Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: part of Global Wall Street. Arguably this is the conversation
Speaker 1: of the day. Kata Kaminsky and the titles boring Chief
Speaker 1: Research Strategist at Elphas Simplex, but far more importantly out
Speaker 1: of the Andrew Low Combine in MIT Boston is trend based.
Speaker 1: She and her shop follow trends in the probability of
Speaker 1: coming out of a range into some trend across all assets,
Speaker 1: like nobody on the street. Katie Minsky to briefist this morning, Katie,
Speaker 1: I'm gonna be honest here. You correlate across some bonds,
Speaker 1: economics and all that over to equity markets where you
Speaker 1: are more than tentative. Tell us about the repricing that
Speaker 1: we could see in the equity markets.
Speaker 2: Good point. Okay, So this year, what we've really seen
Speaker 2: is that the equity market has been disjointed from the
Speaker 2: fixed income market. So it's been blissfully going along, relatively positively,
Speaker 2: ignoring the fact that there might be some issues and
Speaker 2: we might need to have higher rates for longer. We
Speaker 2: feel like last week we finally saw a point of recognition.
Speaker 2: We saw a breakout in the fixed income market where
Speaker 2: we saw yields higher significantly on the long end. What
Speaker 2: this means is the market has really finally said, wait
Speaker 2: a minute, these upside risks are real, like higher energy praises.
Speaker 3: That's a challenge.
Speaker 2: I mean, these things have to be solved for the
Speaker 2: equity market to waiver through this.
Speaker 1: And now we go over the prosphere to tread Wells
Speaker 1: Wilder nineteen with Katie Coominski. Katie cut to the chase.
Speaker 1: There's a green equity feel of up up, up and
Speaker 1: a red down down down from Wells Wilder called ADX DMI.
Speaker 1: It's a toxic soup of calculus as well. What are
Speaker 1: you learning right now from a broader S and P
Speaker 1: or NASDAQ one hundred ADX DMI available only on the
Speaker 1: Bloomberg terminal.
Speaker 2: Well, if you look at most of the technical signals
Speaker 2: right now, they all are pretty consistent. The equity has
Speaker 2: been relatively positive, but a little more tentative recently. But
Speaker 2: if you look at fixed income, I mean, let's be honest,
Speaker 2: fixed income is actually set to have two years in
Speaker 2: a row of negative returns, and fixed income signals have
Speaker 2: been consistently short for months and working well, particularly this month.
Speaker 2: We've seen energy breaking out more recently, and then we've
Speaker 2: seen in the currency basket we've seen the dollar trade
Speaker 2: also being one of the stronger ones in the last
Speaker 2: two months. So really seeing last year repeating itself.
Speaker 4: So is that what you're leaning in too well? I mean,
Speaker 4: that's my question is are you basically doubling down on
Speaker 4: your bond bar thesis and doubling down also on oil
Speaker 4: prices going higher, or are you seeing this starting to
Speaker 4: reach a top, a topping point that makes you pull back.
Speaker 2: This is a good question, Litza, because we're not really
Speaker 2: in the business of picking tops and bottoms. But what
Speaker 2: we are doing is following where market themes are moving
Speaker 2: and what people are actually doing, and what people have
Speaker 2: been doing all year. Which has confused me is sol
Speaker 2: bonds but said that they like them so it's really
Speaker 2: sort of this weird dichotomy. And so what we're seeing
Speaker 2: as well as we're seeing continued acceleration in the bond
Speaker 2: market on the short side, not more than before, So
Speaker 2: I wouldn't say that we're seeing more short positions. We're
Speaker 2: just seeing a consistent view. Although we've seen somewhat of
Speaker 2: a bottom at the short end of the curve. So
Speaker 2: remember in earlier this year we saw the short end
Speaker 2: of the curve bottom to some degree, we've been looking
Speaker 2: for more of a bottom on the long end of
Speaker 2: the curve. So when are long term rates going to
Speaker 2: sell off or long term bonds And that's exact that
Speaker 2: we saw last week, and that was our point of
Speaker 2: recognition where the market said, wait a minute, you're right,
Speaker 2: maybe we have to be higher for longer and we
Speaker 2: need to disinvert the curve. And that's finally starting to happen.
Speaker 5: Katie.
Speaker 4: I was struck by maybe people capitulate just ahead of
Speaker 4: the market actually turning their way or the economy turning
Speaker 4: their way. And it feels like a market that wants
Speaker 4: to inflict the most pain on the greatest number of
Speaker 4: people as markets are wont to do. It feels like
Speaker 4: things are turning on the edges in ways that might
Speaker 4: challenge the pond very thesis and how high yields can go.
Speaker 4: So is this a point where you start to reassess
Speaker 4: this is the capitulation moment where things can start to
Speaker 4: normalize in a more significant way. How much are you
Speaker 4: leaning into that?
Speaker 2: So what's interesting is we did a study last year.
Speaker 2: We study the short bond trade and empirically, if you
Speaker 2: look over different cycles of the markets during inverted yield curves,
Speaker 2: trend signals tend to work very well being short fixed income.
Speaker 2: During a flatter yield curve, it becomes more mixed, and
Speaker 2: as we see a steeper yield curve, then we tend
Speaker 2: to lean more into longer positions. So that's something we've
Speaker 2: been kind of monitoring and thinking about over the last year,
Speaker 2: is this concept of we need to find that inflection point.
Speaker 2: And since we now have a much flatter you'll look
Speaker 2: at that tenure today, it's close to four or five.
Speaker 2: That's pretty flat, and so as we see that flattening
Speaker 2: and disinversion, it means that we're going to see more
Speaker 2: of that inflection point closer to the bottom of the
Speaker 2: bond market.
Speaker 1: Well, you just heard there, folks, as gospel from Katie community.
Speaker 1: I can't say enough about disinversion and the point of
Speaker 1: a tip point, if you will, an emotional point to
Speaker 1: pick up on that, Katie. I'm looking at the Bloomberg
Speaker 1: Total Return Treasury Index. You know we're back to twenty
Speaker 1: sixteen pricing. You mentioned two years of negative return in
Speaker 1: the bond market. For the pros out there on bills,
Speaker 1: on notes, on bonds, do they have gamma like equities?
Speaker 1: Is there an emotion there where if we break through
Speaker 1: certain support levels on price go lower in price hiring year,
Speaker 1: that you get so called gamma or the emotion.
Speaker 2: Get me out, Yeah, I think. I mean that's part
Speaker 2: of what we've seen recently is at a certain point
Speaker 2: you have that aha moment. We have that in short
Speaker 2: term bonds earlier this year when people realize so people
Speaker 2: can focus on the shorter end of the curve. But
Speaker 2: I think right now you're hitting that moment where people
Speaker 2: are saying, if inflation is higher for longer, longer term
Speaker 2: cash flows will be exposed more to that particular pressure.
Speaker 2: And even if we have higher yields yield you know,
Speaker 2: higher real yields plus inflation is a nominal rates, So
Speaker 2: we have to have higher nominal rates until we deal
Speaker 2: with the problems. And the problems are higher oil prices,
Speaker 2: inflation not going down. It's dealing with supply chain issues
Speaker 2: and other things that we just didn't have in a
Speaker 2: low interstate world a.
Speaker 1: Clinic, Katie, thank you so much. Four point four to
Speaker 1: ninety percent right now in the ten year yield. She
Speaker 1: was quoting Katherine communscate with Elpha simplex. Earl Davis joins
Speaker 1: us to bounce off what Katherin Kaminski just said. Earl,
Speaker 1: you say priced down, yield up. You have a greater
Speaker 1: conviction on that than the last time we talked.
Speaker 3: So here's the interesting thing. The answer is definitely yes.
Speaker 3: This is unfolding largely as we saw it, and we
Speaker 3: still see, you know what, significant room for our sell
Speaker 3: off on ten to thirty year bonds, you know, possibly
Speaker 3: fifty to seventy five basis points higher before the end
Speaker 3: of the year on ten to thirty year bonds. Having
Speaker 3: said that, we do see that as a buying opportunity.
Speaker 3: You know, Friday, we actually reduced our short positions slightly,
Speaker 3: not by buying nominal bonds, interestingly, by buying tips. We
Speaker 3: do see tremendous value in the tip market at a
Speaker 3: two to twenty real yield. Not to say it can't
Speaker 3: get cheaper, which we believe it will, but that's where
Speaker 3: we're looking to buy when we're reducing our short position.
Speaker 1: Well, two questions, one, very short. Where does the ten
Speaker 1: year real yield? Where can that frame out from a
Speaker 1: two twenty? Does that have scope and scale team sweens
Speaker 1: out to twenty two to twenty five or can it really
Speaker 1: jump out?
Speaker 3: It could really jump out to two fifty to three
Speaker 3: percent of that three percent in two thousand and eight,
Speaker 3: And let me explain the reason why. When the real
Speaker 3: yields goes up, investors obviously get a real return. And
Speaker 3: with the economy being so resilient and still being strong,
Speaker 3: you know solid, as the Fed said, what they have
Speaker 3: to do is take dollars out of the growth economy,
Speaker 3: put it in the savings economy, and you do that
Speaker 3: by having a higher real rate to attract more buyers.
Speaker 3: So we can see it going above two fifty We
Speaker 3: think possibly possibly three percent, very top end.
Speaker 1: Don't stop to show your folks, this is so important.
Speaker 1: You've got Katie Kaminski and Earl Davis pushing against the
Speaker 1: broad consensus looking for lower price, higher yield. This is
Speaker 1: a global Wall Street issue right now, Earl Davis. That
Speaker 1: comes down to the gamma that we see, this instability,
Speaker 1: the the convexity almost that we see in equities. If
Speaker 1: we get a Davis bond pricing to things unraveled, did
Speaker 1: we get to an instability? Do we get the greater gamma?
Speaker 3: So the answer is yes, but for a very short period.
Speaker 3: We believe twenty twenty four to market, the economy will
Speaker 3: still do all right. So we do like credit, We
Speaker 3: do like risk assets, not at these valuations. So we
Speaker 3: do believe we unravel because you have to reprice for
Speaker 3: the higher discount rate. Once it does unravel, we will
Speaker 3: be buying, We will be going overweight. And I think
Speaker 3: that's something important to note that you know, these are
Speaker 3: the flows and ebbs of the market, and it presents
Speaker 3: itself with opportunity. That's why you know what we're active managers,
Speaker 3: and that's what we believe active managers should do.
Speaker 1: Well.
Speaker 4: You were saying that real yields go to two and
Speaker 4: a half to three percent? Is that correct? Really?
Speaker 3: Credit by carollability? Nothing for sure, but.
Speaker 4: To me, this is the lead of this whole thing
Speaker 4: because a lot of people are saying this is not
Speaker 4: driven by inflation. It's not driven and by growth, it's
Speaker 4: driven by something else. What is that something else driving
Speaker 4: the real yield hire?
Speaker 3: Well, i'll tell you what it is. It's expectations. You know,
Speaker 3: when you read history books and the seventies and inflation
Speaker 3: throughout the sixty seventies, inflation wasn't an annoyance. It wasn't
Speaker 3: public enemy number one. It wasn't until Reagan and Volker
Speaker 3: came in where they said, inflation's public enemy number one.
Speaker 3: We're going to grasp, we're going to cut it, we're
Speaker 3: going to get it down. Right now, we're still in
Speaker 3: the annoyance sphace of inflation. That's why we think it
Speaker 3: will persist. That's why we think this is a secular
Speaker 3: change towards high yields, because it takes a lot to
Speaker 3: get it to be public enemy number one, and we're
Speaker 3: not quite there yet.
Speaker 4: At this point. You said that you're going to be
Speaker 4: a buyer when there is some sort of unraveling. What
Speaker 4: kind of unraveling is going to cause you to be
Speaker 4: a buyer If everybody's been saying this, they're waiting for
Speaker 4: the dip to buy, and that's the reason why there
Speaker 4: hasn't been a dip.
Speaker 3: Yeah, you know what were The way we take risk
Speaker 3: is a mix of quantitative and qualitative. You know, we
Speaker 3: have structural risk and tactical risk. Our structural risk will
Speaker 3: be buying as yields get higher. We have our levels,
Speaker 3: we have our view, and then we reassess as they
Speaker 3: get to those levels. But as I said, we're still short,
Speaker 3: and we're still fairly significantly short, but we will be
Speaker 3: covering that on any further weakness and ultimately going long.
Speaker 4: How concerned are you about the quintuple risk that we
Speaker 4: keep talking about that maybe we're seeing right now capitulation
Speaker 4: ahead of the market turning towards all of the expectations
Speaker 4: of slower growth given shutdown strikes, higher gas prices, student
Speaker 4: loan repayments, and just the rates the cost of borrowing
Speaker 4: going up as much as it has it.
Speaker 3: Loosten, I don't have any concern, and the reason is
Speaker 3: I look at the market. It's all about framing and
Speaker 3: how you look at the market. So I look at
Speaker 3: the market like a Boeing a Boeing airplane. So We're
Speaker 3: getting all these weather patterns hitting each other, low inflation,
Speaker 3: high grow, low growth, all this and we're getting turbulence.
Speaker 3: And you know what. The turbulence could shake the plane,
Speaker 3: it could drop five hundred feet, but it's going to
Speaker 3: survive coming out of it. So I have no worries
Speaker 3: about it. But I do believe we're going to have
Speaker 3: a lot of turbulence over the next year.
Speaker 1: Ear very quickly here, and folks, we're gonna get a
Speaker 1: little nerdy here, as we did with Katie Kaminski. Excuse me,
Speaker 1: Earl Davis. I've got looney at a one thirty four.
Speaker 1: It is stochastic, weak Canadian dollar, it' all one forty.
Speaker 1: It's stochastic because the systems overcome by events. If I
Speaker 1: get an Earl Davis market, I get a stronger dollar.
Speaker 1: And does a stronger dollar itself solve its own problem?
Speaker 3: That is a great question, and I agree with the
Speaker 3: sequencing of that. What the stronger dollar itself does? It
Speaker 3: allows us to play out into our story where there's
Speaker 3: going to be some volatility in this quarter, but twenty
Speaker 3: twenty four is going to be all right economically. And
Speaker 3: the key to that stability from an economic perspective is
Speaker 3: a stable, strong dollar, so I think it allows us
Speaker 3: to play into the story of yes, we're going to
Speaker 3: have vaults all times, but we're on the best of
Speaker 3: airplanes and we'll serve it's made for this and we'll
Speaker 3: be able to survive and not only rice thrive. You
Speaker 3: have to remember, as yields go higher, that's a longer
Speaker 3: expected return for retirees, for pensioneers, for investors and bonds.
Speaker 3: There's going to be tremendous opportunity here. And even though
Speaker 3: we believe we're in a secular beer market, I see
Speaker 3: twenty twenty four being a cyclical bull for gields.
Speaker 1: This is fabulous. Earl Davis, thank you so much with
Speaker 1: b MO Asset Manager for picking up the debris of
Speaker 1: our London trip. Is Holger Schmeting is chief economist in
Speaker 1: Behrenberg and has been incredibly perceptive about this linkage of
Speaker 1: monetary and fiscal economics in Europe and.
Speaker 4: China, which is really a key question at a moment
Speaker 4: of flux. In Holger Schmeting, I would love to get
Speaker 4: your opinions starting on what we were just talking about,
Speaker 4: which is this trip of all these Sambrovskis over in China.
Speaker 4: What is the likely outcome to some of the rhetoric
Speaker 4: that is increasingly hardline out of European leaders, Well, the.
Speaker 5: Likely outcome is clear. Germany, the European Union is reducing
Speaker 5: its dependence on China. De risking is the word, not decoupling.
Speaker 5: But the message from Dombsko Doro is clear. We are
Speaker 5: serious about this and in a way we are self
Speaker 5: confident in Europe. Yes, we do have some economic problems,
Speaker 5: but China probably has economic problems that are worse. We
Speaker 5: are the bigger market than China. We the European Union. Yeah,
Speaker 5: don't have to just accept what China does with subsidies,
Speaker 5: with its distortions. We can push back.
Speaker 4: Well, is there a sort of a tacit acceptance of
Speaker 4: slower growth or even recession during this transition process away
Speaker 4: from really depending on trade with China.
Speaker 5: There is a tacit acceptance yes, that, of course the
Speaker 5: de risking with China will means some short term losses.
Speaker 5: It also is an acceptance that, yes, if we want
Speaker 5: to be less dependent on China in the long run,
Speaker 5: an economy China that is actually struggling and will likely
Speaker 5: continue to struggle for quite a while. It means we
Speaker 5: get less boost out of foreign create with China. But
Speaker 5: having said that, the lesson we've learned from Putin is clear,
Speaker 5: if you're too dependent on somebody whom you don't fully trust,
Speaker 5: you may eventually pay a heavy price for that. So
Speaker 5: it's probably worth de risking now with modest near term
Speaker 5: pain in order to secure a longer term, fairer, more
Speaker 5: equal relationship with China.
Speaker 1: You know, one of the great criminal acts in New
Speaker 1: York City is the Oak Room at the Plaza Hotel
Speaker 1: has been shut for I think twenty years, absolutely ridiculous,
Speaker 1: beautiful and historic room as well holgrish mating right now
Speaker 1: with dollar day after day, up up, day after day,
Speaker 1: Euro down down down, over nine ten weeks, whatever it is.
Speaker 1: Are we getting a distance to a plaza accord? How
Speaker 1: many kilometers are we from the discussion of a new
Speaker 1: plaza accord?
Speaker 5: I think we are quite far away from any discussion
Speaker 5: of that. So far, the move seems to be gradual.
Speaker 5: It's not disruptive. It seems to reflect that the US
Speaker 5: economy is holding up better than expected, whereas the Eurozone
Speaker 5: is kind of in stagnation. So as long as the
Speaker 5: currency moves gradually, and does not seem to be fully
Speaker 5: out of kilted with fundamentals. I don't think we need
Speaker 5: a massive intervention come next year. With the European economy
Speaker 5: picking up again, the FED cutting rates sometime next year,
Speaker 5: and the easy be possibly not cutting rates, the euro
Speaker 5: will likely recover on its own.
Speaker 1: This is really really important because the key thing there
Speaker 1: you said was we are not disruptive. Right now, market
Speaker 1: participants feel we're disruptive. We're making jokes about a quinfect
Speaker 1: of five different things we're bouncing off of right now.
Speaker 1: What is the policy the best policy prescription for La
Speaker 1: Guard and government leaders in Brussels.
Speaker 5: I think it's basically now, stay the course for monetary policy. Okay,
Speaker 5: I think we've tied a bit more than we should have,
Speaker 5: but now the mythelic clear message is we're probably at
Speaker 5: the peak, which has actually been one when it came out,
Speaker 5: been sort of reassuring for markets and for physical policy.
Speaker 5: I would say the same, stay the course, which largely
Speaker 5: means we have a big fiscal program in Europe. This
Speaker 5: next to any U program which is now above eight
Speaker 5: hundred billion. The task is more to make sure the
Speaker 5: money is being spent. That is the rollout of the
Speaker 5: program rather than thinking about any new money.
Speaker 1: Is Jerown Powell. Central banker to the world is jer
Speaker 1: Own Powell, whether we want to admit it, or a
Speaker 1: central banker to Europe.
Speaker 5: Not quite. Europe is not that dependent on the US
Speaker 5: to really say so. For Europe, it really is Madame
Speaker 5: la Guarde, the central banker that we have to that
Speaker 5: we are glad to watch.
Speaker 4: Do you think that people are too bearish in Europe?
Speaker 4: Is that basically what I'm hearing from you.
Speaker 5: Not. For the next few month, we are having a
Speaker 5: sharp inventory correction manufacturing. We talked about China. The US
Speaker 5: economy near term will probably be slowing down. So near
Speaker 5: term trade export dependent Europe is having trouble. But come
Speaker 5: next year, global manufacturing will pick up. The inventory correction
Speaker 5: will be over next year. I think Europe could actually
Speaker 5: surprise here, and they're a bit on the upside.
Speaker 4: Will some of this slow down and surprising negativity in
Speaker 4: Europe correct inflation?
Speaker 5: Our inflation doesn't have that much to do with domestic demand.
Speaker 5: A bit. Inflation is coming down largely because this big
Speaker 5: poutine shock on energy and food prices is largely fading.
Speaker 5: We have a bit of wage inflation to come to
Speaker 5: pass through for the next half year. But all in all,
Speaker 5: inflation in Europe is having two probably around two point
Speaker 5: five percent by the second half of next year.
Speaker 4: Okay, but this to me is really the dilemma, right
Speaker 4: if it's not going to really lead to low inflation,
Speaker 4: if we're facing a stagflationary type of environment in Europe,
Speaker 4: how much just at the template that we're basically being
Speaker 4: forced to live with higher inflation, even with taking the
Speaker 4: pain of de risking, with taking the pain of recession,
Speaker 4: even with all of the other toxic brew of the
Speaker 4: quinfecta that we're talking about this morning.
Speaker 5: Well, seculation is a description as to where we are now.
Speaker 5: Probably in Europe, we may see later this week already
Speaker 5: a fall in this inflation rate year over year into
Speaker 5: the four percent hand or from a five percent hand
Speaker 5: basically on Bays effects. And again the big prorise in energy,
Speaker 5: especially gears and electricity prices late last year drops out
Speaker 5: of the comparison goods prices are stabilizing. I think that
Speaker 5: even without needing to constrain demand further, inflation will fall
Speaker 5: to around two point five percent by the second half
Speaker 5: of next year on its own.
Speaker 1: I look Holger at our trip to London, and I
Speaker 1: look back on how Europeans the United Kingdom, how they
Speaker 1: we perceive in America in disarray. How's it different this time?
Speaker 5: Well, it is a weird perception. On the one hand,
Speaker 5: we marvel that the US economy is holding up better
Speaker 5: than expected despite the massive FED rate hikes. But if
Speaker 5: we and we find reasons for that, yes, consumers and
Speaker 5: companies had good money to start with. Yeah, but when
Speaker 5: we look at anything that comes close to US politics,
Speaker 5: we basically shake our heads. How is this going to end?
Speaker 5: Was there another talk of a government shut down? We've
Speaker 5: had that so awful that it's kind of pouch by
Speaker 5: those standards we think European politics, especially the ones that
Speaker 5: Brussel actually are not working on.
Speaker 1: A Swiss watch luckily and JFK holders meeting, thank you
Speaker 1: so much with Behner Blverara joins us this morning here
Speaker 1: in another time and place from two thousand and seven. Sheila,
Speaker 1: if I'd read Daisy Bubble on that August afternoon in
Speaker 1: two thousand and seven where libor Ois went out forced
Speaker 1: to enter deviations, what would you have written about to
Speaker 1: sprightly seven year olds?
Speaker 6: Well, to you, I would have said, you should have
Speaker 6: read Daisy Bubble, probably in two thousand and two, Tess
Speaker 6: and three, when the house in Cobble was starting off. Yeah,
Speaker 6: I would say to young people, as I say in
Speaker 6: the book, and there's some back matter in the book
Speaker 6: that talks a bit about the housing bubble and were
Speaker 6: recent crypto bubble, that speculation is dangerous. You know, her
Speaker 6: behavior is dangerous. How many times we told our kids
Speaker 6: don't do something just because everybody else is And bubbly
Speaker 6: markets are a lot about that. Gen Z has a
Speaker 6: word for it. Fear of missing out fomo, you know, right,
Speaker 6: and everybody else is getting in, and then the bubble pops,
Speaker 6: usually by the smart money selling.
Speaker 1: You were a seller.
Speaker 6: Yeah, for the investor, they sh just stay away.
Speaker 1: Kids were adults a saint with accolade from Democrats and
Speaker 1: Republicans alike about a patient approach in times of crisis.
Speaker 1: We had a banking crisis a number of months ago,
Speaker 1: and we're already back to fear and missing out. That
Speaker 1: crisis is over, is it?
Speaker 3: Well?
Speaker 6: I hope the crisis is over. As I wrote at
Speaker 6: the time, I thought regulators did overreact. I'm not sure.
Speaker 6: Three mid sized regional banks failing buzzer crisis they treated
Speaker 6: as such. The rest is history. But yeah, I think
Speaker 6: more banks are going to fail. I think if properly managed,
Speaker 6: it will not be a crisis. Banks do fail. The
Speaker 6: reality is the very largest banks are too big to fail,
Speaker 6: notwithstanding our best efforts to try to kill that doctrine,
Speaker 6: and the smaller banks are heavily relied on insured deposits,
Speaker 6: which are stickier than the regional banks are suffering some
Speaker 6: they rely more on uninsured deposits for their where they're
Speaker 6: seeing outflows. But yeah, with the inverted yield curve inverted
Speaker 6: for over a year, now, you know if you're or
Speaker 6: deposed fending costs are going higher than your long term
Speaker 6: loan rates, you got a big problem. And with ci
Speaker 6: ARIA there, I can only assume there will be more
Speaker 6: bank fayers. I don't think it will be a lot.
Speaker 6: I think that FDIC and other government agencies have the
Speaker 6: tools to deal with it. But yes, I do. Over
Speaker 6: the next twelve eighteens, I think there will be more
Speaker 6: bank fayers.
Speaker 4: Let's put together some of the ideas that you're talking about,
Speaker 4: the concept of excesses, bubbles, people chasing the fomo trades,
Speaker 4: which we saw in mass over the past ten years,
Speaker 4: and then this idea of a rate regime that harkens
Speaker 4: back to when you were FDIC chair for the first time.
Speaker 4: How much have we seen the excess bubbles kind of
Speaker 4: worked through the system or are they yet to be
Speaker 4: worked through the system? In other words, are we still
Speaker 4: going to see that reckoning that people said what happen
Speaker 4: back in two thousand and seven, two thousand and or
Speaker 4: back in I should say, twenty thirteen.
Speaker 6: Yeah, so I think there's still there's some bubbles left
Speaker 6: that need to be popped. Hopefully it'll be gradual. You're
Speaker 6: seeing valuations come down, commercial real estate still inflated, You're
Speaker 6: seeing some of that start to correct. The stock market,
Speaker 6: you know, I think it's probably got some ways to
Speaker 6: go to go down again. So it's just a matter
Speaker 6: of whether we can you know, the expectations are right,
Speaker 6: people want to understand what's going on and we can
Speaker 6: manage it. But yeah, I think there's there's still many
Speaker 6: shoes left to drop. And of course, just in terms
Speaker 6: of credit markets and distress in debt refinancings, We've got
Speaker 6: a lot of corporate debt refinancing over the next couple
Speaker 6: of years. A lot of that CIA debt is expiring,
Speaker 6: needs to be refinanced. So these are shoes that are
Speaker 6: left to drop, which is why, even though I'm an
Speaker 6: inflation hawk, i am glad. I'm so glad that the
Speaker 6: bet has been hitting pause. I think they were going
Speaker 6: too fast. There's only so much of this transition to
Speaker 6: higher rates that the economy can absorb without triggering very
Speaker 6: broader problems in the financial sector, in the overall economy.
Speaker 4: And Chila, You've been saying that you think that ultimately
Speaker 4: is good to have the discipline that higher you old
Speaker 4: does invoke, that they do invoke, But you think it's
Speaker 4: been too fast. Do you think that that ensures something
Speaker 4: of a recession that people are perhaps overlooking.
Speaker 6: Well, I think if you go too fast, then you
Speaker 6: do truer crisis, and then the FED has to do
Speaker 6: you turn and ratchet back down, and you start this
Speaker 6: whole problem all over again. There's not much research that
Speaker 6: shows low rates and boost sustainable economic growth. There's a
Speaker 6: lot of research that shows as harms productivity, larger companies
Speaker 6: benefit much more than smaller ones. Actually, high rates help
Speaker 6: the smaller businesses because they get their credit from banks.
Speaker 6: It's easier to lend for banks, but bates are higher.
Speaker 6: And even though some pain in the banking system now,
Speaker 6: if we can transition into a more normalized high rate
Speaker 6: environment overall, I think that will make it make the
Speaker 6: traditional banking system the banks and pick deposits and make
Speaker 6: loans stronger. So you know, I've been a lot of
Speaker 6: corporate boards since leaving. My sentence is is that they
Speaker 6: don't borrow to invest in productivity. I mean that comes
Speaker 6: out of operating income. They want to do that anyway.
Speaker 6: So if you just make it cheaper to borrow, you know,
Speaker 6: that goes into m and a activity might go and buybacks.
Speaker 6: There's really no evidence that the ability to borrow cheaply
Speaker 6: by large companies goes into productivity. And I think the
Speaker 6: low productivity we've had since this very accommodative policy stance
Speaker 6: has taken hold shows that.
Speaker 1: Sheila, thank you so much. Shela br the former president Washington,
Speaker 1: Come College of Maryland, former FDIC chairs as well. Subscribe
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