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Speaker 1: This is the Bloomberg Surveillance Podcast.

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Speaker 2: I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz.

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Speaker 2: Join us each day for insight from the best an economics, geopolitics,

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Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,

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Speaker 2: Spotify and anywhere you get your podcasts, and always on

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Speaker 2: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg.

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Speaker 1: Business App with us Randy Krasner.

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Speaker 2: Both school Randy, there's a trend of the smooth three

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Speaker 2: months moving average. I'm acting very PhDe at the Eccles building.

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Speaker 2: This is a very gradual trend to where Chairman Powell

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Speaker 2: wants to get to. Does he have the time to

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Speaker 2: wait for that trend to play out to something that's

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Speaker 2: a lower statistic.

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Speaker 3: You really nailed it. That's the challenge. Now it's moving

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Speaker 3: in the direction that they wanted to move. Finally, it's

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Speaker 3: taken a long time to get there. Now, as I've

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Speaker 3: mentioned before, what they're hoping for is this immaculatus inflation

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Speaker 3: where you just slowly weaken the labor market. Unemployment rate

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Speaker 3: only goes up to about four and a half percent,

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Speaker 3: which is not far from what they think of as

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Speaker 3: the long run average and the inflation rate comes down. Now,

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Speaker 3: the hot number on wages is really not consistent with that.

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Speaker 3: We're going to be getting another labor market report before

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Speaker 3: the FED makes its next decision. We'll be getting a

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Speaker 3: lot more inflation data that's coming in. But as I

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Speaker 3: said on this program before, the Fed's not going to

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Speaker 3: quit until the labor market quits, and this is not

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Speaker 3: a quitting labor market.

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Speaker 4: In these data, how do you understand the average hourly

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Speaker 4: earnings and how much they've gone up. I mean, given

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Speaker 4: the fact that people were saying that we're sorry to

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Speaker 4: see this process where suddenly workers are losing some of

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Speaker 4: the power that they gained in the media aftermath of

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Speaker 4: the pandemic, does this fly in the face of that

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Speaker 4: and really confirm that perhaps we're in a different environment

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Speaker 4: with a smaller workforce and perhaps a greater sort of

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Speaker 4: thrust to labor's power.

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Speaker 3: Sure, so labor force participation is really key to that,

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Speaker 3: and Mike had had had mentioned that that's one of

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Speaker 3: the challenges that the FED has had. You've got this

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Speaker 3: lower labor force participation, You've got demand being continued to

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Speaker 3: be very strong. Some of that had been from fiscal

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Speaker 3: stimulus from before, but continuing on with fairly strong, strong

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Speaker 3: demand and tight labor market means really one thing, which

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Speaker 3: is we just are going to go up. Fortunately, the

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Speaker 3: hope is that they won't go up quite as fast

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Speaker 3: going forward, but that's really so far that the data

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Speaker 3: are not telling us that.

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Speaker 2: Randy Krassner, thank you so much, particularly, professor, thank you

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Speaker 2: so much for your comments on our troubled banks. Here

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Speaker 2: he is at the Boot School, Chicago. Jeffrey Rosenberg of

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Speaker 2: Black Rock of course foil manager, Systematic Multi Strategy.

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Speaker 1: Fun. Great to see you, to see you here.

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Speaker 2: This is like this is our work from office. Okay,

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Speaker 2: it's great to have you here as well.

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Speaker 1: Your being here.

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Speaker 2: Is it a symbol of this job economy and maybe

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Speaker 2: even of this troubled banking crisis that we're somehow getting

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Speaker 2: back to normal.

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Speaker 5: Well, we are getting back to normal in terms of

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Speaker 5: the COVID part. I think when you look at today's report,

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Speaker 5: as you guys have already covered, this is not getting

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Speaker 5: back to the slowing that the bond market is expecting

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Speaker 5: that the FED is hoping for. That's going to really

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Speaker 5: bring down. Mike McKee said something at the beginning which

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Speaker 5: I want to echo, which is we're very far away

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Speaker 5: from what these job market reports need to start to

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Speaker 5: look like to begin to even get close to what

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Speaker 5: the FED is.

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Speaker 2: For and the pros and know that we need to

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Speaker 2: get down to one twenty one hundred and even eighty

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Speaker 2: five whatever, maybe a couple of negative statistics as some

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Speaker 2: have called for in a presumed slow down. But what's

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Speaker 2: the unemployment rate that makes Chairman Pole's sit up straight?

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Speaker 5: Well, it's one that starts to rise, he said it in.

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Speaker 1: It's a vector. It's not so much the level, it's.

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Speaker 5: The change that has to start showing the tightness in

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Speaker 5: the labor market or the tightness of the labor market

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Speaker 5: beginning to ease and getting some increases in the uneployment rate.

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Speaker 5: He said it in the press conference that you know,

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Speaker 5: part of what is the price to pay for achieving

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Speaker 5: success on inflation is a rate of growth that is

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Speaker 5: for a small period of time or a temporary period

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Speaker 5: of time below trend. Well, that's what you know it'll

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Speaker 5: start to look like in the labor report in rising

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Speaker 5: and unemployment rate, And nothing in this report really points

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Speaker 5: to any of that.

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Speaker 4: So do you think that the market is overpricing the

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Speaker 4: boogeyman of some sort of crisis or cracks or something

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Speaker 4: to sort of cause this to halt in its tracks

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Speaker 4: and reverse in some sort of meaningful way.

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Speaker 5: So let's separate the market pricing of you know, what

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Speaker 5: is a boogeyman? I think.

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Speaker 1: I think the.

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Speaker 5: Market worries about tail risk shock events, crises. And look,

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Speaker 5: the banking sector crisis that we saw in March in

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Speaker 5: a little bit of a echo rebound that we've seen

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Speaker 5: this week is that kind of thing. But that's very

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Speaker 5: different than kind of fundamental economic performance, and that's not

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Speaker 5: so much a tail risk. That's really much more about

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Speaker 5: the trajectory. Now, the two can be linked, obviously, because

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Speaker 5: if you have a crisis that feeds back into confidence

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Speaker 5: and that it's the economy.

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Speaker 4: But this creates a real issue, and I'm wondering why

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Speaker 4: we're not seeing it, frankly, and longer term treasure yields

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Speaker 4: a little bit more, and whether this is something you're

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Speaker 4: thinking about, because if you have this push pull and

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Speaker 4: perhaps the FED not being as aggressive as people thought

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Speaker 4: that they would be just based on the economic projection,

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Speaker 4: then isn't the risk of inflation remaining high for a

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Speaker 4: longer period of time that much greater and not being

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Speaker 4: priced in.

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Speaker 5: Yeah, and it's the pricing in of that should be

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Speaker 5: the term premium, right, There should be a premium for

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Speaker 5: holding longer dated maturities because you have more inflation risk

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Speaker 5: and inflation uncertainty. And that's the disconnect here. The market

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Speaker 5: is really wetted to this view that we go very

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Speaker 5: rapidly back down to a pre COVID two percent inflation rate,

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Speaker 5: and today's data is just kind of another piece of

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Speaker 5: evidence that says that's not what we're really seeing in

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Speaker 5: the economy yet. So the disconnect between what the Fed

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Speaker 5: has been saying, what Powell said earlier this week in

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Speaker 5: terms of a lot more cautionary tale relative to what

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Speaker 5: you see in the yield curve, the inversion, the lack

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Speaker 5: of a term premium that your question was just asking about,

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Speaker 5: that's very much still the tension that we're dealing with it.

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Speaker 2: Toper, Carnegie, Mellon, you had Allan Meltzer, Marvin Goodfriend, and

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Speaker 2: the ginormous Bennett McCollum, who we lost late last year

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Speaker 2: at eighty seven years old, and they harken to what

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Speaker 2: some people are looking at now, which is M two

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Speaker 2: exploding with the Biden stimulus and M two coming out

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Speaker 2: for Blackrock. How disruptive is this huge variability of M

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Speaker 2: two and now signaling a real almost like thick oil

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Speaker 2: within the system. The engine oil is getting thicker and thicker.

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Speaker 5: Yeah, it's a huge deal in terms of the structure

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Speaker 5: of interest rates of monetary policy. We went from a

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Speaker 5: restrictive reserve system to a excess reserve system to a

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Speaker 5: plentiful reserve system. And you've seen that in the banking statistics,

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Speaker 5: for example, in terms of loans to deposit ratios. Part

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Speaker 5: of the increase in uninsured deposits that is kind of

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Speaker 5: part of the source of what we saw is because

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Speaker 5: you flooded the system with so much liquidity and that

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Speaker 5: M two and so we're seeing that there are some

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Speaker 5: unintended consequences. The role of RRP and creating competitiveness to deposits.

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Speaker 5: That's all part of the newness of what does it

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Speaker 5: mean to operate with a balance sheet that went from

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Speaker 5: six percent of GDP to thirty five percent of GDP

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Speaker 5: and a lot of things that we just don't know

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Speaker 5: how it works when.

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Speaker 2: Real world folks, I mean what Jeff Rosenberg is really doing.

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Speaker 2: Here is the bondboard folio from sixty thousand feet. What's

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Speaker 2: your conviction three years out looking at a holistic blackrock

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Speaker 2: bond world.

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Speaker 5: Well, the first conviction three years out, the big change

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Speaker 5: is we've reset the level, the starting level of yield. Right,

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Speaker 5: so when you think about bonds, bonds are about income,

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Speaker 5: and when there was no income, it was very hard

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Speaker 5: to kind of really hold on to bonds. So that

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Speaker 5: restoration and the FED getting off of zero interest rates

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Speaker 5: and really this focus on inflation. Well the starting point

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Speaker 5: of that is now five to five and a quarter

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Speaker 5: interest rate yields, and so that resets the bond market.

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Speaker 5: And that's why you've seen a lot of flows and

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Speaker 5: a lot of interest come back to bonds. And that's

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Speaker 5: remember we had a ten year or longer period of

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Speaker 5: several episodes of negative interest rates, zero interest rates. We

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Speaker 5: talked about that word out lack of yield. So you're

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Speaker 5: seeing a restoration of bonds in the portfolio. Because there

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Speaker 5: I'm going to steal that word.

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Speaker 2: I'm gonna be saying restoration one got it. I got

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Speaker 2: it from Jeff Rosenberg.

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Speaker 4: This is the this is the issue is that we're

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Speaker 4: looking at the practicality of it, which is you are

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Speaker 4: getting yield and you're looking at the practicality of the data,

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Speaker 4: which is that the economy is still strong. And the

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Speaker 4: two ideas are kind of getting to be in conflict

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Speaker 4: with one another a little bit, where we're having to

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Speaker 4: either see the Fed step in a little bit more

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Speaker 4: aggressively to bring things back to where they want, or

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Speaker 4: you have to see something change in terms of people's

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Speaker 4: assumption of the longer term inflation rate. What data are

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Speaker 4: you looking at. If it's not the labor market report,

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Speaker 4: If it's not what the Fed said this week, this

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Speaker 4: all doesn't seem to matter anymore as people to sort

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Speaker 4: of hunker down with their narratives.

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Speaker 5: So a couple of data points. So let's come back

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Speaker 5: to your favorite data point, average hourly earnings in this

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Speaker 5: report and zero point five. And you know why that

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Speaker 5: one is a hard one to anchor on is because

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Speaker 5: it's so subjective, it's so sensitive to the mix shift.

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Speaker 5: So part of what you saw in the internals of

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Speaker 5: today's labor report is a little bit less boost from

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Speaker 5: leisure and hospitality, a little bit more spread. Those tend

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Speaker 5: to be small, lower income changes. So when that mixed

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Speaker 5: shifts that helps to boost That's not giving us a

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Speaker 5: good picture of inflation and wage inflation. That's just changing

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Speaker 5: the mixture of what is in that component. Last week's

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Speaker 5: ECI a much better measure at LANTA FED Wage tracker,

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Speaker 5: much better measure, And next week we'll look at core

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Speaker 5: services X housing as the kind of mapping to the

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Speaker 5: labor market and the more stable long run indicator of

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Speaker 5: where is inflation going to settle down. No one doubts

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Speaker 5: that peak inflation has occurred. Inflation is declining, the shelter

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Speaker 5: piece is gonna decline and help push everything down. It's

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Speaker 5: about do we get to two percent the way the

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Speaker 5: bond market expects, or do we maybe get to three?

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Speaker 5: And because this way or dynamic, you end up having

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Speaker 5: a lot harder time, and the debate shifts to the

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Speaker 5: cost of getting to three to two versus three versus the.

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Speaker 6: Benefits in the here and now.

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Speaker 4: Historically, how hard is it to get to recession with

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Speaker 4: a labor market report like what we just got.

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Speaker 5: We're that's a three point four percent on employment right now. Yes,

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Speaker 5: it's a lagging indicator, and we get that. But again,

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Speaker 5: what Powell said earlier this week is a little bit

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Speaker 5: of surprise that with five hundred basis points of tightening,

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Speaker 5: you haven't really seen that much slowing. And you know,

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Speaker 5: you look at earnings and what the companies are saying,

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Speaker 5: You look at what credit markets are saying, high yield spreads,

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Speaker 5: investment grade spreads away from the banking sector, of course,

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Speaker 5: and this is still a very robust economy. So the

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Speaker 5: tightening has yet to show up. We expected to show up,

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Speaker 5: but it hasn't yet.

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Speaker 2: Now you said that eight months ago too as well.

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Speaker 4: On the JO shocking thing is that people were talking

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Speaker 4: about the lag effects, some people saying it's eighteen months now,

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Speaker 4: twelve to eighteen months. But it is a serious thing,

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Speaker 4: especially given the fastest pace of tightening.

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Speaker 2: Going back to go from Randy Cross under Jeff Rosenberger's

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Speaker 2: wonderful Jeff, thank you so much, particularly for those thoughts

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Speaker 2: on Ben at McCollum and Carne Mellan, Paul and I

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Speaker 2: and John and Lisa have been remiss and that it's

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Speaker 2: been distraction.

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Speaker 1: May it has been nuts this week. I'm not going

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Speaker 1: to mince words on that.

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Speaker 2: And what we're going to do right now is slow

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Speaker 2: down and actually talk about the American labor economy. Tiffany

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Speaker 2: Welding can do this, she joins us right now from PIMCO,

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Speaker 2: is there, chief us, I only talk about the jobs

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Speaker 2: report economists right as well, Tiffany.

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Speaker 1: Are we fully employed?

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Speaker 7: Yeah? I think that for the most part, we think

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Speaker 7: we're fully employed, you know, But I would say that

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Speaker 7: it seems like every labor market report, we're finding more

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Speaker 7: and more people who can come back to the labor market,

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Speaker 7: or maybe we're unemployed and get jobs, or you know,

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Speaker 7: maybe they're switching jobs. So you know, the labor market

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Speaker 7: remains pretty strong and resilient.

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Speaker 2: Here I quoted with an Marie Hoarded today, folks, Bloomberg

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Speaker 2: balance of power. Look for that an re Hoarden, our

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Speaker 2: chief Washington correspondent, and Tiffany I was quoting out of

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Speaker 2: the Washington Post about how states beleaguered with sub three

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Speaker 2: percent unemployment rates are trying to change their child labor laws,

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Speaker 2: which which I find just like throwing us back to

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Speaker 2: Dickens in the nineteenth century, is an exaggeration. But hey,

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Speaker 2: stay with me, folks, It's Friday. Are we in such

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Speaker 2: dire straits for labor that we're going to employ kids?

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Speaker 7: Well, you know, I don't. I don't know about that

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Speaker 7: in particular, but I mean, I think the bottom line is,

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Speaker 7: from a longer term perspective, the demographics in the United States,

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Speaker 7: you know, would would point to lower labor supply over

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Speaker 7: the medium term, you know, And that's regardless of those

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Speaker 7: kinds of policies. I think, you know, one of the

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Speaker 7: other policies that might make our sense is immigration. You know,

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Speaker 7: our neighbor country, Canada has obviously been able to achieve

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Speaker 7: much more immigration more recently than in the US, you know,

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Speaker 7: and as a result, their labor markets are are looking

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Speaker 7: a little bit less tight than ours. So you know,

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Speaker 7: I think that, I know, it's really difficult to get

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Speaker 7: labor to get immigration reform, but looking towards those policies,

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Speaker 7: you know, also, I think would be would be very

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Speaker 7: helpful for the labor market.

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Speaker 2: Can I have a yeah, Paul that the reason we're

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Speaker 2: having this conversation with Tiffany Wilding is over the success

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Speaker 2: of America.

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Speaker 8: Yep.

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Speaker 9: Absolutely, And this is the other names it's that's a

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Speaker 9: very good taken and Tiffany, my point to Tomas, we

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Speaker 9: were just talking off air before you came on, is

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Speaker 9: how can we entertain recession? Recession discussions when we've got

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Speaker 9: such a strong labor market, how do you think about that?

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Speaker 7: Yeah, No, I mean I think that's a really good question.

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Speaker 7: And the way I've been characterizing it, I guess a

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Speaker 7: little tongue in cheek is is I think we have

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Speaker 7: a two handed economy right now. Obviously, economists are famous for,

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Speaker 7: on the one hand, on the other hand statements, But

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Speaker 7: you know, I do think that the decline in bank

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Speaker 7: stocks is quite concerning, you know, and that's because, you know,

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Speaker 7: historically there's been a lot of academic analysis that's been

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Speaker 7: done that suggests when you have bank stocks that are

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Speaker 7: falling you know, thirty percent forty percent on average, like

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Speaker 7: what we've seen more recently, that tends to be indicative

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Speaker 7: of higher cost of capital for that industry. Obviously, that

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Speaker 7: tends to slow their loan growth, and that's really important

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Speaker 7: for the economy for future growth. So statistical analysis suggests

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Speaker 7: that when we have stock declines like what we've seen,

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Speaker 7: you do tend to see you know, one to two

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Speaker 7: percentage point drags on GDP relative to what you otherwise

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Speaker 7: would have gotten. So, you know, I think that is

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Speaker 7: that is concerning, and that does cloud the outlook you know,

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Speaker 7: and I think that comes on the heels of just

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Speaker 7: the fact that monetary policy is tight. Demand for loans

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Speaker 7: should also be declining as you have higher interest rates, So,

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Speaker 7: you know, I think all of this would still suggest

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Speaker 7: monetary policy works with long and variable lags. That's still

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Speaker 7: working its way through the economy, and there is still

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Speaker 7: a recession that's that's probably quite likely on the horizon,

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Speaker 7: even though labor markets are strong now. Inflation is obviously

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Speaker 7: very strong now, you know, and it may may seem

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Speaker 7: farther away.

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Speaker 9: Tiffany, what was your takeaway from what we heard from

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Speaker 9: Fetcherman j Pal this week on raising the rates the

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Speaker 9: base rate twenty five basis points. What was your take

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Speaker 9: key takeaway if.

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Speaker 7: Anything, Well, I mean, I do think that, as I mentioned,

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Speaker 7: with this banking sector stress, I think the balance of

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Speaker 7: risks are changing. You know, we've been talking about solely

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Speaker 7: elevated upside risk for you know, over you know, I

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Speaker 7: would say maybe two years now and now that monetary

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Speaker 7: policy is solidly and restrictive territory, we do have this

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Speaker 7: banking sector stress that can result in a bigger downturn.

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Speaker 10: The risks.

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Speaker 7: The balance of risks have just changed, and I think

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Speaker 7: the Fuberle reserve is responding to that. Monetary policy is

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Speaker 7: a risk management exercise. Powell has said that multiple times,

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Speaker 7: and so they see I think for the most part,

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Speaker 7: the FED officials that feel like we're in restrictive territory.

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Speaker 7: Let's just take a little break. We're going to go

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Speaker 7: on hold for a little while and just see how

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Speaker 7: the data plays out, see how these long and variable

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Speaker 7: lags work out, you know. And of course, if things

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Speaker 7: continue to be this robust by the end of this year,

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Speaker 7: I would expect the FED to hike again or potentially more.

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Speaker 7: But if it's not right and you know, then then

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Speaker 7: we're we're you know, in the world that the bond

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Speaker 7: market is pricing in right now, which is recuse.

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Speaker 2: Take the unit labor cost part of a three ratio

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Speaker 2: six dynamic parts productivity study and take the unit labor

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Speaker 2: costs and pull that over to the worries the angst

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Speaker 2: of Chairman Powell and the team. Does that signal a

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Speaker 2: persistency to elevated wage increases even if it's not a

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Speaker 2: real wage.

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Speaker 7: Increase, Yes, no, it absolutely does. The fact that unit

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Speaker 7: labor costs are kind of around, you know, it looks

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Speaker 7: like maybe five six percent, you know, is very concerning.

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Speaker 7: I mean because that you know, that does have a

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Speaker 7: leading quality for core inflation. If you have you know,

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Speaker 7: wages that you know, whatever your labor costs are there increasing,

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Speaker 7: you know that will be passed on for the most

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Speaker 7: part usually to consumers into price inflation. If I look

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Speaker 7: across a range of a wage statistics, the core PCEE,

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Speaker 7: you know, labor costs, as you say, I think the

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Speaker 7: underlying trend and inflation right now, you know, it looks

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Speaker 7: like four maybe even four and a half percent, and

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Speaker 7: that's well above the two percent target. You know, so

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Speaker 7: hopefully over time that comes down, you know, but there's

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Speaker 7: a little bit of a you know, there's a little

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Speaker 7: the other side of that coin is that you know,

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Speaker 7: the Fed probably actually needs to engineer a recession. They

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Speaker 7: need they've said they need some pain in the labor

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Speaker 7: market in order to get that down. But you probably

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Speaker 7: need that type of economically unfortunately, to solve that problem.

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Speaker 2: Is there any study in your economic history, Tiffany Wilding

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Speaker 2: where a central bank quote unquote engineered a recession?

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Speaker 7: Yeah, I mean there's a there's a lot of times

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Speaker 7: right where you where you see recession, you know, I

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Speaker 7: would say over no, you see it.

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Speaker 2: But does the central bank wake up and go, let's

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Speaker 2: engineer a recession.

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Speaker 7: Well, they obviously never say that, you know, but if

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Speaker 7: you look, you know, so we've looked over seventy years

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Speaker 7: fourteen developed markets. When a central bank starts hiking interest rates,

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Speaker 7: usually you get a recession on average about two to

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Speaker 7: two and a half years after the start of a

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Speaker 7: rate hiking cycle, you know. So there is something certainly

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Speaker 7: to when central banks start to tighten policy. You do

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Speaker 7: see economies you know, weakend and eventually you know, go

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Speaker 7: into recession. Now, these these issues tend to be nonlinear.

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Speaker 7: These periods tend to be kind of nonlinear in the

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Speaker 7: sense that, like, the central Bank's probably not trying to

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Speaker 7: do that, but you have financial market accidents, you know,

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Speaker 7: Jeremy Stein, it gets in the you know, higher interest

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Speaker 7: rates you know famously get in the cracks, and you

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Speaker 7: just don't understand where the pockets of vulnerability are until

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Speaker 7: you get to these higher levels, you know, and that

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Speaker 7: again results in an economy that weakens in kind of

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Speaker 7: a nonlinear way. So that's always a risk here, thank.

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Speaker 1: You, Tiffany Wilder. So that wasn't Nicer, We didn't really

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Speaker 1: do bank stress. We can talk about it. She's a PIMCO.

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Speaker 2: It seems like Monday was two years ago, but I

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Speaker 2: believe I tweeted out on Monday about the Fifth Bank

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Speaker 2: of the United States, and ultimately that is what the

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Speaker 2: liberals and conservatives are arguing about.

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Speaker 1: Is this scope and scale John in this banking system.

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Speaker 1: Should we talk to somebody as an.

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Speaker 6: Expert Plat Yeah's that on the.

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Speaker 2: Second Bank of the United States and the Fifth Bank

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Speaker 2: of the United States.

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Speaker 1: Chris Marrinack is an expert.

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Speaker 2: He's director of Research Jenny Montgomery Scott, and has really

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Speaker 2: been excellent force. My theme on this Friday, Chris Marrinnack

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Speaker 2: is let's get to the weekend and Friday the banks

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Speaker 2: have to get to the weekend. What should we see

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Speaker 2: into Friday afternoon in this weekend from troubled banks with

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Speaker 2: new book value valuations that are shocking.

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Speaker 10: Well, Tom, I think the reality is most of these

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Speaker 10: banks just have security losses that are unrealized, and those

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Speaker 10: are getting better as treasury rates fall. I think you

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Speaker 10: could see some action from the Fed or Treasury to

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Speaker 10: reinstute the TAG program from two thousand and eight that

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Speaker 10: was guaranteeing transaction accounts.

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Speaker 8: That would be very helpful.

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Speaker 10: I think most of these companies have much more stable

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Speaker 10: deposit flows than anyone realizes. And that's been the challenge

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Speaker 10: all week, is that we've had this temper tantrum against

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Speaker 10: the FED in using bank stocks as a weapon against

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Speaker 10: the Fed to try to get the Fed to change.

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Speaker 6: Hey, Chris Well said, when you listen to some of

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Speaker 6: the numbers coming out of the banks, they're telling you

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Speaker 6: the deposits are stable. So when you hear people like

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Speaker 6: Senator Warren say that we need changes to the limits

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Speaker 6: for deposit insurance, that's actually changed this story this week,

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Speaker 6: not really.

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Speaker 10: I mean, I think it's good that she's supporting the

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Speaker 10: changes in the limits, but I think the rest of

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Speaker 10: the rhetoric correct is incorrect.

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Speaker 4: What do you think is going to be the circuit breaker, Chris,

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Speaker 4: to really prevent this temper tantrum from rearing its head

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Speaker 4: again as we talk about the otherwise resilient economy, Well,

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Speaker 4: changing the.

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Speaker 8: Short sale rule would help.

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Speaker 10: I think also instituting, to some extent going back to

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Speaker 10: the tag program would be helpful.

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Speaker 8: I'd like to.

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Speaker 10: See the FED change the stress test program to accelerate

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Speaker 10: the timing.

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Speaker 8: The stress test results were already filed.

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Speaker 10: In April, and the FED as an army of folks

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Speaker 10: that they could stick out to put this out next week.

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00:22:36,280 --> 00:22:37,960
Speaker 8: It would be very useful to know that most of

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00:22:38,000 --> 00:22:39,879
Speaker 8: the banks, if not all, the banks, have passed the

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00:22:39,920 --> 00:22:40,480
Speaker 8: stress test.

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00:22:40,920 --> 00:22:43,440
Speaker 10: The reality is, if you look at the next eighteen

444
00:22:43,480 --> 00:22:45,919
Speaker 10: to twenty four months of cash flow that the banks have,

445
00:22:46,119 --> 00:22:49,959
Speaker 10: it covers five hundred to six hundred points of loan losses,

446
00:22:50,000 --> 00:22:51,960
Speaker 10: which is just as much as we had in the

447
00:22:51,960 --> 00:22:55,320
Speaker 10: Great Financial Crisis. I don't think those credit issues exist today,

448
00:22:55,359 --> 00:22:57,520
Speaker 10: despite all of the worries on commercial real estate.

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00:22:57,880 --> 00:22:59,640
Speaker 8: If most banks really looked at.

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00:22:59,560 --> 00:23:03,880
Speaker 10: Their portfolio did a default loss given default analysis, you'll

451
00:23:03,920 --> 00:23:07,120
Speaker 10: find that the credit marks and the credit losses are

452
00:23:07,200 --> 00:23:08,640
Speaker 10: very moderate in the industry.

453
00:23:08,920 --> 00:23:10,880
Speaker 8: I think we should recognize those and what.

454
00:23:10,800 --> 00:23:13,480
Speaker 10: They are, and the ability for banks to absorb those

455
00:23:13,480 --> 00:23:16,640
Speaker 10: losses with existing earnings and capital, and then we can

456
00:23:16,720 --> 00:23:18,720
Speaker 10: reinstitute confidence back in the sector.

457
00:23:19,080 --> 00:23:22,000
Speaker 4: You said short sellers should be investigated. What do you

458
00:23:22,040 --> 00:23:24,320
Speaker 4: make of the back and forth with Western Alliance, in

459
00:23:24,359 --> 00:23:27,960
Speaker 4: particular yesterday with shares plunging after the Financial Times report

460
00:23:28,000 --> 00:23:29,879
Speaker 4: and then them coming out and saying this is just

461
00:23:29,920 --> 00:23:32,280
Speaker 4: a tool of short selling. Is there validity to that?

462
00:23:32,320 --> 00:23:34,199
Speaker 4: Do you think that people are going to exploit the

463
00:23:34,240 --> 00:23:35,800
Speaker 4: jitters the temper tantrum?

464
00:23:36,720 --> 00:23:37,320
Speaker 8: Absolutely.

465
00:23:37,359 --> 00:23:40,160
Speaker 10: I mean we've seen stories that were rehashed from six

466
00:23:40,200 --> 00:23:43,200
Speaker 10: weeks earlier on pack West and again with Western Alliance.

467
00:23:43,240 --> 00:23:46,159
Speaker 8: There was no news there. PacWest hired an advisor at

468
00:23:46,200 --> 00:23:46,600
Speaker 8: the end.

469
00:23:46,520 --> 00:23:49,119
Speaker 10: Of March, so that was completely fail I don't know

470
00:23:49,200 --> 00:23:52,520
Speaker 10: why we continue to kind of create new narratives just.

471
00:23:53,040 --> 00:23:54,560
Speaker 8: To help justify the positions.

472
00:23:54,600 --> 00:23:57,680
Speaker 10: The facts are these banks have very good cash flow,

473
00:23:57,760 --> 00:24:00,320
Speaker 10: they have deposits that are much more stable, and really

474
00:24:00,520 --> 00:24:02,520
Speaker 10: Quity has served in the past two months.

475
00:24:02,640 --> 00:24:06,080
Speaker 2: Chris, your note is blistering. You say the press reports

476
00:24:06,200 --> 00:24:10,120
Speaker 2: are stale. Just for instance, I know a guy, he's

477
00:24:10,119 --> 00:24:13,280
Speaker 2: a guy that he's with the show quite often through

478
00:24:13,280 --> 00:24:13,800
Speaker 2: the week.

479
00:24:13,960 --> 00:24:14,880
Speaker 1: He's going to sit with.

480
00:24:14,880 --> 00:24:18,520
Speaker 2: His barons open on Saturday and try to figure out

481
00:24:18,640 --> 00:24:22,080
Speaker 2: which bank to buy. How do you select the good

482
00:24:22,119 --> 00:24:25,400
Speaker 2: banks from the troubled banks on a Saturday morning, as

483
00:24:25,400 --> 00:24:27,679
Speaker 2: we've crashed, So.

484
00:24:27,600 --> 00:24:30,560
Speaker 10: We start with tangible book value and then we apply

485
00:24:30,680 --> 00:24:34,760
Speaker 10: the unrealized marks from HTM held the maturity portfolios that's

486
00:24:34,760 --> 00:24:37,760
Speaker 10: now disclosed in the FDIC call reports, and we've provided

487
00:24:37,800 --> 00:24:40,119
Speaker 10: and so of some of our peers around the street.

488
00:24:40,480 --> 00:24:43,080
Speaker 10: That gets you to adjust a tangible book. That's the

489
00:24:43,080 --> 00:24:45,439
Speaker 10: first place to start. Then I think you look at

490
00:24:45,440 --> 00:24:47,800
Speaker 10: the cash flow that banks have the pre tax pre

491
00:24:47,840 --> 00:24:51,000
Speaker 10: provision or what we call ppn R. It's the cornerstone

492
00:24:51,000 --> 00:24:53,440
Speaker 10: of the FED stress test, and then you apply that

493
00:24:53,560 --> 00:24:56,680
Speaker 10: for the next twelve to twenty four months, and that

494
00:24:56,760 --> 00:24:59,480
Speaker 10: gives you a loss absorption of the current lawn portfolio

495
00:25:00,080 --> 00:25:03,480
Speaker 10: edition of that. Banks have got very well disclosed information

496
00:25:03,600 --> 00:25:07,439
Speaker 10: on their loan loss allowances, on their credit marks, and

497
00:25:07,480 --> 00:25:10,359
Speaker 10: particularly the amount of real estate that they have. Banks

498
00:25:10,359 --> 00:25:12,439
Speaker 10: have been a wide open commona this time, which is

499
00:25:12,560 --> 00:25:14,760
Speaker 10: massively different than what we saw in two thousand and

500
00:25:14,760 --> 00:25:15,240
Speaker 10: eight nine.

501
00:25:15,400 --> 00:25:16,880
Speaker 6: Chris, what I hear from you is that the price

502
00:25:16,920 --> 00:25:19,119
Speaker 6: sanction is divorced from the fundamentals, and I've heard that

503
00:25:19,160 --> 00:25:21,000
Speaker 6: a lot from a lot of analysts on a lot

504
00:25:21,040 --> 00:25:23,240
Speaker 6: of banks this week. The problem I think that a

505
00:25:23,240 --> 00:25:25,040
Speaker 6: lot of other people have though, Chris, is that the

506
00:25:25,119 --> 00:25:28,320
Speaker 6: fundamentals will be shaped by the price action. So even

507
00:25:28,359 --> 00:25:30,640
Speaker 6: if you think the price action is divorced from the fundamentals,

508
00:25:30,680 --> 00:25:32,960
Speaker 6: the price sanction is going to shape the fundamentals, Chris,

509
00:25:33,119 --> 00:25:34,119
Speaker 6: does that not concern you?

510
00:25:35,400 --> 00:25:38,080
Speaker 10: Well, I lived it through two thousand and nine. Fifth

511
00:25:38,080 --> 00:25:40,280
Speaker 10: Third is my favorite example. It hit a dollar in

512
00:25:40,359 --> 00:25:43,120
Speaker 10: late February two thousand and nine, they came back three

513
00:25:43,160 --> 00:25:45,560
Speaker 10: months later and raised capital at six dollars, and then

514
00:25:45,600 --> 00:25:47,200
Speaker 10: at the end of two thousand and nine the stock

515
00:25:47,280 --> 00:25:51,040
Speaker 10: was fourteen sixty. So I've seen that happen with many

516
00:25:51,080 --> 00:25:53,840
Speaker 10: regional banks and all their other large companies as well.

517
00:25:54,040 --> 00:25:57,480
Speaker 10: So I feel like that is the repeat event that

518
00:25:57,600 --> 00:25:59,760
Speaker 10: is going on in my world. So I think we

519
00:25:59,880 --> 00:26:02,560
Speaker 10: just have to have the confidence to move forward that

520
00:26:02,640 --> 00:26:05,560
Speaker 10: the facts are that the banks have better credit quality,

521
00:26:05,640 --> 00:26:09,040
Speaker 10: better cash flow than the investors. Understand I realize that

522
00:26:09,080 --> 00:26:12,199
Speaker 10: the barecase always sounds more intelligent, but it doesn't make

523
00:26:12,240 --> 00:26:12,760
Speaker 10: it correct.

524
00:26:12,840 --> 00:26:15,400
Speaker 6: So you think that these banks, I'm viable with five

525
00:26:15,440 --> 00:26:17,200
Speaker 6: percent interest rights for the rest of this year.

526
00:26:18,200 --> 00:26:21,160
Speaker 10: Absolutely, it's difficult, it's not ideal, but they can make

527
00:26:21,160 --> 00:26:23,959
Speaker 10: a spread. The spread overly narrower, but they can. And

528
00:26:24,000 --> 00:26:26,679
Speaker 10: we think that deposit flows are much more stable than

529
00:26:26,720 --> 00:26:27,080
Speaker 10: the market.

530
00:26:27,160 --> 00:26:27,879
Speaker 8: It understands.

531
00:26:27,920 --> 00:26:30,320
Speaker 6: Hey, Chris, wonderfully get your perspective. Thank you, sir. A

532
00:26:30,400 --> 00:26:33,639
Speaker 6: constructive view from Chris Marinak of Jenny Montgomery Scotch.

533
00:26:33,760 --> 00:26:37,600
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534
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535
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540
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