Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets Podcast called Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: Let's bring in some smart people who do this stuff
Speaker 1: for a living. We'll kind of see if you can
Speaker 1: break it down a little bit. Chris Whalen, founder of
Speaker 1: Whale and Global Advisors, joins us here and Hugh Henry
Speaker 1: have Aklectica Asset Management. They joined for an extended round
Speaker 1: table on what we might be seeing in these markets. Hugh,
Speaker 1: thanks so much for joining us here in our studio here.
Speaker 1: What do you make of the past few days that
Speaker 1: fed the ECB. We've got some banks kind of I
Speaker 1: don't know if it's crisis or not. That's debatable, but
Speaker 1: there's a lot going on out there. What do you
Speaker 1: make of it?
Speaker 3: I don't think it's debatable. Okay, you know this is
Speaker 3: and we went over the clip, but I mean, seriously,
Speaker 3: this this is real, right. I think the FED will
Speaker 3: stand charged with the greatest FED folly in a very
Speaker 3: long time.
Speaker 2: And in terms of raising rates too fast or what
Speaker 2: so or too late.
Speaker 3: So it is a fact that they raise rates fast, yeah,
Speaker 3: in terms of the timeline and the magnitude. And typically
Speaker 3: the FED doesn't do that. And there's a reason for
Speaker 3: that because your bank is effectively like a hedge fund.
Speaker 3: Yeah it has it gets the money from deposits, right,
Speaker 3: but there's no gate. Yeah, you can take like with
Speaker 3: a hedge fund, they insist. I mean, if you're in
Speaker 3: like one of those big hedge funds, try getting your
Speaker 3: money out. It takes you to like, you know, it
Speaker 3: takes you two years with that with the iPhone. With
Speaker 3: the banks, so the gate issue, right, But the other
Speaker 3: issue is that the assets are loans and it takes
Speaker 3: kind of like two years to reprice your loan book
Speaker 3: so that you can raise your CDs without destroying your
Speaker 3: net interest margin like with our going into losses. So
Speaker 3: the FED is cognizant of that, right, and it takes
Speaker 3: its time. This was an impatient Fed, okay, And then
Speaker 3: what we've discovered.
Speaker 2: Well, first two patient, right, and then impatient.
Speaker 3: Well, I think the world of economicists has changed profoundly.
Speaker 3: But we may come back to that. But yeah, and
Speaker 3: then impatient. But it's the deposit flight revealed. There's always
Speaker 3: a revelation in markets, and the revelation has been the
Speaker 3: conceit and the arrogance of a whole to maturity bond portfolio.
Speaker 3: And that was fine, okay when rates were stable, but
Speaker 3: when you aggressively hid them. And then with this technology jump,
Speaker 3: with the iPhone and with the deposit flight, suddenly you
Speaker 3: had to mark because deposits were fleeing, You had to
Speaker 3: reduce the HTM portfolio, and suddenly you discover that you've
Speaker 3: wiped out your shareholder funds. There was a FED report
Speaker 3: back I think to the twenty third of March, which revealed,
Speaker 3: as we know that total bank assets in the US
Speaker 3: twenty three trillion dollars. What does that give? Give us
Speaker 3: a reference? That's one time's GDP. Yeah, and you had
Speaker 3: about twenty three billion of shareholder funds in fractional reserves
Speaker 3: and we're kind of leveraged entities. But the marked market
Speaker 3: or the unmarked loss was two point three trillion dollars. Okay, Right,
Speaker 3: so we're talking about your metaphorically the kind of notion
Speaker 3: of the dead people walking the banking sector, and that's
Speaker 3: kind of I'm afraid that's on the Federal reserve. We
Speaker 3: are staring at a scenartio which is very similar to
Speaker 3: nineteen thirty where we had the widespread failure of the
Speaker 3: US banking community.
Speaker 2: Chris Whalen, what do you think about that? I want
Speaker 2: to bring you in here because you're one of the
Speaker 2: foremost bank analysts in the country. What do you think
Speaker 2: about Hugh's point that the FED really kind of has
Speaker 2: blood on its hands.
Speaker 4: Well, I think I totally agree with Hugh in the
Speaker 4: nineteen thirty metaphor is the correct one, because you know,
Speaker 4: this isn't the two thousand and eight which was basically
Speaker 4: just a bit of a tantrum around private mortgages. This
Speaker 4: is solvency. This is a FED induced you know, panic
Speaker 4: that looks a lot like the eighties. By the way,
Speaker 4: with Paul Volker, the last time we had benchmarks four
Speaker 4: or five points about bank deposit rates, it was back
Speaker 4: in the eighties. We destroyed the snls, but the snls
Speaker 4: didn't matter. These banks matter. That's the difference. And I
Speaker 4: think that the FED is badly miss you know, they
Speaker 4: panicked in twenty eighteen with the money market crisis in December.
Speaker 4: They started dumping reserves into the system the next year,
Speaker 4: a year before COVID. You can see it on the
Speaker 4: Bloomberg look at the index for Ginny May duration. Wonderful
Speaker 4: chart you guys have on the turbinil. It tells the story.
Speaker 4: So by the time we get to COVID, the duration
Speaker 4: on two point two trillion dollars in Giny MA securities
Speaker 4: is one, which is almost impossible.
Speaker 1: But Chris, I mean we we've heard from some analysts
Speaker 1: that most or a lot of these I would say
Speaker 1: most of these banks they have enough capital.
Speaker 2: And let's talk specifically about pac West. I had our
Speaker 2: regional banks analyst in here, Herman Chan. He said they
Speaker 2: have one hundred and eighty eight percent assets to deposits.
Speaker 4: I know, but it doesn't matter. These are going concerns.
Speaker 4: When the stock price gets two point three times buck,
Speaker 4: that tells you that the bank's going out of business.
Speaker 4: It's like the politicians. They get voted on every day
Speaker 4: in the stock market. Right, we're voting on pack West
Speaker 4: this morning.
Speaker 2: And you explains to me like I'm five, okay, if
Speaker 2: every if every deposit goes into pack West and says
Speaker 2: I want my money out. They can have it out
Speaker 2: as far as I understand it right now.
Speaker 4: No, you're thinking of this like it's a wonderful life. No,
Speaker 4: that's not the way financial markets work. They want to
Speaker 4: know that that bank is a going concern, and when
Speaker 4: the stock price gets as low, the business counterparties back away,
Speaker 4: and the formula and the bloomberg by the way that
Speaker 4: generates probability of default is geared off of the equity price.
Speaker 4: Uh huh, okay, what do you think the hedge funds use?
Speaker 4: That's how it works.
Speaker 2: So I'm typing it in right now, Jack W Equity DRSK.
Speaker 4: What is it like four hundred basis points?
Speaker 2: So yeah.
Speaker 4: So my point is there's a lot of banks behind
Speaker 4: this flat and you know I own Western Alliance. I
Speaker 4: love that bank Ato point seven times book. I think
Speaker 4: they'll be fine. They had already traded off because the
Speaker 4: mortgage market had come off. That was one of the
Speaker 4: best performing banks in the country in twenty twenty one.
Speaker 4: So you know what's happened is the FED wants to
Speaker 4: pretend that they can have a traditional anti inflation scenario
Speaker 4: raising target rates, but they're ignoring the manipulation of the
Speaker 4: bond market that came with quantitative es.
Speaker 2: Let me get you in here, because the securities. You
Speaker 2: made your money and your name by figuring out how
Speaker 2: this kind of thing is going to play out? Right,
Speaker 2: how does how does this look to you right now?
Speaker 2: I mean we've had a few days of this sixty,
Speaker 2: you know, fifty percent drops in these bank prices, and
Speaker 2: yet the FED came out yesterday and said, you know,
Speaker 2: the US banking system is sound and resilient.
Speaker 3: Yeah, lyyer puns on fire. So you know, I mean,
Speaker 3: I'm now really representing acid capitalism. You know, the eclectica
Speaker 3: is no more. This is the world of us at capitalism.
Speaker 3: There are occasional ripples through risk assets when people kind
Speaker 3: of get excited with this notion that the Treasury might
Speaker 3: come in and ensure old deposits. I want to tell
Speaker 3: you that we are past the point of relevancy for
Speaker 3: that procedure, my fear, and I do not say this lightly.
Speaker 3: I've given it great consideration given the peril present peril
Speaker 3: with regard to the magnitude of losses on security portfolios
Speaker 3: held within predominantly the regional banks. Okay, you have to
Speaker 3: cast your mind back to nineteen thirty four and the
Speaker 3: Gold Reserve Act back then, as everyone knows, the US
Speaker 3: citizens in their gold was confiscated. I can actually conceive
Speaker 3: of a federal or Treasury rule coming in and saying
Speaker 3: for the next one hundred and eighty days, you can't
Speaker 3: pull your money out of the banking sector.
Speaker 2: That would be terrified.
Speaker 3: That would be terrified. But let me tell you that
Speaker 3: the issue people are the deposit flight today is not
Speaker 3: people fearing uninsured deposits. It's people saying I'm getting paid
Speaker 3: ten basis points on a CD I need five hundred.
Speaker 3: And what was castraphic about yesterday was the FED raised
Speaker 3: hate hiked again. It went, hey, why don't we just
Speaker 3: encourage more deposit flight. They are do gooders, but they're
Speaker 3: incompetent and they're not seeing the picture. We are on
Speaker 3: the verge of a catastrophe which will rival two thousand
Speaker 3: and eight.
Speaker 2: They keep trying to separate. You know, every FED speaker
Speaker 2: you've heard the last couple of weeks says they want
Speaker 2: to separate monetary policy on the one side with financial
Speaker 2: stability on the other, and they don't want to mix
Speaker 2: the two. Right and and the FED fundraid is a
Speaker 2: monetary policy tool. Chris, what do you think because I've
Speaker 2: asked a lot of people, you know, who do you
Speaker 2: blame for the collapse of SBB, Who do you blame
Speaker 2: for the collapse of signature? And now a first Republic?
Speaker 2: Is it possibly?
Speaker 5: You know?
Speaker 2: The FED raising rates five hundred basis points in a
Speaker 2: year and two a man. Until today, everyone has said no, Well.
Speaker 4: Look, these banks did stupid things. I've written about the
Speaker 4: Silicon Valley particularly, But the key thing is that the
Speaker 4: FED is in a very and dantic sort of way.
Speaker 4: And I love what your guest has been saying. By
Speaker 4: the way, I totally agree, but they want to continue
Speaker 4: to think they can separate monetary policy from financial policy
Speaker 4: when we execute monetary policy in the bond market. For
Speaker 4: Christ's sake, it's not credible for the chairman of the
Speaker 4: FED to get up and tell us yesterday that the
Speaker 4: banking system is fine when the FDIC has already published
Speaker 4: numbers to show that it's insolvent. Okay, the two agencies
Speaker 4: need to talk to one another, and I've spoken to
Speaker 4: governors about this in the past. You know, I worked
Speaker 4: at the FED in New York. They don't talk to
Speaker 4: the Bank supervision people, and when they were on the hill,
Speaker 4: you saw a vice chairman Barr. He was asked, did
Speaker 4: you talk to the bank supervisory staff about your monetary policy,
Speaker 4: about quantitative easing? And the answer is numb. So I
Speaker 4: think we should make economists where ankle bracelets are really do.
Speaker 4: These are the most dangerous people in our society right now,
Speaker 4: and they are going to crash the system. It is very,
Speaker 4: very close to nineteen thirty three months.
Speaker 1: Yeah, yeah, you we had it. Seems like a lot
Speaker 1: of folks are saying we had JP Morgan come in
Speaker 1: and buy First Republic, but Jamie Diamond he can't be
Speaker 1: literally JP Morgan and go out and support the system.
Speaker 1: You have a solution. Do you feel like our regulators
Speaker 1: need to do something now? And if so, what would
Speaker 1: that be.
Speaker 3: Yeah, it's called zup, It's called we gotta be humble
Speaker 3: and we gotta say we kind of got this wrong.
Speaker 6: My point.
Speaker 3: Hey, listen, we've got debt which is approximately four times
Speaker 3: the economy. Okay, We've got interest rates which are five percent. Okay,
Speaker 3: if we make the comparison with Jay's idle, mister Volka,
Speaker 3: in the seventies, we had twenty percent interest rates, and
Speaker 3: we had debt which was one time's GDP. We've gone
Speaker 3: back to the future. Effectively, we're at the point where
Speaker 3: the FED was at twenty percent interest rates and it
Speaker 3: was breaking everything in nineteen eighty two.
Speaker 2: Say in nineteen eighty two we had twenty percent rates
Speaker 2: and what was debt to one time?
Speaker 3: Well, one times twenty is twenty, right, and now we're
Speaker 3: at four times debt and we're five five and a quarter, right,
Speaker 3: So we've actually surpassed right where we're all So, Jay,
Speaker 3: you did it? Okay, Now get your ass and get
Speaker 3: those rates down to zero. Other thing's gonna blow up.
Speaker 2: Where do you get four hundred times? Do you four
Speaker 2: hundred percent GDP?
Speaker 7: Where are you?
Speaker 3: Okay? I'm We're like three point six seven or something, right,
Speaker 3: and I'm running up to the neatest destiny point. But
Speaker 3: if you add government debt, household debt, financial debt, industrial dead, you.
Speaker 1: Get yeah, just real quickly, guys come across a Bloomberg terminal,
Speaker 1: another red headline. Western Alliance Moll's options including a potential sale.
Speaker 1: So here we go. Yeah, it's a Financial Times. You
Speaker 1: want to credit the Financial Times.
Speaker 4: I think if we have another major bank failure. J
Speaker 4: Powells can have to his sign and this system cannot
Speaker 4: tolerate that kind of uh, you know, coming to Jesus
Speaker 4: if you will, on the part of an agency like
Speaker 4: the FED, because we depend on them to get it right,
Speaker 4: and when they don't get it right, you know, to
Speaker 4: the earlier comment, what should they have done? They should
Speaker 4: have gotten FED funds up to three and a half
Speaker 4: or four and sold assets. That was the astute thing
Speaker 4: to do given their past policy moves. But instead they're
Speaker 4: pretending it's twenty years ago and they could just raise
Speaker 4: you know, target rates as fast as they want to
Speaker 4: reclaim their credibility, because that's what's really driving this. I
Speaker 4: want a panic of Powell. And then you had the
Speaker 4: fact that they were caught out on inflation and they
Speaker 4: were so embarrassed as an agency that now they've tried
Speaker 4: to regain their credibility in what eighteen.
Speaker 2: Months, right, I want to reset this. Just so listeners understand,
Speaker 2: we're talking to Hugh Henry, who was the founder of Eclectica.
Speaker 2: Now he's a surfer and a hotelier.
Speaker 3: I tweet I'm the Acid and he's.
Speaker 2: On Twitter, and then we're and then we're talking about
Speaker 2: to Chris Whalen, I'm going to say, for me at
Speaker 2: least one of the foremost banking analysts in the country,
Speaker 2: and of course he's also the chairman of Whaling Global Advisors.
Speaker 2: We had yesterday pack West saying they're gonna look at
Speaker 2: strategic options, including the possibility of a sale. Their shares
Speaker 2: now are down more than fifty or fifty percent. Western
Speaker 2: Alliance now is saying it's smalling options, including a potential
Speaker 2: sit sale, and their shares are down about thirty percent.
Speaker 1: Haulted there for Western Alliance.
Speaker 2: I'm I'm good getting goosebumps to some extent because this
Speaker 2: is so scary and so dramatic. But I don't know
Speaker 2: if I'm just not smart enough to push back against
Speaker 2: these two geniuses. Here we have a listener writing in
Speaker 2: and asks of Hugh, do you think any of this
Speaker 2: is imminent? And then he's got a list of three things,
Speaker 2: government intervention, deposit guarantees, or a ban on short sailing.
Speaker 3: Oh Heaven's buns on short selling. Let's bond the truth.
Speaker 2: Let's pretend. I mean, I think is are we in
Speaker 2: a real crisis here? That's about snowball.
Speaker 3: This is wild Coyoto we've gone over the cliff. THEO
Speaker 3: what happened yesterday. The FOMC is no longer relevant. Right,
Speaker 3: policy's too tight. Policy will be like I say, my
Speaker 3: one fear if you're talking about government regulation, government intervention,
Speaker 3: and I don't say it lightly, but I fear that
Speaker 3: they may have to get the deposit base of the
Speaker 3: US within the banking sector.
Speaker 1: I agree, that's Chris.
Speaker 2: Do you really think that that regulators are going to
Speaker 2: put up gates? I mean, that would cause the biggest
Speaker 2: bank run since the nineteen thirties.
Speaker 4: I imagine that's what happens when the central bank injects
Speaker 4: volatility into this system. That's what they have done. You know,
Speaker 4: to Hugh's earlier point, right, you can't move interest rates
Speaker 4: this much when the average coupon in the mortgage space
Speaker 4: is three percent. Everyone listen, solve it, just do the math, right,
Speaker 4: But unfortunately these PhDs that the FED can't do math.
Speaker 1: So but I guess, just my again, I'm not you
Speaker 1: guys are the experts, but their focus, or one of
Speaker 1: their key focus, is to fight inflation. So if the
Speaker 1: only tool they have or one of the main tools
Speaker 1: they have, is raising interest rates, do you suggest that
Speaker 1: they should have stopped at three percent or something like that,
Speaker 1: or they just go to best.
Speaker 3: I want to let me take that one. Let me
Speaker 3: take one, because what we are seeing here is we
Speaker 3: are seeing the crucifixion of the common man on the
Speaker 3: cross of the vanity of JPOW. In twenty twenty, Jpower
Speaker 3: went on US prime television, daytime television and he said, folks,
Speaker 3: we got this. We are we at the Federal Reserve.
Speaker 3: We're printing money. I was like, J, don'll send you
Speaker 3: to prison. You're not allowed. You have no federal sanction
Speaker 3: to print money. What are you doing. But again, the
Speaker 3: Fed business is in the business of camouflage. To see,
Speaker 3: it's in the business of aura. We are all powerful.
Speaker 3: And so it made that comment. And then you get
Speaker 3: this profound supply shop which was COVID right, and prices
Speaker 3: get elevated, and people go, hey, J, you're printing money.
Speaker 3: And now prices are like running double digit and J
Speaker 3: went in to meltdown in terms of the institution and
Speaker 3: the repidity of the rate hikes was to protect and
Speaker 3: safeguard and pull back that comment that they had printed money.
Speaker 3: Inflation I believe is transitory. I'm now with bad deflationary
Speaker 3: money running through the banking sector. I would anticipate that
Speaker 3: we're going to see prices that, hey, this in ninety days.
Speaker 3: CPI is going to be running at three and a
Speaker 3: half percent. By the end of the year, then we're
Speaker 3: going to be close to zero again. We're going to
Speaker 3: be low the Fed's target.
Speaker 2: Chris is terrifying.
Speaker 4: What do you think, Well, no, but to his point,
Speaker 4: if you're a banker right now and you're trying to survive,
Speaker 4: what have you done? You told your loan officers to
Speaker 4: step back and turn it down. So you know, this
Speaker 4: economy is going to slow down because the supplier credit
Speaker 4: from the banking system, from the bond market is going
Speaker 4: to be greatly reduced. Because everybody who's got this problem
Speaker 4: we've been talking about with interest rates, it's got to
Speaker 4: raise cash. Everything is for sale.
Speaker 5: So J.
Speaker 4: Powell has basically put the whole banking industry, and I
Speaker 4: mean big and small banks. Don't think the big guys
Speaker 4: are immune here. They're all for sale now. They're all
Speaker 4: in liquidation mode. And I think the FED is going
Speaker 4: to come out of this greatly weakened. I think you're
Speaker 4: going to see Powell force to resign and then I think, yell,
Speaker 4: and I'll be following them out the door because you.
Speaker 2: Know, Chris, do you believe that's.
Speaker 4: Ceiling this week?
Speaker 8: Right?
Speaker 4: Yeah?
Speaker 2: Well, now we have a tsunami. Before the tsunami, do
Speaker 2: you believe that the that regulators could put up gates
Speaker 2: to deposits?
Speaker 4: Yes, it's inevitable. It's very third world, But here we are.
Speaker 4: You know, we've got to start practicing, practicing our Portuguese.
Speaker 4: I really think, you know, I worked in the emerging
Speaker 4: markets years ago, and it is scary to me watching
Speaker 4: this because it's like deja voo. And it's not just
Speaker 4: Wiley coyote. I think that's very clear. But it is
Speaker 4: the hubris and the personal convenience of J. Powell and
Speaker 4: the other members of the FED board that we're seeing.
Speaker 4: They're not acting in the public interest right now. They're
Speaker 4: covering their ass because they don't want to admit they
Speaker 4: made a mistake.
Speaker 1: But let me ask a question, Chris, me just go
Speaker 1: to your real quickly. The money comes out of the banks,
Speaker 1: don't I just put it into money market funds? Isn't
Speaker 1: the cash still in the system.
Speaker 4: Because in the T bills at five percent?
Speaker 1: Right, So it's still there. It's not like I put
Speaker 1: it under my mattress.
Speaker 3: Yeah, but is in there?
Speaker 6: Right?
Speaker 3: You know, you have to let me take this, Chris.
Speaker 3: The you when you pooh the deposits out of the
Speaker 3: banking sector, they've then got to sell assets, right, What
Speaker 3: are their assets? Well, their assets are loans to the bank.
Speaker 1: Accounting thing is very difficult.
Speaker 3: Money. Money is complicated. It is easy to spend, difficult
Speaker 3: to decipher.
Speaker 1: All right, Chris, what are what are some of the
Speaker 1: next steps you're looking for in the evolution of what
Speaker 1: we're seeing out there or what should we be on
Speaker 1: the lookout for.
Speaker 4: I think the FED needs to come forward and offer
Speaker 4: to finance all of these legacy assets that the banks
Speaker 4: have a problem with at par at whatever the coup
Speaker 4: pund rate is. So, if I have a gy may two,
Speaker 4: defense should charge me two indefinitely until rates fall. That's
Speaker 4: how you take this off the table.
Speaker 1: All right. So, but but we've had some of the
Speaker 1: bank's regional banks report and most of them are saying
Speaker 1: don't worry.
Speaker 2: I mean, well they have to say that, right, but
Speaker 2: they can't say freak out. But there's everyone panic.
Speaker 1: Look at our balance sheet, look at our stuff work okay, hughe,
Speaker 1: I mean, do we not take them at their word?
Speaker 3: I guess?
Speaker 1: Or is it or is the problem too big for
Speaker 1: an individual bank per se?
Speaker 2: But do you have any bank deposits in the US?
Speaker 3: Hugh, No, I don't. I'm in a very fortunate position.
Speaker 3: But I owe the banks a lot of money. I
Speaker 3: recommend that, in fact, to everyone, I'd recommend your panic.
Speaker 3: I mean, this is a good time to panic.
Speaker 2: Do you recommend gold? Do you like bitcoin? I?
Speaker 3: So gold has a logic, okay, But when we look
Speaker 3: at that kind of Bell curve of distribution of where
Speaker 3: we are on distribution of returns, like gold presently is
Speaker 3: a little bit too far on the right axis in
Speaker 3: terms of like it's kind of rich, it could be richer.
Speaker 2: Yeah, twenty fifty four, we're almost at the all time
Speaker 2: You know what I like?
Speaker 3: Well, I like the Bell curve. I like when it's
Speaker 3: hitting the x axes at zero on the left hand side,
Speaker 3: which is to say, you're like two three standard deviations
Speaker 3: below the price norm over the last forty years.
Speaker 6: Right.
Speaker 3: Welcome to the world of the ultra long treasury, the
Speaker 3: most despised security because we got the ballgame ount of
Speaker 3: inflation right. So the TLT, the ETF has halfed right,
Speaker 3: one hundred and eighty to ninety today it's one hundred.
Speaker 3: I think that's an easy moonshot back to one hundred
Speaker 3: and forty hundred and fifty.
Speaker 1: Wow.
Speaker 2: Wow, take a long long duration treasuries TLT. Chris, what
Speaker 2: do you think, I mean, where would you put your
Speaker 2: money right now?
Speaker 5: Well?
Speaker 4: I think you is right. It's hard to argue with
Speaker 4: the treasury. I mean, my god, why wouldn't you be.
Speaker 2: Everybody's at the short end of the curve, right, I mean,
Speaker 2: hence the price. Yeah, but the head.
Speaker 3: It's a function of let like so it's like with duration.
Speaker 3: So if you've got a drug dealer storry I meant
Speaker 3: to say, is their contract with a prime broker?
Speaker 9: Right?
Speaker 3: Then you get but mountains of leverage and you can
Speaker 3: own two year. But if you've got an ny view
Speaker 3: of a billion dollars, you might have one hundred billion
Speaker 3: dollars in the two year and you'll make money. When
Speaker 3: in the ordinary world we own the t LT, you've
Speaker 3: got to own duration to get the to sup up
Speaker 3: your returns for the retail invest So that's how that
Speaker 3: that equation works.
Speaker 1: All right, We're gonna let Hugh gosse you have some
Speaker 1: TV coming up, so well you appreciate the time with Hugh.
Speaker 1: We're gonna kick you out now.
Speaker 2: I just want to quickly ask, I see at Hugh
Speaker 2: under at Henry Underscore Hugh for your for your Twitter darling,
Speaker 2: I love you, Yeah, okay. At Henry Underscore Hugh is
Speaker 2: where you find Hugh Henry of course the founder of Eclectica.
Speaker 2: And as I said, uh, surfer, Chris Whalen, what what
Speaker 2: what do you think? What do you think we need
Speaker 2: to be watching today? What where should I be faced
Speaker 2: at kr E? Should I be looking at you know, rates?
Speaker 2: Should I be looking at stocks? What's the most important
Speaker 2: thing to follow?
Speaker 4: Well, I think you're looking at long rates for the
Speaker 4: flight to quality. I also think that there's gonna be
Speaker 4: enormous pressure on short term rates in terms of buyers
Speaker 4: because they're going to be running out of risk assets.
Speaker 4: You know, the US is playing with fire. I think
Speaker 4: we're going to see dollar swaps flip back to a
Speaker 4: positive premium. They've been negative since it's a great financial crisis.
Speaker 4: And then I think this is going to start to
Speaker 4: weigh on the dollar and on the US financial system.
Speaker 4: Because we're demonstrating the people that we don't know what
Speaker 4: we're doing. You know, when the Fed chairman tells everybody
Speaker 4: banks are fine and then you see the market going
Speaker 4: the other way, that's not a good picture. And I
Speaker 4: think it raises questions of credibility to go to the
Speaker 4: top of the government. So you know, the president has
Speaker 4: a problem. I think he needs to make some changes
Speaker 4: in his team very quickly.
Speaker 1: Well, that's right where I was going to go, Chris.
Speaker 1: This has not made the pages of the local papers.
Speaker 1: I mean, unless you're happen to be in a town
Speaker 1: with and I've heard nothing from Washington really, from Congress
Speaker 1: or the administration really about this issue.
Speaker 4: Well, I've been hearing from career staff. Okay not the
Speaker 4: political staff, but the career people. And most of these
Speaker 4: agencies are deeply concerned and they're moving, but there's only
Speaker 4: so much they can do. They execute government policy, they
Speaker 4: don't make policy. So you know, right now, the government,
Speaker 4: I think, unfortunately, is a very we can't I work
Speaker 4: in the mortgage business. I deal with most of these
Speaker 4: agencies in Washington, and they really don't have people that
Speaker 4: are financial professionals. They have politicians mostly, so I think
Speaker 4: we have an issue. You know, Washington wants to continue
Speaker 4: to pretend that we can just fight inflation in a
Speaker 4: very traditional sort of way without the implications for financial
Speaker 4: stability that are clearly in our face.
Speaker 2: Well, Hughes says we're headed for deflation by you know,
Speaker 2: a year end.
Speaker 4: I agree with him. I agree with him because look again,
Speaker 4: if the bankers are stepping back to raise cash, what
Speaker 4: does that mean. That means they're going to cut people
Speaker 4: off from credit and that leads to default. I think
Speaker 4: by third quarter, credit is going to be the headline, Matt,
Speaker 4: you and I are going to be sitting here talking
Speaker 4: about credit.
Speaker 1: All right, All right, Chris, thank you so much for
Speaker 1: joining us. Really appreciate getting some of your time and
Speaker 1: getting your formed opinion. Chris Whalen, chairman of Whalen Global Advisors,
Speaker 1: along with Hugh Henry from Eclectica Asset Management. What an
Speaker 1: incredible roundtable, Matt, of just getting these quite frankly very
Speaker 1: dire views of kind of some of the risks in
Speaker 1: the financial sys.
Speaker 2: It's really freaking me out. I think we need to
Speaker 2: talk to some optimistic bolts. I know, because I'm terriff.
Speaker 2: I'm running home, right now sell the house, sell the car,
Speaker 2: sell the kids, and yep, we'll see.
Speaker 1: All right, let's say down to Washington.
Speaker 6: You're listening to the team Ken's Are Live program, Bloomberg
Speaker 6: Markets weekdays at ten am East Darren con Burg dot Com,
Speaker 6: the iHeartRadio app and the Blowberg Business app, or listen
Speaker 6: on demand wherever you get your podcasts.
Speaker 1: All right, let's flip it. Maybe we can get a
Speaker 1: different perspective. I'm not sure, but we've certainly got somebody
Speaker 1: here who has a learned perspective, Doctor Richard Portus. He's
Speaker 1: a professor at the London Business School, but that does
Speaker 1: not begin to explain kind of his background, his experience,
Speaker 1: because the CV just goes on and on and on,
Speaker 1: undergraduate of elphd at Oxford, all the other kind of
Speaker 1: stuff that goes on there. I'm looking for perspective, and
Speaker 1: that's why we asked doctor Porters to join us here.
Speaker 1: He's based in London, buddy, joining us here in our
Speaker 1: Bloomberg studio here. So we appreciate that, Doctor Porters, thanks
Speaker 1: so much for coming in. How concerned should investors be
Speaker 1: about the US banking system?
Speaker 5: I think very concerned. I certainly wouldn't want to be
Speaker 5: holding shares in any of the mid sized banks, any
Speaker 5: of the midsize banks, but certainly not those that have
Speaker 5: profiles that look anything like First Republic or Silicon Valley
Speaker 5: or whatever that is to say, specialized, specialized, clontel I
Speaker 5: net Worth maybe whatever. Okay, you just don't want to
Speaker 5: be concentrated in that way, and you don't want to
Speaker 5: be sensitive to deposit runs. That's what we call the
Speaker 5: deposit beta, right, Okay, how much how much deposits will
Speaker 5: move out in response to an interest rate differential that
Speaker 5: you can get elsewhere, And what we saw with what
Speaker 5: we've seen in a number of these cases is precisely that.
Speaker 2: So what is the answer to stop this? You know,
Speaker 2: it seemed like we had it in the rear view
Speaker 2: mirror when Jamie Diamond and JP Morgan came in and
Speaker 2: bought First Republic, or at least that was you know,
Speaker 2: at the Milken conference, that was the general feeling that
Speaker 2: fears had been calmed. Now, you know, the concerns are
Speaker 2: front and center again, and the Federal Reserve grays rates
Speaker 2: even further, which seems to be the crux of the problem.
Speaker 5: It is the crux of the problem, but that's because
Speaker 5: rates were nominal rates were low for a very long
Speaker 5: period of time. People took risks they shouldn't have taken.
Speaker 5: They accumulated portfolios that were very long duration, and that's
Speaker 5: coming home to roost. So it's very straightforward and it
Speaker 5: should have been expected. Supervisors should have been much more
Speaker 5: vigorous in their investigations of the various of these banks.
Speaker 5: But where we are, where we are, and you know,
Speaker 5: it made me think today. The Westpac story made me
Speaker 5: think of the of the line about you know, how
Speaker 5: does a bank stock come down by ninety percent? The
Speaker 5: answer is that comes down by eighty percent the first
Speaker 5: day and fifty percent the next day.
Speaker 1: Oh good point.
Speaker 2: Right, that's the myth and.
Speaker 5: That's what's happening. And they can't survive like that. So
Speaker 5: we will see more failures whatever you want to have
Speaker 5: to call them.
Speaker 1: But I had my foot of reserve yesterday. Tell me
Speaker 1: there's not a problem with the banking system sound and resilient.
Speaker 5: Yeah, you know, I've heard that one, that resilient line before.
Speaker 5: When the chair of the Financial Stability Board in twenty seventeen,
Speaker 5: Mark Kinnie, then the Governor of the Bank of England,
Speaker 5: said we've now created a market based financial system that
Speaker 5: is resilient. Right three years later March twenty twenty wasn't
Speaker 5: resilient at all. And the answer is that that there
Speaker 5: are some contingencies you can't provide for yep. But also
Speaker 5: there are structural structural weaknesses, and you have to you
Speaker 5: have to try.
Speaker 2: To deal with those in the short term. How do
Speaker 2: they deal with that? Do we see some kind of
Speaker 2: government or regulatory intervention. Do we see deposit guarantees? Do
Speaker 2: we see a ban on short selling? It seems archaic,
Speaker 2: but you know, the.
Speaker 5: Ban on short selling won't do you much good. The
Speaker 5: suggestion that you might stop deposits from running. That won't do.
Speaker 5: That just won't pass.
Speaker 2: Putting up gates is what our last two guys said
Speaker 2: was a possibility that will pass politically.
Speaker 5: It's completely out of the question. I mean, you can
Speaker 5: put up gates on a real estate an open end
Speaker 5: real estate fund if there starts to be a run
Speaker 5: on that, that makes sense, okay, And they can then
Speaker 5: consolidate their position, liquidate some of their assets, and so
Speaker 5: forth in a reasonable time. But you can't put a
Speaker 5: gate on the positives. Come on, give me a break.
Speaker 5: It's not gonna it's not gonna happen.
Speaker 1: Right, Okay, that's the political stage.
Speaker 2: They did, it would be the last thing they ever did.
Speaker 5: If they did, it would be the last time anybody
Speaker 5: put their money in a bank.
Speaker 1: Yeah, yeah, that's right. Doctor Portershyer based in London at
Speaker 1: the London School of Business. We heard from the ECB
Speaker 1: today raising rates again. What's your view on the ECB
Speaker 1: and kind of what they're trying to do with the
Speaker 1: economy in Europe.
Speaker 5: I think the general mood of the ECB is this
Speaker 5: was a hawkish twenty five b raises point rise in
Speaker 5: the sense that the President announced that she didn't expect
Speaker 5: this to be the end, and I think that's probably
Speaker 5: what we're going to see. Unless something thrown out happens,
Speaker 5: We're going to see more twenty five basis point rises
Speaker 5: up until the autumn. Probably my view they'll peak at
Speaker 5: four four percent, but that's a sort of consensus few
Speaker 5: there's no news there. I think they're wrong in the
Speaker 5: sense that I think they should have paused. There is
Speaker 5: a credit crunch developing as it is here, by the way,
Speaker 5: for small and medium sized enterprises, it's going to be
Speaker 5: very tough with the consumers, and yeah, and consumers too, absolutely,
Speaker 5: but I'm worried about I'm worried about firms that won't
Speaker 5: have access to credit. They and that's just you know,
Speaker 5: that is a big thing in Europe. You know, the system,
Speaker 5: the system is much more bank dependent in Europe than
Speaker 5: it is in the United States, and that's where financing
Speaker 5: comes from for the most part, and it's not going
Speaker 5: to come. It's not coming.
Speaker 2: I just had to jump in here with a quick
Speaker 2: head line because we told our listeners earlier that Western
Speaker 2: Alliance is mauling options, strategic options, including a potential sale
Speaker 2: that came from the Financial Times. Western Alliance itself comes
Speaker 2: out and says the report of deal talks is absolutely.
Speaker 1: False.
Speaker 2: So you know, this is the Financial Times reporting, Western
Speaker 2: Alliance is denying it. Nonetheless, we do see shares of
Speaker 2: Western Alliance down right now sixty one percent, so and
Speaker 2: then of course they're halted, so you know, this is
Speaker 2: absolute free fall. They've already done the eighty percent drop
Speaker 2: that you talked about in the fifty percent drop.
Speaker 9: And.
Speaker 2: They have come down. Western Alliance shares have well eighty
Speaker 2: one percent so far this year to date. But we're watching.
Speaker 2: Of course. Pack West as well reports yesterday that pack
Speaker 2: West is looking for strategic options. They're down eighty eight
Speaker 2: percent year to date.
Speaker 5: Outfits are dead men walking, Oh right, all right, and
Speaker 5: that's there are going to be several of them. I
Speaker 5: would not want to count, right, but that's where we.
Speaker 1: Are, all right. Doctor Richard Porters, thank you so much
Speaker 1: for joining us. We really appreciate you taking the time
Speaker 1: coming into our students studio, Doctor Richard Porters. He's a
Speaker 1: professor at the London Business School, giving us some of
Speaker 1: his perspective and wisdom on kind of what we're seeing
Speaker 1: out there in the economy.
Speaker 6: You're listening to the tape Cat's are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: This segment's called Don't Fight the Fit. Barry Ridols, founder
Speaker 1: of Bertholts Wealth Management and host of Masters in Business,
Speaker 1: joins us here on the access line, and Danielle di
Speaker 1: Martino Booth CEO and chief strategists at QI joins us
Speaker 1: in studio. We're gonna have an extended kind of couple
Speaker 1: blocks toscussion with these two very smart people. And Daniel,
Speaker 1: let's start with you here. Matt and I just had
Speaker 1: you know, we were scared to death about it. Forty
Speaker 1: five minutes ago. We had it a panel of folks
Speaker 1: saying this banking crisis is bad. It's like nineteen thirty.
Speaker 2: Surely you met Hugh Henry in the green room, because
Speaker 2: I saw you were both in there.
Speaker 10: Yes, I did recently yesterday I think he postponed an
Speaker 10: interview with me. He said, I think I need another
Speaker 10: week to prepare.
Speaker 1: Okay, So what's your feeling here just about the banking
Speaker 1: system out there? And is a FED contributing to some
Speaker 1: of this stress there? How all importance to you?
Speaker 10: So I certainly think that the FED, that the Fed's
Speaker 10: aggressive policies have obviously made quite the mark, if not,
Speaker 10: if not a scar. But that being said, you know,
Speaker 10: I was looking back at FED rate hikes, but by
Speaker 10: the time we got to June July twenty twenty two,
Speaker 10: I think the market should have ordered the banks at
Speaker 10: least should have figured out that j.
Speaker 11: Powell was serious.
Speaker 10: You know, the day that he was confirmed by the
Speaker 10: US Senate May the twelfth, twenty two, after being basically
Speaker 10: an a holding puner for six months. After being renominated,
Speaker 10: he went on NPR's marketplace and he did an interview
Speaker 10: and he said, inflation is now my number one target.
Speaker 10: We have to get it down to two percent period.
Speaker 10: And he changed his tune that day. He has not
Speaker 10: deviated and it's been almost a full year. So there's
Speaker 10: an argument to be made that there was time to
Speaker 10: prepare because by then he was lobbing out seventy five
Speaker 10: basis point rate hikes.
Speaker 2: Fair enough, they should have prepared. But in the absence
Speaker 2: of action from bank managers, don't they have regulators that
Speaker 2: are there to force them. I mean, what was Mary
Speaker 2: Daily doing all this time?
Speaker 5: Well?
Speaker 11: What was Janet Yellen doing when New Century went down?
Speaker 10: I mean, and in fact, you know, the very last
Speaker 10: chapter of fed Up argues that we needed fewer banking
Speaker 10: districts than we have today.
Speaker 2: Fed Up is Danielle di Martino Booth's book, Yes High.
Speaker 11: Riders take on why the Federal Reserve is bad for America.
Speaker 2: It really subtles up. I think Hugh Henry agrees with you.
Speaker 11: Yeah, but better place.
Speaker 10: I really do think that he's got noble Aames. Listen
Speaker 10: to what's coming out of the Milking conference this week.
Speaker 10: There's a lot of fear running through the private credit
Speaker 10: markets right now that something is going to give, and
Speaker 10: yet private credit makes the rules.
Speaker 11: They dictate monetary policy.
Speaker 10: They have for years, ever since Dodd, Frank and all
Speaker 10: of the talent went bleeding out of the conventional banking system.
Speaker 10: They're like, wait a minute, we can't make egregious amounts
Speaker 10: of profits. Fine, We'll just leave and set up our
Speaker 10: own little non banking system that's bigger than the conventional
Speaker 10: banking system.
Speaker 1: Hey, Barry, want to bring you in here again. Matt
Speaker 1: and I we kind of got, you know, freaked out
Speaker 1: by some of our previous guests talking about the banking situation.
Speaker 1: I kind of feel like, just from my personal view,
Speaker 1: I've kind of term it now a crisis where a
Speaker 1: few days ago I wasn't there. How are you viewing
Speaker 1: what's going on out there in the banking world, you
Speaker 1: know what?
Speaker 7: I look, I have a slightly different view than than
Speaker 7: Daniel does about the impact of the FED and why
Speaker 7: you don't want to unilaterally disarm and not have a
Speaker 7: central bank. But that said, the FED was very belated
Speaker 7: in recognizing inflation. Some people have made the claim it
Speaker 7: was because Chairman Powell was in that holding pattern, waiting
Speaker 7: to be confirmed that the FED was sitting on their hands.
Speaker 7: They didn't want to be seen raising rates. I don't
Speaker 7: know how true that is, but it's pretty clear that
Speaker 7: the fastest rising rate environment of the modern era has
Speaker 7: broken things. You can't take rates from zero to five
Speaker 7: hundred bases points in twelve months and not cause some
Speaker 7: sort of damage. So some of this is the Fed's responsibility. Now,
Speaker 7: some of this is responsibility of the private sector bankers
Speaker 7: who don't seem to understand duration risk in a rising
Speaker 7: rate environment. That's pretty obvious. Even when we look at
Speaker 7: Silicon Valley Bank. People forget those geniuses actually put a
Speaker 7: hedge on on and were fine in their whole to
Speaker 7: maturity book. They just realized how valuable that hedge was
Speaker 7: and said, hey, if we sell this hedge, we can
Speaker 7: all give ourselves bigger bonuses, not realizing but we're taking
Speaker 7: our hedge off and putting our portfolios at risk. So
Speaker 7: so I'm less inclined to blame fed supervision of all
Speaker 7: the banks under them for not they were doing what
Speaker 7: the banks were supposed to do, which is manage their
Speaker 7: own risk.
Speaker 11: Barry.
Speaker 10: There there were red flags at Silicon Valley Bank, and
Speaker 10: the regulators knew it, and the regulators did nothing about it.
Speaker 10: And this was a presentation made in February of last year.
Speaker 2: Yeah, yeah, they probably should have done something in February
Speaker 2: of last year.
Speaker 7: It wasn't nearly as catastrophic as it became.
Speaker 2: But they were wive hundred bats later. They knew about
Speaker 2: the whole to maturity portfolio. By the way, what, Danielle,
Speaker 2: why don't they mark that stuff to market like weekly?
Speaker 2: Why why are they allowed to just because we know
Speaker 2: that then the valuations are insanely detached from reality. If
Speaker 2: they only have to they never have to market, or.
Speaker 10: Have an entire generation of banking regulators that are effectively
Speaker 10: used to operating at the zero bound. I mean, but
Speaker 10: that being said, Okay, the rules have changed, change your methodology,
Speaker 10: change your approach. And if you've got all these red
Speaker 10: flags on these banks and you know that they're making
Speaker 10: insane commercial real estate loans, or that they've got a
Speaker 10: highly concentrated book or that they're only banking to the
Speaker 10: venture capital industry.
Speaker 11: Then, for heaven's sake, factor that in.
Speaker 2: I just don't barry. What do you think is the
Speaker 2: bond market? Two? Opaque? Is it? Do we not have
Speaker 2: the technology? Should we create a machine a terminal so
Speaker 2: to speak? Could that allows GPT? Can AI help in
Speaker 2: terms of why don't they mark their Why didn't First
Speaker 2: Republic mark their mortgages on a regular basis? Is it
Speaker 2: not possible?
Speaker 7: Sure? All that stuff is possible. Keep in mind there
Speaker 7: were some rules that required more aggressive disclosure and more
Speaker 7: aggressive marks that the banking industry lobbied and actually got
Speaker 7: approved a couple of years ago, which arguably certainly would
Speaker 7: have helped. Singing that your bank probably would have helped
Speaker 7: Silicon Valley Bank. You know, every time we go through
Speaker 7: this cyclical from too much regulation to too little regulation,
Speaker 7: it seems that banks demanding less oversight have a tendency
Speaker 7: to blow themselves up.
Speaker 10: But it was Silicon Valley Banks CEO Greg Becker himself
Speaker 10: who sat on the San Francisco Board of Directors and
Speaker 10: who personally successfully lobbied Congress to loosen the regulation. And
Speaker 10: I mean clearly Chair Powell has now somebody's had their.
Speaker 11: Behind handed to them.
Speaker 10: I thought that I had to stop myself there. But
Speaker 10: somebody's had their behind to hand it to them. And
Speaker 10: now we know that we need to be stress testing
Speaker 10: banks of a certain size and with bigger stress the
Speaker 10: small community banks. However, that was a complete regulatory fumble
Speaker 10: with Dodd Frank to target banks with ten billion dollars
Speaker 10: of assets, and then they went out and made up
Speaker 10: for having to cover the cost of compliance by making
Speaker 10: go go commercial real estate loans.
Speaker 1: So, Barry, are we going to see or do you
Speaker 1: believe we will get to the point where the government
Speaker 1: needs to step in somehow, whether it's the FDIC or
Speaker 1: the FED and prop up this banking.
Speaker 2: By the way, Barry, we should point out that we
Speaker 2: had a Chris whalen on and Hugh henry on earlier
Speaker 2: and they made some pretty extreme forecasts. They said that
Speaker 2: regulators are going to have to come in and put
Speaker 2: down deposit gates for US banks. I feel like, if
Speaker 2: that's the case, that's the last thing that the government
Speaker 2: will ever do.
Speaker 7: Yeah, what are they? Hedge funds are in private equity.
Speaker 7: They're allowed to not have people leave that. That doesn't
Speaker 7: make any sense. I think what the real key is
Speaker 7: that we need to have much more robust approach to oversight,
Speaker 7: and that allowing banks this mad lobbying approach to say
Speaker 7: we want less oversight, less regulation, less capital reserves required
Speaker 7: is really problematic. But here's the key thing I think
Speaker 7: we should focus on. When when we had the financial crisis,
Speaker 7: everybody had eaten at the same poisoned buffet, and so
Speaker 7: you had this systemic problem of every bank, every broker,
Speaker 7: every non regulated bank all had consumed the same toxic
Speaker 7: things which they either securitized or subsequently bought, and so
Speaker 7: the whole system was put at risk. Yeah, the FED
Speaker 7: has raise rates too quickly and they've broken things. It
Speaker 7: doesn't appear that the entire system is at risk just yet.
Speaker 7: If the FED keeps raising if they if they keep
Speaker 7: breaking things, then we could have other issues. Maybe these
Speaker 7: banks should be holding their long term treasuries in hold
Speaker 7: to maturity instead of assets that could be sold. Maybe
Speaker 7: that's one solution. This all comes back to, you're less
Speaker 7: profitable if you have more capital on the books. Maybe
Speaker 7: you need to think of yourselves as a sleepy utility
Speaker 7: in bank and accept lower profit margin in order to
Speaker 7: increase stability.
Speaker 1: We've had a couple of days of central bank speak.
Speaker 1: They fed yesterday, the ECB today, they seem to be
Speaker 1: in sync. Anything kind of jump out of you from
Speaker 1: either bank.
Speaker 7: Yeah, I continue to be struck by how both central
Speaker 7: banks seem to be far far behind the data about
Speaker 7: when inflation peaked and how much further it's going to
Speaker 7: come down. And I know the phrase transitory has gotten
Speaker 7: a bad rap, but transitory seems to have taken longer
Speaker 7: than expected by most measures. Goods peaked June twenty twenty
Speaker 7: two and have come appreciably down. I heard you guys
Speaker 7: call talking earlier this morning about oil at sixty seven dollars.
Speaker 7: Wherever we look at the things that were really prime
Speaker 7: drivers of inflation over the past couple of years, lumber prices, medals,
Speaker 7: car prices, shipping containers, even just the course of costs
Speaker 7: of transport, they've all come down appreciably. In some cases,
Speaker 7: like lumber, they're below where they were when the pandemic started.
Speaker 7: And so yes, services remain elevated. But the largest part
Speaker 7: of services is owner's equivalent rent, and that's driven in
Speaker 7: large part by where mortgage rates are. And guess who's
Speaker 7: driven mortgage rates higher in the United States. It's the FED.
Speaker 7: Europe is a little different set of circumstances. They are
Speaker 7: behind us both in terms of the economic recovery and inflation,
Speaker 7: but it always seems like they're late to the party
Speaker 7: and fighting the previous lies.
Speaker 2: So is inflation coming down rapidly? Do you think because
Speaker 2: Powells seem to think yesterday Danielle that inflation could still
Speaker 2: rear its ugly head. He's very careful and has been
Speaker 2: about this. He doesn't want to repeat Arthur Burns. What
Speaker 2: do you think?
Speaker 10: So I have a little bit of a different view
Speaker 10: on this. I believe, and we were talking about this
Speaker 10: during the break.
Speaker 11: I believe that j.
Speaker 10: Powell wants for monetary policy to actually affect the non
Speaker 10: banking sector. So it's he's not dim. He knows that
Speaker 10: inflation's coming down. He knows that Barry and I are mutual friend,
Speaker 10: Peter book bar He knows that there's at least a
Speaker 10: half a percentage point of additional tightening as of First Republic.
Speaker 10: Now we might have one hundred basis points of additional
Speaker 10: tightening in the form of the credit credit crunch that
Speaker 10: we're seeing.
Speaker 2: Peter book far from Miller tayback.
Speaker 11: And back in the day now, is it blately?
Speaker 2: Yeah, the book report, the book report boosk.
Speaker 10: But the fact is, I think J. Powell knows this,
Speaker 10: and I think J. Powell wants to continue with quantitative tightening.
Speaker 10: He wants to continue that in the back background, and
Speaker 10: he's got to have something to hide behind, for lack
Speaker 10: of a better word, in order.
Speaker 11: To keep this going, keep what going, keep quantitative tightening going,
Speaker 11: keep shrinking the balance sheet.
Speaker 7: Yeah, but that can happen gradually, and the.
Speaker 2: Problem is exaggerary gradual already. Yeah.
Speaker 7: The problem isn't the actual absolute level of rates, it's
Speaker 7: how quickly we've gotten here by historic measures. FED funds
Speaker 7: rate and even mortgage rates are not crazy, they're just
Speaker 7: crazy relative to the past. Doesn't the acute level hurt
Speaker 7: as well? I mean, this is Hugh Henry was making that,
Speaker 7: you know, twenty percent in nineteen eighty when total debt
Speaker 7: was you know, one time's GDP, it's just as bad
Speaker 7: as five percent now when total debt to GDP is
Speaker 7: four times. I don't really buy that. I've been hearing
Speaker 7: my entire adult life that you know, if we keep
Speaker 7: running debt and deficits. You know, no one will lend
Speaker 7: to Uncle Sam. The economy will crash and the dollar
Speaker 7: will collas.
Speaker 2: Just that the caring costs are very high.
Speaker 7: Yeah, they're going to continue to be caught high. But
Speaker 7: you know, look at Japan, they're double our GDP to
Speaker 7: debt ratio. It hasn't affected their ability to borrow it
Speaker 7: practically zero or for their GDP to continue chugging along.
Speaker 7: They have other demographic concerns, but I worry much less
Speaker 7: about the actual level of debt. Would it be better
Speaker 7: if rates were a little lower, Sure, but I don't
Speaker 7: think a couple of percentage points are going to make
Speaker 7: a big difference to something like seeing that your bank
Speaker 7: or Silicon Valley Bank or First Republic or any of
Speaker 7: the other banks that ran into trouble for very specific
Speaker 7: managerial errors that were exacerbated by the rapidity of the
Speaker 7: Fed race.
Speaker 11: So think about think about this for just a second.
Speaker 10: Remember Standard Impoorsy, we were there in Maine. Standard impor
Speaker 10: Is downgraded the debt of the United States August the fifth,
Speaker 10: twenty eleven because there had been no reforms done during
Speaker 10: the debt ceiling kerfuffle. What if this moment of higher
Speaker 10: interest rates actually brings a serious discussion to the table
Speaker 10: about some of the reforms that are desperately needed with
Speaker 10: our fiscal spending. And I'm not necessarily talking about the
Speaker 10: level of debt and or deficits, but being rational about
Speaker 10: the trajectory of the growth and going to the table
Speaker 10: and seriously taking this debt situation serious.
Speaker 2: So, Berry, I'm sure you read that a couple of
Speaker 2: days ago, Stan Druckenmiller was speaking I think it was
Speaker 2: USC at the USC School of Business, and he said
Speaker 2: that we're all sitting here worried about a thirty foot
Speaker 2: wave in the form of the debt sealing problem, when
Speaker 2: we should be worried about the two hundred foot tsunami
Speaker 2: just ten miles out in the form of the total debt.
Speaker 7: So so first, let me just remind everybody that shortly
Speaker 7: after the S and P five hundred I'm sorry, shortainly
Speaker 7: after the SMP as a ratings agency lowered the US
Speaker 7: credit worthiness.
Speaker 2: I guess what happened to treasuries?
Speaker 7: Rates went lower, went lower, Right, It's like, oh, hold
Speaker 7: my beer, watch this. And so if we if the
Speaker 7: financial crisis didn't teach us that the least valuable entity
Speaker 7: in the entire known universe are the credit rating agencies.
Speaker 7: Then you weren't paying attention, there were worthless. Then they're worthless.
Speaker 7: Now they'll be worthless in the future. Nobody should care about.
Speaker 11: It, So fade the credit rating agencies.
Speaker 10: Isn't it still nice to think that we could, actually,
Speaker 10: like adults, approach fiscal reform again?
Speaker 7: If you if you look at what the market is
Speaker 7: telling us, it doesn't matter all thatch Are you a
Speaker 7: mathematic say that again?
Speaker 2: Are you a magic money tree guy? No, I'm you know,
Speaker 2: I'm a hemmingway guy.
Speaker 7: That it's very gradual until all at once, and right
Speaker 7: now it's still very gradual. And when we look at Japan,
Speaker 7: they're much further down the debt rabbit hole than we are,
Speaker 7: and they're still in that gradual process. At some point
Speaker 7: in the future, all of this debt will matter, but
Speaker 7: it's going to be the way people go bankrupt gradually
Speaker 7: and then all at once, and we're still in the
Speaker 7: gradual thing.
Speaker 11: I would too.
Speaker 10: I've got kids, and they'll have kids, and we should
Speaker 10: be thinking about future generations and not necessarily.
Speaker 2: What we're trying to do is rip them off to
Speaker 2: pay for our retirement.
Speaker 10: Yeah, but that's been going on for that's been going
Speaker 10: on right forever, forever, exactly.
Speaker 7: All right, at a certain point when to keep it
Speaker 7: going the boy who cried wolf. At a certain point,
Speaker 7: nobody pays attention, And all.
Speaker 1: Right, we guys, we got to cut off there. Thank
Speaker 1: you for the extended stay.
Speaker 2: We appreciate it.
Speaker 1: Barry Ridolts, founder of Ridolts Wealth Management, and Danielle Di Martino,
Speaker 1: Booth CEO and chief strategists at QI helping us kind
Speaker 1: of frame out what's going on in these markets. Well
Speaker 1: more coming up. This is Bloomberg.
Speaker 6: You're listening to the teenth Ken's Are Live program Bloomberg
Speaker 6: Markets weekdays at ten am eastering on Bloomberg dot com,
Speaker 6: the iHeartRadio app and the Bloomberg Business App, or listen
Speaker 6: on demand wherever you get your podcasts.
Speaker 1: All right, let's get right back to the discussion here.
Speaker 1: We're going to bring in our next guest. We really
Speaker 1: always appreciate getting a few minutes of ret I'm Claudia Sam,
Speaker 1: founder and independent economists at Some Consulting. Claudia, We've had
Speaker 1: a lot of Federal Central Bank discussion and moving over
Speaker 1: the past couple of days, but it seems to be
Speaker 1: pushed a little bit to the background by what's going
Speaker 1: on with the US regional banks. How are you viewing
Speaker 1: what's happening out there with the banks? How concerned are
Speaker 1: you about how this may be maybe more systemic than
Speaker 1: others think?
Speaker 12: Right this week has really been a competition for the
Speaker 12: worst thing happening in the US economy. I mean, it's
Speaker 12: pretty amazing to have the dead ceiling eclipsed. In addition,
Speaker 12: I absolutely think that there should be concern about what's
Speaker 12: happening with the regional banks. Would chair Pow said yesterday
Speaker 12: the banking system is resilient in sound. That is a
Speaker 12: true statement, and yet fundamentals are not enough to bring
Speaker 12: contagion and this kind of downward spiral that we're seeing
Speaker 12: under control. So it's really disconcerting that this is continued
Speaker 12: and it's not clear how this ends, whether we really
Speaker 12: are seeing the end of it. It doesn't appear that way.
Speaker 2: Are you concerned about I mean, it doesn't seem like
Speaker 2: regulators did much in terms of stopping this collapse of
Speaker 2: SVB or First Republic. Are they gonna Is there something
Speaker 2: they can do now? Claudia that that you can think of.
Speaker 12: They're in a difficult position. In the beginning, they were
Speaker 12: just flat footed, right, Silicon Valley Bank came out of nowhere.
Speaker 2: I mean it should but they've known for They've known
Speaker 2: for a year.
Speaker 11: Yeah, no, they.
Speaker 12: Knew, but I mean it's it's different between knowing something
Speaker 12: and acting in a serious way, and they acted in
Speaker 12: a serious way. They're at a point now and the
Speaker 12: FDI see like this is they're doing the playbook. Now
Speaker 12: banks are in trouble and then they you know, find
Speaker 12: a buyer and so things are in more of that
Speaker 12: state of now quote unquote business as usual when you
Speaker 12: have banks understrain. And yet the piece that is really
Speaker 12: hard for policy makers, and this is why the genie
Speaker 12: out of the bottle was such a big problem, is
Speaker 12: you have this psychology. J Pal can tell people all
Speaker 12: he wants the banking system resilient, nothing to see here,
Speaker 12: and they are not believing it right. And so this
Speaker 12: is the tricky part. And honestly, I don't know how
Speaker 12: the policy makers pull this back in because you say
Speaker 12: the wrong word like pac West said last night about
Speaker 12: their you know, strategic looking for a buyer, and things
Speaker 12: can really go south. Quickly.
Speaker 1: So, Claudia, how concerned are you that you know this
Speaker 1: banking crisis that many people are calling and I think
Speaker 1: I might be in that camp now, will in fact
Speaker 1: have a material impact on the availability and the affordability
Speaker 1: of credits such that it really will have a big
Speaker 1: impact on this economy.
Speaker 12: You will absolutely have a big impact on small businesses
Speaker 12: that do a lot of their business with smaller and
Speaker 12: regional banks. It will have an impact, though it may
Speaker 12: be slow moving, and impact on commercial real estate, which
Speaker 12: again does a lot of business with regional banks. It's
Speaker 12: and we're going to see this not just in the
Speaker 12: interest rates, right the Federal Reserve continues to raise interest
Speaker 12: rates though there's a lot going on in the markets.
Speaker 12: What we are seeing, and I think we're going to
Speaker 12: absolutely see next week when we get the Senior Loan
Speaker 12: Officer and Opinion survey, is that we see standards tightening.
Speaker 12: So this is about the supply of credit getting harder,
Speaker 12: and that you know, it's one thing to just say, hey,
Speaker 12: i'm a business, I'll pay more for the credit. It's
Speaker 12: another thing to say I just can't get it right.
Speaker 12: And that does limit the kind of opportunities that they
Speaker 12: have to grow and expand and have keep their workers right.
Speaker 12: So it can have a lot of effects, and it
Speaker 12: will have effects in these local, more localized communities. It's
Speaker 12: an open question as to how much it spills over
Speaker 12: like in aggregate, But the longer this goes on, the
Speaker 12: higher those chances go.
Speaker 2: And I think that this conversation then dovetails nicely with
Speaker 2: your column, with the column that you put on the
Speaker 2: Bloomberg Terminal about labor market tightness and the issue of yes,
Speaker 2: we're at a nationally a record low for unemployment, but
Speaker 2: if you look in pockets, you know, big important states
Speaker 2: like New York and Ohio, we still don't have employment
Speaker 2: levels back up to where they were pre pandemic. I
Speaker 2: was listening to Diane Swank talk yesterday on our FED
Speaker 2: special and she pointed out the importance of small and
Speaker 2: medium sized companies as employers, and these are the companies
Speaker 2: that are going to be directly affected by a regional
Speaker 2: banking credit crunch. Does that, you know, does this exacerbate
Speaker 2: the problems that you know, these these localities and especially
Speaker 2: you know, underfunded, underbanked communities have in terms of getting
Speaker 2: jobs back.
Speaker 12: Absolutely, Diana's right, The small businesses or the heartbeat of
Speaker 12: the employment that we have in the country, and they're
Speaker 12: the ones that are going to have difficulty accessing credit.
Speaker 12: In the column I was talking about today, where like
Speaker 12: we should be careful on Safe Jobs Day tomorrow when
Speaker 12: we get the aggregate numbers and we have Chair Powles
Speaker 12: saying we have a very tight labor market, we need
Speaker 12: to be careful. There's a lot of variation across the country.
Speaker 12: Right now, about forty percent of the US states haven't
Speaker 12: achieved their pre pandemic employment levels, and then you've got
Speaker 12: another twenty percent that are well above it. So we
Speaker 12: don't have a tight labor market in every labor market
Speaker 12: we have kind of when you add it all up,
Speaker 12: it looks like, you know, there's a shortage of workers.
Speaker 12: That's not the case. The Federal Reserve and by letting
Speaker 12: them dominate the conversation about the economy, their tools are
Speaker 12: very blonde, their mandates are national. But we have so
Speaker 12: many other policy makers that can be much more targeted.
Speaker 12: But we have to actually, you know, admit that there's
Speaker 12: this diversity and then think about how how to address it.
Speaker 2: So how do we I saw one of the lines
Speaker 2: in your in your column, geographic realignment could help address
Speaker 2: some of the national labor shortages, and I was trying
Speaker 2: to think of, you know, how the FED could be
Speaker 2: involved in geographic realignment. But as you point out, their
Speaker 2: tools are blunt, which regulators need to be you need
Speaker 2: to be brought in and what do they need to do.
Speaker 12: Well when that, you know, we have a potentially looming
Speaker 12: recession that we should be preparing for. You know, hope
Speaker 12: for the best, but prepare for the worst. And one
Speaker 12: thing that we can do, and we're putting policies in place,
Speaker 12: is to target and particularly when the policies phase out,
Speaker 12: to the local labor market conditions. So the unemployment insurance
Speaker 12: ought to phase out is that state's unemployment rate gets
Speaker 12: back to normal. We saw a lot of problems with
Speaker 12: the politics of it when we had just a date
Speaker 12: in the last you know, in the last recession where
Speaker 12: it turned off, and they just didn't take into account
Speaker 12: that some states it took a lot longer for them
Speaker 12: to recover, they're still recovering, and others really came back strong.
Speaker 12: So if you want to use money effectively and equitably,
Speaker 12: then you know, look at the reality of what's going
Speaker 12: on in terms of now to build resilience because a
Speaker 12: lot of our communities that were struggling before COVID, they
Speaker 12: got hit really hard and they're still struggling. And we
Speaker 12: have large programs like CHIPS infrastructure that you could say,
Speaker 12: let's give some priority to communities that haven't recovered yet.
Speaker 2: So a question came up in my head reading your column.
Speaker 2: And I want to preface this by saying, I'm a
Speaker 2: total idiot when it comes to economics, and so don't
Speaker 2: get angry if this is a bad question. Is there
Speaker 2: some kind of mobility program that we could put out
Speaker 2: there which would which would help the realignment? I mean,
Speaker 2: I guess if you're looking for a job in New
Speaker 2: York and you can't find one, you're probably not in
Speaker 2: a position to relocate to Florida.
Speaker 1: Right.
Speaker 2: Is there is there any way that we could help
Speaker 2: that relocation that mobility Would that be a good solution.
Speaker 12: For a long time, economists had been big proponents of
Speaker 12: moving people to prosperity, right, So moving people from the
Speaker 12: heartland to the New York cities, the Bay areas, you
Speaker 12: know that had a lot of jobs, and you know,
Speaker 12: I grew up in the Midwest. The last thing my
Speaker 12: family wants to do in Indiana is moved to New
Speaker 12: York City, right, Like, that's just it's a non starter.
Speaker 2: Yeah, but what about Orlando. New York's not a great
Speaker 2: place right now? If the sun Dell's a good place to.
Speaker 12: Go, It's true, and it right like the communities now,
Speaker 12: I think where we've come around to is we must
Speaker 12: figure out a way to invest in the communities. There's
Speaker 12: a lot of you know, Atlanta took a lot of
Speaker 12: effort after the Great Recession. They really struggled with some
Speaker 12: of the comeback in jobs as a lot of the
Speaker 12: and they really built up their workforce development networks. That's
Speaker 12: one of those are hard to build up. But when
Speaker 12: you take the view that you've got to make it
Speaker 12: better on the ground, as opposed to telling people, well,
Speaker 12: you know, you can stick around, but really you ought
Speaker 12: to go to ship out right.
Speaker 1: Exactly, all right, Claudia, thank you so much for joining us.
Speaker 1: Really appreciate it.
Speaker 2: I wish I wish we had more time about you know,
Speaker 2: I grew up at Grandville right Brandall, Ohio. I know,
Speaker 2: I know Claudia went.
Speaker 1: To Dennis Dennison. That's right. That makes it all come
Speaker 1: home Claudia Soom, founder in independent e commerce for some consulting.
Speaker 6: You're listening to the tape Cat's are Live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station Just Say Alexa play Bloomberg eleven thirty.
Speaker 1: Talking about central banks this week raising rates, the FED
Speaker 1: and the ECB each raising by twenty five bases point.
Speaker 1: And obviously that's been just maybe the end of what
Speaker 1: has been an unbelievably stark increase in rates across the world,
Speaker 1: including here, most notably here in the US. And what
Speaker 1: does that mean for the real estate business. Well, we're
Speaker 1: going to check in with Brad case. He's the chief
Speaker 1: economist and director of research at middle Bird middle Bird Communities. Brad,
Speaker 1: thanks so much for joining us here. I mean, I
Speaker 1: don't know, I just took out a mortgage for a property,
Speaker 1: but I kind of feel like I'm the exception rather
Speaker 1: than the rule. And oh, by the way, I fully
Speaker 1: plan on refinancing that bad boy in twelve to eighteen
Speaker 1: months at materially lower rates.
Speaker 2: But talk to us.
Speaker 1: About kind of good luck, talk to us about kind
Speaker 1: of what you're seeing in your business. Bread.
Speaker 8: Well, what we're seeing in the commercial part of the
Speaker 8: real estate market is is that financing is still available,
Speaker 8: but it is a little bit harder to access. And
Speaker 8: that's and that's not really a problem. You know, if
Speaker 8: when there's concern about the banking system, when something makes
Speaker 8: borrowing more difficult, whether it's the rise of interest rates,
Speaker 8: or whether it's the concern about about the regional banks
Speaker 8: that have that have gotten in trouble recently, you know
Speaker 8: when when when that makes it harder to borrow money,
Speaker 8: it's not everybody who fails who you know who has
Speaker 8: difficulty accessing capital. It's the weakest projects. And so that's
Speaker 8: that's why it doesn't really doesn't really bother me. It
Speaker 8: makes us work harder to get financing for the projects
Speaker 8: that we have that are really good projects. If you've
Speaker 8: got a if you've got a development project, for example,
Speaker 8: that makes sense only because the capital is easy to get,
Speaker 8: then it doesn't really make sense. You don't really want
Speaker 8: projects like that happening, as you know, on an economy
Speaker 8: wide basis. So yes, it's harder to get financing, and
Speaker 8: that's not really a problem.
Speaker 2: So and the other thing is refinancing.
Speaker 4: Uh.
Speaker 2: You know, I think a lot of people hear what
Speaker 2: you're saying and visualize a project getting started. But there
Speaker 2: are a lot of refiles that need to happen out there,
Speaker 2: and if they don't, asset values will dropped dramatically, won't they.
Speaker 8: Oh yes, And I mean asset values have dropped already
Speaker 8: over the past year, and I expect that there is
Speaker 8: more to come. However, again, it's not that that all
Speaker 8: asset values drop, It's that it's that average asset value drop,
Speaker 8: which is to say, some projects that that you know
Speaker 8: you've got to you've got a retail project where no
Speaker 8: one really wants to shop, or you've got an office
Speaker 8: project in a place where where there's not a lot
Speaker 8: of office employment. It's going to be difficult to convince
Speaker 8: your source of capital that they should that they should
Speaker 8: refinance a loan that's coming due when you don't really
Speaker 8: have the fundamentals to support continuing to pay make payments
Speaker 8: on that debt. So so, uh, the pain of something
Speaker 8: like that is not spread evenly at all. It's uh,
Speaker 8: you know, other parts of the real estate market that
Speaker 8: are just doing just fine. They are not going to
Speaker 8: have have difficulty getting new financing to replace their existing loans.
Speaker 1: Right, We're experiencing a lot of turmoil in the regional
Speaker 1: banking space over the last four or five six weeks,
Speaker 1: and it's really picked up steam again over the last
Speaker 1: several days with some of these names really being taken
Speaker 1: to the woodshed in terms of their stock price. From
Speaker 1: your perspective, from your business perspective, how are you viewing
Speaker 1: this development?
Speaker 8: Well, it's a concern. But you know, if if you
Speaker 8: if you use a lot of if you use debt frequently,
Speaker 8: then what you have been doing is setting up a
Speaker 8: range of options because for any any particular use of debt,
Speaker 8: it may be that, you know, one source of capital
Speaker 8: is just not looking to fund that kind of a
Speaker 8: kind of a project or an acquisition or whatever it is.
Speaker 8: And so you're lining up several sources of capital so
Speaker 8: that when one one of them says, now we have
Speaker 8: too much of that sort of work. Uh, then you
Speaker 8: go to somebody else who says who says, yeah, we're
Speaker 8: ready to ready to finance that, and so you know,
Speaker 8: that's a that's a normal way of doing business. So
Speaker 8: so there aren't there shouldn't be a situation where the
Speaker 8: regional banks that are you know, that are having difficulty
Speaker 8: are your only sources of capital. So so going forward,
Speaker 8: we will see other sources of capital picking up the slack.
Speaker 2: Did you. I mean, one thing I've been thinking about
Speaker 2: is anyone who needs financing, Ay should have taken care
Speaker 2: of it as he saw rates rising, you know.
Speaker 1: But the Jersey is sure a state did not come
Speaker 1: on the market when we're.
Speaker 2: Okay, I'm not talking about you. I'm talking about Brad's business.
Speaker 2: You know, people developing, you know, big businesses or you know,
Speaker 2: even medium sized businesses should already have gone out there
Speaker 2: or should be getting out there now. Brad, have you
Speaker 2: have you at Middleburg community has already taken care of
Speaker 2: your financing needs as you see, as you saw rates
Speaker 2: coming higher and higher.
Speaker 8: Well, there's always this process of looking at our pipeline
Speaker 8: and making sure that we have the financing, the right
Speaker 8: financing in place for all of the projects in the pipeline.
Speaker 8: But yeah, it's very important to be looking forward and
Speaker 8: anticipating issues like this. You can't you can't do it perfectly.
Speaker 8: But if you look at what happened back back before
Speaker 8: the liquidity crisis of two thousand and eight and two
Speaker 8: thousand and nine, there were companies that anticipated that things
Speaker 8: were going to be tighter. It doesn't mean they anticipated
Speaker 8: a crisis, but they anticipated that things were going to
Speaker 8: get more difficult, and they addressed that. You know, maybe
Speaker 8: they refinanced some some borrowing before they had to, but
Speaker 8: because they were concerned that they might be more difficult
Speaker 8: going forward. And if you were one of the people
Speaker 8: who who you know, looked forward, made it, made a guess,
Speaker 8: made a pretty good guess, and acted on it, then
Speaker 8: you came out of that crisis much more solid than
Speaker 8: companies that, you know, just sort of let the market
Speaker 8: happen to them. So, you know, what what we tried
Speaker 8: to do is we try to do a better job
Speaker 8: of than other than our competitors, of anticipating that kind
Speaker 8: of development in the market and responding to it in
Speaker 8: terms of when we're raising capital, how much raising capital,
Speaker 8: and who we're raising it from.
Speaker 1: And Brad, in terms of deploying that capital, are you
Speaker 1: just building stuff down in Florida and Texas where everybody
Speaker 1: seems to be going, Where where are you guys seeing
Speaker 1: the opportunities you look several years ahead.
Speaker 8: So we were so our our our area is basically
Speaker 8: from Virginia to Texas, and yes, it includes includes Florida, Georgia,
Speaker 8: and North Carolina, South Carolina, Alabama, Tennessee. You know, so
Speaker 8: those are very good markets. But one of the things
Speaker 8: that we pay very close attention to, of course, is
Speaker 8: what other people are doing, because we don't want to
Speaker 8: be building a new, a new rental housing community in
Speaker 8: a place where there is too much construction. And fortunately
Speaker 8: in that part of the market, you know, there is
Speaker 8: still so much unmad demand. But we look market by
Speaker 8: market and we say, we may say, all right, here's
Speaker 8: a particular city that that you know, it looks terrific,
Speaker 8: but look how much new supply is coming on online.
Speaker 8: We don't want to be locked into a big development
Speaker 8: that's coming online in the middle of you know, what
Speaker 8: may be a softening of rent growth or or an
Speaker 8: increase in vacancy, or it's because there's too much supply
Speaker 8: coming along online. So yeah, we we we pay close
Speaker 8: attention to it. And and again our goal is to
Speaker 8: be a little bit better than our community, than our
Speaker 8: competitors in terms of anticipating how much new supply there's
Speaker 8: going to be, how much new demand there's going to be,
Speaker 8: not just nationwide, but but in particular markets.
Speaker 1: Yeah, it just seems like the regional aspect that I
Speaker 1: guess it's pretty straightforward, and of the markets you're in,
Speaker 1: I seem to be some of the higher growth areas.
Speaker 1: What do you think about when you if you when
Speaker 1: you think about going into uh A, is it who
Speaker 1: are like, who are your competitors? Are there other builders
Speaker 1: you're competing against, or are there other modes of living
Speaker 1: that you kind of look at, or is it just
Speaker 1: simply oh boy, our big competitor cross the street is
Speaker 1: building a big property in this market. Let's let's stay
Speaker 1: away from it now.
Speaker 8: You know, we we are a full service company, so
Speaker 8: we we we we build rental housing communities, we buy them,
Speaker 8: we manage them, including sometimes manage for other people. So
Speaker 8: we're looking at competitors on a whole range of the
Speaker 8: uh you know, of parts of the business. But so
Speaker 8: so part of what we're trying to do is to say,
Speaker 8: all right, you know, right now it looks like a
Speaker 8: really good time to develop. Let's, you know, let's make
Speaker 8: sure that we have a good development pipeline, or at
Speaker 8: a different time we may be saying, all right, development
Speaker 8: is really not the best, you know, best place to
Speaker 8: focus our efforts. You know, let's be thinking about acquiring properties.
Speaker 8: And it has to do and there's a lot of
Speaker 8: differences both by market and by segment of the rental
Speaker 8: housing market. So, for example, we were among the earliest
Speaker 8: in terms of the you know, building single family rental
Speaker 8: housing communities. Uh, you know, because you know, the the
Speaker 8: some of the single family rental housing is scattered site
Speaker 8: and what we work on is a community with amenities
Speaker 8: and it's sort of a professionally managed place to live
Speaker 8: where instead of sharing a wall with your neighbor, you've
Speaker 8: got your own four So we were a little bit
Speaker 8: earlier than many of our competitors in terms of figuring
Speaker 8: out that that's what a lot of people were gonna
Speaker 8: want and what kind of house would work well for them.
Speaker 1: All right, good stuff, Brad, thanks so much for taking
Speaker 1: the time. We really appreciate talking about the real estate
Speaker 1: biz and the economics of the real estate business. Brad
Speaker 1: Case he's a chief economist and director of research at
Speaker 1: Middelburg Community talking about kind of some of the real
Speaker 1: estate opportunities around the country.
Speaker 6: You're listening to the tape cans Are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 1: We'll talk about cross currents. We got earnings coming at
Speaker 1: us seemingly left right and center this week. It's been
Speaker 1: a busy week. We've got the FED and the ECB
Speaker 1: raising rates, maybe gonna pause, we have to pay attention
Speaker 1: to that. We've got some uncertain yet of Washington over
Speaker 1: this whole debt ceiling thing. And then if that's not enough,
Speaker 1: throw in some real concerns brewing in this marketplace about
Speaker 1: some of the banks in the United States. So how's
Speaker 1: a professional suppost to deal with that? Well, fortunately, we
Speaker 1: have one that has a lot of perspective, a lot
Speaker 1: of experience. Margy Pateel, Senior portfolio manage at all Spring
Speaker 1: Global Investments, joins us. Margy, I'd like to to start
Speaker 1: with kind of what we've been experiencing really over the
Speaker 1: last couple of days, but over the last four or
Speaker 1: five weeks with some of these regional banks. How concerned
Speaker 1: are you that this is something systemic that could be
Speaker 1: a problem for the economy.
Speaker 9: Well, it definitely is, and I would say in almost
Speaker 9: all cases, the banks really weren't doing anything wrong. They
Speaker 9: simply structured their balance sheets according to zero rates and
Speaker 9: simply couldn't adjust for a five point increase in short
Speaker 9: rates in a year. So I think that the fragility
Speaker 9: that we're seeing is really caused by FED actions, and
Speaker 9: the FED scenes rather immune to the damage they're causing.
Speaker 1: And we haven't heard that in the comments from Jay
Speaker 1: Powell yesterday that whereas the banking system, his estimation is
Speaker 1: pretty sound. Where do you think we are with this
Speaker 1: Federal Reserve? And do you think that they are pausing
Speaker 1: to risk or is there a chance that they may
Speaker 1: be cut in the face of what could be some
Speaker 1: challenges in economy stemming apart from the banks.
Speaker 9: Well, it seems to me they are so focused on
Speaker 9: bringing down the inflation rate that they're really losing track
Speaker 9: of what's going on in the real economy, particularly in
Speaker 9: the financial sector. We're we're seeing lots of stress, again
Speaker 9: precipitated by Fred actions and really looking at his comments,
Speaker 9: he was really rather high handed about what happens to banks,
Speaker 9: and oh, well, if we have a number of banks
Speaker 9: continue to shrink, then that's just the way it goes,
Speaker 9: rather than looking at how much of that is really
Speaker 9: due to what the Fed has done to limit them.
Speaker 9: So we think that there is something to be concerned
Speaker 9: about because the Fed, just the FED doesn't seem very
Speaker 9: concerned about the financial system. They're looking at the inflation
Speaker 9: rate and so that's why they think the course is
Speaker 9: still steady and they're missing the bigger picture.
Speaker 1: Yeah, is that comes back to bite them In terms
Speaker 1: of earnings, Margie, we're about eighty percent through I guess
Speaker 1: the S and P five hundred reporting, and the good
Speaker 1: news is there was some revenue growth close to four percent,
Speaker 1: but the earnings growth a negative three percent, indicating some
Speaker 1: real margin pressure out there. What's your takeaway from this
Speaker 1: earning season so far and maybe what that means to
Speaker 1: your sense of evaluation.
Speaker 9: Well, just like the fourth quarter surprised by better results
Speaker 9: than we expected, the first quarter has actually been better
Speaker 9: than the market expected. It's true we're starting to see
Speaker 9: some pressure on revenue growth, and we're also seeing some
Speaker 9: pressure on earnings, but it's been less than the market expected,
Speaker 9: and it shows companies so far have held up pretty well. However,
Speaker 9: I think the question is what we're seeing in some
Speaker 9: of the companies that are disappointing is really telegraphing that
Speaker 9: we may see a much more sharp deterioration as we
Speaker 9: go into the next few quarters.
Speaker 1: So are you are you baking into your outlook an
Speaker 1: outright recession and if so, kind of what duration.
Speaker 9: I'd like to think we could avoid a recession. But honestly,
Speaker 9: when you look at the signs that we're seeing bank
Speaker 9: lending officers becoming more conservative, we've seen hiring statistics really
Speaker 9: roll over, and we've seen signs that consumers are starting
Speaker 9: to feel a little stressed, especially in the lower chier consumers.
Speaker 9: So we think that we rather suddenly are seeing some
Speaker 9: pressure on the economy. Plus a lot of the things
Speaker 9: that make the economy look good are going to go away.
Speaker 9: For example, if student loans come back to start to
Speaker 9: take a bite out of income. And also many state
Speaker 9: and local governments have been spending their COVID money. That's
Speaker 9: why construction by public entities has hauled up so well,
Speaker 9: so that's going to come to an end. So we
Speaker 9: may sort of go off more of a cliff than
Speaker 9: we see right here in the first quarter.
Speaker 1: All right, given all those cross currents, if you will,
Speaker 1: and maybe even some headways out there, what are some
Speaker 1: of the sectors that you guys are still find attractive.
Speaker 1: You might be doing some work.
Speaker 9: In well thinking and that basically everybody over the next
Speaker 9: few quarters is going to have disappointing earnings compared to
Speaker 9: what we're seeing today. We still like the technology sector,
Speaker 9: especially semiconductors. We think they're working through their inventory issues.
Speaker 9: They're well understood the inventory, and we expect to see
Speaker 9: long term growth there. We like the industrial sectors because
Speaker 9: we do believe that the reshoring and the increased capital
Speaker 9: expenditure is going to increase. And selectively, we like part
Speaker 9: of healthcare. We think that companies that can innovate and
Speaker 9: avoid some of the price pressures of the drugs coming
Speaker 9: off patent will still have a sustainable growth path, and
Speaker 9: companies that have good balance sheets in case we do
Speaker 9: have real financial stress.
Speaker 1: Yeah, it's interesting on the tech side. You know, I
Speaker 1: don't know, I guess all I know are what I
Speaker 1: really know about that the chip business is Boy, it's
Speaker 1: long cycle, and you better really get the cycle right.
Speaker 1: So do you see demand picking up for chips in
Speaker 1: the back half of this year?
Speaker 9: Well, we're thinking in the back half of the year
Speaker 9: that we should see the excess inventory be largely worked
Speaker 9: off and then looking for a pickup and demand as
Speaker 9: we get in the second half. And if we see
Speaker 9: more pressure on the economy, we may have to push
Speaker 9: that out a bit. But at this point that's our thinking.
Speaker 1: And on this the restoring issue that was certainly a
Speaker 1: very really hot topic during the beginning of the pandemic
Speaker 1: when some of these supply chain issues became really apparent,
Speaker 1: including chips, and you know, we say, boy, we got
Speaker 1: to start restoring some of the stuff, and I know
Speaker 1: the rhetoric was hot and heavy at the time. Have
Speaker 1: we actually seen businesses across you know, sectors really start
Speaker 1: to reshore some of this stuff.
Speaker 9: Yes, we have, of course at the margin, it's still
Speaker 9: a small part of the economy. We've also seen companies
Speaker 9: move to, if not in the United States, close to
Speaker 9: the United States, save Mexico for an example.
Speaker 1: Right, friendshuring, I guess is what they tell about.
Speaker 9: Yes, to make those but we think that's a permanent change,
Speaker 9: a permanent swing away from particularly sourcing from China. We
Speaker 9: don't think that's going to be reversed.
Speaker 1: And it's interesting in the healthcare space, you know, we've
Speaker 1: seen some deals happening and that always seems to be
Speaker 1: kind of a merger Monday on the pharmacy space, and
Speaker 1: is that when you invest in healthcare do you try
Speaker 1: to keep that in mind? Do you ignore that or
Speaker 1: do you just stay with some of the bigger names
Speaker 1: that kind of give you a broad diversification diversification in
Speaker 1: the space.
Speaker 9: Yes, we try to stay with the larger names that
Speaker 9: have good cash flow, that are diversified said that won't
Speaker 9: be hurt by fall off in anyone product. And rather
Speaker 9: than looking for companies that might be acquired, we think
Speaker 9: good companies or the companies that eventually get acquired, and
Speaker 9: so we're looking for companies that can have sustainable cash
Speaker 9: flow through what might turn out to be a more
Speaker 9: difficult period than we're thinking right now.
Speaker 1: Right yep, absolutely, all right, Margie, thank you so much.
Speaker 1: We appreciate getting your time as always. Argy Btel, she's
Speaker 1: a senior portfolio manager, Offspring Global Investments.
Speaker 2: Thanks for listening to the bloom Markets podcasts. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm Faull Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio