Speaker 1: namely and treasuries. So in that sense, we have basically
Speaker 1: never before had a banking crisis in a strong economy,
Speaker 1: and that's really unusual. So what's the distinction between a
Speaker 1: liquidity crisis where it's just to posits being withdrawn and
Speaker 1: a credit crisis? When is a liquidity crisis become a
Speaker 1: credit crisis? So that's exactly why. What matters now is
Speaker 1: how the bank's going to respond to this liquidity crisis.
Speaker 1: Are they going to say it doesn't matter, We're just
Speaker 1: going to lend more, or are the three head winds
Speaker 1: they're facing from higher funding costs, also more regulatory scrutiny,
Speaker 1: and also ultimately and look at assets in a different way.
Speaker 1: Is that going to make them hold back? And if
Speaker 1: they do begin to hold back, the risk of causes
Speaker 1: that this could magnify this low downa is already. Let's
Speaker 1: not forget we were even debating a few months ago, Oh,
Speaker 1: this will be a hot landing even without a banking situation.
Speaker 1: It's completely inappropriate for me to ask you about Deutsche Bank.
Speaker 1: But there I wasn't Davos standing with you and mister
Speaker 1: saving long ago and far away as he was coming
Speaker 1: in to salvage the bank away from Deutsche Bank. Explain
Speaker 1: to our American audience why European financial banking dynamics are
Speaker 1: so different and original from the American model. Well, there's
Speaker 1: a lot of academic studies that show you that the
Speaker 1: deposit BEZA in other words, how sensitive deposits are to
Speaker 1: interest rates, has tended to be lower in Europe. So
Speaker 1: that means also therefore that the propensity to move money
Speaker 1: quickly in and out of your accounts, like we're seeing
Speaker 1: in the weekly data from the FIT last Friday in
Speaker 1: the US, where money was moved from small banks about
Speaker 1: one hundred and twenty billion outflow to sixty billion in
Speaker 1: flows to last banks. That has basically a most significant,
Speaker 1: more pronounced effect in the US restive to what we
Speaker 1: see in Europe. Over the weekend, the Financial Times did
Speaker 1: a full treatment of the Swiss culture in their banking
Speaker 1: and again it was seventy eight percent or whatever. The
Speaker 1: Swiss people are dead set against this mating of these
Speaker 1: two banks, not on those two banks. But do the
Speaker 1: people of Europe have a voice in this or is
Speaker 1: it the elites, the elites above high they get to
Speaker 1: fix EU banking well. One very important difference between the
Speaker 1: US and the European banking sector is that the European
Speaker 1: banking sector is much more dominant. In other words, we
Speaker 1: have a bank driven finance. Last night stunning and at
Speaker 1: least stunning the first thing I joined with at the
Speaker 1: IMF in the early at nineteen nineties. But the conclusion
Speaker 1: is that it is very important conclusion that US has
Speaker 1: a market based financial system. Europe has a bank based
Speaker 1: financial system. And when you have a more bank based
Speaker 1: financial system, the banks just play a more important role.
Speaker 1: And whereas in the US. Remember in the US, the
Speaker 1: vast majority of credit in the US to the private
Speaker 1: sector comes from outside the banks, and that's very important
Speaker 1: because that of course means that the markets play a
Speaker 1: much more significant role. US financial system is much more diversified.
Speaker 1: If you want financing as a company, you could basically
Speaker 1: go to many more sources in the US than you
Speaker 1: can in Europe. So there are two different things here.
Speaker 1: There's less deposit data in Europe than there is in
Speaker 1: the US, but there is of greater dependency on banks,
Speaker 1: So that's more susceptible. It's an economy, it's more susceptible
Speaker 1: to issues in the banking system. So if there is
Speaker 1: no issue in the banking system, if Credit Suite was
Speaker 1: a troubled bank that had been troubled for a long
Speaker 1: time that came to a head on a number of
Speaker 1: different issues, then is lending going to remain stronger and
Speaker 1: thus foster a stronger economy in Europe than the US,
Speaker 1: which is more susceptible to market pricing it's moving quick. Well,
Speaker 1: that's correct, But the issue here is also what is
Speaker 1: the behavioral change going to be not only in US
Speaker 1: regional banks, but in banks globally. And that's why if
Speaker 1: you do have a behavioral change where banks globally do
Speaker 1: begin to pull a bit back, then in a more
Speaker 1: bank based economy you would expect a more negative effect
Speaker 1: simply because the banks are playing a pio role. That's
Speaker 1: why the diversification of the US financial system that you
Speaker 1: have so many more different places to go. If we
Speaker 1: were a company we wanted to forget financing, we could
Speaker 1: go to a bank. If that said no, well then
Speaker 1: we could go to bank markets, to venture capital, to
Speaker 1: private capital, to private credit, to private equity. There's so
Speaker 1: many more places to raise funds in US financial markets,
Speaker 1: which is really the beauty of US capital markets that
Speaker 1: they are so much more diversified and therefore more able
Speaker 1: to provide the financing. It is very important that Bloomberg
Speaker 1: Surveillance to spend our tradition for decades that we try
Speaker 1: to capture the zeitgeist among the adults in the room
Speaker 1: this week, and Jason Furman, who has to speak to
Speaker 1: act ten in the room at Harvard said shut up
Speaker 1: and read it, and basically shut up and read it
Speaker 1: is the new to quote Furman. Professor Furman phenomenal and
Speaker 1: hard hitting essay by Adam Posen of the Peterson Institute.
Speaker 1: Doctor Posen is definitive on German culture. Doctor Posen is
Speaker 1: definitive of synthesizing together American policy in our economics. Adam Posen,
Speaker 1: I want to begin, first of all with buried in
Speaker 1: your wonderful paragraph by paragraph article, is that Trump Biden
Speaker 1: trade policy gives us the risk of losing American jobs.
Speaker 1: I thought we were gaining jobs by Intel factories from
Speaker 1: sea to shining sea. Fraid not, Tom, Initially you might
Speaker 1: gain a few. Thank you so much for the intro
Speaker 1: for having me today on surveillance. The issue is, first,
Speaker 1: we've only got a finite number of skilled workers people
Speaker 1: from these companies Intel, Qualcom, TSMC, Tokyo, Electron. They don't
Speaker 1: have the American workers here who can do the job,
Speaker 1: and if they do, they have to hire them away
Speaker 1: from someplace else. It's not like skilled engineers are unemployed
Speaker 1: in the US right now. We need an immigration to
Speaker 1: get that up. Second, if you put all this stuff
Speaker 1: and you force it to be built here at higher expense,
Speaker 1: then what you get is less competitiveness for the rest
Speaker 1: of the country. They're going to be paying more for semiconductors,
Speaker 1: they're going to be paying more for equipment, and that's
Speaker 1: fine if you think it serves some goal, but it's
Speaker 1: certainly gonna hurt jobs. And third, you're never going to
Speaker 1: export any of this, because what you're doing is you're
Speaker 1: bringing stuff home, so to speak, in order to make
Speaker 1: it uncompetitive. We've sort of done this with turning NAFTA
Speaker 1: into USMCA. We've increased the rules of origin, meaning more
Speaker 1: domestic content and as a result, fewer exports. So on
Speaker 1: that this is not a job's creation program. Someone who
Speaker 1: was definitive on this strength of the Peterson Institute was
Speaker 1: William Klein. All of our debate, including GOP and Democrats,
Speaker 1: is simplistic bilateral tension. And William Klein had the courage
Speaker 1: to say, you've got to think multilateral and differential bilateral
Speaker 1: of Singapore in China, Singapore in Mexico, Mexico and South Korea.
Speaker 1: How naive are we in a simplistic China US study. Well,
Speaker 1: Bill is right, and I'm trying to make the same
Speaker 1: kind of case that there's what hemon is called general equilibrium,
Speaker 1: but in international relations that the US cannot simply say
Speaker 1: we do this. You have to play along and no
Speaker 1: one's going to react. Other countries you mentioned Singapore, South Korea, Mexico, Australia, India,
Speaker 1: they have agency, they do not just have to passively
Speaker 1: deal with whatever the US does. And if the US
Speaker 1: decides to play hardwall to make them play along, then
Speaker 1: we become a police force, make enemies. So it's not
Speaker 1: a viable strategy. I wouldn't ascribe it to naivete. I
Speaker 1: describe it to overconfidence and ideological blinders and mc gunpoint.
Speaker 1: Years ago, I was forced to read Ricardo eighteen seventeen
Speaker 1: cover to cover and to be honest, folks, David Ricardo,
Speaker 1: who is so much of this based off of in
Speaker 1: eighteen seventeen? You know it's a tough read. It's there's
Speaker 1: some distance to it centuries ago and imposing our trade
Speaker 1: policy is based from a distance and maybe Bretton Woods,
Speaker 1: maybe the middle twentieth century. Do we need a new
Speaker 1: trade policy for a more open technological world. We need
Speaker 1: a new trade policy in the US because we haven't
Speaker 1: been open. The rest of the world's continue to open up,
Speaker 1: continue to do more trade, more investment, and as I
Speaker 1: argued in a Foreign affairs piece a couple of years ago,
Speaker 1: US has been deglobalizing basically since NAFTA, certainly since two
Speaker 1: thousand and So all this blaming everything on the China
Speaker 1: shock doesn't make any sense, because every other country was
Speaker 1: exposed to the China Shock and they continued to grow
Speaker 1: or they had the same decline in manufacturing jobs. You
Speaker 1: mentioned Germany. We did a look at North Rhine Westfallen,
Speaker 1: the Ohio of Germany compared it directly with Ohio. They
Speaker 1: lost more manufacturing jobs than we did, despite their trade surplus,
Speaker 1: despite all these things that the Americans claimed the Germans did.
Speaker 1: And so our trade policy isn't the problem. It's our
Speaker 1: politics that is the problem, that refuses to recognize that
Speaker 1: America can't have everything it wants and that some people
Speaker 1: in rural manufacturing jobs have to adjust, like the people
Speaker 1: who've been in services in cities have adjusted through the years.
Speaker 1: Can there be a middle ground in Washington on trade
Speaker 1: or do we just need to live to the polarity
Speaker 1: that we've seen for the last eight, nine, ten years.
Speaker 1: I'm not sure. This is one of the few issues
Speaker 1: taught where I don't think it's an issue of polarity.
Speaker 1: I think it's large part of the Democratic Republican Party
Speaker 1: have come together. It's no, no, it's fine. But I
Speaker 1: mean just to say the extremism is the majority position,
Speaker 1: and just as on other issues like communism in the
Speaker 1: fifties at home, like environmental issues before the seventies, like
Speaker 1: civil rights. I don't mean to say this is on
Speaker 1: a par with those, but just to say, congress and
Speaker 1: popular views sometimes are wrong. We have to confront that
Speaker 1: these views, even if popular and widespread, are wrong. Adam,
Speaker 1: you lead with America's zero sum economics. I mean this
Speaker 1: is like Chad Jones out on the West Coast talking
Speaker 1: to a solo one oh one. I mean, how do
Speaker 1: we get away from what we all intuitively understand it's
Speaker 1: not a good thing, zero sum economics? How do we
Speaker 1: get back to something constructive off of Solo nineteen fifty seven?
Speaker 1: Great question. I think there's two tracks. One is we
Speaker 1: have to be more aggressive about confronting China and others
Speaker 1: in the diplomatic and military space. This a whole part
Speaker 1: of the whole trade issue. Is people in foreign policy
Speaker 1: security not wanting to do the dangerous and hard work
Speaker 1: on the security side and hoping they can sub economics
Speaker 1: for it. But it doesn't work. It's not that economics
Speaker 1: is more important, it's just it doesn't work. So beef
Speaker 1: up the security side, pick up few technologies. Really cram
Speaker 1: on that. The second side, as you said, is solo
Speaker 1: esque or Robert Gordon or anything like that. Huge public investment, yes,
Speaker 1: not industrial policy to exclude other countries, not industrial policy
Speaker 1: to maximize production at home, but made by America instead
Speaker 1: of made in America. Money towards R and D, money
Speaker 1: towards education, money towards supporting standards that let us get
Speaker 1: innovation from the free world. Those are the two tracks
Speaker 1: I would go on for buy Americans that have made
Speaker 1: in America. And I'm posing wonderful to get started here
Speaker 1: on our IMF coverage here, And of course it's article folks,
Speaker 1: I really can't say enough about. Don't listen to me,
Speaker 1: listen to Professor ferman up At However, to America, zero
Speaker 1: sum economics doesn't add up. It is without question the
Speaker 1: read of the weekend from Adam Posen of the Peterson
Speaker 1: Institute Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
Speaker 1: and anywhere else you get your podcasts. Listen live every weekday,
Speaker 1: starting at seven am Eastern. I'm Bloomberg dot Com, the
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Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and
Speaker 1: this is Bloomberg