1 00:00:10,119 --> 00:00:13,480 Speaker 1: Hello, and welcome to another episode of the Odd Blots podcast. 2 00:00:13,560 --> 00:00:17,360 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, we 3 00:00:17,560 --> 00:00:21,240 Speaker 1: are recording this on April nineteenth, and we are firmly 4 00:00:21,360 --> 00:00:24,880 Speaker 1: in the middle of bank earning season, and so far 5 00:00:25,520 --> 00:00:26,560 Speaker 1: it seems pretty good. 6 00:00:27,000 --> 00:00:28,560 Speaker 2: You always know it's going to be a good one 7 00:00:29,280 --> 00:00:32,200 Speaker 2: when we have to state the data. That's a sign. 8 00:00:32,240 --> 00:00:34,320 Speaker 2: It's like, Okay, we're right in the fi stuff is happening. 9 00:00:34,360 --> 00:00:37,200 Speaker 2: We're talking about news. It's going on right now. This 10 00:00:37,240 --> 00:00:40,199 Speaker 2: is not some big theoretical thing where we're going to 11 00:00:40,240 --> 00:00:43,080 Speaker 2: be talking about some ancient economic theory from one hundred 12 00:00:43,159 --> 00:00:44,320 Speaker 2: years ago. This is right now. 13 00:00:44,600 --> 00:00:45,080 Speaker 3: That's right. 14 00:00:45,280 --> 00:00:49,880 Speaker 1: So you know, obviously we had the banking crisis in March, 15 00:00:50,600 --> 00:00:54,040 Speaker 1: and we have seen some signs of distress in the 16 00:00:54,080 --> 00:00:57,960 Speaker 1: financial system start to fade since then, so things like 17 00:00:58,240 --> 00:01:02,040 Speaker 1: borrowing from the discount when that has gone down from 18 00:01:02,080 --> 00:01:04,000 Speaker 1: the peak that we saw at the end of last month. 19 00:01:04,280 --> 00:01:06,000 Speaker 1: And then of course, if you'd been listening to all 20 00:01:06,040 --> 00:01:08,559 Speaker 1: lots before then, you would have known that discount lending 21 00:01:08,680 --> 00:01:12,000 Speaker 1: was ticking up for months, even before March. But the 22 00:01:12,040 --> 00:01:16,800 Speaker 1: point is that if you look behind some of these headlines, 23 00:01:16,840 --> 00:01:21,920 Speaker 1: headlines about bank earnings, headlines about you know, discount borrowing 24 00:01:22,040 --> 00:01:26,200 Speaker 1: starting to come down, some signs of strain beginning to evaporate. 25 00:01:26,400 --> 00:01:29,680 Speaker 1: If you actually look into the guts of the financial system, 26 00:01:30,000 --> 00:01:35,400 Speaker 1: there are still some issues and some maybe suggestions that 27 00:01:35,440 --> 00:01:37,840 Speaker 1: there are more problems to come, right. 28 00:01:38,040 --> 00:01:40,679 Speaker 2: I think that's a really good summary. Early March with 29 00:01:40,760 --> 00:01:44,959 Speaker 2: the Silicon Valley bank implosion and some other concerns like 30 00:01:45,040 --> 00:01:47,880 Speaker 2: that was like fears of financial crisis, and it faded 31 00:01:47,920 --> 00:01:51,520 Speaker 2: pretty quickly, like those acute fears. But then there are 32 00:01:51,560 --> 00:01:53,840 Speaker 2: the other questions. It's like, okay, well, it's like all right, 33 00:01:53,880 --> 00:01:57,760 Speaker 2: the banking system maybe is still chugging along, but what 34 00:01:57,800 --> 00:02:00,960 Speaker 2: does it mean for credit and how much of a 35 00:02:01,080 --> 00:02:04,160 Speaker 2: mark will it leave on the sort of broader economy 36 00:02:04,240 --> 00:02:07,000 Speaker 2: in general. That we had this moment and that all 37 00:02:07,040 --> 00:02:09,280 Speaker 2: these sort of banks saw what can happen if they 38 00:02:09,280 --> 00:02:12,280 Speaker 2: get on the wrong side of certain trends totally. 39 00:02:12,440 --> 00:02:15,440 Speaker 1: And you know, banks are obviously big players in a 40 00:02:15,440 --> 00:02:18,560 Speaker 1: lot of different markets, but a big one would have 41 00:02:18,639 --> 00:02:21,080 Speaker 1: to be bonds, all sorts of different types of bonds, 42 00:02:21,080 --> 00:02:24,760 Speaker 1: so everything from treasuries to T bills to commercial mortgage 43 00:02:24,760 --> 00:02:28,400 Speaker 1: backed securities, to residential mortgage backed securities. And so the 44 00:02:28,480 --> 00:02:32,360 Speaker 1: question is, if there's more regulatory scrutiny on all of 45 00:02:32,400 --> 00:02:35,400 Speaker 1: these things, if there's more concern about interest rate risk 46 00:02:35,520 --> 00:02:39,840 Speaker 1: and duration exposure, is the appetite, the bank appetite for 47 00:02:39,880 --> 00:02:42,840 Speaker 1: those assets still going to be there. And even though 48 00:02:42,840 --> 00:02:45,720 Speaker 1: we've seen some of the crisis headlines fade away, we 49 00:02:45,800 --> 00:02:49,360 Speaker 1: know that use of the fed's reverse repo facility, for instance, 50 00:02:49,400 --> 00:02:53,280 Speaker 1: the RRP is still pretty high, which means, you know 51 00:02:53,520 --> 00:02:55,360 Speaker 1: a lot of money is still moving out of banks 52 00:02:55,400 --> 00:02:58,080 Speaker 1: into money market funds and they're parking that at the FED. 53 00:02:58,600 --> 00:03:01,799 Speaker 1: So the major disaster headlines may be gone, but there 54 00:03:01,880 --> 00:03:04,680 Speaker 1: is still this evidence of strains in the background, worries 55 00:03:04,720 --> 00:03:08,240 Speaker 1: about a credit crunch, a possible collateral crunch. Of course, 56 00:03:08,280 --> 00:03:11,399 Speaker 1: those two things are interrelated. So we need to talk 57 00:03:11,440 --> 00:03:13,600 Speaker 1: about all this. We need to get deep into the 58 00:03:13,639 --> 00:03:16,520 Speaker 1: guts of the financial system and talk about what's going on. 59 00:03:17,000 --> 00:03:19,640 Speaker 1: And I'm very pleased to say we have the perfect guest. 60 00:03:19,800 --> 00:03:22,280 Speaker 1: We are going to be speaking with, Ben Emmons. He 61 00:03:22,440 --> 00:03:25,720 Speaker 1: is a portfolio manager over at New Edge Wealth, and 62 00:03:25,840 --> 00:03:28,520 Speaker 1: before that, for a long time he was a portfolio 63 00:03:28,560 --> 00:03:32,640 Speaker 1: manager at PIMCO. I believe it sat fairly close to 64 00:03:32,720 --> 00:03:34,680 Speaker 1: Bill Gross at the time, which must have been an 65 00:03:34,680 --> 00:03:37,960 Speaker 1: interesting experience, to put it mildly, But someone who can 66 00:03:38,040 --> 00:03:40,880 Speaker 1: talk to us about, you know, what is going on 67 00:03:40,960 --> 00:03:44,120 Speaker 1: in this market? What do banks actually mean for bonds? 68 00:03:44,240 --> 00:03:47,400 Speaker 1: Are we seeing signs of an unfolding credit crunch and 69 00:03:47,480 --> 00:03:50,400 Speaker 1: collateral issues? So Ben, thank you so much for coming 70 00:03:50,400 --> 00:03:51,160 Speaker 1: on all thoughts. 71 00:03:51,400 --> 00:03:53,760 Speaker 4: Hi Tracia, Hi Joe, it's great to be here. Thank you. 72 00:03:54,080 --> 00:03:56,280 Speaker 1: I'm glad we can finally get you on one thing 73 00:03:56,320 --> 00:03:58,480 Speaker 1: I was wondering, just as I was sort of doing 74 00:03:58,520 --> 00:04:01,040 Speaker 1: some of the prep for this episode, how do we 75 00:04:01,080 --> 00:04:05,120 Speaker 1: actually measure credit in the banking system and what do 76 00:04:05,160 --> 00:04:08,640 Speaker 1: we look at for signs of strains. I'm aware, for instance, 77 00:04:08,680 --> 00:04:11,400 Speaker 1: that suddenly everyone has woken up to the fed H 78 00:04:11,480 --> 00:04:14,280 Speaker 1: eight data, which hasn't gotten a lot of attention for 79 00:04:14,320 --> 00:04:15,120 Speaker 1: a long time. 80 00:04:15,520 --> 00:04:17,080 Speaker 3: But what are we looking at here? 81 00:04:17,839 --> 00:04:20,680 Speaker 4: Yeah, the HA data, the arcane data. If you think 82 00:04:20,720 --> 00:04:23,000 Speaker 4: about it, right, it's like, you know, you wouldn't really 83 00:04:23,120 --> 00:04:26,039 Speaker 4: pay attention to it unless you We're in the nineteen eighties, 84 00:04:26,040 --> 00:04:29,279 Speaker 4: a trader then and standing at the Xerox fax machine, 85 00:04:30,000 --> 00:04:32,279 Speaker 4: eagerly seeing the money supply, A numbers coming off and 86 00:04:32,320 --> 00:04:34,680 Speaker 4: then making assessment. Okay, what the FED is doing this 87 00:04:34,760 --> 00:04:37,080 Speaker 4: with the FED is doing that, and that's a little 88 00:04:37,080 --> 00:04:39,479 Speaker 4: bit what we deal with today too. Though you would 89 00:04:39,520 --> 00:04:43,880 Speaker 4: say that that data now is important because this term 90 00:04:43,960 --> 00:04:47,960 Speaker 4: called bank credit that's in there. There's seventeen trillion or 91 00:04:47,960 --> 00:04:51,479 Speaker 4: a change is currently that accounts for all the loans 92 00:04:51,520 --> 00:04:54,159 Speaker 4: and securities that the banks have on that books, and 93 00:04:54,200 --> 00:04:58,600 Speaker 4: that's ultimately how they extend credit or contracted. So if 94 00:04:58,640 --> 00:05:00,760 Speaker 4: you look at that number and the change and that 95 00:05:00,880 --> 00:05:03,120 Speaker 4: which happened over the last months or so, it's kind 96 00:05:03,160 --> 00:05:05,560 Speaker 4: of a few on abilion that changed it. That know, 97 00:05:05,680 --> 00:05:07,320 Speaker 4: that's what people look at. That's a credit. 98 00:05:07,160 --> 00:05:10,920 Speaker 2: Change, right. So every Friday, the FED releases this table 99 00:05:11,040 --> 00:05:14,599 Speaker 2: called the HIGHT Data Assets and Liabilities of Commercial Banks 100 00:05:15,000 --> 00:05:17,200 Speaker 2: in the United States. And it's interesting to get this 101 00:05:17,360 --> 00:05:20,719 Speaker 2: historical perspective because back in the day forty years ago 102 00:05:20,800 --> 00:05:22,960 Speaker 2: or whatever, the FED didn't give much in the way 103 00:05:23,000 --> 00:05:26,480 Speaker 2: of communication about its policy. It just had some sort 104 00:05:26,480 --> 00:05:28,960 Speaker 2: of money supply target and so people would look at 105 00:05:28,960 --> 00:05:31,520 Speaker 2: this data to see how it was doing. Now though 106 00:05:31,520 --> 00:05:33,599 Speaker 2: it's you know, we get all this communication, but it 107 00:05:33,600 --> 00:05:37,120 Speaker 2: gives us some additional information about the growth and contraction 108 00:05:37,200 --> 00:05:37,640 Speaker 2: of credit. 109 00:05:38,320 --> 00:05:40,640 Speaker 4: Yeah, indeed, And I think even so that you could 110 00:05:40,680 --> 00:05:43,920 Speaker 4: think of that as you listen to FAT speakers and 111 00:05:43,960 --> 00:05:47,599 Speaker 4: they pointed this data, they seem to be quite confident 112 00:05:47,640 --> 00:05:51,240 Speaker 4: that there isn't really anything you know, materially going on. Sure, 113 00:05:51,320 --> 00:05:53,719 Speaker 4: but everybody paying attention to it means, like, you know, 114 00:05:53,760 --> 00:05:55,839 Speaker 4: I'm going to try to distract the signal from this 115 00:05:56,600 --> 00:06:00,480 Speaker 4: because if it does show more material decline and credit 116 00:06:00,520 --> 00:06:03,080 Speaker 4: in this case, then the FAT would react to this, right, 117 00:06:03,120 --> 00:06:04,680 Speaker 4: And that's what happened to Marus just. 118 00:06:04,560 --> 00:06:08,159 Speaker 2: In terms of measuring credits. So this is volume, But 119 00:06:08,200 --> 00:06:11,840 Speaker 2: then there are how do you incorporate the surveys of 120 00:06:11,920 --> 00:06:14,159 Speaker 2: businesses we're having a harder time getting a loan that 121 00:06:14,200 --> 00:06:15,480 Speaker 2: seems to be getting worse. 122 00:06:15,360 --> 00:06:18,080 Speaker 1: Or the loan officers survey where they have been reporting 123 00:06:18,400 --> 00:06:19,640 Speaker 1: tighter fighting, Yeah. 124 00:06:19,960 --> 00:06:22,799 Speaker 2: Or spreads obviously we can look at you know, junk 125 00:06:22,839 --> 00:06:25,880 Speaker 2: spreads or CNBS spreads, et cetera. So like, is it 126 00:06:25,920 --> 00:06:28,360 Speaker 2: one of those things where like all of the we're 127 00:06:28,400 --> 00:06:30,799 Speaker 2: all blind and like touching the side of the elephant 128 00:06:30,839 --> 00:06:33,000 Speaker 2: and just trying to gather as much different pieces of 129 00:06:33,040 --> 00:06:33,800 Speaker 2: it as possible. 130 00:06:33,960 --> 00:06:36,240 Speaker 4: Yeah, The idea of a dashboard right, you have all 131 00:06:36,240 --> 00:06:39,560 Speaker 4: these different signals that come at you. Obviously what you're 132 00:06:39,560 --> 00:06:42,480 Speaker 4: summarizing the at different parts of the credit markets, because 133 00:06:42,520 --> 00:06:44,960 Speaker 4: if you were to look at spreads and you look 134 00:06:45,000 --> 00:06:47,960 Speaker 4: at say, junk bonds, you know that's little to do 135 00:06:48,080 --> 00:06:51,039 Speaker 4: with the bank credits itself, unless there's underwriting from an 136 00:06:51,080 --> 00:06:54,080 Speaker 4: investment bank in there. Even so, it's not really what 137 00:06:54,160 --> 00:06:56,800 Speaker 4: we're looking at here today commercial bank credit, which is 138 00:06:56,839 --> 00:07:00,560 Speaker 4: really about mortgages, about consumer loans, about credit cards and 139 00:07:00,600 --> 00:07:03,400 Speaker 4: things like that. But you're right, you have to look 140 00:07:03,440 --> 00:07:07,280 Speaker 4: at a broader spectrum of measures about what credit is 141 00:07:07,320 --> 00:07:10,040 Speaker 4: really doing in the economy because it gets extended in 142 00:07:10,040 --> 00:07:10,640 Speaker 4: different ways. 143 00:07:10,720 --> 00:07:10,880 Speaker 2: Right. 144 00:07:10,920 --> 00:07:14,080 Speaker 4: So I think if we take the Haight data and 145 00:07:14,120 --> 00:07:16,200 Speaker 4: also the H four data, just don't mention that too, 146 00:07:16,240 --> 00:07:18,840 Speaker 4: which is the fast balancy data every week, is the aggregate. 147 00:07:19,480 --> 00:07:21,640 Speaker 4: The change in that does give us a sense where 148 00:07:21,680 --> 00:07:24,120 Speaker 4: we are right now. Like we've risen rates a lot, 149 00:07:24,240 --> 00:07:27,440 Speaker 4: it starts to affect the economy. People know that eventually 150 00:07:27,480 --> 00:07:30,200 Speaker 4: banks will pull back, and the earnings from banks show this. 151 00:07:30,320 --> 00:07:33,440 Speaker 4: To the start the provision for loan losses as a 152 00:07:33,480 --> 00:07:36,559 Speaker 4: sort of a precautionary measure. But I think what happened 153 00:07:36,600 --> 00:07:39,760 Speaker 4: in March was a reaction to what ltimate happen where 154 00:07:39,800 --> 00:07:42,240 Speaker 4: banks can extend credit through and that's deposits, right, and 155 00:07:42,320 --> 00:07:44,440 Speaker 4: the posits have obviously declined. 156 00:07:44,600 --> 00:07:46,760 Speaker 3: Well, this is exactly what I wanted to ask you. 157 00:07:46,800 --> 00:07:49,600 Speaker 1: So let's step back for a second and talk about 158 00:07:49,880 --> 00:07:53,800 Speaker 1: why a credit contraction could materialize. So what are the 159 00:07:53,920 --> 00:07:56,760 Speaker 1: dynamics that are affecting banks at the moment. You know, 160 00:07:56,800 --> 00:08:00,400 Speaker 1: I mentioned that if there's additional regulatory scrutiny on interest 161 00:08:00,480 --> 00:08:04,200 Speaker 1: rate risk, then obviously that could affect appetite for certain 162 00:08:04,240 --> 00:08:07,040 Speaker 1: types of bonds. But you also have a situation where 163 00:08:07,040 --> 00:08:09,840 Speaker 1: banks may be nervous about the future, they may be 164 00:08:10,120 --> 00:08:14,240 Speaker 1: increasing their or hoarding their reserves, and that would also 165 00:08:14,800 --> 00:08:17,480 Speaker 1: start to curtail on their lending. So walk us through 166 00:08:17,560 --> 00:08:18,920 Speaker 1: how this materializes. 167 00:08:19,600 --> 00:08:21,720 Speaker 4: Yeah, I was looking at the other day Tracy of 168 00:08:21,760 --> 00:08:25,000 Speaker 4: thinking of different channels that are currently showing some signs 169 00:08:25,040 --> 00:08:28,360 Speaker 4: of that credit crunch stress. So one is then that 170 00:08:28,520 --> 00:08:31,480 Speaker 4: leverage loans, which is you know, or syndicate loans. That 171 00:08:31,520 --> 00:08:33,320 Speaker 4: has to client quite a bit, and that has to 172 00:08:33,320 --> 00:08:36,320 Speaker 4: do with that. During the pandemic boom, fair bit of 173 00:08:36,520 --> 00:08:40,080 Speaker 4: financing took place because of all the hive that bank 174 00:08:40,160 --> 00:08:42,920 Speaker 4: sitting on a lot of like residual loans on that 175 00:08:43,040 --> 00:08:45,480 Speaker 4: bound sheet and having a hard time getting rid of 176 00:08:45,520 --> 00:08:47,440 Speaker 4: those loans. You know, they have to be discound of 177 00:08:47,480 --> 00:08:49,920 Speaker 4: low value, and therefore they pull back from that syndicate 178 00:08:50,000 --> 00:08:53,040 Speaker 4: loan market and pushed it into the private credit market, 179 00:08:53,080 --> 00:08:57,079 Speaker 4: which although have been lending, are lending at higher rates. Right, 180 00:08:57,120 --> 00:09:01,080 Speaker 4: So it affects credit that way. Secondly, it's the commercial 181 00:09:01,080 --> 00:09:03,360 Speaker 4: paper market, which is interesting that was mentioned in the 182 00:09:03,400 --> 00:09:06,520 Speaker 4: FED minutes too. That's frozen, so to speak, meaning there's 183 00:09:06,600 --> 00:09:08,000 Speaker 4: very little issuing is going on. 184 00:09:08,679 --> 00:09:11,800 Speaker 1: I always get bad flashbacks like two thousand and eight, 185 00:09:11,840 --> 00:09:14,920 Speaker 1: two thousand and nine when we start talking about commercial 186 00:09:15,000 --> 00:09:16,640 Speaker 1: paper and that seizing up. 187 00:09:16,840 --> 00:09:19,360 Speaker 4: Yeah, and that was happening in the twenty twenty as well, right, 188 00:09:19,400 --> 00:09:22,160 Speaker 4: and then that's in March of twenty twenty the market 189 00:09:22,200 --> 00:09:25,120 Speaker 4: community collapsed and I fat actually did something about it. 190 00:09:25,160 --> 00:09:28,000 Speaker 4: This time it seems to be driven by, yeah, little 191 00:09:28,040 --> 00:09:32,079 Speaker 4: appetite to issue these commercial paper this moment. As one 192 00:09:32,240 --> 00:09:33,319 Speaker 4: one on a channel. 193 00:09:33,120 --> 00:09:37,280 Speaker 2: Can you talk about, you know, different slices of the 194 00:09:37,360 --> 00:09:40,160 Speaker 2: credit market or you know, I think one of our 195 00:09:40,240 --> 00:09:42,640 Speaker 2: longtime guests that we haven't had on a while ago 196 00:09:42,800 --> 00:09:45,520 Speaker 2: Chris Whitet, you know, talked about these different slices of 197 00:09:45,520 --> 00:09:48,079 Speaker 2: the credit market essentially each being their own world, each 198 00:09:48,120 --> 00:09:51,280 Speaker 2: being their own ecosystem. So when you talk about okay 199 00:09:51,360 --> 00:09:54,520 Speaker 2: banks no longer being able to sell into the leverage 200 00:09:54,600 --> 00:09:57,840 Speaker 2: loan market and having to move into the private credit market, 201 00:09:58,600 --> 00:10:00,800 Speaker 2: I don't know what, like, what is the difference between 202 00:10:00,800 --> 00:10:03,160 Speaker 2: these markets. Why do they have a different complexion? Why 203 00:10:03,360 --> 00:10:05,040 Speaker 2: is the cost of funding in the letter higher? 204 00:10:05,640 --> 00:10:09,080 Speaker 4: Well, the two things there so one the private credit 205 00:10:09,480 --> 00:10:14,360 Speaker 4: lenders that's special lending or direct lending. I mean, you know, 206 00:10:14,440 --> 00:10:16,720 Speaker 4: they use different terms. They don't act like a bank. 207 00:10:16,840 --> 00:10:19,120 Speaker 4: You have to think of like companies like Apollo or 208 00:10:19,200 --> 00:10:23,160 Speaker 4: KKR or Blackstone. You know, they lend to mid size 209 00:10:23,280 --> 00:10:27,040 Speaker 4: to smaller sized companies that cannot go to a bank 210 00:10:27,160 --> 00:10:29,200 Speaker 4: or find it harder to go to a bank. Is 211 00:10:29,200 --> 00:10:31,480 Speaker 4: in the lending centers are tighter a the bank than 212 00:10:31,520 --> 00:10:35,280 Speaker 4: they are at a private lender. Yet the interest rate 213 00:10:35,360 --> 00:10:38,880 Speaker 4: that they pay, which is typically spread over the standard 214 00:10:39,160 --> 00:10:41,959 Speaker 4: overnight funding rate of I'm secured overnight funding rate. Sorry, 215 00:10:42,320 --> 00:10:45,200 Speaker 4: you know it's wider rights. The private lender will ask 216 00:10:45,520 --> 00:10:49,200 Speaker 4: for more compensation on taking risks of a company that 217 00:10:49,280 --> 00:10:53,400 Speaker 4: generates say fifty million ebitash you call that way per year. 218 00:10:53,760 --> 00:10:57,160 Speaker 4: So on the other end, you have the syndicated low market, 219 00:10:57,200 --> 00:10:59,320 Speaker 4: which you know is a bigger market, like there's a 220 00:10:59,320 --> 00:11:03,280 Speaker 4: bigger company involved. I really think there was what the 221 00:11:03,360 --> 00:11:06,880 Speaker 4: leverage buyout boom that happened briefly in twenty twenty twenty 222 00:11:06,880 --> 00:11:11,480 Speaker 4: one contributed to the banks puilding back and now provisioning 223 00:11:11,520 --> 00:11:13,920 Speaker 4: for it too, as that's what showed up in the 224 00:11:14,360 --> 00:11:17,400 Speaker 4: earning data so far. And that's actually the point that 225 00:11:17,559 --> 00:11:19,840 Speaker 4: you were asking about, Tracy, is that you know, what 226 00:11:19,920 --> 00:11:21,880 Speaker 4: I really think where the crunch comes from is that 227 00:11:21,920 --> 00:11:25,080 Speaker 4: if we're getting banks starting to accumulate more and more reserves, 228 00:11:25,760 --> 00:11:30,200 Speaker 4: lend out less or less incentivized to lend, and then 229 00:11:30,240 --> 00:11:33,640 Speaker 4: you're getting a really pressure on auto markets other credit 230 00:11:33,679 --> 00:11:37,400 Speaker 4: markets that have to then no longer having the access 231 00:11:37,440 --> 00:11:39,679 Speaker 4: to banks because they ultimately to provide the liquidity and 232 00:11:39,720 --> 00:11:42,400 Speaker 4: the credit for the system. Right. So I think this 233 00:11:42,440 --> 00:11:44,480 Speaker 4: is where the real issue is. And people, if you 234 00:11:44,520 --> 00:11:47,200 Speaker 4: rethink of back of history as you often do on 235 00:11:47,240 --> 00:11:50,640 Speaker 4: the show, you think of treatment and sports studies about 236 00:11:50,679 --> 00:11:53,360 Speaker 4: money supply, what they really looked at was like what 237 00:11:53,520 --> 00:11:56,079 Speaker 4: banks in the thirties did too. They started to really 238 00:11:56,200 --> 00:11:59,800 Speaker 4: cumulate reserves quite significantly, and that led to this huge 239 00:12:00,080 --> 00:12:02,720 Speaker 4: contraction of credit and economy. Now we're not there here 240 00:12:02,760 --> 00:12:05,319 Speaker 4: today yet because it's not like that at that time, 241 00:12:05,960 --> 00:12:08,800 Speaker 4: but we have had instances of this, you know. Twenty 242 00:12:08,840 --> 00:12:12,079 Speaker 4: eighteen nineteen was an example where it turned out as 243 00:12:12,080 --> 00:12:14,880 Speaker 4: the FAT kept pulling, you know, kept we're reducing its 244 00:12:14,880 --> 00:12:18,040 Speaker 4: bound sheet. The banks in the meantime, we're worried about 245 00:12:18,040 --> 00:12:20,920 Speaker 4: the economy and start pulling back and started accumulating reserves. 246 00:12:21,320 --> 00:12:23,679 Speaker 4: Not every bank has access to the FAT reserves, by 247 00:12:23,720 --> 00:12:27,200 Speaker 4: the way, so there's another aspect of that too. So 248 00:12:27,240 --> 00:12:30,400 Speaker 4: I think if you summarize it the different aspects of 249 00:12:30,400 --> 00:12:33,640 Speaker 4: the credit markets, the private lending is really different from 250 00:12:33,720 --> 00:12:37,760 Speaker 4: bank lending, clearly driven by different i think governance and 251 00:12:37,960 --> 00:12:42,679 Speaker 4: underwriting standards and lending standards. But then the banks themselves 252 00:12:43,280 --> 00:12:46,800 Speaker 4: are I think in a very precautionary mode currently, and 253 00:12:46,880 --> 00:12:50,079 Speaker 4: therefore there is that possible risk of this, you know, 254 00:12:50,400 --> 00:13:08,520 Speaker 4: further pressure on lending in the economy. 255 00:13:09,280 --> 00:13:11,640 Speaker 1: So one of the interesting things that we've seen, and 256 00:13:11,679 --> 00:13:14,319 Speaker 1: again this is sort of in the background, and I 257 00:13:14,360 --> 00:13:16,840 Speaker 1: haven't seen it discussed that much, but I think risk 258 00:13:16,920 --> 00:13:21,400 Speaker 1: premiums on things that tend to be dominated by bank buyers, 259 00:13:21,480 --> 00:13:25,720 Speaker 1: So you know, mostly securitized products like residential mortgage backed 260 00:13:25,720 --> 00:13:30,200 Speaker 1: securities or commercial mortgage backed securities rmbs and cnbs, which 261 00:13:30,240 --> 00:13:33,319 Speaker 1: I mentioned in the intro. Risk premiums on those are 262 00:13:33,400 --> 00:13:36,960 Speaker 1: higher than a lot of unsecured stuff, And I would 263 00:13:37,040 --> 00:13:40,920 Speaker 1: guess the assumption is because people are thinking that banks 264 00:13:40,920 --> 00:13:44,520 Speaker 1: may be less incentivized in the future to buy those 265 00:13:44,600 --> 00:13:47,240 Speaker 1: types of assets given what we just saw in the 266 00:13:47,240 --> 00:13:51,480 Speaker 1: additional regulatory scrutiny or caution that we're expecting. 267 00:13:51,520 --> 00:13:53,400 Speaker 3: Now, talk to us about. 268 00:13:53,080 --> 00:13:56,160 Speaker 1: Those markets and what sort of impact you see there. 269 00:13:56,960 --> 00:14:00,160 Speaker 4: Yeah, we rethink about the agency mortgage back secure this 270 00:14:00,280 --> 00:14:04,320 Speaker 4: market in particular that that's as a class that you know, 271 00:14:04,360 --> 00:14:07,199 Speaker 4: there's still government guarantee by the way manit so. 272 00:14:07,120 --> 00:14:10,000 Speaker 3: You're not worried about credit risk, just the rate risk, just. 273 00:14:09,920 --> 00:14:13,000 Speaker 4: The purely the rate risk. And you know, a simple 274 00:14:13,040 --> 00:14:15,520 Speaker 4: math of mortgages is that if rates go up, the 275 00:14:15,559 --> 00:14:19,000 Speaker 4: prepayment speed of mortgages goes down, and that actually extends 276 00:14:19,040 --> 00:14:22,400 Speaker 4: the maturity of a mortgage backed security. But banks by 277 00:14:22,440 --> 00:14:26,320 Speaker 4: those because they're yielding a bit higher than treasuries. There 278 00:14:26,320 --> 00:14:29,600 Speaker 4: are liquid there's a big market and the fat is involved. 279 00:14:29,640 --> 00:14:32,200 Speaker 4: Right then that's been part of the reason. Now as 280 00:14:32,200 --> 00:14:34,560 Speaker 4: the feed is reducing his balance sheet and pulling away 281 00:14:34,600 --> 00:14:38,080 Speaker 4: from that market, the banks are left with buying more. Now, 282 00:14:38,120 --> 00:14:42,240 Speaker 4: what's happened during this latest episode was that banks discovered 283 00:14:42,280 --> 00:14:45,400 Speaker 4: that the duration of a deposit is actually a lot 284 00:14:45,480 --> 00:14:48,800 Speaker 4: shorter than what has been estimated. You know, there's been 285 00:14:48,960 --> 00:14:50,960 Speaker 4: real estimates out on this that this could be as 286 00:14:51,000 --> 00:14:53,240 Speaker 4: long as seven years. That's basically the idea of like 287 00:14:53,760 --> 00:14:55,720 Speaker 4: the three of us have a bank account that X 288 00:14:55,800 --> 00:14:57,600 Speaker 4: Y Z bank, we have a deposit in there, we 289 00:14:57,640 --> 00:15:00,680 Speaker 4: trust that bank, we stay there for longly years, and 290 00:15:01,160 --> 00:15:02,720 Speaker 4: we don't have a real to pull our money out 291 00:15:02,760 --> 00:15:05,720 Speaker 4: unless we absolutely have to. Now, what happened and in 292 00:15:05,800 --> 00:15:07,840 Speaker 4: margins obviously people got really worried to pull their money 293 00:15:07,840 --> 00:15:10,320 Speaker 4: out really quick. In other words, it's not seven years, 294 00:15:10,320 --> 00:15:13,800 Speaker 4: it's probably seven hours, right. So if you think of that, 295 00:15:14,400 --> 00:15:17,240 Speaker 4: the posit side of the duration much shorter, and you're 296 00:15:17,240 --> 00:15:19,240 Speaker 4: having a lot of more expect securities on your bounce 297 00:15:19,320 --> 00:15:21,760 Speaker 4: sheet that can extend the maturity as rates go up, 298 00:15:21,960 --> 00:15:25,000 Speaker 4: you have this duration mismatch, and that I think is 299 00:15:25,040 --> 00:15:27,760 Speaker 4: the issue here now for banks. They have to reassess 300 00:15:27,800 --> 00:15:31,880 Speaker 4: that gap, and that will be regulatory scrutiny, as you say, 301 00:15:32,080 --> 00:15:35,920 Speaker 4: coming in here, meaning they're going to be reevaluation of 302 00:15:36,000 --> 00:15:39,680 Speaker 4: banks risk management in the wake of Silicon Valley. Obviously, 303 00:15:40,440 --> 00:15:43,640 Speaker 4: I think what then happens is that you could expect 304 00:15:43,640 --> 00:15:46,240 Speaker 4: that banks will either decide to sell more more expect 305 00:15:46,240 --> 00:15:48,480 Speaker 4: securities or let them run off like so to speak. 306 00:15:48,480 --> 00:15:51,360 Speaker 4: That just what the fetid. Either way, more of that 307 00:15:51,440 --> 00:15:54,680 Speaker 4: supply code quote comes on the secondary market in mortgages, 308 00:15:54,840 --> 00:15:58,960 Speaker 4: and it has to be repriced a higher spread. Indeed, 309 00:15:59,040 --> 00:16:01,080 Speaker 4: nothing to do with the credit risk on the line, 310 00:16:01,080 --> 00:16:03,360 Speaker 4: it's the government, but much more to do with I 311 00:16:03,360 --> 00:16:06,720 Speaker 4: think the liquidity risk and the bank duration risk. 312 00:16:07,200 --> 00:16:10,640 Speaker 1: Yeah, super reminiscent of the conversation we had late last 313 00:16:10,720 --> 00:16:14,320 Speaker 1: year about the sort of broken mortgage market and how banks, 314 00:16:14,400 --> 00:16:17,360 Speaker 1: you know, they didn't really want to hold a lot 315 00:16:17,360 --> 00:16:20,160 Speaker 1: of mbs as rates were going up last year, and 316 00:16:20,200 --> 00:16:23,360 Speaker 1: I can imagine this year they're even less incentivized to do. 317 00:16:23,320 --> 00:16:27,320 Speaker 2: It on the mortgage front. Specifically, I mean, would their 318 00:16:27,440 --> 00:16:32,440 Speaker 2: show up in sort of a straightforward higher spread relative 319 00:16:32,440 --> 00:16:35,760 Speaker 2: to treasuries. I mean, all things equal in terms of like, okay, 320 00:16:36,000 --> 00:16:38,360 Speaker 2: banks want to reduce their duration risk. They all saw 321 00:16:38,400 --> 00:16:41,240 Speaker 2: what happened with Silicon Bailey Bank. The regulators come in, 322 00:16:41,720 --> 00:16:43,800 Speaker 2: would this be expected to feed through in a sort 323 00:16:43,800 --> 00:16:46,920 Speaker 2: of straightforward way to cost their mortgages. 324 00:16:47,280 --> 00:16:49,680 Speaker 4: In some way? It does, right, because it's a market 325 00:16:49,680 --> 00:16:53,920 Speaker 4: functioning is in Okay, there's a it's a very liquid market, 326 00:16:53,960 --> 00:16:56,880 Speaker 4: so people will price in this quote quote higher supply 327 00:16:57,080 --> 00:16:59,440 Speaker 4: that comes naturally own the market, so to speak, because 328 00:16:59,480 --> 00:17:05,000 Speaker 4: there's continuous mortgage origination that are packaging these securities. Then 329 00:17:05,080 --> 00:17:07,640 Speaker 4: you have to think about what happens also with other 330 00:17:07,760 --> 00:17:11,560 Speaker 4: investors in this space, So the mutual funds and ETFs 331 00:17:11,680 --> 00:17:14,359 Speaker 4: and foreign investors you know out of foreg mutual funds 332 00:17:14,400 --> 00:17:18,080 Speaker 4: or foreign central banks even or foreign pension funds, what 333 00:17:18,200 --> 00:17:21,600 Speaker 4: they do, how they respond. Now the analysis that's out 334 00:17:21,640 --> 00:17:24,399 Speaker 4: there as an expectation that they're demand will pick up 335 00:17:24,400 --> 00:17:28,120 Speaker 4: as that spread implicitly widens, you know, there will be 336 00:17:28,440 --> 00:17:31,639 Speaker 4: the moneymar money managers that will find it attractive. But 337 00:17:31,720 --> 00:17:34,480 Speaker 4: I do think that's say, on average, it should become 338 00:17:34,520 --> 00:17:37,760 Speaker 4: a wider spread. Really because banks in the United States 339 00:17:38,040 --> 00:17:41,760 Speaker 4: have been the purchaser of these securities. In fact, with 340 00:17:41,840 --> 00:17:44,800 Speaker 4: all my nose that brought with me here today. 341 00:17:44,720 --> 00:17:46,480 Speaker 2: I always love when guests bring data. 342 00:17:46,680 --> 00:17:50,679 Speaker 4: Yeah, there's data out actually really specifically by entity with 343 00:17:51,280 --> 00:17:57,000 Speaker 4: most backed securities. You have, even credit unions, involved, community banks, 344 00:17:57,040 --> 00:18:00,920 Speaker 4: smaller regional banks. They all rely on these most backed 345 00:18:00,960 --> 00:18:04,800 Speaker 4: securities in part because their loan book is largely FHA. 346 00:18:06,200 --> 00:18:09,560 Speaker 4: Now mortgage is not really non residential sorry, not non 347 00:18:09,600 --> 00:18:13,679 Speaker 4: agency mortgages. It's it starts mostly government backed loans. So 348 00:18:14,520 --> 00:18:18,040 Speaker 4: I think there's that change potentially coming. How much it 349 00:18:18,080 --> 00:18:21,439 Speaker 4: will be of spread mining is obviously a party, a 350 00:18:21,440 --> 00:18:25,040 Speaker 4: bit of a market functioning ideas in you know, who 351 00:18:25,080 --> 00:18:28,680 Speaker 4: will really be the buyer here? I can imagine that 352 00:18:28,840 --> 00:18:32,159 Speaker 4: my former colleagues, as I may listen now, hey, you 353 00:18:32,200 --> 00:18:34,480 Speaker 4: know you're right, Ben, this is interesting. We can you know, 354 00:18:34,520 --> 00:18:37,200 Speaker 4: mortgage are interesting to buy. But that's not going to 355 00:18:37,240 --> 00:18:39,879 Speaker 4: fill entirely the voice in my sense, given what the 356 00:18:39,920 --> 00:18:43,359 Speaker 4: Feathers doing too with their portfolio, which is large, large 357 00:18:43,359 --> 00:18:44,280 Speaker 4: portfolio mortgages. 358 00:18:44,480 --> 00:18:47,120 Speaker 1: So would it be fair to say, summing it all up, 359 00:18:47,160 --> 00:18:50,600 Speaker 1: that you know, Americans are in for higher mortgage rates 360 00:18:50,640 --> 00:18:53,840 Speaker 1: thanks to a bunch of I guess venture capitalists who 361 00:18:54,080 --> 00:18:55,879 Speaker 1: caught their money out of Silicon Valley. 362 00:18:56,600 --> 00:18:59,359 Speaker 2: Yeah, maybe on average who had their money, who had 363 00:18:59,400 --> 00:19:03,240 Speaker 2: their portfolio oil companies' money in Silicon Valley Bank in parts, 364 00:19:03,240 --> 00:19:06,480 Speaker 2: so they personally could get lower mortgages from the bank. 365 00:19:06,560 --> 00:19:08,320 Speaker 2: I don't you know that seems to be part of 366 00:19:08,359 --> 00:19:10,240 Speaker 2: the story. So thank you, and now we all have 367 00:19:10,240 --> 00:19:13,960 Speaker 2: to pay higher mortgages. But into the interest owns the 368 00:19:14,080 --> 00:19:15,080 Speaker 2: layer on to the ironing. 369 00:19:15,359 --> 00:19:18,400 Speaker 4: Yeah, the interest only mortgages that they that they have, right, 370 00:19:18,440 --> 00:19:21,840 Speaker 4: they originate a low costs and you know, and all 371 00:19:21,880 --> 00:19:24,320 Speaker 4: part of this idea if yeah, bring all your money 372 00:19:24,320 --> 00:19:26,840 Speaker 4: in and we'll do more business with you. That's probably 373 00:19:26,840 --> 00:19:29,120 Speaker 4: going to change to an extent. Now. I do think 374 00:19:29,200 --> 00:19:31,960 Speaker 4: pointing to announced for Boomberg put out is really good, right, 375 00:19:32,000 --> 00:19:34,760 Speaker 4: how mapping out where these interest only mortgages were in 376 00:19:35,280 --> 00:19:39,440 Speaker 4: California and the East Coast. Fortunately it's all high quality borrowers, right, 377 00:19:39,480 --> 00:19:42,480 Speaker 4: people that can essentially pay all those loans without a problem. 378 00:19:42,480 --> 00:19:45,760 Speaker 4: It's not subprime. But nonetheless it's I think that market 379 00:19:45,800 --> 00:19:49,680 Speaker 4: has changed and that will add to you know, rising 380 00:19:50,119 --> 00:19:52,160 Speaker 4: costs of credit. I guess can we. 381 00:19:52,119 --> 00:19:54,439 Speaker 1: Talk a little bit about what we're seeing in terms 382 00:19:54,440 --> 00:19:58,200 Speaker 1: of collateral, because of course, you know, collateral, the availability 383 00:19:58,240 --> 00:20:02,120 Speaker 1: of collateral will affect the availability of credit because it's 384 00:20:02,200 --> 00:20:05,280 Speaker 1: the thing that's used to secure a bunch of loans. 385 00:20:05,600 --> 00:20:10,320 Speaker 1: And we have seen some signs of like I don't 386 00:20:10,320 --> 00:20:13,800 Speaker 1: want to say necessarily problems, but maybe weirdness in that market. 387 00:20:13,920 --> 00:20:15,600 Speaker 1: So I think I wrote about this in the All 388 00:20:15,640 --> 00:20:19,080 Speaker 1: Lots newsletter. But for instance, the one month T bill 389 00:20:19,200 --> 00:20:24,080 Speaker 1: is yielding like eighty basis points below the effective FED 390 00:20:24,119 --> 00:20:26,680 Speaker 1: funds rate, for instance, which is something that you wouldn't 391 00:20:26,720 --> 00:20:30,199 Speaker 1: expect to see unless there was a big scramble for 392 00:20:30,320 --> 00:20:31,560 Speaker 1: T bills at the moment. 393 00:20:32,240 --> 00:20:33,359 Speaker 3: What is going on there? 394 00:20:34,320 --> 00:20:37,680 Speaker 4: Yeah, there is I think three things happening. So, as 395 00:20:37,720 --> 00:20:40,280 Speaker 4: you said earlier, the reverse rebo facility of the Fed 396 00:20:40,400 --> 00:20:43,760 Speaker 4: is very large, and that has been for a while now, 397 00:20:43,800 --> 00:20:46,840 Speaker 4: and the main reason is that which are particularly money 398 00:20:46,920 --> 00:20:50,920 Speaker 4: market funds that are in that facility, they cannot purchase 399 00:20:51,200 --> 00:20:55,080 Speaker 4: enough T bills out there. So one, it's the Treasury 400 00:20:55,080 --> 00:20:58,199 Speaker 4: that hasn't issues more T bills right because of the 401 00:20:58,280 --> 00:21:00,520 Speaker 4: debt ceiling in their account of the fat and that 402 00:21:00,600 --> 00:21:04,360 Speaker 4: dynamic talk about it in second. Secondly, I think there 403 00:21:04,359 --> 00:21:06,840 Speaker 4: has been indeed somewhat of a hoarding of these T 404 00:21:06,960 --> 00:21:09,359 Speaker 4: bills now if it isn't by those money market funds, 405 00:21:09,480 --> 00:21:14,199 Speaker 4: by other participants. And then it's about I think the 406 00:21:14,240 --> 00:21:18,639 Speaker 4: way the foreign investors are involved in our markets, because 407 00:21:19,160 --> 00:21:21,280 Speaker 4: you know, the latest data I looked up from the 408 00:21:21,320 --> 00:21:24,159 Speaker 4: FAT TIC data showed actually increase of holdings of T 409 00:21:24,320 --> 00:21:27,359 Speaker 4: bills by foreign central banks of foreign investors what they 410 00:21:27,400 --> 00:21:29,359 Speaker 4: call it, which can be could be others. Right, So 411 00:21:30,119 --> 00:21:33,040 Speaker 4: if you take that to gether there is a i'd 412 00:21:33,040 --> 00:21:36,120 Speaker 4: say a limited supply of T bills in the marketplace, 413 00:21:36,680 --> 00:21:39,439 Speaker 4: then the Treasury is not issuing enough of it, or 414 00:21:39,520 --> 00:21:41,880 Speaker 4: so to speak. By the way, the FAT owns about 415 00:21:41,880 --> 00:21:45,640 Speaker 4: three hundred billion of A two, which not insignificant. So 416 00:21:45,880 --> 00:21:48,240 Speaker 4: I think it gives you together a picture of that. 417 00:21:48,880 --> 00:21:51,879 Speaker 4: And this is statistics. By the way data and the notes, 418 00:21:52,240 --> 00:21:55,240 Speaker 4: there's four trillion of T bills outstanding. That's something like 419 00:21:55,320 --> 00:21:58,440 Speaker 4: two point two trillion is pledged as collateral. There's data 420 00:21:58,480 --> 00:22:02,160 Speaker 4: from the FAT. Anything in between the sitting somewhere, someone's 421 00:22:02,200 --> 00:22:04,560 Speaker 4: holding us and so it could be very different entities. 422 00:22:04,600 --> 00:22:07,439 Speaker 4: I think this is constrained to supply of D bills. 423 00:22:07,480 --> 00:22:11,600 Speaker 4: Why that yield is lower the effect. 424 00:22:11,440 --> 00:22:14,920 Speaker 2: Would you expect that premium to shrink a bit? I mean, 425 00:22:15,040 --> 00:22:18,040 Speaker 2: I could see like Okay, if it's early March, and 426 00:22:18,080 --> 00:22:20,080 Speaker 2: you're probably thinking two things. I don't want to take 427 00:22:20,119 --> 00:22:22,280 Speaker 2: any duration risk because we just saw a bank get 428 00:22:22,280 --> 00:22:24,000 Speaker 2: blown out by duration risk. And I don't want to 429 00:22:24,000 --> 00:22:26,880 Speaker 2: take any credit risk because I just saw a bank collapse. 430 00:22:27,440 --> 00:22:30,040 Speaker 2: But we you know, as we get as that recedes 431 00:22:30,080 --> 00:22:32,520 Speaker 2: in the past, we see some of these emergency functions 432 00:22:32,520 --> 00:22:35,159 Speaker 2: start to recede again. Would you expect some of that 433 00:22:35,280 --> 00:22:36,960 Speaker 2: to just sort of ease a little bit as people 434 00:22:37,000 --> 00:22:39,720 Speaker 2: feel a little bit safe to hold something other than 435 00:22:39,840 --> 00:22:42,680 Speaker 2: you know, one month government securities or something ultra short. 436 00:22:43,320 --> 00:22:46,240 Speaker 4: Yeah, and in some ways playing out as we speak, right, 437 00:22:46,440 --> 00:22:48,479 Speaker 4: you know, the spread looks like like where we are 438 00:22:48,520 --> 00:22:50,560 Speaker 4: in two thousand eights, But I don't that's not the 439 00:22:50,600 --> 00:22:55,000 Speaker 4: same idea, even though people link it to the bank stress, 440 00:22:55,119 --> 00:22:58,600 Speaker 4: you know, and parallels to the bank stress are like, yeah, okay, oh, 441 00:22:58,680 --> 00:23:00,639 Speaker 4: seven of eight showld some much similar events that we 442 00:23:00,960 --> 00:23:03,920 Speaker 4: just went through. But there's a difference. Maybe that one 443 00:23:04,000 --> 00:23:07,080 Speaker 4: the feed is much more in position to do something 444 00:23:07,119 --> 00:23:09,560 Speaker 4: about it very really quickly. That's what we saw that 445 00:23:09,560 --> 00:23:11,960 Speaker 4: that has definitely the fuse part of the crisis, And 446 00:23:12,040 --> 00:23:13,840 Speaker 4: do as you say, there are a lot of alternatives 447 00:23:13,880 --> 00:23:17,720 Speaker 4: now in terms of of T bills right that people 448 00:23:17,760 --> 00:23:19,960 Speaker 4: want to invest in, you know, given that where rates 449 00:23:20,000 --> 00:23:22,480 Speaker 4: are and fixed income, so I think that spread will 450 00:23:22,480 --> 00:23:25,280 Speaker 4: not be so inverted for now for a long time, 451 00:23:25,800 --> 00:23:28,560 Speaker 4: but that it is a combination of the technicality of 452 00:23:28,920 --> 00:23:32,040 Speaker 4: T bill markets in terms of its supply and what 453 00:23:32,160 --> 00:23:34,359 Speaker 4: the treasury is issuing and who's holding it, and the 454 00:23:34,440 --> 00:23:37,680 Speaker 4: dynamic of the treasury with that seating and it's accounted 455 00:23:37,680 --> 00:23:41,040 Speaker 4: the fat against just a general sense of flight the 456 00:23:41,080 --> 00:23:43,560 Speaker 4: safety that is temporarily and has receded again. 457 00:24:00,760 --> 00:24:03,600 Speaker 1: You've been a portfolio manager for a long time, which 458 00:24:03,640 --> 00:24:05,399 Speaker 1: is one of the reasons we wanted to talk to 459 00:24:05,480 --> 00:24:09,080 Speaker 1: you about this. But you know, you have experienced various 460 00:24:09,280 --> 00:24:12,720 Speaker 1: financial crises from a sort of bond perspective. 461 00:24:13,080 --> 00:24:14,720 Speaker 3: Talk to us about I. 462 00:24:14,680 --> 00:24:19,520 Speaker 1: Guess what you saw in previous collateral crunches. So two 463 00:24:19,560 --> 00:24:23,920 Speaker 1: thousand and eight Eurozone crisis. I mean, I remember writing 464 00:24:23,920 --> 00:24:26,920 Speaker 1: about the repo market and the role of your Eurozone 465 00:24:26,920 --> 00:24:31,080 Speaker 1: government bonds in the Eurozone crisis. Like these were financial 466 00:24:31,840 --> 00:24:36,399 Speaker 1: crises that were basically caused by collateral problems and a 467 00:24:36,440 --> 00:24:40,119 Speaker 1: big like crunch in that secured lending market. 468 00:24:40,359 --> 00:24:41,359 Speaker 3: Talk to us about that. 469 00:24:41,800 --> 00:24:44,520 Speaker 4: Yeah, and that was quite significant in twenty eight and 470 00:24:44,560 --> 00:24:47,119 Speaker 4: twenty eleven. You know, on the one end, it was 471 00:24:47,280 --> 00:24:51,880 Speaker 4: about people indeed literally holding safe bonds and by by 472 00:24:52,040 --> 00:24:54,720 Speaker 4: quote quote holding them and not lending them out to 473 00:24:54,800 --> 00:24:59,960 Speaker 4: the report market. You're getting this repostquisical other words. You know, 474 00:25:00,000 --> 00:25:02,040 Speaker 4: so if there's not enough collateral to lend out there 475 00:25:02,040 --> 00:25:04,200 Speaker 4: and people need that collateral, they have to pay more 476 00:25:04,320 --> 00:25:06,439 Speaker 4: higher interests as a results. So come in to their 477 00:25:06,440 --> 00:25:09,080 Speaker 4: discussion about mortgage the same idea, but the reduction of 478 00:25:09,119 --> 00:25:12,240 Speaker 4: that supply mortgages because banks don't want to hold it, 479 00:25:12,240 --> 00:25:15,520 Speaker 4: push it up at the cost of borrowing. Then obviously 480 00:25:15,920 --> 00:25:18,560 Speaker 4: the derivatives market play is a huge role here because 481 00:25:18,960 --> 00:25:21,880 Speaker 4: that's experience I had from two thousand and eight. It 482 00:25:21,920 --> 00:25:24,240 Speaker 4: was not just the Leman moment itself, but it was 483 00:25:24,359 --> 00:25:27,240 Speaker 4: the recognition that Lemen was such an important play in 484 00:25:27,280 --> 00:25:30,400 Speaker 4: the derivatives market. And there's a collateral agreements that back 485 00:25:30,480 --> 00:25:36,520 Speaker 4: those derivatives. And is that agreement International Security Data got 486 00:25:36,520 --> 00:25:39,800 Speaker 4: the term is that the swap agreement. There's a collateral 487 00:25:39,840 --> 00:25:42,960 Speaker 4: agreement and that's a quite quite detailed agreement, and it's 488 00:25:43,040 --> 00:25:45,480 Speaker 4: important there is that if you are managing derivatives in 489 00:25:45,560 --> 00:25:48,600 Speaker 4: a mutual fund or ETF. The banks that you have 490 00:25:48,720 --> 00:25:52,879 Speaker 4: that derivtic agreement with, you agree on exchanging collateral as 491 00:25:52,960 --> 00:25:56,919 Speaker 4: margining against the mark the market of the position. And 492 00:25:56,960 --> 00:25:59,040 Speaker 4: then two thousand and eight what happened was that the 493 00:25:59,040 --> 00:26:01,600 Speaker 4: banks were not in the position to deliver that clatteral 494 00:26:02,040 --> 00:26:05,200 Speaker 4: or vice versa, and that led to this huge crunch 495 00:26:05,240 --> 00:26:08,280 Speaker 4: now on top game Lehman, which was this big counterparty 496 00:26:08,280 --> 00:26:11,840 Speaker 4: obviously pulling that out of the system, no longer recognizing 497 00:26:11,840 --> 00:26:15,119 Speaker 4: that who is facing who in the system. Also, people 498 00:26:15,119 --> 00:26:17,919 Speaker 4: didn't know like where's my coladal? You know, can I 499 00:26:17,960 --> 00:26:20,640 Speaker 4: get it back? So from the experience of back then 500 00:26:20,840 --> 00:26:23,600 Speaker 4: with PIMCO, you know, they did a really good job 501 00:26:24,119 --> 00:26:27,840 Speaker 4: at that time to negotiate those cloudal agreements so that 502 00:26:27,840 --> 00:26:30,320 Speaker 4: the banks had no choice that legally to actually return 503 00:26:30,359 --> 00:26:32,879 Speaker 4: the cloudal unless they absolutely couldn't, because there was a 504 00:26:32,920 --> 00:26:35,400 Speaker 4: lot of that going on too. It was like if 505 00:26:35,440 --> 00:26:37,600 Speaker 4: you didn't have a good cloudal agreement, you would be 506 00:26:37,600 --> 00:26:40,800 Speaker 4: at significant risk. But all of that contributed to this 507 00:26:41,000 --> 00:26:45,000 Speaker 4: huge pressure in funding markets and what we call claudal 508 00:26:45,119 --> 00:26:48,960 Speaker 4: shortage that to extent repeated in the Euro crisis too, 509 00:26:49,040 --> 00:26:53,040 Speaker 4: in particularly with German government bonds. And then maybe last 510 00:26:53,040 --> 00:26:56,240 Speaker 4: point on that is that this repo market, the repurchase market, 511 00:26:56,520 --> 00:26:58,560 Speaker 4: which you then get is that you know, if people 512 00:26:58,600 --> 00:27:01,119 Speaker 4: cannot or are on link to lend out cloud, you 513 00:27:01,160 --> 00:27:03,480 Speaker 4: get a really functional market. Then it's not only that 514 00:27:03,600 --> 00:27:06,080 Speaker 4: the bond straight what they say special were you're getting 515 00:27:06,119 --> 00:27:08,560 Speaker 4: a significant squeeze, right, And that's. 516 00:27:08,480 --> 00:27:10,639 Speaker 1: I was going to ask, have we seen any like 517 00:27:11,080 --> 00:27:13,639 Speaker 1: pick up and fails to deliver and things like that 518 00:27:13,680 --> 00:27:16,680 Speaker 1: in the repo market this time around, Ben's smiling because 519 00:27:16,680 --> 00:27:19,159 Speaker 1: he has the data right in front of him, excellent. 520 00:27:18,840 --> 00:27:21,480 Speaker 4: Grinning, grinning, grinning at you know. So at three four 521 00:27:21,520 --> 00:27:24,480 Speaker 4: am this morning, I did look out that data the 522 00:27:24,560 --> 00:27:27,040 Speaker 4: Treasury fails. It had picked up actually in March, you know, 523 00:27:27,119 --> 00:27:28,200 Speaker 4: there was a little spike there. 524 00:27:28,560 --> 00:27:31,639 Speaker 3: So this would be a classic sign something else deliver. 525 00:27:31,880 --> 00:27:33,600 Speaker 2: You get buy something and they don't give it to you. 526 00:27:33,720 --> 00:27:36,040 Speaker 4: Yeah, it's it's literally death. As you know that there's 527 00:27:36,119 --> 00:27:40,040 Speaker 4: people that are unable to settle securities or settle rebolt. 528 00:27:40,359 --> 00:27:43,480 Speaker 3: Transaction, deliver the bond that you said you would deliver. 529 00:27:43,600 --> 00:27:44,800 Speaker 2: Why is that not a default? 530 00:27:45,680 --> 00:27:46,440 Speaker 4: Yeah, because the. 531 00:27:46,440 --> 00:27:49,159 Speaker 3: Repo market is special in many ways. 532 00:27:49,200 --> 00:27:52,440 Speaker 1: And actually if it was, if I mean, Ben can 533 00:27:52,480 --> 00:27:55,680 Speaker 1: talk about this obviously, but if it was considered a default, 534 00:27:55,720 --> 00:27:58,879 Speaker 1: I think we would suddenly have a major seizure in 535 00:27:59,160 --> 00:28:01,960 Speaker 1: credit because part of what happens is like you can 536 00:28:02,040 --> 00:28:05,159 Speaker 1: kind of online credit that you've been promised, so you 537 00:28:05,200 --> 00:28:09,000 Speaker 1: get this daisy chain of credit that lubricates the entire market. 538 00:28:09,480 --> 00:28:11,520 Speaker 1: And if you start breaking the chain by saying this 539 00:28:11,600 --> 00:28:13,800 Speaker 1: is a default rather than a fail to deliver, then 540 00:28:13,960 --> 00:28:15,080 Speaker 1: that's a big issue. 541 00:28:15,160 --> 00:28:17,280 Speaker 2: Ben is showing me some cool charts that he has 542 00:28:17,320 --> 00:28:19,000 Speaker 2: on his laptop, so we got to get them and 543 00:28:19,040 --> 00:28:19,920 Speaker 2: then post them along. 544 00:28:20,000 --> 00:28:22,360 Speaker 3: Yeah too, you know, I have a question. 545 00:28:22,240 --> 00:28:25,159 Speaker 2: Also going back from the portfolio manager perspective, and we 546 00:28:25,160 --> 00:28:29,119 Speaker 2: were talking about mortgages and mortgage spreads and maybe what 547 00:28:29,320 --> 00:28:31,800 Speaker 2: is sort of a worse situation for a bank because 548 00:28:31,920 --> 00:28:33,359 Speaker 2: they don't want to get a tap on the shoulder 549 00:28:33,400 --> 00:28:37,399 Speaker 2: from a regulator. Maybe that's an opportunity for an asset 550 00:28:37,440 --> 00:28:41,800 Speaker 2: manager like a PIMCO or something else. In general, how 551 00:28:41,880 --> 00:28:45,719 Speaker 2: much of the opportunity to pick up alpha or extra 552 00:28:45,840 --> 00:28:49,240 Speaker 2: gains for an asset manager, whether it's the size of 553 00:28:49,280 --> 00:28:52,440 Speaker 2: Pimco or maybe a smaller one, comes from essentially the 554 00:28:52,520 --> 00:28:56,200 Speaker 2: constraints that are imposed on other types of potential holders 555 00:28:56,520 --> 00:28:58,640 Speaker 2: that don't exist for the asset manager. 556 00:28:59,360 --> 00:29:01,920 Speaker 4: Yeah, what comes to mind immedia is like that these 557 00:29:01,920 --> 00:29:04,920 Speaker 4: securities have I liquidity risk and therefore that's priced into 558 00:29:04,960 --> 00:29:08,320 Speaker 4: the spread right as a risk premium. Because if the 559 00:29:08,400 --> 00:29:11,600 Speaker 4: banks are somewhat called called natural holders of these mortgages, 560 00:29:11,640 --> 00:29:14,760 Speaker 4: as they originate the mortgages, they have MORGS backed securities 561 00:29:14,800 --> 00:29:18,840 Speaker 4: to manage to repayment risk, and so I could imagine 562 00:29:18,840 --> 00:29:23,200 Speaker 4: that that therefore the spread could add alpha to your portfolio. 563 00:29:23,680 --> 00:29:25,880 Speaker 4: The other part of it is more about that It 564 00:29:25,960 --> 00:29:29,959 Speaker 4: isn't that again liquidity, I guess, but it's the dislocation idea, 565 00:29:30,120 --> 00:29:32,600 Speaker 4: like you know, how do you generate alpha as you 566 00:29:32,680 --> 00:29:35,480 Speaker 4: jump on these opportunities where there's some level of dislocation 567 00:29:36,040 --> 00:29:38,960 Speaker 4: and you expect it to reverse right, and therefore you're 568 00:29:38,960 --> 00:29:43,080 Speaker 4: getting price return out of those securities. The other part 569 00:29:43,120 --> 00:29:45,680 Speaker 4: could be is that as much as the FAT is 570 00:29:46,320 --> 00:29:50,080 Speaker 4: continuing with its quantitative tidening policy, and I guess the 571 00:29:50,120 --> 00:29:53,760 Speaker 4: commercial banks have to pull back or because of duration risk, 572 00:29:54,480 --> 00:29:57,840 Speaker 4: that you're getting this more permanent, higher level of mortgage 573 00:29:58,040 --> 00:30:02,520 Speaker 4: backed securities yielding higher more permanently. Then it becomes an 574 00:30:02,600 --> 00:30:06,480 Speaker 4: income opportunity, and I could see for that reason certain 575 00:30:06,520 --> 00:30:10,720 Speaker 4: funds allocate to these type of securities. But from my 576 00:30:10,800 --> 00:30:14,360 Speaker 4: own experience with mortgages is that the challenge of managing 577 00:30:14,360 --> 00:30:16,960 Speaker 4: them in your own bump portfolio is duration. Because of 578 00:30:17,040 --> 00:30:20,760 Speaker 4: the repayment movements. You know, they have coveccity. They can 579 00:30:20,800 --> 00:30:23,840 Speaker 4: sometimes be very positive if rates go up really quick, 580 00:30:24,800 --> 00:30:27,240 Speaker 4: but then the other way around it, you'd start to decline. 581 00:30:27,920 --> 00:30:30,880 Speaker 4: The convectionity on these securities get quite negative, and that 582 00:30:30,960 --> 00:30:34,920 Speaker 4: could actually adversely strength and shrink your duration of your 583 00:30:34,960 --> 00:30:38,440 Speaker 4: portfolio versus your index, and then your alpha argument isn't 584 00:30:38,520 --> 00:30:40,200 Speaker 4: really there because you'll be lagging. 585 00:30:40,800 --> 00:30:44,560 Speaker 1: Yeah, you touched on this already briefly, but I think 586 00:30:44,560 --> 00:30:46,840 Speaker 1: there's probably more to say. How would you expect the 587 00:30:46,880 --> 00:30:49,719 Speaker 1: FED to react to all of this, because this is 588 00:30:49,760 --> 00:30:51,479 Speaker 1: also one of the things that is going on at 589 00:30:51,480 --> 00:30:54,440 Speaker 1: the moment. Seems to be a lot of volatility and 590 00:30:54,520 --> 00:30:59,320 Speaker 1: almost day to day changes in expectations for future hikes 591 00:30:59,480 --> 00:31:02,120 Speaker 1: maybe even future cuts. You know, people are trying to 592 00:31:02,120 --> 00:31:06,080 Speaker 1: figure out what potentially lower credit circulating in the economy 593 00:31:06,160 --> 00:31:09,440 Speaker 1: actually means for things like inflation. How would you expect 594 00:31:09,440 --> 00:31:10,440 Speaker 1: the FED to handle this? 595 00:31:11,320 --> 00:31:13,240 Speaker 4: So the One of what they did in March was 596 00:31:13,320 --> 00:31:16,360 Speaker 4: I think, as expected, you know, your lender of last resort, 597 00:31:16,440 --> 00:31:20,040 Speaker 4: you should provide this liquidity. So that term loan facility 598 00:31:20,760 --> 00:31:22,840 Speaker 4: was a new facility, but it wasn't to me a 599 00:31:22,840 --> 00:31:25,760 Speaker 4: surprise because the FED is the ability now to put 600 00:31:25,760 --> 00:31:27,560 Speaker 4: those up those facilities in twenty four hours? 601 00:31:28,040 --> 00:31:30,520 Speaker 3: Can I take them off a shelf basically pretty much? 602 00:31:30,560 --> 00:31:33,200 Speaker 4: So the market knows this right. So it means that 603 00:31:33,200 --> 00:31:35,720 Speaker 4: if we're getting autocredit stresses that we saw in March 604 00:31:35,760 --> 00:31:38,240 Speaker 4: twenty twenty, for example, yeah, with a visit corporate bump 605 00:31:38,280 --> 00:31:41,760 Speaker 4: purchase program, a commercial paper purchase program and so on, 606 00:31:41,840 --> 00:31:44,480 Speaker 4: that is an alphabet soup of these facilities. So I 607 00:31:44,520 --> 00:31:48,280 Speaker 4: think that will be the first reaction. The other reaction 608 00:31:48,480 --> 00:31:52,320 Speaker 4: is is that it is interesting how LA Guard looks 609 00:31:52,360 --> 00:31:55,280 Speaker 4: at this crisis and saying this is not affecting us, 610 00:31:55,760 --> 00:31:58,440 Speaker 4: but we're on guard right because it does correlate with 611 00:31:58,520 --> 00:32:02,320 Speaker 4: their banking system. You know, if bank stocks go down 612 00:32:02,320 --> 00:32:05,800 Speaker 4: here significantly, so will they do so will they in Europe? 613 00:32:06,240 --> 00:32:08,200 Speaker 4: And the ECB would have to react to that. So 614 00:32:08,240 --> 00:32:11,160 Speaker 4: that's another I think an element of the total reaction 615 00:32:11,240 --> 00:32:15,160 Speaker 4: function central banks. Lastly, people probably look at this by 616 00:32:15,200 --> 00:32:17,680 Speaker 4: the two yields as being so volatile, Will there be 617 00:32:17,720 --> 00:32:19,600 Speaker 4: a raycod will there be a pause? And that sort 618 00:32:19,600 --> 00:32:22,280 Speaker 4: of idea. It turns out not right. It turns out 619 00:32:22,280 --> 00:32:24,440 Speaker 4: that this was for the FED not the reason to 620 00:32:24,800 --> 00:32:27,760 Speaker 4: shift policy at this point. But it isn't to say 621 00:32:27,800 --> 00:32:29,400 Speaker 4: that that could be the case. And that's what we've 622 00:32:29,400 --> 00:32:30,240 Speaker 4: been discussing, right. 623 00:32:30,400 --> 00:32:32,520 Speaker 2: Yeah, Well, that's that's what I sort of wanted to 624 00:32:32,880 --> 00:32:35,880 Speaker 2: follow up on specifically, And again I'm thinking back to 625 00:32:35,960 --> 00:32:38,760 Speaker 2: how we started the conversation, which is that sort of 626 00:32:39,400 --> 00:32:42,080 Speaker 2: measures of total bank credit or at one point the 627 00:32:42,160 --> 00:32:46,160 Speaker 2: sort of central the central data points that bond traders 628 00:32:46,280 --> 00:32:48,160 Speaker 2: would look forward to see where the FED was and 629 00:32:48,240 --> 00:32:51,640 Speaker 2: hitting its goals, et cetera. And one other thing, you know, 630 00:32:51,680 --> 00:32:55,240 Speaker 2: we talked about this with Matt King and City recently, 631 00:32:55,320 --> 00:32:59,080 Speaker 2: which is this sort of return of monitorist thinking on 632 00:32:59,160 --> 00:33:02,280 Speaker 2: some level, to what extent is there a sort of 633 00:33:02,400 --> 00:33:06,080 Speaker 2: clear relationship between the volume of credit, the so called 634 00:33:06,120 --> 00:33:09,400 Speaker 2: money supply, and the actual change to price, the price 635 00:33:09,480 --> 00:33:12,200 Speaker 2: level that we see in the economy. The idea that 636 00:33:12,360 --> 00:33:15,600 Speaker 2: money supply and prices were correlated went out of fashion 637 00:33:15,720 --> 00:33:18,080 Speaker 2: pretty hard, I would say, in the twenty tens, but 638 00:33:18,160 --> 00:33:21,320 Speaker 2: could it come back and do fashion And I don't know, 639 00:33:21,480 --> 00:33:24,560 Speaker 2: is there a like how much is the FED or 640 00:33:24,720 --> 00:33:29,040 Speaker 2: economists at the FED looking at these credit numbers as 641 00:33:29,080 --> 00:33:32,600 Speaker 2: being early warning signals in one way or another about 642 00:33:32,640 --> 00:33:35,200 Speaker 2: what inflation will be doing three months or six months 643 00:33:35,280 --> 00:33:35,960 Speaker 2: down the line. 644 00:33:36,240 --> 00:33:38,080 Speaker 4: Yeah, And I think it touched there on like how 645 00:33:38,120 --> 00:33:42,959 Speaker 4: people behave with money, meaning what happened with these deposits 646 00:33:42,960 --> 00:33:45,440 Speaker 4: at Silicon Value Bank, for example, and how quickly that 647 00:33:45,560 --> 00:33:48,440 Speaker 4: went out of Silicon Valley within forty eight hours, like 648 00:33:48,880 --> 00:33:52,800 Speaker 4: you no, forty fifty billion or whatever was requested. That's 649 00:33:52,840 --> 00:33:55,560 Speaker 4: I think what they would be looking at that behaviors change. 650 00:33:55,600 --> 00:33:58,040 Speaker 4: That money went elsewhere. It went to money market funds, 651 00:33:58,120 --> 00:34:00,360 Speaker 4: but the part of it is not known where went 652 00:34:01,000 --> 00:34:03,520 Speaker 4: The data shows only only half of the depositive fly 653 00:34:03,640 --> 00:34:06,000 Speaker 4: it went to money market fund So to your point, 654 00:34:06,520 --> 00:34:09,719 Speaker 4: the money supply analysis, And I actually read the transcript 655 00:34:09,800 --> 00:34:12,239 Speaker 4: from the early eighties because I was looking at when 656 00:34:12,239 --> 00:34:14,400 Speaker 4: they rates speak and what was the fat focus on. 657 00:34:14,520 --> 00:34:16,680 Speaker 4: Obviously they were focused on M one and M two. 658 00:34:17,200 --> 00:34:18,960 Speaker 4: They knowed by the way back then at M two 659 00:34:19,000 --> 00:34:21,600 Speaker 4: and then one were really rising a lot, and that 660 00:34:21,680 --> 00:34:24,960 Speaker 4: was part of the economy growing and doing actually well 661 00:34:25,400 --> 00:34:27,880 Speaker 4: that this does matter to the fat today too, meaning 662 00:34:28,320 --> 00:34:32,120 Speaker 4: if they don't see in these eggo good significant contraction 663 00:34:32,239 --> 00:34:35,239 Speaker 4: at points to a change in the economy going out 664 00:34:35,239 --> 00:34:37,719 Speaker 4: of the direction. That means that there's money from commercial 665 00:34:37,719 --> 00:34:39,799 Speaker 4: banks that went to money market funds and elsewhere. It's 666 00:34:39,840 --> 00:34:43,239 Speaker 4: just recycled and gets ultimately out in the economy. So 667 00:34:43,280 --> 00:34:45,520 Speaker 4: I do think that they pay attention to it because 668 00:34:45,520 --> 00:34:47,719 Speaker 4: there is that link. We came out of a pandemic 669 00:34:47,760 --> 00:34:52,000 Speaker 4: at a production capacity was hugely shut off right and 670 00:34:52,040 --> 00:34:55,120 Speaker 4: had to turn it back on, so that equation monitors 671 00:34:55,160 --> 00:34:57,880 Speaker 4: the equation plays an our role because if you have 672 00:34:57,920 --> 00:35:01,680 Speaker 4: price level higher reproduction best you could say to be higher, 673 00:35:02,320 --> 00:35:05,600 Speaker 4: the movement of money will only drive into the economy. 674 00:35:05,640 --> 00:35:09,279 Speaker 4: I think so because velocity is funny, is that the 675 00:35:09,400 --> 00:35:12,080 Speaker 4: toughest that is the measure is probably higher given what's 676 00:35:12,080 --> 00:35:15,200 Speaker 4: happened with is depositive flights. So I think if I 677 00:35:15,200 --> 00:35:18,160 Speaker 4: think of a Joe, I think of it that within 678 00:35:18,280 --> 00:35:21,400 Speaker 4: the fact they're going to try to model OUs. Not 679 00:35:21,440 --> 00:35:22,839 Speaker 4: only would the New York I put out the other 680 00:35:22,920 --> 00:35:26,359 Speaker 4: day how sensitive deposits are to change an interest rates. 681 00:35:26,560 --> 00:35:30,279 Speaker 4: It was an interesting research piece but also then you know, 682 00:35:30,480 --> 00:35:32,960 Speaker 4: if people change their mind about holding it the positive 683 00:35:33,000 --> 00:35:36,000 Speaker 4: the bank and using it in a different way, say 684 00:35:36,080 --> 00:35:39,640 Speaker 4: money market fund, will that ulto spending behavior and therefore 685 00:35:39,719 --> 00:35:40,719 Speaker 4: affect the economy. 686 00:35:41,320 --> 00:35:44,880 Speaker 1: So the overall dynamic that we're seeing is that deposit 687 00:35:44,960 --> 00:35:49,840 Speaker 1: flight from banks and rotation into largely money market funds 688 00:35:50,000 --> 00:35:53,319 Speaker 1: cash like instruments, who are then parking it at the 689 00:35:53,360 --> 00:35:57,080 Speaker 1: reverse repo facility because they probably don't have enough t 690 00:35:57,239 --> 00:35:59,960 Speaker 1: bows to invest in things like that. Is there a 691 00:36:00,200 --> 00:36:04,560 Speaker 1: point at which the RRP becomes problematic for the economy, 692 00:36:04,640 --> 00:36:07,440 Speaker 1: Like the Fed created it, I think it was in 693 00:36:07,520 --> 00:36:10,239 Speaker 1: twenty fourteen or twenty thirteen as a way of better 694 00:36:10,280 --> 00:36:14,200 Speaker 1: managing interest rate hikes or preparing for interest rate hikes 695 00:36:14,239 --> 00:36:16,719 Speaker 1: around that time. But is there a point at which 696 00:36:16,800 --> 00:36:20,560 Speaker 1: like it becomes competition for banks? 697 00:36:20,640 --> 00:36:23,560 Speaker 4: Basically yeah, and that may be happening. You know, if 698 00:36:23,600 --> 00:36:27,360 Speaker 4: you raise rates to a certain level, that attracts money 699 00:36:27,400 --> 00:36:31,359 Speaker 4: to alternatives to deposits, and the banks have a hard 700 00:36:31,400 --> 00:36:33,799 Speaker 4: time you know, catching up, as that announcement New York 701 00:36:33,840 --> 00:36:36,560 Speaker 4: Fed shows, and we're seeing it through earnings by the way, 702 00:36:36,560 --> 00:36:39,200 Speaker 4: coming through now that banks are adjusting somewhat but not 703 00:36:39,840 --> 00:36:44,120 Speaker 4: significant enough then a bloated a very large reverse repo 704 00:36:44,200 --> 00:36:46,719 Speaker 4: facility indicates that the money markets are getting way too 705 00:36:46,800 --> 00:36:49,120 Speaker 4: much money in that they cannot deploy in T bills 706 00:36:49,160 --> 00:36:52,000 Speaker 4: directly and have to go to the Fed's facility to 707 00:36:52,040 --> 00:36:54,399 Speaker 4: get sort of a quasi T bill. There By they 708 00:36:54,440 --> 00:36:56,719 Speaker 4: post money to defend and get an interest back on 709 00:36:56,760 --> 00:37:00,360 Speaker 4: that money, and it's a collaborized transaction. But it's lily 710 00:37:00,400 --> 00:37:02,360 Speaker 4: they're getting just interest paid on that money like the 711 00:37:02,400 --> 00:37:06,839 Speaker 4: T bill. But that becomes a problematic as much as 712 00:37:06,880 --> 00:37:09,120 Speaker 4: too that the money marks are funds are happy, right 713 00:37:09,200 --> 00:37:10,799 Speaker 4: they go out there market and you know, we are 714 00:37:10,880 --> 00:37:13,520 Speaker 4: higher heels and you know, and but at some point 715 00:37:13,680 --> 00:37:16,960 Speaker 4: this creates this, I guess, this tension in the system, 716 00:37:17,080 --> 00:37:19,640 Speaker 4: just like in twenty eighteen when the FED discovered, like 717 00:37:20,000 --> 00:37:23,000 Speaker 4: there's a natural level of bank reserves that we cannot 718 00:37:23,000 --> 00:37:26,560 Speaker 4: go under or we're getting major attention in the system 719 00:37:26,560 --> 00:37:29,640 Speaker 4: because if we're getting any major tax payments that are 720 00:37:29,680 --> 00:37:32,080 Speaker 4: not coming in or cash withdrawals or any sort of 721 00:37:32,080 --> 00:37:36,040 Speaker 4: that sort of dynamic causes this friction and then they 722 00:37:36,080 --> 00:37:37,960 Speaker 4: have to do other things. At that time, they had 723 00:37:37,960 --> 00:37:40,160 Speaker 4: to actually they bought E bills at that time to 724 00:37:40,239 --> 00:37:43,279 Speaker 4: try to reverse the situation. This case, you probably see 725 00:37:43,280 --> 00:37:47,000 Speaker 4: more of these landing facilities being initiated in order to 726 00:37:47,080 --> 00:37:49,399 Speaker 4: upset the friction of the reverse repubs. 727 00:37:49,200 --> 00:37:52,120 Speaker 1: Because this kind of it reminds me of like, you know, 728 00:37:52,400 --> 00:37:54,520 Speaker 1: you bring in like a cat to catch a mouse, 729 00:37:54,560 --> 00:37:56,279 Speaker 1: and then you have to bring in, like, I don't know, 730 00:37:56,280 --> 00:38:00,160 Speaker 1: a dog to catch the cat, and then. 731 00:37:59,120 --> 00:37:59,960 Speaker 3: Like it just keeps going. 732 00:38:00,320 --> 00:38:02,600 Speaker 1: Right, It's like one lending facility and to fix the 733 00:38:02,680 --> 00:38:05,320 Speaker 1: tensions or frictions caused by the other lending facility. 734 00:38:05,560 --> 00:38:07,879 Speaker 4: Yeah, and they've long said that they wanted to use 735 00:38:07,920 --> 00:38:11,759 Speaker 4: the permanent repo facility as a way to control all 736 00:38:11,800 --> 00:38:14,560 Speaker 4: of this, but people have said, like, well you do that, 737 00:38:15,120 --> 00:38:18,320 Speaker 4: then everything will converge to that facility, because that's the 738 00:38:18,440 --> 00:38:21,000 Speaker 4: safest points that you in the system that you can 739 00:38:21,040 --> 00:38:21,719 Speaker 4: go to. Right. 740 00:38:21,800 --> 00:38:25,279 Speaker 1: It's almost like they're creating like different tiers of money, right, 741 00:38:25,320 --> 00:38:29,080 Speaker 1: because the RRP suddenly becomes like a specific type of 742 00:38:29,120 --> 00:38:33,440 Speaker 1: money that's in competition with like money in bank deposits 743 00:38:33,480 --> 00:38:34,600 Speaker 1: and that sort of thing, but. 744 00:38:34,600 --> 00:38:37,160 Speaker 4: It's considered to be safe. So that's the safest acid 745 00:38:37,239 --> 00:38:41,200 Speaker 4: you can have, is that reverse repo facility. So it's 746 00:38:41,200 --> 00:38:45,279 Speaker 4: obviously a really complex issue, not easy to solve. I 747 00:38:45,320 --> 00:38:47,839 Speaker 4: think for markets, it continues to mean like we're going 748 00:38:47,880 --> 00:38:50,480 Speaker 4: to phase another episode like this for sure. I mean 749 00:38:50,480 --> 00:38:53,520 Speaker 4: I think the more that facility grows, as one indicator 750 00:38:53,600 --> 00:38:56,040 Speaker 4: to our earlier discussion, that's a sign of stress. 751 00:38:56,400 --> 00:38:59,759 Speaker 2: So just sort of a big picture, I mean, we 752 00:38:59,800 --> 00:39:02,520 Speaker 2: have I've not seen credit fall off a cliff yet, 753 00:39:02,560 --> 00:39:05,800 Speaker 2: Like we're seeing some signs of stress difficulty getting but 754 00:39:05,800 --> 00:39:07,880 Speaker 2: it's not been fall of a clip. Nonetheless, there's something, 755 00:39:08,280 --> 00:39:10,560 Speaker 2: but it sounds like from this conversation there's like a 756 00:39:10,600 --> 00:39:13,880 Speaker 2: few distinct stories. So there was the acute shock at 757 00:39:13,920 --> 00:39:17,360 Speaker 2: the beginning of March related to Silicon Valley Bank. But also, 758 00:39:17,400 --> 00:39:20,120 Speaker 2: as you point out, like twenty twenty one was just 759 00:39:20,200 --> 00:39:23,920 Speaker 2: sort of an insane year and when everyone sort of 760 00:39:23,920 --> 00:39:26,600 Speaker 2: got drunk on line go up and then some of 761 00:39:26,640 --> 00:39:29,920 Speaker 2: that naturally has to be unwound. Then there is the 762 00:39:30,040 --> 00:39:36,640 Speaker 2: stress of rising rates creating competition for deposits, and so 763 00:39:36,920 --> 00:39:39,960 Speaker 2: it's particularly at the smaller and regional banks where they 764 00:39:40,120 --> 00:39:42,200 Speaker 2: may have been doing very well in that interest margin. 765 00:39:42,280 --> 00:39:44,799 Speaker 2: Suddenly they might have higher funding costs if they want 766 00:39:44,840 --> 00:39:47,200 Speaker 2: to keep their deposit base. Each of these seem like 767 00:39:47,280 --> 00:39:50,520 Speaker 2: slightly different sort of strange putting stress. But like, how 768 00:39:50,520 --> 00:39:52,120 Speaker 2: would you sort of I don't know if weight is 769 00:39:52,160 --> 00:39:54,040 Speaker 2: the right word, but like sort of like think about 770 00:39:54,360 --> 00:39:56,000 Speaker 2: all these things we're talking about and sort of like, 771 00:39:56,360 --> 00:39:58,160 Speaker 2: I don't know, rank them in terms of top of 772 00:39:58,280 --> 00:40:01,080 Speaker 2: mind or like what sort of the most salient factor 773 00:40:01,160 --> 00:40:03,560 Speaker 2: here at this point in terms of what could drive 774 00:40:03,600 --> 00:40:04,760 Speaker 2: the availability of credit. 775 00:40:05,520 --> 00:40:08,400 Speaker 4: Yeah, I do think it's it is the depositive story 776 00:40:08,480 --> 00:40:12,000 Speaker 4: that was I think the significant change because what it 777 00:40:12,000 --> 00:40:15,200 Speaker 4: did was that as we're seeing it coming through the earnings, 778 00:40:15,680 --> 00:40:19,160 Speaker 4: bank become cautious, so they start to build up reserves. 779 00:40:19,360 --> 00:40:23,359 Speaker 4: I think is really important underlying trend there against you know, 780 00:40:23,520 --> 00:40:27,080 Speaker 4: the fact that you have an economy that's uncertain, so 781 00:40:27,200 --> 00:40:32,120 Speaker 4: the opportunities to lend are by definition diminishing. Right, that's natural, 782 00:40:32,160 --> 00:40:34,520 Speaker 4: I guess. But I think the fact that the way 783 00:40:34,560 --> 00:40:38,879 Speaker 4: people responded to what happened at Silicon Valley Bank has 784 00:40:38,960 --> 00:40:42,000 Speaker 4: woken up markets right and saying, wait a minute, you 785 00:40:42,040 --> 00:40:44,920 Speaker 4: have actually an ability to withdraw money so fast, so 786 00:40:45,040 --> 00:40:47,640 Speaker 4: quick through an app, and you know the digital age 787 00:40:47,680 --> 00:40:50,799 Speaker 4: of our money, as you covered crypto laws. Fact that's 788 00:40:50,840 --> 00:40:52,759 Speaker 4: actually at this time that much to do with this. 789 00:40:53,280 --> 00:40:57,320 Speaker 4: But it's in the context, right, a digital payment system 790 00:40:58,040 --> 00:41:01,120 Speaker 4: could cause more shocks going from here is my sort 791 00:41:01,160 --> 00:41:03,520 Speaker 4: of broader take. I would think, yeah, it's good interesting 792 00:41:03,560 --> 00:41:04,440 Speaker 4: years that we're waking up. 793 00:41:04,480 --> 00:41:08,839 Speaker 2: We did a episode again right before SVB with Joe 794 00:41:08,960 --> 00:41:12,520 Speaker 2: Baldad Barclays, who put out a note recently talking about 795 00:41:12,840 --> 00:41:16,640 Speaker 2: SVB waking up so called sleepy deposits, which is suddenly 796 00:41:16,640 --> 00:41:18,360 Speaker 2: people waking up to the fact that it's like I 797 00:41:18,360 --> 00:41:21,239 Speaker 2: can get higher yield and higher safety in one move, 798 00:41:21,320 --> 00:41:22,040 Speaker 2: Like what's the catch? 799 00:41:22,880 --> 00:41:23,360 Speaker 3: Exactly it? 800 00:41:23,480 --> 00:41:26,839 Speaker 1: Yeah, I remember I actually pitched a story idea after 801 00:41:26,920 --> 00:41:29,360 Speaker 1: It was after our conversation with the New York landlord 802 00:41:29,360 --> 00:41:31,120 Speaker 1: where he was like, why do I want to be 803 00:41:31,160 --> 00:41:33,120 Speaker 1: in the business of renting out apartments when I can 804 00:41:33,160 --> 00:41:35,600 Speaker 1: get six percent on like a money market front or 805 00:41:35,640 --> 00:41:38,120 Speaker 1: like a bank deposit. And I remember pitching a story 806 00:41:38,160 --> 00:41:40,799 Speaker 1: going we should do like how higher rates are kind 807 00:41:40,840 --> 00:41:42,040 Speaker 1: of changing everything. 808 00:41:42,280 --> 00:41:45,280 Speaker 2: It's like, what's the catch? Yeah, it's like no credit, 809 00:41:45,320 --> 00:41:48,000 Speaker 2: no bank run risk, and higher rates Like who wouldn't want? 810 00:41:48,040 --> 00:41:48,200 Speaker 1: You know? 811 00:41:48,360 --> 00:41:49,920 Speaker 2: But I think a lot of people would wake up 812 00:41:49,960 --> 00:41:50,239 Speaker 2: to that. 813 00:41:50,239 --> 00:41:53,200 Speaker 1: That's exactly what we're seeing, right, It's like the reconfiguration 814 00:41:53,640 --> 00:41:56,840 Speaker 1: of money because of the higher rates that we haven't 815 00:41:56,880 --> 00:42:00,839 Speaker 1: seen for many, many many years anyway, and we're gonna 816 00:42:00,880 --> 00:42:03,440 Speaker 1: leave it there, but so glad we could have you on. 817 00:42:03,560 --> 00:42:04,840 Speaker 1: That was an amazing discussion. 818 00:42:04,880 --> 00:42:07,040 Speaker 3: So thank you so much, Thank you, Tracy, Thanks Joe. 819 00:42:07,040 --> 00:42:08,120 Speaker 4: It's wed be great to be. 820 00:42:08,239 --> 00:42:09,960 Speaker 2: Yeah, this is really fun. Thank you so much. Ben, 821 00:42:10,040 --> 00:42:10,440 Speaker 2: Thank you. 822 00:42:23,320 --> 00:42:25,120 Speaker 3: So Joe. I thought that was fascinating. 823 00:42:25,239 --> 00:42:27,719 Speaker 1: I can see a headline about, you know, venture capitalists 824 00:42:27,719 --> 00:42:31,200 Speaker 1: pulling money causing higher mortgage rates for millions of Americans, 825 00:42:31,480 --> 00:42:34,640 Speaker 1: just doing absolute number we could get in lots of traffic. 826 00:42:35,040 --> 00:42:37,759 Speaker 1: Maybe we won't do that, but there is something there, right, 827 00:42:37,920 --> 00:42:40,520 Speaker 1: you know, you have seen this deposit flight set in motion, 828 00:42:40,840 --> 00:42:43,480 Speaker 1: and it seems natural to assume that there is going 829 00:42:43,520 --> 00:42:45,640 Speaker 1: to be some sort of impact on the banks who 830 00:42:45,800 --> 00:42:47,720 Speaker 1: may pull back from certain markets. 831 00:42:48,200 --> 00:42:50,520 Speaker 2: No, it's really interesting, and there are like so many 832 00:42:50,600 --> 00:42:54,080 Speaker 2: like different factors, Like getting a handle on what's going 833 00:42:54,120 --> 00:42:57,680 Speaker 2: on with credit at any given moment is really tough, 834 00:42:57,680 --> 00:42:59,399 Speaker 2: and I thought Ben sort of explained why. I mean, 835 00:42:59,400 --> 00:43:02,640 Speaker 2: one is, there's no one credit market. There's bank credit, 836 00:43:02,719 --> 00:43:06,360 Speaker 2: there's entities like Pimcode, there's private credit entities like Apollo, 837 00:43:06,440 --> 00:43:09,480 Speaker 2: et cetera. So like, there's no one thing. Spreads are 838 00:43:09,560 --> 00:43:13,839 Speaker 2: different from volume. You have surveys of private borrowers, you 839 00:43:13,840 --> 00:43:16,000 Speaker 2: have surveys of bank lenders. You're trying to get a 840 00:43:16,040 --> 00:43:17,919 Speaker 2: handle on it, and I you know, it does seem 841 00:43:17,960 --> 00:43:20,600 Speaker 2: like we're not in like a crisis by any stretch, 842 00:43:20,680 --> 00:43:23,200 Speaker 2: but it does seem like, you know, money is less 843 00:43:23,200 --> 00:43:25,480 Speaker 2: freely available than it was maybe several Once. 844 00:43:25,320 --> 00:43:26,520 Speaker 3: Again, well, this is the other thing. 845 00:43:26,600 --> 00:43:29,680 Speaker 1: I think people naturally they hear the word credit crunch 846 00:43:29,760 --> 00:43:31,919 Speaker 1: or the term kind of crunch, and they think two 847 00:43:31,960 --> 00:43:34,799 Speaker 1: thousand and eight, and they think, you know, sharp dramatic 848 00:43:34,960 --> 00:43:39,080 Speaker 1: pullback in credit availability, And that's not necessarily the way 849 00:43:39,120 --> 00:43:41,040 Speaker 1: it has to play out. You can have these sort 850 00:43:41,080 --> 00:43:45,359 Speaker 1: of slow moving crunches that maybe affect certain markets more 851 00:43:45,400 --> 00:43:49,040 Speaker 1: than others. And I would imagine that's probably what we're 852 00:43:49,080 --> 00:43:49,760 Speaker 1: going to see. 853 00:43:49,920 --> 00:43:52,040 Speaker 2: And you know, again that's what the Fed's going for 854 00:43:52,080 --> 00:43:53,880 Speaker 2: in some sense, I mean, what is what is interest 855 00:43:53,920 --> 00:43:57,080 Speaker 2: rate policy but an attempt to make credit more expensive 856 00:43:57,160 --> 00:43:59,840 Speaker 2: with the goal of stealing the economy for fighting inflation 857 00:44:00,440 --> 00:44:02,560 Speaker 2: and so like, to the extent that all these things 858 00:44:02,600 --> 00:44:06,080 Speaker 2: are coming together to put pressure on credit availability. And 859 00:44:06,160 --> 00:44:08,440 Speaker 2: again it goes back to the mad King conversation and 860 00:44:08,480 --> 00:44:11,200 Speaker 2: the sort of like prety like straightforward return of like 861 00:44:11,320 --> 00:44:14,959 Speaker 2: monitorist thinking. On some level, we're watching the plan. 862 00:44:15,239 --> 00:44:18,200 Speaker 1: Yeah, I mean, it's the reconfiguration of money in the 863 00:44:18,200 --> 00:44:21,440 Speaker 1: financial system based on these new sort of rates that 864 00:44:21,560 --> 00:44:25,120 Speaker 1: are available in different ways or at different places. 865 00:44:25,680 --> 00:44:27,160 Speaker 2: Shall we leave it there, Let's leave it there. 866 00:44:27,239 --> 00:44:27,520 Speaker 4: Okay. 867 00:44:27,840 --> 00:44:30,560 Speaker 1: This has been another episode of the All Thoughts podcast. 868 00:44:30,640 --> 00:44:33,200 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 869 00:44:33,200 --> 00:44:34,040 Speaker 1: Tracy Alloway. 870 00:44:34,160 --> 00:44:37,000 Speaker 2: And I'm Jill Wisenthal. You can follow me on Twitter 871 00:44:37,080 --> 00:44:40,240 Speaker 2: at the Stalwart. Follow our guest Ben Emmons on Twitter. 872 00:44:40,280 --> 00:44:44,440 Speaker 2: He's under the handle at Marco Madness to post a 873 00:44:44,440 --> 00:44:46,200 Speaker 2: bunch of great charts. Maybe he'll post some of the 874 00:44:46,400 --> 00:44:49,680 Speaker 2: charts that we talked about today on the show. Follow 875 00:44:49,680 --> 00:44:54,160 Speaker 2: our producers Carman Rodriguez at Carman Arman and Dashel Bennett 876 00:44:54,200 --> 00:44:57,480 Speaker 2: at dashbot. And check out all of the Bloomberg podcasts 877 00:44:57,600 --> 00:45:01,680 Speaker 2: under the handle at Podcasts, and for more Oddlots content, 878 00:45:01,719 --> 00:45:05,799 Speaker 2: go to Bloomberg dot com slash Oddlots, where we post transcripts. 879 00:45:05,920 --> 00:45:07,839 Speaker 2: We have a blog. We have a newsletter that comes 880 00:45:07,840 --> 00:45:11,520 Speaker 2: out every Friday, and go check out our discord listeners 881 00:45:11,560 --> 00:45:13,680 Speaker 2: hanging out and chatting about all these topics and more 882 00:45:13,719 --> 00:45:17,560 Speaker 2: twenty four to seven discord dot gg slash odlots. It's 883 00:45:17,640 --> 00:45:19,720 Speaker 2: really fun. Thanks for listening,