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Speaker 2: I'm Lisa A.
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Speaker 2: The question is certainly shifted away from how far are
Speaker 2: they going to hike? To how far were they cut?
Speaker 2: Prams were joined just now had a global rate strategy
Speaker 2: at TD Securities Prayer. Let's start with the economic data.
Speaker 2: It's changed since we last spoke. It's started to weaken.
Speaker 2: That process seems to be continuing. Do you expect it
Speaker 2: to accelerate in the coming months?
Speaker 3: We do.
Speaker 4: I mean the Fed still hiking QT is still ongoing,
Speaker 4: long end real rates high, and now you've got the
Speaker 4: bank tightening lending standards. I guess our viewer is this
Speaker 4: is not an idiosyncratic mismanagement of a few banks. This
Speaker 4: is going to have long lasting issues. We think deposits
Speaker 4: continue to fly out of banks into money market funds,
Speaker 4: and so the banks are going to have to cut
Speaker 4: lending standards. You know, even if you ignore the CIRE issue.
Speaker 4: I think as lending slows down, our views is going
Speaker 4: to accelerate. But it's a really tricky time for the
Speaker 4: market because things are slowing. I don't think I can
Speaker 4: point to any data right now and say here's the recession,
Speaker 4: but we think it is going to happen. I think
Speaker 4: that speed of the decline, particularly in high frequency data,
Speaker 4: is what we're looking at. In our view, it is
Speaker 4: going to accelerate into the second half. We see a
Speaker 4: recession in the fourth quarter, But really, I think you
Speaker 4: have to be nimbled because the data is just slowing.
Speaker 4: I think it's not obvious right now, but we do
Speaker 4: think it's all the signs point towards this accelerating into
Speaker 4: the end of the year.
Speaker 1: Preer, I'd love you to take on Alan Roskin's comments
Speaker 1: with respect to the divergence that we see with respect
Speaker 1: and manufacturing and services. He says that this is a
Speaker 1: sign that if the FED pauses, they may have to
Speaker 1: hike again later on as some of the distortions from
Speaker 1: the pandemic era build up of inventory starts to work
Speaker 1: itself through. Do you agree that there actually is a
Speaker 1: risk here signaled by this divergence of inflation that stickier
Speaker 1: and remains much higher than people expect.
Speaker 4: So I agree that inflation is likely to be more sticky.
Speaker 4: We think there are structural factors demographics, you know, on shoring, etc.
Speaker 4: You know, But I would say manufacturing is a most
Speaker 4: cyclical industry. Manufacturing typically slows down before services services have
Speaker 4: been strong because the consumers have a saving buffer and
Speaker 4: monetary policy works with a lad Our view is manufacturing
Speaker 4: is actually a harbinger for the fact that services is
Speaker 4: going to slow down as that savings buffer comes down
Speaker 4: and I can't really max out my credit card and
Speaker 4: I can't get another credit card. I think that's when
Speaker 4: consumer spending starts to slow down. So our view is
Speaker 4: that the FED is going to be torn, really torn
Speaker 4: between inflation north of two percent but the unemployment rates
Speaker 4: starting to rise.
Speaker 5: I think we.
Speaker 4: Don't know their pain threshold. Is it four percent, is
Speaker 4: it four and a half, is it five? I think
Speaker 4: the market's going to grapple with that for the rest
Speaker 4: of the year. But I actually think that services is
Speaker 4: going to slow down, and so you know, I hiking again.
Speaker 4: I think that we should be talking about that in
Speaker 4: twenty twenty five. I think first they're going to have
Speaker 4: to cut rates. They're going to have to take rates
Speaker 4: into accommodative territory, which is not priced and we're still
Speaker 4: pricing in a torough rate above three percent on FED funds.
Speaker 4: If the economy is in a recession at the end
Speaker 4: of this year, I think we'll be talking about how
Speaker 4: low they are going rather than stopping around three percent rare.
Speaker 1: This is pretty incredible at a time, and a lot
Speaker 1: of people don't think that FED is ever going to
Speaker 1: go back to the ultra low rates that we saw
Speaker 1: pre pandemic. Are you saying that zero or even half
Speaker 1: a percent or one percent is very much on the
Speaker 1: table for a FED funds rate?
Speaker 4: So I look at real rates. I think real rates
Speaker 4: should probably be closer to zero negative. You know, if
Speaker 4: inflation is going to be three percent next year or
Speaker 4: heaven FORURID four percent next year, you know, then how
Speaker 4: low can the FED go in terms of nominal rates?
Speaker 4: Perhaps two one, you know? But I do think if
Speaker 4: the if the unemployment rate is rising we see it
Speaker 4: peaking at five and a half next year, is very
Speaker 4: similar to what happened after the savings and loan crisis.
Speaker 4: If you get that much weakening in the labor market,
Speaker 4: the FED has to take real rates negative. So I
Speaker 4: don't know about zero or QE, but can they get
Speaker 4: to two percent on FED funds? I think that would
Speaker 4: be our base case, two two and a half at
Speaker 4: least get rates that low, and the market is not
Speaker 4: pricing that, and so I think we should keep an
Speaker 4: eye on inflation clearly, but those real rates and real
Speaker 4: rates right now are well in restrictive territory. I think
Speaker 4: that's what we'll be watching how much the Fed cuts.
Speaker 4: But right now they're in a bind. I don't think
Speaker 4: they can signal any near term cuts. So our views
Speaker 4: that they start later in terms of rate cuts. They're
Speaker 4: going to be pulled in, as we call it, kicking
Speaker 4: and screaming into rate cuts. But when they start that cutting,
Speaker 4: they're going to be much more aggressive than the market's
Speaker 4: pricing in.
Speaker 2: Prayer just awesome to get your perspective, as always, Prayer
Speaker 2: mesure of TV Securities. Let's talk about Tesla and the
Speaker 2: next narrative around this name. So yesterday price cuts again
Speaker 2: this morning, price high specific ones they've increased prices if
Speaker 2: they're model SNX and those vehicles in the United States
Speaker 2: after the state markdowns that we've seen through the whole
Speaker 2: year so far. Yesterday, the stock at absolutely hammered. This morning,
Speaker 2: the stock looks like this positive by about a half
Speaker 2: of one percent DNA. I've senior equity research analyst of
Speaker 2: web Bush joins us now to talk about it. Dan,
Speaker 2: can you help frame the strategy? Hit yesterday, cuts, this morning, hikes.
Speaker 2: What's happening?
Speaker 6: Look, they're trying to find the yin yang the bounds
Speaker 6: because I think for right now it's about a driving
Speaker 6: demand but also aggressive because of competition that we're seeing global,
Speaker 6: and I think we're going to continue to see this
Speaker 6: some cut, some hikes. I think over the next few
Speaker 6: months you'll starting to see it level off. But I
Speaker 6: think it just speaks to some odjita that investors have
Speaker 6: because of margins, and that's why the stock got crossed yesterday.
Speaker 1: The sort of flip flopping though of messaging in terms
Speaker 1: of cutting or raising prices. What do you make of
Speaker 1: Elon Musk's somewhat I don't know, random approach in terms
Speaker 1: of how he's signaling, at least to the pricing.
Speaker 6: Yeah, at least I think a lot of it is
Speaker 6: inventory driven as well as what they're seeing in demand.
Speaker 6: I think you know, from month to month they could
Speaker 6: tell if ultimately they cut too much or maybe they
Speaker 6: need to cut more, and I think they're trying to
Speaker 6: find that balance. Now when you look at SNX, that's
Speaker 6: a little different than what's a model Y and three.
Speaker 6: I think you're starting to see more of a sort
Speaker 6: of leveling off from a supplied demand mile three mile
Speaker 6: of why. I mean, that's really the focus of the
Speaker 6: street in terms of how many more price cuts, what
Speaker 6: margins look like, because right now they're kind of going
Speaker 6: Game of Throne style in terms of what they're trying
Speaker 6: to do from a pricing perspective. That's great for demand
Speaker 6: from a unit perspective, but obviously margins that continues to
Speaker 6: be the elephant in the room.
Speaker 1: We were speaking with Jullian Emmanuel yesterday and he said
Speaker 1: that Tesla is not just in aduosyncratic story, that it
Speaker 1: is a macro story, as J'ah miss mentioning earlier, because
Speaker 1: it does signal this need to cut prices and a
Speaker 1: disinflationary force. How much are you expecting to see that
Speaker 1: as a th bleeding through some of the tech earnings
Speaker 1: that we start getting next week.
Speaker 6: Look, I do think it is a little separate from
Speaker 6: what we're going to see next week, and maybe even
Speaker 6: if I go back next call a few weeks. I
Speaker 6: mean Apple, we see iPhone demand that continues to be
Speaker 6: pretty resilient in the storm. I think cloud. When you
Speaker 6: look in Microsoft, what we're going to see out of Amazon,
Speaker 6: Google and others, I think slight beats. But I think
Speaker 6: overall we're starting to see some stabilization relative to what
Speaker 6: we saw in the summer. Jen you, at least from
Speaker 6: an enterprise spent, I think in terms of tech stocks,
Speaker 6: in terms of going to earnings, it's a green light
Speaker 6: to continue to in tech. I think this earning season
Speaker 6: is something I think more investors are ultimately going to
Speaker 6: start to then dive back into tech rather than fearing it.
Speaker 6: In terms of where I believe are fundamentals starting to stabilize.
Speaker 2: Dan dive back in. Talk to me about yet today,
Speaker 2: What do you think people have been doing already?
Speaker 6: They've ripped, no doubt, But I think from an institutional perspective,
Speaker 6: still many hate the rally. May I think on the
Speaker 6: sidelines ultimately sort of bending against tech, and which is argue,
Speaker 6: you know, we can see tech stocks up another ten
Speaker 6: percent plus for the rest of the year because you
Speaker 6: look what's happened in terms of numbers that are starting
Speaker 6: to stabilize. They already ripped the band aid off on guidance.
Speaker 6: I think big tech specifically when I look at fang names,
Speaker 6: logan names like Apple, Google, Amazon, and I think these
Speaker 6: are stocks that could be fifteen to twenty percent for
Speaker 6: the rest of the year. You know, red by Apple.
Speaker 2: Well, you mentioned the cloud story. Can we just build
Speaker 2: on that a little bit more? There was obviously massive
Speaker 2: pull forward in demand for a range of things across
Speaker 2: this whole spectrum through the pandemic. Dan, I just wonder
Speaker 2: how much the cloud story has become much more of
Speaker 2: a cyclical issue now for some of these companies. What's
Speaker 2: your feel on that, Dan.
Speaker 6: But I think we'll see with Microsoft and with what
Speaker 6: comes out of REDMINU on Tuesday. I think the big
Speaker 6: issue is that a lot of companies, you know, budgets
Speaker 6: were not set, but during the they're halfway through massive
Speaker 6: cloud deployments, so now you're starting to see more and
Speaker 6: more only forty five percent of workloads during the cloud,
Speaker 6: so that I believe goes to seventy percent next two years.
Speaker 6: And I think that's why names like Microsoft continues to
Speaker 6: sort see share gains versus the likes of Amazon, and
Speaker 6: I think Google is another one that continues to see success.
Speaker 6: But I think ultimately, I mean, these are rock Gibraltar
Speaker 6: sectors in terms of where I've seen cloud cybersecurity, which
Speaker 6: is why we're bullish going into earnings.
Speaker 1: What about disappointments. We were speaking earlier with lu Kawa
Speaker 1: and he said that if there is some kind of
Speaker 1: earning disappointment, it will be punished a proportionately because his
Speaker 1: sense is people are waiting for the cash behemoths to
Speaker 1: continue to be cash behemoths.
Speaker 6: Do you agree, Oh, no doubt. And also never underestimate
Speaker 6: just how bad imagined team could be or overestimate how good.
Speaker 6: That's why you have tacticians like Cook and Nadella and
Speaker 6: others on one side. But you're going to see, especially
Speaker 6: in smid Caplan, I mean it's almost a fork in
Speaker 6: the road where you're going to see weekends play out.
Speaker 6: I think there is still some fraud, and I think
Speaker 6: you know this is ultimately really going to be I think,
Speaker 6: a defining earning season for winners and losers. But I
Speaker 6: believe I almost viewed as a stock pickers market, which
Speaker 6: is why I really enjoyed this year in terms of
Speaker 6: just the way texts playing out. You know, especially as
Speaker 6: we go into earning.
Speaker 2: Season, Dan, you've got Leaster excited. There was a glimmer
Speaker 2: of bearishness there. Can you build on that? What do
Speaker 2: you perish about?
Speaker 5: Dan?
Speaker 6: Oh, it's not. What I'm saying is this is not
Speaker 6: a Roses and Rainbow and Champagne macra. So ultimately you're
Speaker 6: going to see weekends fall by the wayside. Competition is
Speaker 6: going to continue to increase, But ultimately that's why I
Speaker 6: think you got to pick the right stocks. It's not
Speaker 6: necessarily a basket approach, and I think that's what we're going
Speaker 6: to see playoff continued during earning season. But I think
Speaker 6: when it comes to large cap tach, when it comes
Speaker 6: to high quality tech cybersecurity cloud, I just continue view
Speaker 6: that as a green light going into earnings.
Speaker 2: Okay, then I was a wet bush down, not doubt
Speaker 2: with touch base of the nice company were going to
Speaker 2: get those endings, thank.
Speaker 1: CUSA gil doubt of joining us right now ahead of
Speaker 1: US economic research. It retissan to Macro, and I am
Speaker 1: curious about your view after hearing all of the pessimistic
Speaker 1: prognostications about why we should remain bearish, while you're coming
Speaker 1: on now to tell us we are all completely misguided
Speaker 1: and we need to be a little bit more optimistic.
Speaker 3: Well, good to see you, Lisa, Happy Friday, Happy Friday.
Speaker 3: You know. Look, I mean I think what's this business
Speaker 3: is about is about what the consensus is pricing in
Speaker 3: and what the likely outcome is going to be. Uh,
Speaker 3: that's how that's how we distinct, you know, create some
Speaker 3: distinction here. And remember the consensus is basically priced for,
Speaker 3: you know, essentially sudden stop dynamics in the economy. I mean,
Speaker 3: people are calling for recession starting, you know, sometime this week.
Speaker 3: It feels like, and I got to tell you that's
Speaker 3: just not in the data. I mean, in my view,
Speaker 3: the time to have been concerned about recession was last year.
Speaker 3: I mean, it's not to say that we're not worried
Speaker 3: about things now, but it would have been more prudent
Speaker 3: to be even more worried last year. You had energy
Speaker 3: prices spiking, the global economy was going down the tubes, right,
Speaker 3: I mean, people are worried about Europe, whether they're going
Speaker 3: to be able to keep the heat and the lights on.
Speaker 3: China was slowing down. In the US, we had the
Speaker 3: housing market weakening, fiscal tightening, right, the you know, and
Speaker 3: all the rest of it. So think about each of
Speaker 3: these things in turn. Right, fiscal policy, that's a tail
Speaker 3: and for the economy now there is no fiscal drag.
Speaker 3: The government's the tail went for growth housing. Take a
Speaker 3: look at a chart of homebuilding stocks. Anybody have that
Speaker 3: on their Bengo card for twenty twenty three.
Speaker 1: I think that people missed a lot of things.
Speaker 5: Globalis that came out this morning.
Speaker 3: Now, admittedly the manufacturing piece of it wasn't as strong,
Speaker 3: but you know, it's pretty clear that global growth in
Speaker 3: the aggregate is stronger so far this year than it
Speaker 3: was before. So if the consensus is talking about, you know,
Speaker 3: some sort of cliff dive moment in the second quarter,
Speaker 3: that's not happening. It doesn't mean that you don't pencil
Speaker 3: in a recept I mean, I do think that if
Speaker 3: you want to be honest with yourself, you have to
Speaker 3: kind of keep this in the baseline outlook for the
Speaker 3: next eighteen months. But the question is whether it's going
Speaker 3: to happen imminently, because that's what the consensus is expecting,
Speaker 3: and I don't really see it.
Speaker 5: In the data, Neil.
Speaker 1: There are two aspects of this. There's growth and there's inflation.
Speaker 1: And what we have seen is that growth has slowed,
Speaker 1: but it has not cratered in the same kind of way.
Speaker 1: To highlight what you're talking about, and in certain sectors
Speaker 1: is actually accelerated and inflation seems to be coming down.
Speaker 1: Do you believe that this can continue, that you will
Speaker 1: see the sort of disinflation at the same time that
Speaker 1: there still is a lot of momentum underputting the growth.
Speaker 3: Oh wow, Lisa Bramwitz, growth in some parts of the
Speaker 3: economy accelerated. Man, that must have tasted like vitterger coming
Speaker 3: out of your mouth.
Speaker 1: Well, I've actually bought airplane tickets, so I understand that
Speaker 1: in some areas there is complete capacity carry out.
Speaker 3: Look, I think to me, it actually feels a little bit.
Speaker 3: I mean, I might get crucified for saying this, but
Speaker 3: it does feel a little bit. It does feel a
Speaker 3: little bit like a soft landing. I mean, at the
Speaker 3: margin the data is consistent with soft landing. I mean,
Speaker 3: think about what you just said. Inflation is slowing down
Speaker 3: activities holding up right. I mean you look at some
Speaker 3: of what the early reads are for auto sales in April.
Speaker 3: They're planting to sequential acceleration Lisa for for auto sales
Speaker 3: in April despite this financing costs and the rest of it.
Speaker 3: And the builders are doing the same thing sequential improvement
Speaker 3: and activity in April.
Speaker 5: So remember everyone.
Speaker 3: Was talking about how housing is a leading indicator and
Speaker 3: because housing was collapsing in twenty twenty two, that was
Speaker 3: going to spell the death of the economy in early
Speaker 3: twenty twenty three. Well, now housing's rea accelerating and it's
Speaker 3: highly likely that single family residential construction picks up over
Speaker 3: the next few months.
Speaker 5: Well, so I.
Speaker 1: Hear what you're saying, Neil, and I think that a
Speaker 1: lot of people would agree with you, which is a
Speaker 1: reason why you've seen the rallies year to date. That
Speaker 1: has surprised a lot of people, even in some of
Speaker 1: the areas that people had left for dead or said
Speaker 1: that they were going to underperform. Now, however, a lot
Speaker 1: of people are saying just wait for it, because the
Speaker 1: tightening credit conditions are going to really play out, and
Speaker 1: we're starting to see it around the margins with loan
Speaker 1: originations and credit loss provisions. How do you push back
Speaker 1: against that and say, look, it's just not going to happen.
Speaker 1: It's not that big of a drag. This happens as
Speaker 1: a feature of every single tightening cycle that we've ever had.
Speaker 5: Yeah, I mean it's not good.
Speaker 3: The question is whether that's enough to push the economy
Speaker 3: into a below potential growth state that pushes up the
Speaker 3: unemployment rate.
Speaker 5: And I think we're not there yet. I mean, if
Speaker 5: you and you know, speaking to the.
Speaker 3: Point about credit, keep in mind, the housing market's working,
Speaker 3: that must mean that credit is flowing to households. But
Speaker 3: more broadly, if you take a look at loan and
Speaker 3: leases long growth, you know, bank credit relative to GDP,
Speaker 3: it's basically been flat since twenty sixteen twenty seventeen, So
Speaker 3: perhaps the economy is not nearly as credit sensitive as
Speaker 3: as is being made out to be. You know, what
Speaker 3: I see is the reason why the economy has been
Speaker 3: holding up is because is because consumers have been doing okay.
Speaker 3: And the reason they're doing okay is because disposable incomes
Speaker 3: have been holding up, and that's going to continue because
Speaker 3: lower natural gas prices will bleed into household utilities.
Speaker 5: And you know the fact that.
Speaker 3: You know, wholesale gasoline futures have been declining, that's probably
Speaker 3: going to show up in lower pump prices in coming weeks.
Speaker 3: So we're not going to get as much of a
Speaker 3: food and energy and frankly food tax as we've seen,
Speaker 3: and that's going to push up disposable income, which in
Speaker 3: turn will support consumer spending. So I think that the
Speaker 3: credit sensitivity of the economy, you know, it certainly affects
Speaker 3: some sectors. I mean, I don't want to, you know,
Speaker 3: sort of sound like everything's great here, but you know,
Speaker 3: my sense is that disposable income growth will remain relatively
Speaker 3: stable and probably continue climbing in.
Speaker 5: The second quarter.
Speaker 1: Yeah, you said that you.
Speaker 5: Think that's and I think that's an important story.
Speaker 1: You said that you think that you'll get crucified by
Speaker 1: saying that this is looking a lot like a soft landing.
Speaker 1: I would actually beg to differ. I think that probably
Speaker 1: people will say yes finally saying the quiet part out loud,
Speaker 1: because the market agrees with you. It seems like the
Speaker 1: equity markets are pricing in a soft landing right now
Speaker 1: in a lot of sectors. Do you disagree, I mean,
Speaker 1: how much is this already priced in? Not necessarily the
Speaker 1: recession calls that people keep waiting for.
Speaker 3: I think there's more room to go. I mean, I
Speaker 3: do think that you probably continue to see you know,
Speaker 3: growth holding up. You know, I think you start to
Speaker 3: see parts of the inflation picture continue to continue to
Speaker 3: improve somewhat. You know, we did see shelter come in
Speaker 3: quite a bit in March, and remember that's very inertial,
Speaker 3: it's sticky, so it's not going to start to reaccelerate
Speaker 3: right away. So I think that that's an important development.
Speaker 3: And you know, when I think about the FED, I mean,
Speaker 3: they're they're closer to the end of this than not,
Speaker 3: so it's unlikely that they're going to begin ratcheting up
Speaker 3: hikes immediately as well. So I do think you can
Speaker 3: make a case for equities here. You know, over the
Speaker 3: over the next you know, a couple of quarters for
Speaker 3: for equities to rally, and we continue to see a
Speaker 3: tailwind as well from from what's going on globally that
Speaker 3: will continue to pressure take pressure I think off the
Speaker 3: dollar which should provide earning support for a lot of
Speaker 3: the the cyclical names that do a lot of business overseas.
Speaker 1: How much do you see tech participating in this, especially
Speaker 1: with the earnings coming up next week? Are they still
Speaker 1: going to be the leaders at a time when there
Speaker 1: are a lot of areas that could perhaps recover if
Speaker 1: what you're saying comes to.
Speaker 3: Pass, well, if the FED is backing off, which I
Speaker 3: think is likely at some point this summer, you know
Speaker 3: that should that should provide some talent for for for
Speaker 3: technologlogy stocks given their rate sensitivity.
Speaker 1: How do you push back against the idea that we're
Speaker 1: getting right now? Sentiment really shifting and we saw that
Speaker 1: in the leading economic indicators, We saw that in the
Speaker 1: FED Beaige book. We saw that when it comes to
Speaker 1: just marginal softening in the labor market around the edges,
Speaker 1: and yes, you could say it's just marginal. On the
Speaker 1: other hand, it's starting, it's starting in a more meaningful way. Now,
Speaker 1: how do you say that is just par for the course,
Speaker 1: it's controlled, it's not going to pick up more meaningfully.
Speaker 3: Well, I mean it's something that you have to be
Speaker 3: concerned about. I mean, to me, the risk is that
Speaker 3: you know, you get this sort of you know, snowballing
Speaker 3: effect in unemployment. But you know, I would just say
Speaker 3: that they're offsets. It's very rare. I mean, people are
Speaker 3: pointing to continuing claims. Obviously they're up I think, like
Speaker 3: what forty percent from the lows. But you've also typically
Speaker 3: when that's happened, that's always been a recession. But then again,
Speaker 3: what about this recovery has been typical as that's happened,
Speaker 3: You've seen prime age employment rates rise to cycle highs.
Speaker 3: That's never happened. You know, typically, when continuing claims rise
Speaker 3: this much off the low, the prime age employment rate
Speaker 3: is already declining. It's off about, you know, anywhere from
Speaker 3: three tens to half a percentage point from its peak.
Speaker 5: From its cycle peak. Hasn't happened.
Speaker 3: Right now, it's still going up to new highs. Consumer
Speaker 3: attitudes about the labor market it's still very very strong.
Speaker 3: So I think it's really hard to know, x Anti,
Speaker 3: and I think people should be a little bit more shows,
Speaker 3: a little bit more like humility about this. It's very
Speaker 3: difficult to know, x Anti, whether you know this is
Speaker 3: the start of something truly nefarious or just a normalization
Speaker 3: of labor market conditions from unsustainably hot level hot rates
Speaker 3: last year. My sense is that there are offsets least.
Speaker 3: I mean, you have global growth getting better, you have
Speaker 3: US housing, you have fiscal tailwind. Now, you're going to
Speaker 3: have real income still holding up, and you have the
Speaker 3: FED backing off, you know sometime after, like probably in June.
Speaker 3: And I think the risk is is that you know
Speaker 3: the I mean, they may have to come in later.
Speaker 3: That to me still is the risk. But I think
Speaker 3: you can make a case here for risk assets. You know,
Speaker 3: over the next couple of quarters, when you get this
Speaker 3: sort of confluence of slowing inflation, growth, holding up, FED
Speaker 3: backing off.
Speaker 1: I guess that before we have to end, I do
Speaker 1: want to just raise this one issue. And I think
Speaker 1: you're right about the humility point, and I feel it,
Speaker 1: and I think broadly I hear it all the time.
Speaker 1: I wonder about the fact that suddenly deposits aren't free
Speaker 1: anymore and the longer term implications of that in the
Speaker 1: main credit impulse of this economy, which is a smaller
Speaker 1: regional banks. How do you factor that into your calculus
Speaker 1: at a time when that has to be before it happens.
Speaker 1: It cannot be with any material data just yet.
Speaker 3: No, I mean, I look, I take that point. There
Speaker 3: are there are certainly areas of concern within the banking system.
Speaker 3: I mean, I think obviously people have been talking a
Speaker 3: lot about commercial real estate, but and the how the
Speaker 3: regional banks drive credit to that sector of the economy.
Speaker 3: But it's also important to remember that, you know, when
Speaker 3: we think about structures investment in GDP LISA, that has
Speaker 3: rarely been as low a share of GDP as it
Speaker 3: is right now. Right, So even if you're talking about
Speaker 3: a twenty percent drop in structor's investment annualized, yeah, that
Speaker 3: probably gets you maybe half a point off of GDP growth.
Speaker 3: So you know, as I say, I mean, there are issues.
Speaker 3: And clearly, you know, residential lending I think continues and
Speaker 3: that's a big piece of it too. Right, So household
Speaker 3: they're still getting credit when they want it. But I
Speaker 3: take your point about what's going on with the small business.
Speaker 3: The question is, you know, there are areas of you know,
Speaker 3: of the economy that are weak, that look very bad, right,
Speaker 3: I mean, no one's denying that. The question is is
Speaker 3: that enough to push the economy into a below potential
Speaker 3: growth state?
Speaker 5: Remember, that's what's required.
Speaker 3: Yeah right, I mean, if Beed believes we need below
Speaker 3: potential growth for a period of time to basically quell
Speaker 3: the inflation.
Speaker 5: Issue, we're getting it.
Speaker 1: I don't see it yet, Neil Dota Renissans Macro.
Speaker 2: Let's talk about the banks right now. We can do
Speaker 2: that with Maro Rodriguez Veladadas, the managing director principal at
Speaker 2: MRV Associates. Mayra Wander for to catch up with you.
Speaker 2: I really want your thoughts on the region ors, the
Speaker 2: small banks first, and maybe we can shift back to
Speaker 2: some of the bigger lenders in just a moment. Lisa
Speaker 2: jumped all over it yesterday, the net interest margins, the
Speaker 2: profitability story. Do you think it's too early to see
Speaker 2: some of the pain, to see how this is going
Speaker 2: to evolve over the next coming quarters.
Speaker 5: Yes, definitely.
Speaker 7: We have to remember that the banking turmoil started really
Speaker 7: the second and the third week of March, and by
Speaker 7: that point, the vast majority of regional bank strategies, all
Speaker 7: their transactions were well underway, and they certainly have benefited
Speaker 7: from high interest rates. They have definitely been charging more
Speaker 7: on a variety of loans and credit facilities, but they
Speaker 7: haven't been paying more as much over on the deposit side,
Speaker 7: and so that net interest margin really benefited them. However,
Speaker 7: I do see a few trouble spots in the horizon,
Speaker 7: like what well, you definitely see just about every single
Speaker 7: regional bank increasing their provisions for credit losses, and some
Speaker 7: of them had even released them a couple of quarters ago,
Speaker 7: and so that's certainly a big sign that all of
Speaker 7: these banks are preparing, at worst for the beginning of
Speaker 7: a recession or at best for a softening of the economy.
Speaker 7: You also, of course, had a lot of banks had
Speaker 7: a decrease in deposits, and for regional banks this is
Speaker 7: incredibly important. Anywhere from seventy five to eighty five percent
Speaker 7: of their funding come from deposits. They're not diversified like
Speaker 7: the globally systemically important banks, so it's very important to
Speaker 7: watch not just the level of their deposits, but the
Speaker 7: diversity of the deposits. And that can be really hard
Speaker 7: for some of the really small regional banks because by
Speaker 7: definition they're concentrated in the communities and regions that they serve.
Speaker 6: There's a lot there to unpack.
Speaker 1: I want to stick on the loan loss provisions there
Speaker 1: are two ways to read this. One is that they're
Speaker 1: continuing to lend more aggressively and just provisioning for more
Speaker 1: potential losses, or they are withdrawing some of their lending
Speaker 1: prowess on the heels of some of the deposit outflows
Speaker 1: as well as the concern about loan losses that keep
Speaker 1: taking up. Which is it, you.
Speaker 7: Know, Unfortunately the answer may not be so satisfactory to investors.
Speaker 6: It's a bit of both.
Speaker 7: There are a lot of signals in the economy, in
Speaker 7: the market that we really do need to pay attention to.
Speaker 7: We've got a lot of tech companies, consulting companies, retail
Speaker 7: media that all little by the little have been announcing layoffs.
Speaker 7: So how are these people eventually going to pay their
Speaker 7: mortgages and their other credit facilities. You have American companies
Speaker 7: at their most embedded level in history. Many of those
Speaker 7: loans are leverage, which means six seven times debt over ibidah.
Speaker 7: The Page Book just this week already stated that some
Speaker 7: of the banks had already been tightening their credit conditions.
Speaker 7: So a lot of these banks are actually exhibiting good
Speaker 7: risk management when they increase their provisions. And I'm not
Speaker 7: seeing big rises and lending you have trouble areas over
Speaker 7: in the auto loan sector. You're already seeing high housing
Speaker 7: prices in the West. So there's a lot there to
Speaker 7: remind banks they need to remember the religion of good
Speaker 7: risk management.
Speaker 1: Maray, yesterday at four thirty pm, we got some data
Speaker 1: from the FED on the latest emergency borrowings from that
Speaker 1: discount window, as well as a new program. I almost
Speaker 1: laughed at the way that it was interpreted. Optimists said
Speaker 1: the show's stability. The pestmist said, the shows that people
Speaker 1: are still drawing down at some of these emergency facilities.
Speaker 1: How would you read the fact that we said the
Speaker 1: first increase in usage of some of these operations in
Speaker 1: five weeks.
Speaker 5: Yeah, that's a great point.
Speaker 7: You really the banks should no longer be barring if
Speaker 7: they're iss stable and as liquid as they say they are.
Speaker 7: And this is one of the reasons why legislators and
Speaker 7: regulators really should be demanding that banks be more transparent.
Speaker 7: By the time that you and I get some of
Speaker 7: their liquidity metrics, such as the liquidity coverage ratio or
Speaker 7: deposits as a percent of total funding, it's already too late.
Speaker 7: That information is old. But any of these facilities from
Speaker 7: the FED is not the way that banks in a
Speaker 7: capitalist system should be running. They should be depending on
Speaker 7: their own cash flow, and that's why most of them
Speaker 7: need to be much better managed than they currently are.
Speaker 2: Just to finish on this word, crisis, would you call
Speaker 2: it a crisis? This time last week? Muhammadel Erin was
Speaker 2: with us and he said, this is not a crisis.
Speaker 2: Brian moynihan, Bank for America, not a crisis. What's in
Speaker 2: a word? Why is that word so important?
Speaker 7: It is incredibly important because unfortunately it starts to really
Speaker 7: be overused. This is bank turmoil caused by serious lack
Speaker 7: of good risk management. And there's really no excuse for
Speaker 7: that Silicon Valley bank signature. All of those banks needed
Speaker 7: to have been back on the basics a long time
Speaker 7: ago of managing their interest rate, risk, managing their liquidity.
Speaker 7: We have to be very careful not to over use words.
Speaker 7: This is banking turmoil and it is not a crisis.
Speaker 7: A crisis is when we're really talking about massive interconnections
Speaker 7: with banks and the real economy as well, of course,
Speaker 7: as corporations. Two thousand and seven, two thousand and nine
Speaker 7: was a crisis. This is not a crisis, and I'm
Speaker 7: really hoping that it doesn't go that way.
Speaker 2: Preciate your perspective as always, Maira Rodriguez Viadarus there of
Speaker 2: MRFI associates. Let's get back to something we might know
Speaker 2: something about with Dantann about iv Oliver wire meant Dan
Speaker 2: joined us now, Dan, wonderful to catch out with you, buddy.
Speaker 2: I want to build on the reporting from our colleague
Speaker 2: Jenny Leonard from earlier on this morning that President Biden
Speaker 2: aims to sign an executive order in the coming weeks
Speaker 2: there will limit investment in key parts of China's economy
Speaker 2: by American businesses. Dan, where'd you see this one going?
Speaker 8: Yeah? No, thanks John. This outbound sythius, as it's been
Speaker 8: labeled for the last few months, is really the culmination
Speaker 8: of a focus of the Biged administration for the last
Speaker 8: two years. And I actually spent some time on the
Speaker 8: Hill a few weeks ago at some Senior House GOP
Speaker 8: members that have been looking at this as well. I mean,
Speaker 8: this is actually something that one is very bipartisan issue
Speaker 8: in the US. I think also you're going to begin
Speaker 8: to see more clarity as there has been a lot
Speaker 8: of investor concern on what does this actually look like,
Speaker 8: because we've seen in the past the US government attempted
Speaker 8: to regulate certain or limit investment in certain Chinese companies
Speaker 8: and it had a pretty adverse impact on threats to
Speaker 8: dlist and other sorts of challenges. But really, this executive
Speaker 8: order is going to cover specific investment of semiconductor companies,
Speaker 8: artificial intelligence, and quantum computing companies in China, with a
Speaker 8: focus on US firms playing an active role in management.
Speaker 8: So venture and private equity firms are really under the
Speaker 8: magnifying glass where they're largely managing and not just taking
Speaker 8: a passive investment in some of these specific sectors, not
Speaker 8: anything necessarily more.
Speaker 2: Broadly, Dan, forgive me for asking you to read the
Speaker 2: political tea leaves, but Jenny pointing out that this push
Speaker 2: will take place at this May summit for the G
Speaker 2: seven in Japan, do you think the allies will be
Speaker 2: on board with this push coming from the US side.
Speaker 8: Yeah, It's something I've been looking at as well. I'm
Speaker 8: not sure how much Allied support really exists for this
Speaker 8: package only has a chance of any sort of success
Speaker 8: with multilateral support. Otherwise you're just going to essentially open
Speaker 8: up opportunities for other G seven plus allies to take
Speaker 8: the investments that American businesses are essentially restricted or investors
Speaker 8: are restricted from. You know, I think the US administration
Speaker 8: has had a pretty good track record of beginning to
Speaker 8: chin up support for these type of issues. I think
Speaker 8: a lot of the challenge has been the confusion of
Speaker 8: what is this And again, it's really been labeled as
Speaker 8: outbound scifius for the last few months, which takes on
Speaker 8: a much broader connotation than what we're talking about here,
Speaker 8: which is a narrower swath of Chinese firms, and what
Speaker 8: type of investment restrictions would really be placed on US companies.
Speaker 1: Dan, you're at the IMF meetings last week. What's your
Speaker 1: read on how where policymakers are on what kind of
Speaker 1: hit economically there would be if there was some sort
Speaker 1: of true fragmentation or breakdown in the relationship between China
Speaker 1: and the US.
Speaker 8: Firstly, I can't believe that was a week ago. But
Speaker 8: that's a second issue. I think there are a lot
Speaker 8: of a lot of concerns, and this is where this
Speaker 8: Biden administration team in Treasury is very careful about looking
Speaker 8: for unint unanticipated consequences, especially when doing dealing with anything
Speaker 8: that has broader market impact. I think there's a huge
Speaker 8: focus on not disrupting the China US China Western efforts
Speaker 8: from a business standpoint, because there's still a substantial amount
Speaker 8: of trade. I think the decoupling threats have been somewhat
Speaker 8: overblown by the numbers, and Bloomberg certainly covered this as well.
Speaker 8: But I think there's a huge recognition that you can't
Speaker 8: only play around with this relationship too much before it
Speaker 8: has too many adverts consequences. I mean, who can forget
Speaker 8: at the end of the Trump administration one exchange that
Speaker 8: was delisting then not delisting, then delisting certain Chinese telecom
Speaker 8: companies that created some pretty massive confusion for a number
Speaker 8: of weeks.
Speaker 1: Well, but Dan just sort of spind us forward. Then
Speaker 1: how comprehensive can some of these restricts be that the
Speaker 1: Biden administration plans to put out there. How much meat
Speaker 1: can there be behind what Jennet Yellen had to say
Speaker 1: last week about the potential to put national security over
Speaker 1: economic interest.
Speaker 8: Yeah, it's a balancing act. I mean, there's obviously national
Speaker 8: security concerns, there's it protection concerns. You know, it's hard
Speaker 8: to say that they don't have broader economic protections for
Speaker 8: the US economy as well. I mean, really, this is
Speaker 8: the investment restriction equivalent of some of the bands that
Speaker 8: the US government has put in place as well as
Speaker 8: certain other European nations on the ability for China to
Speaker 8: import certain high tech components they need to potentially catch
Speaker 8: up in some of their technology manufacturing.
Speaker 4: Done.
Speaker 2: Just a final word on enforcement. We mentioned your name
Speaker 2: a little bit earlier on this morning, just with regards
Speaker 2: to foreign exchange in the US dollar dam a de
Speaker 2: emphasis around the US dollar, a push for that coming
Speaker 2: from China other countries as well, just based implied by
Speaker 2: some of the actions agreements we've seen develop over the
Speaker 2: last month. Dan, where'd you see that one heading?
Speaker 8: Yeah, I've had this discussion with your Sileiah Mosen a
Speaker 8: number of times over the last five years. Look, we've
Speaker 8: heard the d dollarization threat for the last fifteen years,
Speaker 8: since the US has tried to force other countries to
Speaker 8: certainly choose in foreign policy decisions. I'm not sure that
Speaker 8: the world is going to move off the dollar quite
Speaker 8: so fast. And while we have seen larger countries like
Speaker 8: Brazil kind of push for this, India look to settle
Speaker 8: certain transactions outside of the dollar. I still don't know
Speaker 8: if the dollar dominance is going to erode quite so quickly, Dan,
Speaker 8: I think.
Speaker 2: A lot of people listening to this right now might
Speaker 2: agree with you. Downtown abound of voldable Iman.
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