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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. Joining us now, I'm

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Speaker 2: pleased to say f I moy and had CEO and

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Speaker 2: Chairman of Banks for America Brian we have to say

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Speaker 2: thank you, thanks for having us.

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Speaker 3: It's great for you to be here. These talent teammates

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Speaker 3: are out working early in the morning and hopefully making

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Speaker 3: some money for the shareholders.

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Speaker 2: It's getting noisy. We could talk about how much money

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Speaker 2: they're making in just a moment. I actually wanted to

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Speaker 2: start with a quote from Liz from the Bank of

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Speaker 2: America Institute in the first hour of our coverage here.

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Speaker 2: I find this stunning every time I read it. This

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Speaker 2: will be the fifth time today medium value of savings

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Speaker 2: and checking balances a more than forty percent higher than

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Speaker 2: twenty nineteen for all income levels. As you look across

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Speaker 2: the business, consumers, companies, just how resilient is this economy still?

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Speaker 1: Well?

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Speaker 3: Listen, the team do a great job of putting this

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Speaker 3: out and we purposely created the institute so we can

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Speaker 3: get this date out and it's not a reflection what's

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Speaker 3: coming tomorrow. It's more reflection on what you see in

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Speaker 3: the past. But it's very great. There's sixty plus million

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Speaker 3: customers at thirty seven million checking account holders, and they

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Speaker 3: have been remarkably resilient. And so the idea we were

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Speaker 3: sitting here last year this time we'd be talking about

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Speaker 3: our team was predicting a recession somewhere early this year.

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Speaker 3: Then they took that off the table as you moved

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Speaker 3: through the year, and now they're predicting two percent plus

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Speaker 3: growth this quarter. So you've gone from negative to slightly

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Speaker 3: positive two percent.

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Speaker 4: That is.

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Speaker 3: Returning to the mean. It's not outsized growth, it's actually

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Speaker 3: slowing down. So people can't forget we're going from a

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Speaker 3: four to five percent growth rate. That two and a

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Speaker 3: half percent growth is slowing down. In the striction on

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Speaker 3: economy accomplishments purpose. Meanwhile, the consumer is very resilient and

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Speaker 3: that's providing an anchor to windward that the FED has

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Speaker 3: latitude that a lot of places don't have. That they

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Speaker 3: can be holded restrictive and let the economy really catch up,

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Speaker 3: but they have to be mindful of the change at

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Speaker 3: some point that consumers slow down, and they have slowed

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Speaker 3: down their spending, and so last year to have been

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Speaker 3: ten percent growth, this year in the fall five percent.

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Speaker 3: Now it's down to three to four percent, and they've

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Speaker 3: got to be careful they to overshoot. So this is

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Speaker 3: the tension we're in right now, which is this resilient

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Speaker 3: economy and actually, as you said, Lisa, actually trying to

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Speaker 3: bring inflation down for since the financial crisis, and now

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Speaker 3: most center banks are trying to get inflation up, and

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Speaker 3: so it's a completely different execution and that's what we

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Speaker 3: got to get right.

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Speaker 2: You're dominant in small business lending. I'm just wondering just

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Speaker 2: how much confidence there is nowt that's still in corporate

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Speaker 2: America at the lower level, and the small companies across

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Speaker 2: this country.

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Speaker 3: If you say, by virtue of their activity, it's strong

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Speaker 3: but on the other hand, line usage and one do

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Speaker 3: you be on here? Later she'll talk about that line

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Speaker 3: uses has come down a bit, which means that the

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Speaker 3: cost of borrowing went up, and so therefore I'm a

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Speaker 3: little more careful, and so hiring is a little more careful,

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Speaker 3: Equipment purchases a little more careful, and so well, they're

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Speaker 3: fine making money, and the profits are strong, and the

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Speaker 3: team will talk about profits driving this market and the

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Speaker 3: EPs estimates for public companies, even mid sized companies are participating.

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Speaker 3: That the American economy is the dominant economy in the

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Speaker 3: world right now in terms of activity and interest and

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Speaker 3: investment and lots of good transport. But on the other hand,

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Speaker 3: why aren't they user line so much? It's a little

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Speaker 3: more costly. Therefore you a little more careful. And that's

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Speaker 3: the tension we're going through. Everybody's trying to really figure

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Speaker 3: out how this economy will perform. And four months ago

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Speaker 3: people worried about a recession. Six months ago worried about recession.

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Speaker 3: Now they're not. But now the question is that they

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Speaker 3: really want to invest heavily, and and that's where you

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Speaker 3: see in a little bit of tension here. So everything's fine, solid, resilient,

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Speaker 3: all the words you wanted to do, but it has

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Speaker 3: to sort of work the next twist in the economy

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Speaker 3: to get back to normal.

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Speaker 5: It's funny I hear some of the people who work

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Speaker 5: for you, and they sound incredible bullish, nothing's wrong. Whatever

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Speaker 5: is it your job to basically look around quarners and

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Speaker 5: see what potentially could be the problem. But otherwise things

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Speaker 5: are screaming, and it suggests that even four and a

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Speaker 5: half percent ten year rates would be just fine for

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Speaker 5: the lending and the activity that you're seeing.

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Speaker 3: Well, I think we're also adjusting as a company and

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Speaker 3: as an industry and as a society to simple thing

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Speaker 3: that from two thousand and seven or eight till seventeen,

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Speaker 3: you had no interest rate. Then you had indust rate

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Speaker 3: for about twenty four to thirty six months. Then they

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Speaker 3: were dropping rates in twenty nineteen. Then the COVID comes

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Speaker 3: and they draw. So we've never really had a normal

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Speaker 3: interest rate environment. You know, what would have typically been

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Speaker 3: a three you know, three percent front end rate, four

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Speaker 3: to four and a half percent back end rate, a

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Speaker 3: normal sloping curve, real interustration. It hasn't a curve for

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Speaker 3: anybody under forty, you know, they literally weren't working back then,

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Speaker 3: so and that sounds curmudgeonly, but the raality is that's true.

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Speaker 3: So everybody's adjusting this. So these high rates at four

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Speaker 3: four and a half percent in a tenure are not

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Speaker 3: high rates in the grands give me things. Are high

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Speaker 3: rates in the last fifteen years. So we got to

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Speaker 3: adjust to that, and that'll take time to work to

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Speaker 3: the systems and models and thought process. Our team is

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Speaker 3: the best team in the world in research, and you're

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Speaker 3: going to hear from a lot of today and your

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Speaker 3: viewers of benefit. On the other hand, you know, as

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Speaker 3: you look at it more broadly, my jobs in the

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Speaker 3: team's job at the top of the house is to

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Speaker 3: make sure we're balanced for all outcomes, and that's why

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Speaker 3: we're always worried about what happens tomorrow and we play

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Speaker 3: for The.

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Speaker 5: Balance in outcomes is leading to some really frustrated and

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Speaker 5: board traders, and we talk about that with a lot

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Speaker 5: of people who basically say there's not a lot to

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Speaker 5: do because you can't really get an edge.

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Speaker 1: Are you seeing that in trading activity?

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Speaker 5: Are you seeing that in trading revenues as people basically

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Speaker 5: have no incentive other than just to hold in video,

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Speaker 5: hold on to you know, some of the credit that

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Speaker 5: keeps on rallying and just you know mag.

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Speaker 3: Bank, Well, our team has just come off of last

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Speaker 3: year a record amount of revenues and the quarters the

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Speaker 3: record and growing quarter of a quarter, and we think

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Speaker 3: they're going to farewell this quarter. We hold the market

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Speaker 3: that a few weeks ago. And so Jimmy Damar and

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Speaker 3: the team that's out here, the research team under Candas

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Speaker 3: and the investment banking team on Matthew, you're driving the

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Speaker 3: business and actually gaining share, and so well, you know,

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Speaker 3: pools are down investment banking, we've gained some share there

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Speaker 3: where pools are stable flatish, we're actually up. And that's

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Speaker 3: different in this business. And they do it with the

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Speaker 3: right risk. They made money I think every trading day

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Speaker 3: last year, nearly every trading day for the last five years,

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Speaker 3: and so they do it the right way. Is that

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Speaker 3: boring or not? You have to ask them. It's just

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Speaker 3: fine with us because in the end of that recurring capability,

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Speaker 3: that ability to keep delivering for clients and doing what

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Speaker 3: they need to do and make money at it and

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Speaker 3: deliver for the shareholders and get a return on capitals.

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Speaker 3: What Jim and the team have done.

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Speaker 2: A great you alluded to it, if you maintained that

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Speaker 2: momentum from that record fourth quarter.

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Speaker 3: Yeah, it's we think we're this quarter start off well.

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Speaker 3: The team's doing a good job, and when you get

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Speaker 3: to be bigger and bigger, it's hard to keep that

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Speaker 3: growth going. They keep doing it.

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Speaker 2: Can we talk about the m and a slump as well?

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Speaker 2: Are we working our way out of that? We wake

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Speaker 2: up every single morning we've got a new big blockbuster

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Speaker 2: deal and then we have a conversation about whether they

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Speaker 2: can actually close it or not because of anti trust

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Speaker 2: concerns down in Washington, d C. Do you find us

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Speaker 2: exiting that slump this year? Is that what you're looking for?

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Speaker 3: I think until there's a clarity on policy, that question

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Speaker 3: is going to come up every time it deals out.

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Speaker 3: So the companies are actively engaging a dial like trying

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Speaker 3: to figureut the strategic moves, and then the question is

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Speaker 3: going to get the deals through and that happens in

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Speaker 3: all industries. We need to get this resolved and we

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Speaker 3: need to get to a more rational, predictive outcome to

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Speaker 3: have your people willing to take the risk of putting

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Speaker 3: your company at risk for a cell side. And that's

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Speaker 3: really comes down to the buyers, you know, put themselves

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Speaker 3: somewhat at risk. Their sellers really put themselves at risk

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Speaker 3: because a company the hanging in the bayans for a

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Speaker 3: longer period of time is a tough place to be.

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Speaker 3: Having been there before in my life and having caused

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Speaker 3: people to be there a lot in my life, you

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Speaker 3: know it's a tough place. And so how to run

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Speaker 3: the company? What you can do? So I think we

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Speaker 3: need to get a faster turnaround. The idea is these

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Speaker 3: transactions don't change this month or a year from now.

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Speaker 3: There's the same transaction. People need to get after them,

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Speaker 3: look at and decide what they're going to do and

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Speaker 3: give clarity so that the market tape place. The good

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Speaker 3: news is, you know, investment banking revenues have stabilized and

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Speaker 3: move back up, and that's good. But the M and

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Speaker 3: A piece is still the piece that could come on

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Speaker 3: and push it.

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Speaker 2: Do you find that some clients are reluctant to make

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Speaker 2: deals based on what you just said, even though they

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Speaker 2: make business sense. They just don't even want to en

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Speaker 2: to time the conversation.

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Speaker 3: Because the risk of war balance is so tough, not

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Speaker 3: everybody has a stay in power to fight through you know,

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Speaker 3: lawsuits and time and effort and things like that, and

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Speaker 3: so it really requires if you said you needed ten

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Speaker 3: points of strategic import out of ten to do it,

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Speaker 3: possible points you might need seven before. Now you need

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Speaker 3: all ten because you really have to say this is

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Speaker 3: worse hanging on to and fighting through. That's a different environment.

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Speaker 3: Now against that, you are seeing deals announced, and that's

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Speaker 3: because they make strategic compelling sense for that buyer, seller, etc.

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Speaker 3: But you know, it's just been slowing things down. And

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Speaker 3: I think as you get some rationality here and around

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Speaker 3: the world, because remember, now of these deals are simple

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Speaker 3: anymore if for any company they have operations in Europe

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Speaker 3: where there's same sets of approvals or different sets of

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Speaker 3: approvals and operations other environments. But yeah, the end of

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Speaker 3: the day, consolidation comes because of strategic import and I

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Speaker 3: think you have to let capitalism run.

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Speaker 5: So let's just talk about some of the policy shift,

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Speaker 5: which is nice gentle allusion to the election. Later on,

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Speaker 5: potentially they could offer some more certainty. What kind of

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Speaker 5: em and a boom could you see after that certainty

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Speaker 5: has been established?

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Speaker 3: Yeah, we'll see. I mean I think you know, elections

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Speaker 3: are elections. This company, the oldest part has been around

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Speaker 3: since seventeen eighty four, and you know there's been a

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Speaker 3: lot of elections since that timeframe, and you know, we

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Speaker 3: have to just people. I think you guys asked me

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Speaker 3: in Davos, do you have a drawer from one outcome

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Speaker 3: of d answer is no, We just run the company

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Speaker 3: and drive it. So would you know, I think certainly

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Speaker 3: around the election process here and around the world, we'll

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Speaker 3: add to Okay, we got we know we're dealing with

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Speaker 3: and go on, and so that will create some energy.

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Speaker 3: But I think we have to be careful, say one

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Speaker 3: thing leans one way, one thing leans light, because frankly,

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Speaker 3: the politicians have to get this right for the good

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Speaker 3: of their own state economy, the country economies and stuff.

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Speaker 3: And I think they're all struggling with it.

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Speaker 5: So we talked to a lot of strategists, political policy strategists,

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Speaker 5: and they all say, no, one can really quite believe

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Speaker 5: that it's Trump versus Biden again, and so they're trying

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Speaker 5: to figure out who it's really going to be.

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Speaker 1: Is it going to be you mean, what running for office?

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Speaker 5: I mean, this is sort of what people are talking

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Speaker 5: about to talk about to me.

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Speaker 1: I mean, this is sort of something that comes up.

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Speaker 3: I've got a great job here.

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Speaker 2: I had a feeting and you wouldn't put your hand

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Speaker 2: out to be tracy second this morning.

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Speaker 3: Got a great job at the end of the day.

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Speaker 3: You know, our job, my colleagues that are in the

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Speaker 3: leadership across all industries, is to help any administration be successful.

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Speaker 3: And that's what we try to do here and around

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Speaker 3: the world. And you know, and those are tough jobs,

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Speaker 3: and you know, but I don't think I'm running for office.

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Speaker 3: So I think I've got a great job here and

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Speaker 3: I've got to continue to do it and try to

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Speaker 3: help this team and everybody be better than we could

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Speaker 3: be tomorrow than we are to.

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Speaker 2: There there's been some fires to put out over the

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Speaker 2: last twelve months in the industry. It's been a year

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Speaker 2: since SVB failed, and YCP has been a new issue.

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Speaker 2: Seems like last year was a right shock and this

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Speaker 2: year just big worries about maybe a credit shock. Have

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Speaker 2: you noticed any deposit flight coming towards you from regional

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Speaker 2: banks in any way, shape or form similar to what

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Speaker 2: we saw twelve months ago.

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Speaker 3: There hasn't. There hasn't been a kind of change or

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Speaker 3: was last year, because you I, there are unique business models.

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Speaker 3: That's what's not involved in a little bit of a

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Speaker 3: but and so nothing we're seeing and by the way,

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Speaker 3: we see a lot of flows and we don't see

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Speaker 3: it anywhere. The industry is well capitalized, has good liquidity.

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Speaker 3: Believe me, from last year this year, people short up

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Speaker 3: their liquidity across the industry. Commercial real estate is a

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Speaker 3: slow burn. It's a classic burn. In other words, if

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Speaker 3: you go back in the late eighties and early nineties,

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Speaker 3: we had a role in commercial real estate recession and

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Speaker 3: and so there'll be difficulties and we work in that.

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Speaker 3: But you know, the the trading attitude, which is these

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Speaker 3: assets got to move at a price tomorrow morning, isn't the

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Speaker 3: way the banking system works. And frankly, that's the the

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Speaker 3: value of the banking system. We work with clients. We

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Speaker 3: figure out what the you you take a building, you

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Speaker 3: figure out what the ultimate end state UH rental roles

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Speaker 3: will provide, even refinance it. Sometimes that wipes out the aquity,

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Speaker 3: sometimes it doesn't. We're careful in how we underwrite as

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Speaker 3: an industry. You know, the top thirty banks go through

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Speaker 3: the stress tests, which has a a an effect that says,

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Speaker 3: wait a second, if you're out underwriting outs in a

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Speaker 3: odd way, that will you have to put up the

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Speaker 3: capital prove your right before you even get the chance

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Speaker 3: to prove your right. So, in other words, your capital

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Speaker 3: quirements reflect your underwriting today, even though recession may never come,

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Speaker 3: and it reflects your underwriting commitments under scenario where commercial

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Speaker 3: real estate drops by thirty or forty percent instantaneously, instantaneously.

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Speaker 3: So there's an effect on that on the industry which

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Speaker 3: is much more conservative building and much more middle of

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Speaker 3: the road building, which is probably slowed down the capital

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Speaker 3: provision to some of these companies. But on the other hand,

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Speaker 3: is not a bad thing when you get to this point,

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Speaker 3: So we feel very good. Does that mean banks might fail?

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Speaker 3: There's been thousands of banks have failed across the last

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Speaker 3: thirty forty years. That's what happens. Business models change. But

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Speaker 3: on the other hand, the quality of the banking system

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Speaker 3: is strong.

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Speaker 2: When we caught up in Switzerland, we've been talking about

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Speaker 2: the prospective of a change in capital reserve rules Chem

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Speaker 2: and pal and a semi annual testimony. It pits back

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Speaker 2: away from that. What was your reaction to walk how

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Speaker 2: to sign the last couple of weeks.

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Speaker 3: Well, we in the industry and we in Bank of

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Speaker 3: America believe that we have you know, tremendous amounts of

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Speaker 3: capital liquidity. It's tested the stress test. You know, we

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Speaker 3: don't need to keep moving rules around. We're clear about that.

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Speaker 3: And so you know, I think as people look at

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Speaker 3: this are saying, sort of, what's the reason in the

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Speaker 3: end of the US banking system and the US economy

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Speaker 3: are co exists to each other. And the US economy

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Speaker 3: has grown from pre financial crisis. Now the European economy

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Speaker 3: has grown a lot less. The US economy is much

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Speaker 3: more vibrant. It's recovered from the pandemic shock faster, it's

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Speaker 3: absorbed some of the things. And everybody says, well, that's

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Speaker 3: because X Y or Z E, but they're out. Is

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Speaker 3: it's because the kind of capitalism protect practice in the

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Speaker 3: country is good and the kind of banking system, financial

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Speaker 3: system more broadly helps that happen. And so you know,

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Speaker 3: we've weathered storms. Just think since since since early two thousand,

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Speaker 3: we've had a pandemic recovery from the pandemic, the fastest

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Speaker 3: rise in registrates to kinetic wars on the ground, a

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Speaker 3: trade debates around the world, shipping restrictions. You go through

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Speaker 3: all this. In the end of the day, this industry

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Speaker 3: is we've bid one hundred billion dollars after tax from

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Speaker 3: twenty twenty through now and we build Huger too. Come back.

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Speaker 3: We dealt with the pandemic seventy billion dollars a barrowing overnight,

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Speaker 3: a flood of deposits, and those deposits come out. That's

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Speaker 3: the resilience of the system and that's why we got

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Speaker 3: to be careful about adding capital and stuff when the

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Speaker 3: perceiverisks we don't think justifies them.

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Speaker 5: In the meantime, there has been a shift in terms

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Speaker 5: of consolidation of market share and some of the bigger players,

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Speaker 5: and you were talking about how you were gaining market share.

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Speaker 5: Who are you mostly gaining market share from? Is it

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Speaker 5: the smaller banks? Is it from Europe where in particular y.

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Speaker 3: You know, each of our businesses or eight lines of

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Speaker 3: business have different places they gain from. And so when

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Speaker 3: it's the investment banking and the with Matthew Coder and

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Speaker 3: the trading team and a Jimmy that's largely coming from

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Speaker 3: the long tailed people. This business is hard. It requires

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Speaker 3: about a billion dollars of technology investment a year to

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Speaker 3: have a trading platform to keep up with it. So

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Speaker 3: think about that. So when it's that hard, that means

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Speaker 3: people who don't get the returns and capitals that have

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Speaker 3: quit and it's come this way. That's very different from

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Speaker 3: the consumer bank where Denath and Asia and Holly O'Neal

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Speaker 3: and Aaron llbe to run that business fors it just

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Speaker 3: been driving core account growth and so well, if they

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Speaker 3: give you the statistics about constant accounts, we've grown our

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Speaker 3: consumer base probably four million core checking accounts since the pandemic.

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Speaker 3: So the deposits are up because of those extra balances.

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Speaker 3: That's coming from everywhere. So it really comes from different places.

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Speaker 3: But the idea is our job is to win the

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Speaker 3: market and take it from every place.

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Speaker 5: When you talk about the investment in technology, how much

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Speaker 5: is that going to be an ongoing benefit to a

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Speaker 5: bank like yours.

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Speaker 1: It can invest in.

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Speaker 5: Some of the artificial intelligence that we're hearing about every day.

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Speaker 3: So I think if you think about we've got to

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Speaker 3: be careful about our schischerel intelligence versus machine learning, versus

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Speaker 3: digitization versus digital practice, because it's all different things. But

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Speaker 3: let me just give it a simple stacks. In twenty ten,

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Speaker 3: we had one hundred thousand people in our consumer business.

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Speaker 3: Today we have sixty. We had six thousand branches at

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Speaker 3: the high point about two thousand and eight. We have

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Speaker 3: about four thousand. Now. We had about four in a

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Speaker 3: billion deposits. Now we have nine hundred billion. The amount

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Speaker 3: of transactions going through it's light years bigger. And we're

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Speaker 3: doing the forty thousand less people. And the expense s

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Speaker 3: base we run the whole company on today nominal expenses

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Speaker 3: of sixty four billion dollars round numbers is the same

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Speaker 3: we ran it on twenty fifteen. That is all all

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Speaker 3: the stuff you talking about. That's supplying technology over and

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Speaker 3: over and over again. And do we are we perfect?

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Speaker 3: Absolutely not. Do we have room to keep applying? Yes?

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Speaker 3: Is there plenty ahead of us. It's unbelievable. And so

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Speaker 3: if you look ahead, you know we're raiskally running on

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Speaker 3: neutral headcount. And everybody says, well, you're not hiring. We're

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Speaker 3: hiring people in businesses and putting, you know, revenue generation

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Speaker 3: capabilities out there. At the same time we're taking out

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Speaker 3: of the expense base. And that's a constant strain and

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Speaker 3: it's it's it's pretty remarkable what you can do. But

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Speaker 3: it's if there was some way you snap your fingers

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Speaker 3: and change the whole thing, you would have done it.

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Speaker 3: I mean, we're not.

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Speaker 2: What you just said, though, is so important and can

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Speaker 2: we finish that. I was gonna joke and ask you

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Speaker 2: whether we're all be replaced by a big supercomputer in

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Speaker 2: the next five to ten years, and I think I

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Speaker 2: love the people behind us would like to know the

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Speaker 2: answer to that question as well. But I guess, effectively,

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Speaker 2: in the next five to ten years, are we effectively

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Speaker 2: saying that each dational dollar of revenue is going to

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Speaker 2: be less and less labor intensive because of this adoption

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Speaker 2: of technology.

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Speaker 3: We had three hundred thousand people, we have two hundred

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Speaker 3: and twelve thousands a day. It's going to have less

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Speaker 3: labor content. Are those people paid more? A lot more

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Speaker 3: because the way the labor content shifts, And so if

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Speaker 3: you think about it, it will have less labor content

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Speaker 3: because that is the expensive part, but it'll have more

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Speaker 3: value added from labor because that's the way the mathematics

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Speaker 3: will work. And so so as you think about these trends,

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Speaker 3: they're an ext world. They just keep going on, but

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Speaker 3: people forgetting these trends are already going on. And so

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Speaker 3: one person's AIS and those persons, you know, algorithm models

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Speaker 3: that traders have been using for years. One person's AI

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Speaker 3: is another person's Erica, which is eighteen million customers using it,

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Speaker 3: you know, every day type of thing, and so you've

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Speaker 3: got to be careful about it. Is there potential here

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Speaker 3: that we've never seen bire one hundred and ten percent,

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Speaker 3: But the real question is you don't have to wait

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Speaker 3: for that. Potentially you're taking it out every day if

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Speaker 3: you're working at it.

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Speaker 2: No three day wait comings Bank for Macronnie Thompson, Jamie,

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Speaker 2: you said that three day week.

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Speaker 3: I'm not sure I understand the math there. But our

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Speaker 3: team does a good job. They want to work five days.

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Speaker 2: I'm sure they do. They're not in a way it's

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Speaker 2: going to see it. Thanks for having us. We appreciate it.

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Speaker 2: For I'm Monihan. They're the chairman and CEO of Bank

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Speaker 2: for Maeric, Thank for America Severa Subromania, head of US

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Speaker 2: equity strategy, and Jill Kerrey Hall, the head of US

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Speaker 2: Small and MIDCAF strategy, saying this, we raise our s

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Speaker 2: and P five hundred year end price target a fifty

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Speaker 2: four hundred and five K, but our bullish conviction has

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Speaker 2: called since publishing our twenty four outlook in November. We

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Speaker 2: expect the markets are broad and beyond the mag seven

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Speaker 2: and pockets of the market where we have seen more euphoria.

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Speaker 2: The next message of our market timing framework is still

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Speaker 2: in one word. Up, Savita and Jill join us now

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00:18:52,920 --> 00:18:55,880
Speaker 2: for more. Thank you very much for being with us, Thanks.

437
00:18:55,600 --> 00:18:57,440
Speaker 1: For having us. Thank you very exciting.

438
00:18:57,520 --> 00:18:59,879
Speaker 6: I think this is our first time on team EAT together.

439
00:19:00,200 --> 00:19:03,360
Speaker 2: Probably that well, let's talk about the constructiveness you both

440
00:19:03,400 --> 00:19:06,080
Speaker 2: share and sove, So let's begin with you. That was euphoria. Yeah,

441
00:19:06,080 --> 00:19:08,680
Speaker 2: where are you seeing euphoria right now? Where aren't you

442
00:19:08,720 --> 00:19:09,120
Speaker 2: seeing it?

443
00:19:09,160 --> 00:19:12,600
Speaker 6: I think euphoria is really driven by themes at this point,

444
00:19:12,600 --> 00:19:16,760
Speaker 6: so it's AI. Everybody owns the AI plays. If you

445
00:19:16,760 --> 00:19:20,120
Speaker 6: look at positioning, there's a lot of building euphoria around

446
00:19:20,760 --> 00:19:23,520
Speaker 6: drug discovery GLP one, so.

447
00:19:23,520 --> 00:19:25,000
Speaker 1: There's the matic euphoria.

448
00:19:25,160 --> 00:19:28,879
Speaker 6: But if you look at the actual allocation of fund managers,

449
00:19:29,280 --> 00:19:32,680
Speaker 6: pension funds are at the lowest level of equity exposure

450
00:19:32,720 --> 00:19:37,120
Speaker 6: public equity exposure that we've seen since the nineties. This

451
00:19:37,160 --> 00:19:40,199
Speaker 6: is not a market like ninety nine where everybody is

452
00:19:40,240 --> 00:19:43,240
Speaker 6: telling you to back up the truck on all equities.

453
00:19:43,680 --> 00:19:45,600
Speaker 1: They're saying back up the truck on a.

454
00:19:45,600 --> 00:19:49,560
Speaker 6: Few equities, megacap tech, you know, some pharma, but there's

455
00:19:49,640 --> 00:19:52,320
Speaker 6: no broadspread euphoria in my view. And when you look

456
00:19:52,359 --> 00:19:54,520
Speaker 6: at the positioning, it says something a little bit different

457
00:19:54,960 --> 00:19:57,560
Speaker 6: than the survey data, which I think is also important.

458
00:19:57,800 --> 00:20:00,240
Speaker 6: You know, what they say versus what they do is.

459
00:20:00,200 --> 00:20:01,400
Speaker 1: Sometimes very different.

460
00:20:01,960 --> 00:20:05,800
Speaker 6: I think the risks are sitting outside of the public market.

461
00:20:05,840 --> 00:20:09,080
Speaker 6: Look at where this credit cycle actually unfolded. It was

462
00:20:09,119 --> 00:20:12,040
Speaker 6: in private credit, private equity, and I think those are

463
00:20:12,040 --> 00:20:14,320
Speaker 6: the area's regional banks I think are still working out

464
00:20:14,320 --> 00:20:16,359
Speaker 6: some of their problems. And Jill can speak to that

465
00:20:16,440 --> 00:20:18,920
Speaker 6: as well, but I think that's where you're seeing the

466
00:20:19,400 --> 00:20:22,280
Speaker 6: sort of the credit issues really bubble up.

467
00:20:22,560 --> 00:20:24,720
Speaker 2: Joe, let's turn to the banks. How concerns should we be.

468
00:20:24,840 --> 00:20:27,160
Speaker 2: It feels like we've moved beyond what happened last year.

469
00:20:27,200 --> 00:20:28,199
Speaker 2: Is that still a focus for you?

470
00:20:28,720 --> 00:20:29,440
Speaker 1: Yeah, certainly.

471
00:20:29,480 --> 00:20:31,800
Speaker 7: I think the regional banks are still in an area

472
00:20:31,920 --> 00:20:34,639
Speaker 7: where I think it makes sense to be very selective.

473
00:20:34,720 --> 00:20:36,440
Speaker 2: You know, we're positive on small caps.

474
00:20:36,440 --> 00:20:40,119
Speaker 7: This year, but within financials, that's an area where you know,

475
00:20:40,320 --> 00:20:42,920
Speaker 7: larger banks have looked a bit better than smaller banks.

476
00:20:42,920 --> 00:20:45,120
Speaker 7: But I think there's still opportunity in some of the regions.

477
00:20:45,119 --> 00:20:45,920
Speaker 1: I think this is a.

478
00:20:45,840 --> 00:20:49,399
Speaker 7: Market where stock picking makes sense. Our analysts have done

479
00:20:49,400 --> 00:20:51,919
Speaker 7: a lot of work here. I think the environment this

480
00:20:52,000 --> 00:20:54,320
Speaker 7: year has gotten a bit more optimistic for banks, given

481
00:20:54,400 --> 00:20:56,960
Speaker 7: everyone was expecting a recession going into this year and

482
00:20:57,000 --> 00:20:59,800
Speaker 7: now we're not expecting a recession. Our economists will talk

483
00:20:59,800 --> 00:21:03,560
Speaker 7: about that. I think the the the backdrop for for

484
00:21:03,760 --> 00:21:05,679
Speaker 7: M and A could pick up if we see, you know,

485
00:21:05,720 --> 00:21:07,639
Speaker 7: potentially an easier regulatory environment.

486
00:21:07,640 --> 00:21:08,920
Speaker 1: We'll see how the election goes.

487
00:21:09,600 --> 00:21:11,960
Speaker 7: And I think commercial real estate is still an issue,

488
00:21:11,960 --> 00:21:14,840
Speaker 7: but it makes sense to again be selective be a

489
00:21:14,960 --> 00:21:18,200
Speaker 7: stock picker this year, and that's that's an environment where

490
00:21:18,240 --> 00:21:19,440
Speaker 7: there's a lot of alp opportunity.

491
00:21:19,560 --> 00:21:21,520
Speaker 5: To see this point, Jill, does that mean it's all

492
00:21:21,560 --> 00:21:23,840
Speaker 5: priced in all of those credit issues that we basically

493
00:21:23,840 --> 00:21:25,240
Speaker 5: have heard, I don't think.

494
00:21:25,400 --> 00:21:26,440
Speaker 2: I don't think it's all priced in.

495
00:21:26,520 --> 00:21:29,199
Speaker 7: I think in pockets of the market, especially when you

496
00:21:29,200 --> 00:21:32,560
Speaker 7: look at the broader backdrop within you know, small caps,

497
00:21:32,600 --> 00:21:36,080
Speaker 7: credit sensitivity, refinancing risk, there's a lot of issues that

498
00:21:36,200 --> 00:21:39,679
Speaker 7: if rates continue to move higher or stay high, you know,

499
00:21:39,800 --> 00:21:42,400
Speaker 7: these are areas that are a lot more credit sensitive,

500
00:21:42,440 --> 00:21:45,480
Speaker 7: and we could see areas like real estate that maybe

501
00:21:45,560 --> 00:21:49,439
Speaker 7: multiples haven't moved as much, you know, for the overall market.

502
00:21:49,520 --> 00:21:52,520
Speaker 7: I think for small caps, they have largely priced in

503
00:21:52,600 --> 00:21:55,600
Speaker 7: some of the credit risks there. They were pricing in

504
00:21:55,640 --> 00:21:58,720
Speaker 7: a recession, they were pricing in you know, manufacturing recession,

505
00:21:59,040 --> 00:22:02,840
Speaker 7: they were pricing in eighter credit standards. I think we're

506
00:22:02,840 --> 00:22:04,880
Speaker 7: in a backdrop where if these these continue to ease,

507
00:22:04,920 --> 00:22:06,840
Speaker 7: then there's a lot more upside in that segment of

508
00:22:06,880 --> 00:22:07,639
Speaker 7: the market, which is a.

509
00:22:07,640 --> 00:22:09,680
Speaker 5: Reason why Civita, it's so fascinating to hear you talk

510
00:22:09,680 --> 00:22:11,359
Speaker 5: about how it's not a back the truck up kind

511
00:22:11,400 --> 00:22:13,439
Speaker 5: of moment like it was nineteen ninety nine for all.

512
00:22:13,320 --> 00:22:16,120
Speaker 1: Stocks, just some stocks, some stocks.

513
00:22:15,720 --> 00:22:18,040
Speaker 5: But it sounds like you might want to keep backing

514
00:22:18,119 --> 00:22:20,520
Speaker 5: up the truck in those stocks because they're not as

515
00:22:20,520 --> 00:22:23,320
Speaker 5: susceptible to rates remaining high. Well, you're not as susceptible

516
00:22:23,400 --> 00:22:26,840
Speaker 5: to people getting cold feet realizing that, oh yeah, there

517
00:22:26,880 --> 00:22:28,320
Speaker 5: is some weakness in certain pockets.

518
00:22:28,480 --> 00:22:31,560
Speaker 6: Yeah, No, I think it's it's fair and look, I

519
00:22:31,720 --> 00:22:35,160
Speaker 6: see large cabs as safer until we start to see

520
00:22:35,160 --> 00:22:39,160
Speaker 6: the FED really cut interest rates. Because where we are

521
00:22:39,200 --> 00:22:41,879
Speaker 6: now is an environment where we're pricing in what is

522
00:22:41,920 --> 00:22:43,480
Speaker 6: it now, three rate or.

523
00:22:43,400 --> 00:22:45,399
Speaker 1: Three or four rate cut hikes, two or three.

524
00:22:45,520 --> 00:22:48,359
Speaker 6: Three rate cuts this year, and if we don't get them,

525
00:22:48,880 --> 00:22:50,600
Speaker 6: I think that's the risk for some of these more

526
00:22:50,600 --> 00:22:53,240
Speaker 6: credits on citive areas like real estate, like you know,

527
00:22:53,359 --> 00:22:55,640
Speaker 6: small cabs writ large. I still think there's a lot

528
00:22:55,680 --> 00:22:58,960
Speaker 6: of smaller companies that are economically sensitive that could do

529
00:22:59,040 --> 00:23:01,560
Speaker 6: well in this environment. And then the thing I like

530
00:23:01,560 --> 00:23:03,800
Speaker 6: about the s and P five hundred is that a

531
00:23:03,840 --> 00:23:08,959
Speaker 6: lot of the really risky stuff drifted down in market cabs.

532
00:23:09,000 --> 00:23:12,480
Speaker 6: So you're starting to see the SMP almost get higher

533
00:23:12,600 --> 00:23:16,360
Speaker 6: quality by attrition since twenty twenty two when the FED

534
00:23:16,480 --> 00:23:19,160
Speaker 6: started cutting rates. So if you look at CRE exposure

535
00:23:19,160 --> 00:23:23,640
Speaker 6: commercial real estate exposure of the large cap banks, it's

536
00:23:23,880 --> 00:23:28,600
Speaker 6: a tiny sliver versus where we see it elsewhere. When

537
00:23:28,640 --> 00:23:31,080
Speaker 6: I think about what you were saying earlier about you know,

538
00:23:31,119 --> 00:23:35,520
Speaker 6: this policy having given the private sector consumers and corporates

539
00:23:36,320 --> 00:23:40,640
Speaker 6: a long runway of making money on their short duration

540
00:23:41,560 --> 00:23:46,880
Speaker 6: asset base and locking in long duration liabilities. I think

541
00:23:47,000 --> 00:23:48,960
Speaker 6: that is what we're seeing in the S and P

542
00:23:49,119 --> 00:23:52,360
Speaker 6: five hundred in the average US consumer, And those are

543
00:23:52,359 --> 00:23:54,760
Speaker 6: the areas where I think we can press this because

544
00:23:55,280 --> 00:23:58,439
Speaker 6: even if the FED doesn't cut interest rates, there's still

545
00:23:58,720 --> 00:24:01,600
Speaker 6: you know, relative health and relative gains in those COVID.

546
00:24:01,440 --> 00:24:02,639
Speaker 2: That's what I want to get into. Why do you

547
00:24:02,680 --> 00:24:04,720
Speaker 2: think we have been so comfortable with this repricing of

548
00:24:04,800 --> 00:24:07,240
Speaker 2: interest rates higher? Why do you think we've been so

549
00:24:07,280 --> 00:24:10,520
Speaker 2: comfortable with hot CPI prints, hot PPI prints. Last week

550
00:24:10,600 --> 00:24:13,080
Speaker 2: CPI came in heart the equity market rallied, Yes, what's

551
00:24:13,080 --> 00:24:13,520
Speaker 2: that about?

552
00:24:13,600 --> 00:24:15,879
Speaker 6: Well, the S and P rallied and parts of the

553
00:24:15,920 --> 00:24:17,960
Speaker 6: S and P rally because I think that the S

554
00:24:18,040 --> 00:24:20,320
Speaker 6: and P five hundred is now, you know, a different

555
00:24:20,359 --> 00:24:22,160
Speaker 6: animal than what it was in two thousand and seven.

556
00:24:22,400 --> 00:24:25,280
Speaker 6: Half of it is asset light, it's got positive net

557
00:24:25,320 --> 00:24:27,320
Speaker 6: cash and in you know, the biggest.

558
00:24:26,960 --> 00:24:27,920
Speaker 1: Sectors of tech.

559
00:24:28,280 --> 00:24:30,960
Speaker 6: So I think it's a very different credit cycle. And

560
00:24:31,000 --> 00:24:32,879
Speaker 6: this is what we need to pay attention to, is

561
00:24:33,240 --> 00:24:37,000
Speaker 6: where has credit been extended, who borrowed, and who's going

562
00:24:37,080 --> 00:24:40,080
Speaker 6: to be hurt by a rising interest rate cycle or

563
00:24:40,160 --> 00:24:42,520
Speaker 6: starting to see that. But I think that's what unfolds

564
00:24:42,520 --> 00:24:43,639
Speaker 6: over the next few years.

565
00:24:43,800 --> 00:24:45,640
Speaker 2: Leadership has been narrow. I think we can all agree

566
00:24:45,640 --> 00:24:48,520
Speaker 2: on that, particularly last year. You make the point, Joe,

567
00:24:48,560 --> 00:24:50,520
Speaker 2: and I think it's a point worth exploring that small

568
00:24:50,560 --> 00:24:53,960
Speaker 2: caps tend to outperform following periods of narrow leadership. What

569
00:24:54,080 --> 00:24:56,119
Speaker 2: is that about? Is that connected to the cycle? What

570
00:24:56,280 --> 00:24:56,879
Speaker 2: is that trend?

571
00:24:57,280 --> 00:24:59,720
Speaker 7: Well, I think you know we've seen it both small

572
00:24:59,720 --> 00:25:02,879
Speaker 7: cap tend to outperform and a severe and we expect,

573
00:25:02,960 --> 00:25:04,960
Speaker 7: you know, the equal weighted s and P five hundred,

574
00:25:04,960 --> 00:25:07,560
Speaker 7: we see opportunities there as well. I think you know,

575
00:25:07,680 --> 00:25:10,160
Speaker 7: we're in an environment where the market was led by

576
00:25:10,480 --> 00:25:13,160
Speaker 7: these very narrow themes, you know, some of these megacap

577
00:25:13,200 --> 00:25:17,000
Speaker 7: growth stocks, and now you're at a point where positioning

578
00:25:17,040 --> 00:25:20,040
Speaker 7: is starting to turn more positive on economically sensitive themes.

579
00:25:20,119 --> 00:25:23,320
Speaker 7: We've seen inflows into small caps for the last several months,

580
00:25:23,320 --> 00:25:26,320
Speaker 7: but positioning is very light. A lot of these things

581
00:25:26,440 --> 00:25:29,520
Speaker 7: run in cycles, so small versus large cap leadership. These

582
00:25:29,680 --> 00:25:32,880
Speaker 7: longer cycles tend to last about ten years. Investors were

583
00:25:32,880 --> 00:25:35,439
Speaker 7: in a period from twenty thirteen to twenty twenty when

584
00:25:35,480 --> 00:25:40,240
Speaker 7: small caps underperformed, and now the average multicap manager.

585
00:25:39,840 --> 00:25:42,440
Speaker 1: Is about forty.

586
00:25:41,359 --> 00:25:44,639
Speaker 7: Percent underweight small caps in their portfolio. So, you know,

587
00:25:44,680 --> 00:25:47,200
Speaker 7: I think this is a point where you're starting to

588
00:25:47,240 --> 00:25:49,840
Speaker 7: see more interest in the theme. The economic data, some

589
00:25:49,920 --> 00:25:52,800
Speaker 7: of the macro indicators that Candice talked about earlier are

590
00:25:52,840 --> 00:25:54,959
Speaker 7: all turning off the bottom. So that tends to be

591
00:25:55,359 --> 00:25:57,720
Speaker 7: a positive environment for some of these areas of the

592
00:25:57,760 --> 00:26:00,359
Speaker 7: market that your average fund manager is under expose to,

593
00:26:00,560 --> 00:26:02,320
Speaker 7: like small caps, like cyclicals.

594
00:26:03,200 --> 00:26:04,520
Speaker 1: It sounds pretty bullish.

595
00:26:04,680 --> 00:26:07,160
Speaker 5: I mean, yes, there's some risks if the FED does

596
00:26:07,240 --> 00:26:09,120
Speaker 5: keep rates.

597
00:26:09,240 --> 00:26:10,240
Speaker 2: I think that's the objective.

598
00:26:10,359 --> 00:26:11,679
Speaker 1: I guess here's my question.

599
00:26:12,000 --> 00:26:14,639
Speaker 5: It's not necessarily the same kind of conviction that you

600
00:26:14,760 --> 00:26:15,280
Speaker 5: used to have.

601
00:26:15,960 --> 00:26:18,280
Speaker 1: Why well, I can answer that.

602
00:26:18,400 --> 00:26:23,520
Speaker 6: I think for me, it's because there is more high

603
00:26:23,600 --> 00:26:27,240
Speaker 6: conviction bullishness on equities. Like I said, not all equities,

604
00:26:27,280 --> 00:26:29,320
Speaker 6: but pockets, and I think those are the areas you

605
00:26:29,359 --> 00:26:32,200
Speaker 6: want to watch. I mean, how much do these AI

606
00:26:32,359 --> 00:26:36,480
Speaker 6: plays have to beat earnings from here in order to continue.

607
00:26:35,960 --> 00:26:36,520
Speaker 1: To go up?

608
00:26:36,760 --> 00:26:39,840
Speaker 6: So that's where I worry, and I really firmly believe

609
00:26:39,840 --> 00:26:42,600
Speaker 6: we could see a correction in those areas of the market.

610
00:26:42,600 --> 00:26:44,880
Speaker 6: We could see five percent pullback in the SMP, which

611
00:26:44,920 --> 00:26:48,560
Speaker 6: has been you know, the straight up benchmark for the

612
00:26:48,640 --> 00:26:50,760
Speaker 6: last you know, almost twenty years now.

613
00:26:50,840 --> 00:26:53,800
Speaker 1: But I think that those are the risks. I think

614
00:26:54,119 --> 00:26:55,480
Speaker 1: outside of.

615
00:26:55,320 --> 00:26:59,639
Speaker 6: These themes, there's a lot of you know, dry powder,

616
00:27:00,000 --> 00:27:01,600
Speaker 6: more real growth.

617
00:27:01,640 --> 00:27:04,800
Speaker 1: And when you listen to the Institute, when you.

618
00:27:04,760 --> 00:27:07,160
Speaker 6: Listen to Cannae talk about the indicators we all track,

619
00:27:07,680 --> 00:27:10,160
Speaker 6: it sounds like this is more of a GDP story

620
00:27:10,280 --> 00:27:12,400
Speaker 6: rather than just an earning story.

621
00:27:12,119 --> 00:27:13,200
Speaker 1: Which raises this question.

622
00:27:13,359 --> 00:27:16,879
Speaker 5: In a GDP story, don't bigger companies have an advantage

623
00:27:16,920 --> 00:27:20,120
Speaker 5: structurally at a time where if they can invest in technology,

624
00:27:20,119 --> 00:27:23,520
Speaker 5: and they can invest in some of these small near

625
00:27:23,600 --> 00:27:28,200
Speaker 5: term investments even as they lock in their longer term obligations. Still, ultimately,

626
00:27:28,240 --> 00:27:32,080
Speaker 5: don't you get smaller companies fundamentally disadvantaged in a new

627
00:27:32,080 --> 00:27:34,920
Speaker 5: way that's different from in the past.

628
00:27:35,160 --> 00:27:36,880
Speaker 7: Well, I think while there's some of that, I also

629
00:27:36,920 --> 00:27:39,840
Speaker 7: think that if we're in a cap X cycle, a

630
00:27:39,840 --> 00:27:42,719
Speaker 7: lot of the domestic smaller companies are the ones that

631
00:27:42,880 --> 00:27:47,160
Speaker 7: benefit if a large megacap is spending the domestic smid cap,

632
00:27:47,240 --> 00:27:49,760
Speaker 7: especially if some of these companies are reshoring bringing back

633
00:27:49,760 --> 00:27:51,920
Speaker 7: manufacturing to the US. I think that's a longer term

634
00:27:51,960 --> 00:27:54,919
Speaker 7: theme that will benefit some of these cyclical domestic smaller

635
00:27:54,920 --> 00:27:56,520
Speaker 7: companies within the US Fund.

636
00:27:56,400 --> 00:27:58,480
Speaker 2: Of Questions to ATA. We often do this. I always

637
00:27:58,520 --> 00:28:00,359
Speaker 2: ask you this because we're still upside risk.

638
00:28:01,080 --> 00:28:04,320
Speaker 1: To the S and p Y. Yeah, I would say so, Savita.

639
00:28:04,400 --> 00:28:06,080
Speaker 2: Great to see you, Jill. Thank you to both of you.

640
00:28:06,080 --> 00:28:07,879
Speaker 2: I can't believe you've never done this together. I know,

641
00:28:08,160 --> 00:28:11,159
Speaker 2: but it worked beautiful. Thank you very much. Thanks for

642
00:28:11,200 --> 00:28:25,000
Speaker 2: having joining us around the table. Michael Gapum, the Bank

643
00:28:25,000 --> 00:28:28,240
Speaker 2: for America Global Research Head of US Economics, alongside his

644
00:28:28,359 --> 00:28:31,800
Speaker 2: colleague A Ditch your behalf seeing US economist Mike Aditya.

645
00:28:31,920 --> 00:28:32,720
Speaker 2: Great to see you both.

646
00:28:33,000 --> 00:28:33,960
Speaker 4: Thanks for coming to one.

647
00:28:33,960 --> 00:28:36,040
Speaker 2: Brian Park, Thank you very much for having us. Thank

648
00:28:36,040 --> 00:28:38,280
Speaker 2: you once again. Before we get to the Federal Reserve,

649
00:28:38,360 --> 00:28:40,800
Speaker 2: can we just talk about the recent economic data and

650
00:28:40,840 --> 00:28:43,080
Speaker 2: can you tell me can you point to something that

651
00:28:43,320 --> 00:28:46,840
Speaker 2: demonstrates we are sufficiently restrictive at the Federal Reserve.

652
00:28:47,360 --> 00:28:47,960
Speaker 4: It's tough.

653
00:28:48,000 --> 00:28:50,520
Speaker 8: I mean, as Mike was just saying that housing is

654
00:28:50,560 --> 00:28:55,000
Speaker 8: your typical suspect, and it's hard to Housing did react.

655
00:28:55,400 --> 00:28:57,960
Speaker 8: Activity did slow down, but maybe not for the reasons

656
00:28:57,960 --> 00:29:00,720
Speaker 8: one would expect. I think you could point to bank

657
00:29:00,800 --> 00:29:04,320
Speaker 8: loan growth is another area that's responded to higher rates.

658
00:29:04,320 --> 00:29:07,800
Speaker 8: But outside of maybe loan growth and housing, it's difficult

659
00:29:08,120 --> 00:29:10,760
Speaker 8: in my view to find sectors of the economy that

660
00:29:10,880 --> 00:29:12,200
Speaker 8: had obvious interest rate.

661
00:29:12,080 --> 00:29:15,440
Speaker 2: Effects at the lung and variable lacts just super super

662
00:29:15,480 --> 00:29:17,080
Speaker 2: long or we just not sigh enough.

663
00:29:17,320 --> 00:29:19,680
Speaker 9: Well, we are starting to see some impact on retail

664
00:29:19,760 --> 00:29:22,720
Speaker 9: sales as well. The last couple of prints have been soft,

665
00:29:22,760 --> 00:29:25,200
Speaker 9: and then what was more notable for me.

666
00:29:25,280 --> 00:29:26,600
Speaker 2: Was the downward revisions.

667
00:29:27,040 --> 00:29:29,600
Speaker 9: So after those revisions, it really looks like about four

668
00:29:29,640 --> 00:29:33,200
Speaker 9: of the last five months on retail sales were somewhat weak.

669
00:29:33,240 --> 00:29:35,400
Speaker 9: So we're seeing some moderation there. So far it's being

670
00:29:35,440 --> 00:29:38,720
Speaker 9: offset by very strong services consumption, but we'll have to

671
00:29:38,760 --> 00:29:39,720
Speaker 9: see if that continues.

672
00:29:39,720 --> 00:29:41,440
Speaker 5: All Right, I have to say, we've spoken to one

673
00:29:41,440 --> 00:29:44,600
Speaker 5: person after another. Everyone's been bullish this morning looking at

674
00:29:44,640 --> 00:29:46,960
Speaker 5: the consumer. Yeah, retail sales might feel a little bit softer,

675
00:29:47,040 --> 00:29:48,520
Speaker 5: but for the most part, right it was, you know,

676
00:29:48,600 --> 00:29:49,600
Speaker 5: cash really good.

677
00:29:49,800 --> 00:29:51,480
Speaker 1: Then the economists come in and you.

678
00:29:51,440 --> 00:29:54,320
Speaker 5: Guys say, well there's a little bit of weakness. Isn't

679
00:29:54,480 --> 00:29:57,200
Speaker 5: enough aditya that sort of around them. We had one

680
00:29:57,240 --> 00:30:01,160
Speaker 5: rebaud retail sales print that otherwise people being more discretionary.

681
00:30:01,160 --> 00:30:03,520
Speaker 5: Does that really suggest we're sufficiently restrictive.

682
00:30:04,480 --> 00:30:05,320
Speaker 2: It's a good question.

683
00:30:06,200 --> 00:30:09,520
Speaker 9: I think it's as Mike said, it's tough. You know,

684
00:30:10,160 --> 00:30:13,480
Speaker 9: it's a question of supply and demand. Right. What we

685
00:30:13,600 --> 00:30:16,440
Speaker 9: experienced in twenty twenty three was a very broad supply

686
00:30:16,560 --> 00:30:21,440
Speaker 9: shock from the labor market, from supply chain's healing, and

687
00:30:21,600 --> 00:30:24,000
Speaker 9: just by definition, when you get a positive supply shock,

688
00:30:24,000 --> 00:30:27,040
Speaker 9: you're going to get above trend growth and disinflation at

689
00:30:27,080 --> 00:30:29,680
Speaker 9: the same time. Right, The question is where do we

690
00:30:29,720 --> 00:30:32,160
Speaker 9: stand on that? And if those supply shocks go away,

691
00:30:32,160 --> 00:30:33,920
Speaker 9: then I think we'll get a clearer picture of what's

692
00:30:33,920 --> 00:30:36,320
Speaker 9: happening with demand under the hood. Some of the work

693
00:30:36,360 --> 00:30:39,040
Speaker 9: we've done suggests that demand is cooling off a little bit,

694
00:30:39,400 --> 00:30:40,280
Speaker 9: but there's more.

695
00:30:40,120 --> 00:30:40,600
Speaker 2: Ways to go.

696
00:30:40,880 --> 00:30:43,880
Speaker 5: Is this enough, Mike, to give the Fed confidence that

697
00:30:43,920 --> 00:30:48,320
Speaker 5: there's some kind of true disinflationary trend other than just

698
00:30:48,680 --> 00:30:50,680
Speaker 5: your over your comps that were nice for a couple

699
00:30:50,720 --> 00:30:51,120
Speaker 5: of months.

700
00:30:51,280 --> 00:30:51,480
Speaker 4: Yeah.

701
00:30:51,520 --> 00:30:54,640
Speaker 8: I think that the premise to your question, I think

702
00:30:54,760 --> 00:30:57,080
Speaker 8: is saying is does the FED actually need to do

703
00:30:57,160 --> 00:30:58,440
Speaker 8: more to bring inflation down?

704
00:30:58,520 --> 00:30:59,800
Speaker 4: Or is supply enough right?

705
00:31:00,200 --> 00:31:02,720
Speaker 8: In other words, is that do we need restrictive policy

706
00:31:02,800 --> 00:31:05,760
Speaker 8: to get sustainably to two percent? Because I think most

707
00:31:05,760 --> 00:31:09,760
Speaker 8: people would say policy is moderately restrictive. It's doing something,

708
00:31:10,160 --> 00:31:14,680
Speaker 8: but there's a question how much. But they're complementing that

709
00:31:14,720 --> 00:31:17,280
Speaker 8: by saying, well, we're getting this helpful boost and supply,

710
00:31:17,360 --> 00:31:21,040
Speaker 8: and that's also what's bringing inflation down. The combination of

711
00:31:21,040 --> 00:31:24,880
Speaker 8: the two I think gives them confidence about the overall

712
00:31:24,960 --> 00:31:29,000
Speaker 8: disinflation trend, so rates at some point should move lower.

713
00:31:29,560 --> 00:31:33,680
Speaker 8: The lack of confidence is about when does the window open,

714
00:31:33,840 --> 00:31:36,120
Speaker 8: When does the data tell them, Okay, it's fine to start.

715
00:31:36,440 --> 00:31:38,920
Speaker 8: So I think there's a little uncertainty about when to start,

716
00:31:39,160 --> 00:31:41,800
Speaker 8: but I think the confidence in the overall disinflation trend

717
00:31:41,880 --> 00:31:42,200
Speaker 8: is there.

718
00:31:42,280 --> 00:31:44,800
Speaker 2: So your call now is June. So let's talk about June.

719
00:31:44,880 --> 00:31:47,160
Speaker 2: What is special about June apart from the fact it's

720
00:31:47,160 --> 00:31:49,880
Speaker 2: not much, But what is special about that month? Why

721
00:31:49,920 --> 00:31:51,800
Speaker 2: is that the month now for so many people?

722
00:31:52,000 --> 00:31:55,080
Speaker 8: A more straight I'd say two reasons that the data

723
00:31:55,120 --> 00:31:57,680
Speaker 8: aligns a little better in June in terms of year

724
00:31:57,720 --> 00:32:01,040
Speaker 8: on year rates of inflation being we think at subjective

725
00:32:01,120 --> 00:32:02,120
Speaker 8: levels that they might.

726
00:32:02,040 --> 00:32:03,840
Speaker 2: They'll post here they might. Are they going to focus

727
00:32:03,880 --> 00:32:05,480
Speaker 2: on year over a year and not the month over

728
00:32:05,520 --> 00:32:07,160
Speaker 2: month prizes.

729
00:32:07,120 --> 00:32:09,800
Speaker 8: Year over year is kind of you know, they've said

730
00:32:09,640 --> 00:32:12,360
Speaker 8: we had a good six month run, we need more evidence,

731
00:32:12,520 --> 00:32:14,440
Speaker 8: So I think that's kind of shifted us all to

732
00:32:15,160 --> 00:32:18,240
Speaker 8: looking more a little to year on year. The other

733
00:32:18,280 --> 00:32:20,640
Speaker 8: reason I would say June as opposed to May or

734
00:32:20,720 --> 00:32:23,520
Speaker 8: July is that if you think your cutting rates every

735
00:32:23,520 --> 00:32:25,840
Speaker 8: other meeting once you start, I think you want to

736
00:32:25,880 --> 00:32:29,440
Speaker 8: align those policy decisions on meetings where you release new projections.

737
00:32:29,960 --> 00:32:31,720
Speaker 8: So I think that puts all of us on June

738
00:32:31,760 --> 00:32:33,520
Speaker 8: as opposed to say May or July.

739
00:32:33,680 --> 00:32:36,400
Speaker 2: Let's build on that word confidence. The chairman talked about

740
00:32:36,480 --> 00:32:39,280
Speaker 2: needing more confidence. Do you think, based on the evidence

741
00:32:39,280 --> 00:32:41,400
Speaker 2: that we've seen, the dates we've had between the last

742
00:32:41,440 --> 00:32:43,640
Speaker 2: meeting and the one we're about to see tomorrow, that

743
00:32:43,720 --> 00:32:45,800
Speaker 2: this chairman has lost, gained or retain confidence.

744
00:32:46,600 --> 00:32:50,280
Speaker 8: I would say less confidence around the timing, but still

745
00:32:50,320 --> 00:32:52,760
Speaker 8: confidence on the overall disinflationary trend.

746
00:32:53,680 --> 00:32:56,320
Speaker 2: You could cens Aditya in that news conference the last

747
00:32:56,320 --> 00:32:59,520
Speaker 2: time around. He wasn't quite comfortable talking about the overall

748
00:32:59,560 --> 00:33:01,880
Speaker 2: disinflace I should be trend, and he wanted to know

749
00:33:02,360 --> 00:33:04,400
Speaker 2: whether any of it was due to one off factors.

750
00:33:04,560 --> 00:33:07,080
Speaker 2: When you look at the trend for goods inflation. Do

751
00:33:07,120 --> 00:33:09,400
Speaker 2: you think maybe that worry is justified.

752
00:33:10,000 --> 00:33:13,040
Speaker 9: So we got one month of goods inflation after several

753
00:33:13,120 --> 00:33:15,840
Speaker 9: months of outright deflation, so I wouldn't say that's a

754
00:33:15,880 --> 00:33:18,440
Speaker 9: concern yet. There's a couple of things if you want

755
00:33:18,480 --> 00:33:20,360
Speaker 9: to be concerned that you could be concerned about one.

756
00:33:20,440 --> 00:33:23,240
Speaker 9: One of that concerned okay, you know something to be

757
00:33:23,240 --> 00:33:23,840
Speaker 9: concerned about.

758
00:33:23,960 --> 00:33:24,120
Speaker 4: Right.

759
00:33:24,960 --> 00:33:27,400
Speaker 9: One of the things is there was this question, if

760
00:33:27,440 --> 00:33:29,720
Speaker 9: you just do it from a bottom up perspective, about

761
00:33:30,520 --> 00:33:35,080
Speaker 9: whether goods deflation would end or slow down before housing

762
00:33:35,160 --> 00:33:38,000
Speaker 9: started to cool off. And it looks like that might

763
00:33:38,120 --> 00:33:39,880
Speaker 9: be the case. Again, it's one month of data. You

764
00:33:39,880 --> 00:33:42,160
Speaker 9: don't want to take it too seriously, but that suggests

765
00:33:42,160 --> 00:33:44,000
Speaker 9: that you could get stuck above two percent for a

766
00:33:44,000 --> 00:33:46,920
Speaker 9: longer period of time. That being said, the other concern

767
00:33:47,000 --> 00:33:49,400
Speaker 9: out of the January report was that there was this

768
00:33:49,440 --> 00:33:53,560
Speaker 9: big jump in services X housing, Right, would that continue

769
00:33:53,680 --> 00:33:55,520
Speaker 9: or was that a one off? And that actually looks

770
00:33:55,560 --> 00:33:57,320
Speaker 9: like it was more of a one off.

771
00:33:57,560 --> 00:34:01,120
Speaker 5: There is this also this question we raised again and again,

772
00:34:01,760 --> 00:34:06,080
Speaker 5: are financial conditions contributing to a prolonged inflation kind of

773
00:34:06,120 --> 00:34:07,160
Speaker 5: sticking in the economy?

774
00:34:07,160 --> 00:34:09,560
Speaker 1: And Michael, I'd ask this of you do you think.

775
00:34:09,400 --> 00:34:11,439
Speaker 5: It's important for the FED to push back a little

776
00:34:11,480 --> 00:34:14,400
Speaker 5: bit and say, yeah, if things get this easy, if

777
00:34:14,440 --> 00:34:17,759
Speaker 5: anyone can borrow, if stock markets are doing great, if

778
00:34:17,800 --> 00:34:21,000
Speaker 5: you see mortgages start to come back to the fore,

779
00:34:21,160 --> 00:34:23,719
Speaker 5: if you just get half a percentage point drop in

780
00:34:23,800 --> 00:34:27,239
Speaker 5: the rate, do they need to do that to kind

781
00:34:27,280 --> 00:34:29,040
Speaker 5: of bring this sort of a little bit.

782
00:34:28,920 --> 00:34:29,479
Speaker 1: More in check.

783
00:34:29,840 --> 00:34:33,880
Speaker 8: I think they need to keep financial conditions restrictive.

784
00:34:34,120 --> 00:34:34,439
Speaker 4: I do.

785
00:34:34,640 --> 00:34:38,480
Speaker 8: I think things rallied too much from their perspective from

786
00:34:38,480 --> 00:34:42,080
Speaker 8: the October November period two earlier this year. I think

787
00:34:42,120 --> 00:34:44,840
Speaker 8: they know if we're going to start an easing cycle,

788
00:34:44,840 --> 00:34:47,319
Speaker 8: at some point, financial conditions are going to ease, right,

789
00:34:47,480 --> 00:34:50,120
Speaker 8: So they can't have their cake and eat it too.

790
00:34:50,640 --> 00:34:54,120
Speaker 8: But I do think they need to keep financial conditions

791
00:34:54,120 --> 00:34:55,520
Speaker 8: restrictive on average, and I.

792
00:34:55,520 --> 00:34:56,000
Speaker 4: Think they are.

793
00:34:56,040 --> 00:35:00,640
Speaker 8: I think are by our proprietary indicators, they're restrict but

794
00:35:00,760 --> 00:35:04,200
Speaker 8: they're not as restrictive as they were in prior cycle peaks.

795
00:35:04,239 --> 00:35:07,040
Speaker 8: But again, if they're getting a supply side rebound, that

796
00:35:07,200 --> 00:35:10,120
Speaker 8: should be enough. I think to your point, they would

797
00:35:10,200 --> 00:35:13,280
Speaker 8: want to lean against in their mind, whatever is excessive

798
00:35:13,360 --> 00:35:14,680
Speaker 8: easing and financial conditions.

799
00:35:14,880 --> 00:35:16,120
Speaker 1: DJA, how is this restrictive.

800
00:35:17,840 --> 00:35:20,919
Speaker 10: That's a good question for all the hard questions, right, right,

801
00:35:21,080 --> 00:35:23,400
Speaker 10: So what I would say is the FED would be

802
00:35:23,520 --> 00:35:27,880
Speaker 10: way more concerned if the markets aren't pricing an amount

803
00:35:27,920 --> 00:35:29,840
Speaker 10: of cuts that the FED views is appropriate.

804
00:35:29,920 --> 00:35:30,080
Speaker 4: Right.

805
00:35:30,120 --> 00:35:32,319
Speaker 9: That was the case earlier this year, at the start

806
00:35:32,320 --> 00:35:34,399
Speaker 9: of the year, when the markets were pricing six six

807
00:35:34,480 --> 00:35:36,839
Speaker 9: and a half cuts, and that was clearly not what

808
00:35:36,880 --> 00:35:39,759
Speaker 9: the FED had in mind. Once the market's pricing a

809
00:35:40,040 --> 00:35:42,560
Speaker 9: sort of reasonable number of cuts, let's say three this

810
00:35:42,680 --> 00:35:46,799
Speaker 9: year or two and a half, then whatever that implies

811
00:35:47,000 --> 00:35:50,239
Speaker 9: for equities spreads, I don't think they want to get

812
00:35:50,280 --> 00:35:52,120
Speaker 9: involved in that, right. They don't want to be in

813
00:35:52,160 --> 00:35:54,640
Speaker 9: the business of managing risk premia. So I think they're

814
00:35:54,680 --> 00:35:57,160
Speaker 9: reasonably comfortable now. They probably weren't at the start of

815
00:35:57,200 --> 00:35:58,879
Speaker 9: the year, which is why the pushback was a lot

816
00:35:58,920 --> 00:36:00,720
Speaker 9: more aggressive at the start of the Let's.

817
00:36:00,520 --> 00:36:03,560
Speaker 2: Finish on the playbook for tomorrow, so statement, projections, news conference.

818
00:36:03,640 --> 00:36:06,400
Speaker 2: Let's cut to the second point. Projections only takes a

819
00:36:06,440 --> 00:36:08,759
Speaker 2: few policymakers to come up just a little bit. That

820
00:36:08,880 --> 00:36:11,680
Speaker 2: medium drops down from three to two A data. Is

821
00:36:11,680 --> 00:36:12,920
Speaker 2: that what you're expecting tomorrow?

822
00:36:13,360 --> 00:36:16,120
Speaker 9: No, we're expecting them to stay at three cuts the

823
00:36:16,200 --> 00:36:16,719
Speaker 9: median two.

824
00:36:16,719 --> 00:36:17,719
Speaker 3: But it's a very close call.

825
00:36:17,800 --> 00:36:19,839
Speaker 9: As you said, it only takes two people to move

826
00:36:20,440 --> 00:36:23,319
Speaker 9: up in order for the FED to go from three

827
00:36:23,320 --> 00:36:25,520
Speaker 9: to two cuts. The question is do you really want

828
00:36:25,560 --> 00:36:28,440
Speaker 9: to signal that. What are the implications of that? Just

829
00:36:28,480 --> 00:36:30,720
Speaker 9: to add to a point that Mike was making earlier,

830
00:36:30,880 --> 00:36:33,319
Speaker 9: if you can't justify a cut by June, given that

831
00:36:33,320 --> 00:36:35,360
Speaker 9: the base effects will be a lot less favorable for

832
00:36:35,400 --> 00:36:37,239
Speaker 9: the rest of the year, you might not have a

833
00:36:37,320 --> 00:36:40,160
Speaker 9: leg to stand on to start cutting until early next year.

834
00:36:40,600 --> 00:36:42,680
Speaker 9: So that might be a reason to just get going

835
00:36:42,719 --> 00:36:45,759
Speaker 9: now unless you're really comfortable starting next March. Right, So

836
00:36:45,800 --> 00:36:48,040
Speaker 9: for all of those reasons, we think it stays at three.

837
00:36:48,120 --> 00:36:49,759
Speaker 9: But it's going to be a very close call, and

838
00:36:49,800 --> 00:36:51,319
Speaker 9: that's going to be the big focus for market.

839
00:36:51,400 --> 00:36:53,319
Speaker 2: Mike, what would you look for, So.

840
00:36:53,760 --> 00:36:56,759
Speaker 8: We're on the same page for that. But yeah, it's

841
00:36:56,800 --> 00:36:58,360
Speaker 8: a close call. I think you're going to get a

842
00:36:58,400 --> 00:37:01,520
Speaker 8: big upward revision and growth something maybe to around one

843
00:37:01,560 --> 00:37:04,520
Speaker 8: to eight this year. We think PCE inflation on a

844
00:37:04,600 --> 00:37:06,879
Speaker 8: core basis gets revised to two five, two six.

845
00:37:06,920 --> 00:37:07,959
Speaker 4: We're two six.

846
00:37:09,640 --> 00:37:11,920
Speaker 8: We think there's enough time between now and June for

847
00:37:12,000 --> 00:37:14,200
Speaker 8: them to say, let's let's look at the data a

848
00:37:14,200 --> 00:37:16,480
Speaker 8: little bit more and not not pre judge it. But yeah,

849
00:37:16,480 --> 00:37:17,200
Speaker 8: it's a close call.

850
00:37:17,760 --> 00:37:20,680
Speaker 5: I just say, they don't care about spreads and micromanaging

851
00:37:20,719 --> 00:37:23,359
Speaker 5: them where they're doing well, but they care when.

852
00:37:23,280 --> 00:37:25,600
Speaker 1: They're doing badly. So it raises this question.

853
00:37:25,760 --> 00:37:28,080
Speaker 5: Ultimately, we're talking about a FED put all over again.

854
00:37:28,200 --> 00:37:30,080
Speaker 4: I want them to be consistent. Is that what you're

855
00:37:30,120 --> 00:37:30,600
Speaker 4: asking for.

856
00:37:31,239 --> 00:37:33,080
Speaker 2: I'm just looking for some sort they were trying to

857
00:37:33,080 --> 00:37:35,360
Speaker 2: figure out how symmetrical this actually is, right, thank you.

858
00:37:35,560 --> 00:37:37,279
Speaker 2: I think there is a belief in the market. There

859
00:37:37,320 --> 00:37:40,240
Speaker 2: isn't asymmetric stance of the Federal Reserve that if growth

860
00:37:40,280 --> 00:37:42,120
Speaker 2: is strong, they won't respond to it with hikes, if

861
00:37:42,120 --> 00:37:44,600
Speaker 2: it's weak, they can cut. I think, well, we're trying

862
00:37:44,600 --> 00:37:46,560
Speaker 2: to figure out, at least from myself over the last

863
00:37:46,560 --> 00:37:49,560
Speaker 2: week or so, with hotter than inflation than expected inflation prints,

864
00:37:49,840 --> 00:37:52,960
Speaker 2: whether that tempers their ability to retain that option of

865
00:37:53,040 --> 00:37:55,839
Speaker 2: just saying we'll cut if the economy weakens, we won't

866
00:37:55,920 --> 00:37:57,160
Speaker 2: hike if it gets stronger.

867
00:37:57,600 --> 00:38:00,520
Speaker 8: Right, And I would add on top of that asymmetry, remember,

868
00:38:00,680 --> 00:38:04,320
Speaker 8: in average inflation targeting, you're only responding to shortfalls of employment.

869
00:38:04,480 --> 00:38:07,920
Speaker 8: From its maximum level, So another reason to kind of

870
00:38:07,960 --> 00:38:11,600
Speaker 8: ignore what's happening on the activity side and.

871
00:38:11,680 --> 00:38:12,080
Speaker 4: Just on that.

872
00:38:12,320 --> 00:38:15,040
Speaker 9: On that subject, we get asked a bit about the

873
00:38:15,160 --> 00:38:17,719
Speaker 9: downside risks, right, And I think the big downside risk

874
00:38:17,840 --> 00:38:20,040
Speaker 9: is probably if you can't cut this year, you get

875
00:38:20,080 --> 00:38:23,359
Speaker 9: to next year, inflation is still sticky, things slow down,

876
00:38:23,400 --> 00:38:26,160
Speaker 9: and you don't have the FED poot. Right, So we've

877
00:38:26,200 --> 00:38:28,040
Speaker 9: been so reliant on the FED boot that the big

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Speaker 9: downside risk to the economies if that goes away, things

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Speaker 9: could get sticky.

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Speaker 2: What do you think they would do?

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Speaker 4: Mike?

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Speaker 2: Can we finish on that? I want to give you

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Speaker 2: the final word. If that your mandate went into conflict,

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Speaker 2: how this Federal Reserve, let by chairman power would handle it.

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Speaker 2: How do you think it would handle it?

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Speaker 4: So in what sense would it be in conflict?

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Speaker 2: In conflict of inflation was still above target, but unemployment

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Speaker 2: started rising and it threatened maximum employment.

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Speaker 8: Ultimately, I think they'd respond to the activity side, because

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Speaker 8: I think you would assume inflation with a lag would

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Speaker 8: ultimately respond to that economic.

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Speaker 2: Would that be the right assumption?

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00:38:58,960 --> 00:38:59,880
Speaker 4: I yes, I think so.

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Speaker 2: Okay, Mike, appreciate it, Michael Capan, It's fue.

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Speaker 4: Of a week. Last word there, but thank you.

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Speaker 2: No no, no, don't worry. The conversation will continue from

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00:39:08,000 --> 00:39:10,560
Speaker 2: Bank for Americas the two of you. This is the

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00:39:10,600 --> 00:39:14,839
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00:39:14,880 --> 00:39:17,800
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900
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