WEBVTT - Surveillance: Elevated Risks with Wilson 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.040 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:32.120 the Bloomberg Terminal, and the Bloomberg Business App. Michael Wilson 0:00:32.200 --> 0:00:36.040 joins us now. He's Chief US Equity Strategists in CIO 0:00:36.120 --> 0:00:38.080 at Morgan Stanley. Of course, many of you are in 0:00:38.120 --> 0:00:40.840 Global Wall Street hang on every word if you agree 0:00:41.360 --> 0:00:44.800 or disagree. Mike, I see a massive polarity in the 0:00:44.840 --> 0:00:48.479 equity markets right now. It's a select group of halves 0:00:48.600 --> 0:00:52.199 in everybody else dragging along looking for the next narrative. 0:00:52.440 --> 0:00:56.480 Am I right on that polarity? Yeah, that's right to 0:00:56.320 --> 0:00:58.200 the Tom. I mean, you know, you guys are talking 0:00:58.200 --> 0:01:01.400 about the bondom markets volatility here recently, we've been focused 0:01:01.440 --> 0:01:03.160 on that too. We think that, you know, the bottom 0:01:03.200 --> 0:01:06.000 market is sort of jumping ahead of what the FED 0:01:06.120 --> 0:01:08.200 is saying, and that's the first time we've really seen 0:01:08.319 --> 0:01:11.240 that in quite a while meaning that the bottom market 0:01:11.319 --> 0:01:14.600 is somewhat you know, dismissing the feed stop plot, which 0:01:14.600 --> 0:01:18.280 I find interesting because I think the equity market may 0:01:18.480 --> 0:01:20.520 start to do that too. And it's already happening under 0:01:20.560 --> 0:01:23.800 the circus as you alluded to, meaning small cap stocks 0:01:23.800 --> 0:01:26.200 and anything that's sort of viewed as lower quality or 0:01:26.480 --> 0:01:30.840 will have challenging it needs capital availability is being punished, 0:01:30.880 --> 0:01:33.480 and then we're left with the twenty stocks kind of 0:01:33.480 --> 0:01:36.959 carrying today. I mean the twenty stocks carrying today screams 0:01:37.000 --> 0:01:39.399 the roll up I've been talking about for six seven, 0:01:39.480 --> 0:01:42.560 eight months with the interest rate regime that you studied 0:01:42.600 --> 0:01:46.560 at Michigan a few years back. With that said, is 0:01:46.560 --> 0:01:48.720 it a return to what you and I knew years 0:01:48.720 --> 0:01:53.160 ago or is this a new higher interest rate regime 0:01:53.880 --> 0:01:57.040 for the stock market? Well, I think it's a little 0:01:57.040 --> 0:01:59.600 bit of both. I think what it really is it's 0:01:59.640 --> 0:02:02.760 just a much less predictable world. And this has been 0:02:02.760 --> 0:02:04.480 our theme for the last couple of years, is that 0:02:04.520 --> 0:02:08.519 we're entering a period of higher economic volatility. Right. The 0:02:08.600 --> 0:02:11.919 last twenty years has been a world of repression where 0:02:11.960 --> 0:02:14.679 you know, all of these metrics were somewhat predictable, and 0:02:14.800 --> 0:02:17.600 that's you know, that's for companies, that's for the FED itself, 0:02:17.600 --> 0:02:20.639 that's for investors. And now we're entering a world where 0:02:20.639 --> 0:02:24.320 it's just not as predictable, and that means higher risk premiums, 0:02:24.320 --> 0:02:27.200 whether we're talking about credit, whether we're talking about term 0:02:27.240 --> 0:02:30.440 premium in the bomb market, or we're talking about equity 0:02:30.520 --> 0:02:33.240 risk premium. In our view, you know, I think people 0:02:33.240 --> 0:02:35.120 are operating as if we're going to go back to 0:02:35.120 --> 0:02:37.960 that predictable world, and that's I think misplaced. A lot 0:02:38.000 --> 0:02:40.880 of people have been reading your prognostications of lower earning 0:02:40.960 --> 0:02:45.000 multiples for week after week after week, the latest from you. 0:02:45.160 --> 0:02:47.440 Given the events of the past few weeks, we think 0:02:47.480 --> 0:02:50.519 guidence is looking more and more unrealistic, and equity markets 0:02:50.560 --> 0:02:53.280 are at greater risk of pricing in much lower estimates 0:02:53.280 --> 0:02:57.079 ahead of any hard data changes. Mike, given that you've 0:02:57.120 --> 0:02:59.080 been saying this for a while, and given the fact 0:02:59.080 --> 0:03:01.120 that we have content I need to see resilience in 0:03:01.160 --> 0:03:03.840 equities that refuse to go down, how do you push 0:03:03.840 --> 0:03:05.960 back and say you guys are going to wake up. 0:03:05.960 --> 0:03:08.280 It might not be yet even if we get disappointing earnings, 0:03:08.280 --> 0:03:11.560 but you will, well, look, we try to navigate that 0:03:11.680 --> 0:03:14.080 inside the equity market, right, So, I mean last year 0:03:14.120 --> 0:03:16.920 we saw a pretty big degradation and multiples, but as 0:03:16.919 --> 0:03:20.200 we pointed out again today, all that was due to 0:03:20.320 --> 0:03:23.080 higher interest rates. None of it was due to higher 0:03:23.160 --> 0:03:25.920 risk premium, which is the part of the multiple that is, 0:03:26.040 --> 0:03:29.560 you know, pricing in what growth is going to be. Now, 0:03:29.600 --> 0:03:31.800 I would push back on the pushback, which is that 0:03:31.880 --> 0:03:35.880 the market is starting to revalue or devalue. What I 0:03:35.920 --> 0:03:38.960 would say the companies that are most at risk of 0:03:39.080 --> 0:03:43.240 missing estimates, as I mentioned earlier, you know, lower quality companies, 0:03:43.560 --> 0:03:46.480 more cyclical companies, smaller cap companies that are going to 0:03:46.520 --> 0:03:48.080 have a hard time with you know, what's going on 0:03:48.120 --> 0:03:51.040 in the regional banking system. So it is happening, it's 0:03:51.040 --> 0:03:53.240 just you know, it takes a little bit longer, and everybody, 0:03:53.480 --> 0:03:56.680 you know, kind of focuses on the SMP five hundred 0:03:56.840 --> 0:03:59.760 or maybe NASHDAC one hundred as these kind of you know, 0:04:00.000 --> 0:04:03.880 ashons of safety. And that's true until it's not. Well, Okay, 0:04:03.880 --> 0:04:05.760 so let's talk about the repricing. Last year we were 0:04:05.760 --> 0:04:08.240 talking about big tech, and this year the repricing has 0:04:08.240 --> 0:04:10.480 been in the opposite direction. I'm looking right now at meta. 0:04:10.560 --> 0:04:13.720 Facebook shares up more than seventy one percent so far 0:04:13.960 --> 0:04:16.120 year to date, Apple shares up more than twenty percent. 0:04:16.120 --> 0:04:19.360 I mean, basically, pick your pick your poison, and it's 0:04:19.480 --> 0:04:22.480 up dramatically. How do you push back against this, against 0:04:22.480 --> 0:04:25.160 the recoveries of the names that supposedly we're going to 0:04:25.200 --> 0:04:28.400 come out to pressure in a higher rate world. Well, 0:04:28.440 --> 0:04:30.159 I think you said it right. I mean, these companies 0:04:30.200 --> 0:04:33.240 took their punishment last year because they were, you know, 0:04:33.320 --> 0:04:35.800 part of the tip of the spear in terms of 0:04:35.839 --> 0:04:38.599 you know, valu wishes out of bounds when when rates 0:04:38.600 --> 0:04:41.599 went up, they took it first. And you could argue 0:04:41.680 --> 0:04:44.560 that a lot of those groups are you know, stocks 0:04:44.560 --> 0:04:48.400 and sectors that they're in our intercession already right there. 0:04:48.480 --> 0:04:51.200 That's the area we are seeing layoffs. That's the area 0:04:51.279 --> 0:04:54.839 we are seeing retrenchment on costs. And I think the 0:04:55.120 --> 0:04:58.440 I think the debate now, Lisa, is have those companies 0:04:58.480 --> 0:05:01.359 cut costs and got and in front of it enough 0:05:01.480 --> 0:05:04.640 where they can now see earnings growth again. I think 0:05:04.640 --> 0:05:08.120 there's some appetite for that view. That's not argue. Argue 0:05:08.240 --> 0:05:10.240 is that there's going to be probably be more cost 0:05:10.320 --> 0:05:13.560 cutting in that space because the malinvestment was just so egregious, 0:05:13.760 --> 0:05:16.200 and the over earning was even worse. So I think 0:05:16.240 --> 0:05:18.280 it's just going to be kind of a drip, drip drip. 0:05:18.440 --> 0:05:21.200 You know. My suspicion is markets tend to figure this 0:05:21.240 --> 0:05:24.320 out ahead of the actual numbers coming down. And because 0:05:24.360 --> 0:05:27.359 the bomb market just repriced itself overnight, we think that 0:05:27.480 --> 0:05:30.039 risk pretty equity market is elevated now more than it's 0:05:30.040 --> 0:05:32.000 been for the last six or twelve months. Mike, You've 0:05:32.040 --> 0:05:34.240 been labeled to bear, and I know what it is 0:05:34.320 --> 0:05:36.240 to be labeled to bear. Then people think that everything 0:05:36.279 --> 0:05:38.360 they say is barish, no matter what I'm just saying, 0:05:38.640 --> 0:05:42.080 even when potentially you do get constructive. Are there any 0:05:42.120 --> 0:05:45.159 areas that you think have sufficiently repriced where you're starting 0:05:45.160 --> 0:05:48.520 to see opportunity? Well, look, I mean financials have started 0:05:48.560 --> 0:05:50.560 to reprice in a meaningful way, you know, and now 0:05:50.560 --> 0:05:53.320 all of these companies are going to have problems, you 0:05:53.360 --> 0:05:55.560 know that we're seeing in some of these So yeah, 0:05:55.600 --> 0:05:57.160 I think it's happening. I Mean, the other thing I 0:05:57.160 --> 0:05:58.839 would just point out is that, you know, financials tend 0:05:58.839 --> 0:06:02.160 to lead the overall market, but that's one area for sure. 0:06:02.720 --> 0:06:05.040 Some of the retail and some of the consumer areas 0:06:05.040 --> 0:06:07.120 of repriced. It's been repricing for years. You know, we 0:06:07.240 --> 0:06:09.800 just added a name to our fresh money by listening 0:06:09.800 --> 0:06:12.080 as a retailer. So you know, I think these there 0:06:12.080 --> 0:06:14.720 are definitely areas and markets go through these periods with 0:06:14.800 --> 0:06:18.320 it's called a rolling bear market, rolling reception. We've we've 0:06:18.400 --> 0:06:20.600 kind of I think came out with that view a 0:06:20.600 --> 0:06:22.920 few years ago and now people have used it. But yeah, 0:06:23.000 --> 0:06:24.960 that's the way it works. And you know, we're looking 0:06:24.960 --> 0:06:27.800 for opportunities now at the stock level, but at the 0:06:27.839 --> 0:06:30.360 index level, it just does not look attracted to us. 0:06:30.560 --> 0:06:33.320 Mike Wilson. The thing that's different this time around is 0:06:33.320 --> 0:06:38.040 the pile of money and what's called private equity. Private markets. 0:06:38.520 --> 0:06:41.520 Can they be a catalyst for not like Milken years ago, 0:06:41.640 --> 0:06:45.360 but can they be a catalyst for a roll up 0:06:45.400 --> 0:06:50.000 of all these troubled companies. Well, look, I mean, first 0:06:50.040 --> 0:06:52.240 of all, I don't think there's that many, you know, 0:06:52.360 --> 0:06:55.560 troubled companies. I think we have a situation where evaluations 0:06:55.560 --> 0:06:58.040 are out of bounds and we need to correct that. 0:06:58.560 --> 0:07:01.440 I absolutely think there's ton of cash out there where 0:07:01.440 --> 0:07:05.280 there's private or public money, public money, the meeting asset owners, 0:07:05.279 --> 0:07:07.080 it can come in at the right price, and it will. 0:07:07.680 --> 0:07:09.400 So whatever we're going to get here in the next 0:07:09.440 --> 0:07:12.760 three to six months in terms of finally resetting evaluation 0:07:12.800 --> 0:07:15.600 appropriately getting estimates down, I don't think we're going to 0:07:15.680 --> 0:07:18.000 stay at very very low price levels for a very 0:07:18.040 --> 0:07:20.040 long time. We're not in the camp that we're in 0:07:20.080 --> 0:07:23.880 a secular structural bearer market. This is a cyclical bearer market. 0:07:23.920 --> 0:07:27.200 It has some completion to it. And your question is 0:07:27.240 --> 0:07:30.560 really around is there enough cash and investable funds out 0:07:30.560 --> 0:07:33.120 there to kind of, you know, stabilize things. And I 0:07:33.120 --> 0:07:36.200 think the answer is absolutely yes. Okay, Mike Wilson, thank 0:07:36.200 --> 0:07:38.360 you for the brief this morning, hugely valuable. He is, 0:07:38.400 --> 0:07:52.560 of course, with Morgan Stanley Lisa Hornby ahead of US 0:07:52.680 --> 0:07:55.200 multisector fixed income at shoulders joining us now. Lisa, I 0:07:55.280 --> 0:07:57.760 want to get your sense of what's changed. Have we 0:07:57.840 --> 0:08:00.720 gotten enough stability in the lack of news over the 0:08:00.760 --> 0:08:05.520 weekend to go risk on today? I think possibly temporarily. 0:08:05.520 --> 0:08:07.080 I think there's a bit of a sigh of relief 0:08:07.120 --> 0:08:09.880 that you know, Deutsche Bank amongst others are still standing 0:08:10.440 --> 0:08:13.800 this Monday morning. I don't think we're quite out of 0:08:13.800 --> 0:08:16.400 the woods. Yet you know, I guess part of it 0:08:16.440 --> 0:08:19.720 is there's a bit of a sentiment swing. Everybody has 0:08:19.720 --> 0:08:23.720 gotten super bearish, and you know, rates rallied really really aggressively, 0:08:23.800 --> 0:08:26.920 and everything seems to be a little bit calmer right now. 0:08:26.960 --> 0:08:29.560 So there's probably a bit of a technical now pointing 0:08:29.600 --> 0:08:32.760 towards the positive direction. That being said, I mean, our 0:08:32.800 --> 0:08:36.080 position has always been that when the FED tightens aggressively, 0:08:36.160 --> 0:08:39.840 it exposes the excess leverage the risk in the system, 0:08:39.880 --> 0:08:42.559 and that is going to cause things to break, and 0:08:42.600 --> 0:08:45.840 we've certainly had an element of that. It feels like 0:08:45.920 --> 0:08:49.760 people are having a sort of this polar experience. It's 0:08:49.840 --> 0:08:53.079 either a bipolar experience where it's either the banks are collapsing, 0:08:53.080 --> 0:08:55.440 We're all going straight back to zero and everyone's going 0:08:55.480 --> 0:08:58.720 to just basically hide under their mattresses, or else the 0:08:58.840 --> 0:09:00.680 banks are going to be fine, and then the FED 0:09:00.760 --> 0:09:02.920 eases and then everything's also going to be amazing. It 0:09:02.920 --> 0:09:05.000 seems like both narratives are kind of coming to a 0:09:05.040 --> 0:09:08.000 four right now at a time when by necessity, the 0:09:08.080 --> 0:09:10.520 FED is going to tighten credit conditions in a way 0:09:10.520 --> 0:09:12.720 that we'll have to hurt. So at what point have 0:09:12.840 --> 0:09:15.520 we priced that into the credit spreads, it still are 0:09:15.600 --> 0:09:19.280 below traditional recessionary levels. I think the point you make 0:09:19.440 --> 0:09:22.520 is just highlights how much uncertainty there is in the 0:09:22.559 --> 0:09:25.440 market and how much potential volatility there is to come. 0:09:25.640 --> 0:09:27.480 I mean, we could look at what's discounted for the 0:09:27.559 --> 0:09:29.199 end of the year in terms of FED rate hikes 0:09:29.200 --> 0:09:31.559 and say the markets pricing in give or take a 0:09:31.640 --> 0:09:34.240 hundred basis points excuse me of rate cuts by the 0:09:34.320 --> 0:09:36.800 end of the year, or we could say, well, that's 0:09:36.840 --> 0:09:39.040 actually fifty percent of the market. I thinks there's two 0:09:39.080 --> 0:09:40.840 hundred basis points of rate cuts and the rest who 0:09:40.880 --> 0:09:43.880 think things are unchanged. You know, there's a huge gap 0:09:43.960 --> 0:09:46.280 you'ge spread in the views out there, and I think 0:09:46.360 --> 0:09:49.160 ultimately what that means is you need to be compensated 0:09:49.240 --> 0:09:51.959 more to take risk. You need more risk premium embedded 0:09:52.000 --> 0:09:55.400 in markets, not less. Lisa and SEFA level one, there's 0:09:55.400 --> 0:09:59.320 a point where you passed and I didn't. Accounting asset 0:09:59.440 --> 0:10:03.840 liabil of our bonds are accounted for, and the heart 0:10:03.880 --> 0:10:06.160 of the matter to me, and the magnitude of the 0:10:06.240 --> 0:10:10.960 rate move we've had is held to maturity accounting. Do 0:10:11.080 --> 0:10:15.840 you atroeders have any transparency or vision of the true 0:10:15.960 --> 0:10:20.360 state of held to maturity debt in this crisis or 0:10:20.440 --> 0:10:24.120 is it unknown on a Monday. Well, you're asking me 0:10:24.200 --> 0:10:26.600 to drawback on a few years here at CFA level one. 0:10:26.679 --> 0:10:30.040 But you know, are the big banks certainly are are 0:10:30.080 --> 0:10:33.319 regulated to a different degree than some of the smaller 0:10:33.360 --> 0:10:36.720 regionals that have become known in the headlines more recently. 0:10:36.720 --> 0:10:39.320 And certainly the size of those books were larger in 0:10:39.360 --> 0:10:42.640 our view than those of the major the USG SIPs 0:10:42.640 --> 0:10:45.280 and even some of the larger US regionals. There's there's 0:10:45.320 --> 0:10:49.240 a threshold for when those books need to actually be 0:10:49.280 --> 0:10:51.640 marked to marketed and when they don't on what needs 0:10:51.640 --> 0:10:55.040 to be reported in terms of unrealized losses. So you know, 0:10:55.080 --> 0:10:57.720 I guess the bottom line for US is you have 0:10:57.760 --> 0:10:59.600 to know what you own, and you have to know 0:10:59.640 --> 0:11:02.520 what those on the books of those types of issuers. 0:11:02.520 --> 0:11:06.480 And this is where credit analysts really come into the 0:11:06.520 --> 0:11:10.000 four because this is the type of environment where things 0:11:10.080 --> 0:11:12.559 like that are exposed, and we've certainly seen that over 0:11:12.559 --> 0:11:15.440 the last three weeks. I look, Lisa at the opportunity 0:11:15.440 --> 0:11:19.080 for issues here. We saw genormous healthcare issuance last week. 0:11:19.679 --> 0:11:22.000 Do you and Schroeder's think we'll see a lot of 0:11:22.040 --> 0:11:25.560 issues out there. I mean there's certainly the last couple 0:11:25.600 --> 0:11:27.559 of weeks there's been almost there's been a very very 0:11:27.640 --> 0:11:29.760 light um, So we do think that there's a lot 0:11:29.800 --> 0:11:33.079 of pent up issuance waiting to come. Markets stay like this, 0:11:33.320 --> 0:11:36.120 I think we'll see a good deal of issuance. It's 0:11:36.160 --> 0:11:39.600 interesting some of the healthcare issues that you mentioned actually 0:11:39.600 --> 0:11:42.200 have performed quite well despite all of the volatility, So 0:11:42.240 --> 0:11:44.160 it does show that there's still a bid for for 0:11:44.280 --> 0:11:48.200 defensive healthcare pharma type names. I think that that does 0:11:48.240 --> 0:11:50.880 tell you something about how the market's going to respond 0:11:50.880 --> 0:11:55.040 to future issuance as well, which dislocation over the past 0:11:55.080 --> 0:11:57.760 couple of weeks, were you taking advantage of Lisa, I 0:11:57.800 --> 0:11:59.480 know that you think that perhaps you need to have 0:11:59.520 --> 0:12:02.400 a greater risk premium, But are there any areas where 0:12:02.440 --> 0:12:05.000 there's enough baked in that you think this is an 0:12:05.040 --> 0:12:08.960 attractive moment? Oh? Absolutely. I mean we were fairly defensive 0:12:09.040 --> 0:12:11.880 coming into this, and so there has been opportunity in 0:12:11.920 --> 0:12:14.680 our view and agency mortgages, there's some opportunity, and I 0:12:14.679 --> 0:12:16.560 think in the banking sector, you know, some of the 0:12:16.920 --> 0:12:19.600 higher rated senior us G sibs, I think that we've 0:12:19.640 --> 0:12:22.000 seen some opportunity there over the last couple of weeks, 0:12:22.679 --> 0:12:25.840 particularly in the more fraught moments, some of the higher 0:12:25.920 --> 0:12:28.400 quality industrials, the more defensive names as I as I 0:12:28.400 --> 0:12:31.400 alluded to with healthcare, there's you know, the whole market 0:12:31.440 --> 0:12:35.720 has cheapened. The whole market isn't worse worth less, there's 0:12:35.720 --> 0:12:38.400 certainly diamonds in the rough, if you will, and so 0:12:38.440 --> 0:12:41.400 it's about spotting those for in our view right now, 0:12:41.440 --> 0:12:44.280 you still want to air on the more defensive side. 0:12:44.640 --> 0:12:48.200 Generally speaking, we still think there's more volatility to come in, 0:12:48.240 --> 0:12:50.120 probably in credit spreads. You know, we might be in 0:12:50.120 --> 0:12:51.840 for a little bit of a tactical bounce. As we 0:12:51.920 --> 0:12:54.199 said here, more market feels a little bit firmer today 0:12:55.120 --> 0:12:57.600 and certainly people have gotten off sides and whipside with 0:12:57.679 --> 0:13:02.080 these moves. But there's absolutely opportunity emerging. Harby, thank you 0:13:02.120 --> 0:13:08.600 so much. Now we go to the Atlantic, to the 0:13:08.600 --> 0:13:11.720 northern climbs of Maine and Gerard Cassidy, he's been such 0:13:11.760 --> 0:13:15.240 an advantage to us with RBC capital markets on the banks. 0:13:15.600 --> 0:13:18.280 Is it all quiet on the Cassidy front today, Girard? 0:13:18.320 --> 0:13:20.280 I mean, are we beyond the crisis. I don't buy 0:13:20.320 --> 0:13:24.080 it for a minute, Tom. I think the quiet the 0:13:24.120 --> 0:13:28.000 crisis has really quieted down, and I think as the 0:13:28.040 --> 0:13:30.839 deposit flight has pretty much I think we're going to 0:13:30.920 --> 0:13:33.400 find by the end of this week and slowed down 0:13:33.440 --> 0:13:35.440 to a trickle. You know, the numbers came out as 0:13:35.480 --> 0:13:38.680 you probably saw it late last week, and the deposit 0:13:38.760 --> 0:13:42.880 outflow from the smaller banks was not that material. That 0:13:43.080 --> 0:13:46.120 was less than two percent. It was far less than 0:13:46.160 --> 0:13:49.920 I think some of the folks were thinking. And therefore 0:13:50.679 --> 0:13:52.839 it is calming down. And you saw, of course that 0:13:53.080 --> 0:13:56.719 Silicon Valley. The FDAC was able to sell that over 0:13:56.760 --> 0:13:59.559 the weekend to First Citizens. So both of the failed 0:13:59.559 --> 0:14:02.800 banks have now been sold to private banks or banks 0:14:02.800 --> 0:14:05.480 that are publicly traded. So we're moving in the right direction. 0:14:05.679 --> 0:14:08.720 Isn't the all clear signal? Tom? Probably not, but we're 0:14:08.720 --> 0:14:11.679 getting darn close. Do you think Tar, that the calls 0:14:11.800 --> 0:14:16.040 for deposit insurance at a more generalized scale were overblown 0:14:16.360 --> 0:14:18.440 over the past few weeks, that the need for that 0:14:18.520 --> 0:14:23.480 kind of backstop and certainty was overstated. Lisa, thank you 0:14:23.520 --> 0:14:26.320 for saying that. I couldn't agree with you more. I 0:14:26.400 --> 0:14:31.400 think what people are finding out is that most depositors 0:14:31.440 --> 0:14:35.000 have confidence in their banks. And that being said, when 0:14:35.040 --> 0:14:39.040 you break down the size of our banks less than 0:14:39.360 --> 0:14:41.840 one hundred million in assets or less than ten billion 0:14:41.920 --> 0:14:45.640 in assets, the majority of those deposits in those banks 0:14:45.880 --> 0:14:48.800 are already insured by the government because they're less than 0:14:48.840 --> 0:14:51.720 two d and fifty thousand dollars. That doesn't mean they 0:14:51.720 --> 0:14:54.600 may not look at a revision of lifting up the 0:14:54.680 --> 0:14:57.760 deposit insurance levels at some point. But I think it 0:14:57.880 --> 0:15:01.360 was to your point, overblown over and that was part 0:15:01.360 --> 0:15:05.160 of this whole problem was Unfortunately it's spread like wildfire 0:15:05.280 --> 0:15:07.560 on social media, and I think that's one of the 0:15:07.560 --> 0:15:10.840 biggest issues that has to be addressed as we go forward. 0:15:11.000 --> 0:15:13.000 So there's a conflation here. On one hand, you have 0:15:13.120 --> 0:15:15.520 the potential for bank runs, right, and that was something 0:15:15.520 --> 0:15:18.400 that really spurred the immediate kind of concern. But then 0:15:18.440 --> 0:15:21.320 there's this question of just deposit flight that a lot 0:15:21.320 --> 0:15:24.280 of people are withdrawing their money from banking accounts just 0:15:24.280 --> 0:15:26.360 generally in order to go into money market funds and 0:15:26.440 --> 0:15:30.240 other higher interest paying rates. And this is the issue 0:15:30.280 --> 0:15:33.320 because you're seeing small banks, according to the data, loose deposit. 0:15:33.360 --> 0:15:36.000 It's a much faster clip than larger banks. So at 0:15:36.080 --> 0:15:39.640 what point is that the real problem. It's a profitability problem, 0:15:39.640 --> 0:15:42.320 and it's a competition problem as well as a lending one. 0:15:43.880 --> 0:15:46.640 I would say that the mix is changing to your point, 0:15:47.120 --> 0:15:50.640 When you look at the data from the Federal Reserve, 0:15:50.960 --> 0:15:54.600 you'll notice that something what they referred to as other deposits, 0:15:54.840 --> 0:15:57.840 which are generally the non interest bearing or low interest 0:15:57.840 --> 0:16:01.800 bearing deposits, have falling more aggressively. Both of the large 0:16:01.800 --> 0:16:05.400 banks and small banks since Race have started to go higher. 0:16:05.680 --> 0:16:08.840 What they've replaced that with, though, is time deposits, So 0:16:08.920 --> 0:16:11.720 CDs that you know, Tom might remember back in the 0:16:11.760 --> 0:16:16.720 eighty you could get a CD for you know, thirteen 0:16:16.800 --> 0:16:22.360 percent twelve months. Those those types of instruments are coming back, 0:16:22.640 --> 0:16:24.840 and believe it or not, at least back in the 0:16:24.960 --> 0:16:29.280 nineteen eighties, fifty percent of bank funding was with CDs. 0:16:29.680 --> 0:16:32.400 As at the fourth quarter it was less than ten percent. 0:16:32.720 --> 0:16:35.080 So the mix is changing. What I remember about the 0:16:35.160 --> 0:16:37.640 nineteen eighties Gerard Cassidy is you had a haircut and 0:16:37.680 --> 0:16:41.120 a beard like Bob seeger. That's what I really remember there, 0:16:41.440 --> 0:16:44.080 you know. Well, the smartest tweet this weekend was from 0:16:44.120 --> 0:16:46.760 the Giant or Chicago Jim Bianco where he said, look, 0:16:46.760 --> 0:16:50.080 it's a five percent world. Everybody get over it. How 0:16:50.080 --> 0:16:55.480 does the profitability of the RBC capital market stocks you follow, 0:16:56.040 --> 0:16:59.880 how does the profitability change in Bianco's five percent world? 0:17:01.640 --> 0:17:05.040 Tommy really comes down to, once again, the mix of deposits. 0:17:05.320 --> 0:17:09.040 And for the banks who've been working very hard and diligently, 0:17:09.440 --> 0:17:11.640 you know, for the last twenty years and growing those 0:17:11.720 --> 0:17:16.199 cheap core consumer deposits, the five percent world is very profitable. 0:17:17.200 --> 0:17:21.560 What investors they know now but six months ago people 0:17:21.560 --> 0:17:23.840 who weren't looking at the right side of a bank's 0:17:23.920 --> 0:17:27.560 balance sheet that was fifteen years ago when rates will higher. 0:17:27.720 --> 0:17:31.000 But when you have checking account deposits of consumers and 0:17:31.040 --> 0:17:34.520 they're basically the consumers operating account, banks don't need to 0:17:34.560 --> 0:17:36.960 paint the interest on it because the benefits they're giving 0:17:36.960 --> 0:17:40.320 to the consumer are obviously the ease of use and 0:17:40.440 --> 0:17:42.960 as well as making payments, et cetera. So the point is, 0:17:42.960 --> 0:17:45.120 in a five percent world, if you have the right 0:17:45.160 --> 0:17:48.520 deposit mix, like a Brain Morning and over a Bank America, 0:17:48.640 --> 0:17:51.040 this is very positible for a company like that. Let's 0:17:51.040 --> 0:17:53.639 get a window here into the world. The Cuts wrote 0:17:53.680 --> 0:17:57.400 world a securities analysis in banking. Keith Horowitz is City 0:17:57.400 --> 0:17:59.760 Group Gerrid. I mean, you know Keith works suspect. We 0:17:59.800 --> 0:18:01.960 all know that he goes out and he puts a 0:18:02.040 --> 0:18:04.240 bye today on M and T a Buffalo the best 0:18:04.320 --> 0:18:08.440 run bank in America. I'm not out of tooralizing there, Girard. 0:18:08.480 --> 0:18:12.800 You've got a moonshot on MTB. What will be the 0:18:12.880 --> 0:18:17.119 catalyst for Horowitz is strong By and you're strong By 0:18:17.240 --> 0:18:20.320 on MTB to work out how do you get the 0:18:20.359 --> 0:18:25.640 moonshot on a Buffalo bank? Exactly for that reason time 0:18:25.760 --> 0:18:30.120 you want the slow growth, steady eddies are that are 0:18:30.119 --> 0:18:34.280 funded by these cheap cored deposits. Mnt IS probably has 0:18:34.600 --> 0:18:37.760 one of the best deposit bases. They have the Grandma 0:18:37.800 --> 0:18:41.080 and Grandpa deposit up in Watertown, New York that has 0:18:41.119 --> 0:18:43.639 five thousand dollars in it. That money's not moving to 0:18:43.720 --> 0:18:45.920 Marcus and as a result, they don't need to pay 0:18:46.000 --> 0:18:48.840 up for it. But second, you also have a company 0:18:48.920 --> 0:18:52.360 that never extended its duration like its peers in its 0:18:52.359 --> 0:18:56.840 securities portfolio, and therefore they're earning far more in that portfolio. 0:18:56.880 --> 0:18:59.359 And then third you might remember Tom they close on 0:18:59.400 --> 0:19:02.760 the People's acquisition just over a year ago and the 0:19:02.840 --> 0:19:05.960 cost savings from that acquisition will also drive earnings, so 0:19:06.000 --> 0:19:08.440 they have three drivers. And then lastly, they have one 0:19:08.440 --> 0:19:11.400 of the few banks that has excess capital. They've been 0:19:11.440 --> 0:19:16.119 a great steward of shareholders capital and then going to 0:19:16.200 --> 0:19:19.600 return the access capital through buybacks. We got to leave it. 0:19:19.680 --> 0:19:23.160 They're hugely beneficial. Lisa's right now to buy ticket on Fortress. 0:19:23.240 --> 0:19:36.600 Wilmer's right now. Gerard Cassidy with RBC Capital marks right 0:19:36.680 --> 0:19:41.520 now joining us Torsten Slack, chief economist Apollo Global Management. 0:19:41.560 --> 0:19:44.640 I really want to emphasize that Torston, with his work 0:19:44.680 --> 0:19:46.919 at Deutsche Bank over the years and of course at 0:19:46.920 --> 0:19:51.160 OECD in Paris, gives a global view to the US trauma. 0:19:51.320 --> 0:19:55.160 Right now. You are known for one paragraph, one chart. 0:19:55.560 --> 0:19:59.199 What's the one paragraph, the one chart that matters for 0:19:59.280 --> 0:20:02.119 Tuesday morning? Well, what matters the most really at the 0:20:02.160 --> 0:20:05.159 moment is, as Lisa was just saying, the uncertainty about 0:20:05.200 --> 0:20:08.080 what is the behavioral reaction going to be in the 0:20:08.119 --> 0:20:10.360 regional banks and the banking sects are more broadly as 0:20:10.359 --> 0:20:12.760 a result of what we're seeing at the moment, Because 0:20:12.840 --> 0:20:15.119 everything we're seeing on our Bloomberg screens tells you that, 0:20:15.160 --> 0:20:18.240 oh maybe this is just the modest tightening in financial conditions. 0:20:18.280 --> 0:20:21.040 Maybe the f OS bank funding car spread is out 0:20:21.040 --> 0:20:23.760 about forty fifty basis points. But what we don't know 0:20:23.920 --> 0:20:26.240 is the second order effect, name what is the behavioral 0:20:26.280 --> 0:20:28.639 change going to be in terms of lending standards. Is 0:20:28.640 --> 0:20:30.240 it going to be harder to get a loan, to 0:20:30.280 --> 0:20:33.400 buy a car, to buy a house, to buy commercary estate, 0:20:33.640 --> 0:20:37.000 to buy anything for consumers and for corporates. And as 0:20:37.000 --> 0:20:39.600 a result of that, it is really still a bit 0:20:39.720 --> 0:20:43.840 unknown exactly how deep this is going to be. Well, okay, 0:20:43.960 --> 0:20:46.280 I get the idea there's unknowns here, But to me 0:20:46.640 --> 0:20:49.720 what we may end up is not only maybe not 0:20:49.800 --> 0:20:53.199 a worry about concentration of banking, but you know what, 0:20:53.280 --> 0:20:56.520 We're going to clear the market, remove the people that 0:20:56.560 --> 0:20:59.800 couldn't make it from zero to five percent, and we'll 0:20:59.800 --> 0:21:03.119 be stronger after the fact. Is that the Apollo view, No, 0:21:03.280 --> 0:21:07.000 so they of course outlook here is mainly driven by 0:21:07.119 --> 0:21:09.480 the uncertainty about what is the response going to be 0:21:10.000 --> 0:21:12.639 in terms of how much title lending consistent conditions will be. 0:21:12.640 --> 0:21:14.520