Speaker 1: This is the Bloomberg Surveillance Podcast.
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Speaker 1: Business App with us Randy Krasner.
Speaker 2: Both school Randy, there's a trend of the smooth three
Speaker 2: months moving average. I'm acting very PhDe at the Eccles building.
Speaker 2: This is a very gradual trend to where Chairman Powell
Speaker 2: wants to get to. Does he have the time to
Speaker 2: wait for that trend to play out to something that's
Speaker 2: a lower statistic.
Speaker 3: You really nailed it. That's the challenge. Now it's moving
Speaker 3: in the direction that they wanted to move. Finally, it's
Speaker 3: taken a long time to get there. Now, as I've
Speaker 3: mentioned before, what they're hoping for is this immaculatus inflation
Speaker 3: where you just slowly weaken the labor market. Unemployment rate
Speaker 3: only goes up to about four and a half percent,
Speaker 3: which is not far from what they think of as
Speaker 3: the long run average and the inflation rate comes down. Now,
Speaker 3: the hot number on wages is really not consistent with that.
Speaker 3: We're going to be getting another labor market report before
Speaker 3: the FED makes its next decision. We'll be getting a
Speaker 3: lot more inflation data that's coming in. But as I
Speaker 3: said on this program before, the Fed's not going to
Speaker 3: quit until the labor market quits, and this is not
Speaker 3: a quitting labor market.
Speaker 4: In these data, how do you understand the average hourly
Speaker 4: earnings and how much they've gone up. I mean, given
Speaker 4: the fact that people were saying that we're sorry to
Speaker 4: see this process where suddenly workers are losing some of
Speaker 4: the power that they gained in the media aftermath of
Speaker 4: the pandemic, does this fly in the face of that
Speaker 4: and really confirm that perhaps we're in a different environment
Speaker 4: with a smaller workforce and perhaps a greater sort of
Speaker 4: thrust to labor's power.
Speaker 3: Sure, so labor force participation is really key to that,
Speaker 3: and Mike had had had mentioned that that's one of
Speaker 3: the challenges that the FED has had. You've got this
Speaker 3: lower labor force participation, You've got demand being continued to
Speaker 3: be very strong. Some of that had been from fiscal
Speaker 3: stimulus from before, but continuing on with fairly strong, strong
Speaker 3: demand and tight labor market means really one thing, which
Speaker 3: is we just are going to go up. Fortunately, the
Speaker 3: hope is that they won't go up quite as fast
Speaker 3: going forward, but that's really so far that the data
Speaker 3: are not telling us that.
Speaker 2: Randy Krassner, thank you so much, particularly, professor, thank you
Speaker 2: so much for your comments on our troubled banks. Here
Speaker 2: he is at the Boot School, Chicago. Jeffrey Rosenberg of
Speaker 2: Black Rock of course foil manager, Systematic Multi Strategy.
Speaker 1: Fun. Great to see you, to see you here.
Speaker 2: This is like this is our work from office. Okay,
Speaker 2: it's great to have you here as well.
Speaker 1: Your being here.
Speaker 2: Is it a symbol of this job economy and maybe
Speaker 2: even of this troubled banking crisis that we're somehow getting
Speaker 2: back to normal.
Speaker 5: Well, we are getting back to normal in terms of
Speaker 5: the COVID part. I think when you look at today's report,
Speaker 5: as you guys have already covered, this is not getting
Speaker 5: back to the slowing that the bond market is expecting
Speaker 5: that the FED is hoping for. That's going to really
Speaker 5: bring down. Mike McKee said something at the beginning which
Speaker 5: I want to echo, which is we're very far away
Speaker 5: from what these job market reports need to start to
Speaker 5: look like to begin to even get close to what
Speaker 5: the FED is.
Speaker 2: For and the pros and know that we need to
Speaker 2: get down to one twenty one hundred and even eighty
Speaker 2: five whatever, maybe a couple of negative statistics as some
Speaker 2: have called for in a presumed slow down. But what's
Speaker 2: the unemployment rate that makes Chairman Pole's sit up straight?
Speaker 5: Well, it's one that starts to rise, he said it in.
Speaker 1: It's a vector. It's not so much the level, it's.
Speaker 5: The change that has to start showing the tightness in
Speaker 5: the labor market or the tightness of the labor market
Speaker 5: beginning to ease and getting some increases in the uneployment rate.
Speaker 5: He said it in the press conference that you know,
Speaker 5: part of what is the price to pay for achieving
Speaker 5: success on inflation is a rate of growth that is
Speaker 5: for a small period of time or a temporary period
Speaker 5: of time below trend. Well, that's what you know it'll
Speaker 5: start to look like in the labor report in rising
Speaker 5: and unemployment rate, And nothing in this report really points
Speaker 5: to any of that.
Speaker 4: So do you think that the market is overpricing the
Speaker 4: boogeyman of some sort of crisis or cracks or something
Speaker 4: to sort of cause this to halt in its tracks
Speaker 4: and reverse in some sort of meaningful way.
Speaker 5: So let's separate the market pricing of you know, what
Speaker 5: is a boogeyman? I think.
Speaker 1: I think the.
Speaker 5: Market worries about tail risk shock events, crises. And look,
Speaker 5: the banking sector crisis that we saw in March in
Speaker 5: a little bit of a echo rebound that we've seen
Speaker 5: this week is that kind of thing. But that's very
Speaker 5: different than kind of fundamental economic performance, and that's not
Speaker 5: so much a tail risk. That's really much more about
Speaker 5: the trajectory. Now, the two can be linked, obviously, because
Speaker 5: if you have a crisis that feeds back into confidence
Speaker 5: and that it's the economy.
Speaker 4: But this creates a real issue, and I'm wondering why
Speaker 4: we're not seeing it, frankly, and longer term treasure yields
Speaker 4: a little bit more, and whether this is something you're
Speaker 4: thinking about, because if you have this push pull and
Speaker 4: perhaps the FED not being as aggressive as people thought
Speaker 4: that they would be just based on the economic projection,
Speaker 4: then isn't the risk of inflation remaining high for a
Speaker 4: longer period of time that much greater and not being
Speaker 4: priced in.
Speaker 5: Yeah, and it's the pricing in of that should be
Speaker 5: the term premium, right, There should be a premium for
Speaker 5: holding longer dated maturities because you have more inflation risk
Speaker 5: and inflation uncertainty. And that's the disconnect here. The market
Speaker 5: is really wetted to this view that we go very
Speaker 5: rapidly back down to a pre COVID two percent inflation rate,
Speaker 5: and today's data is just kind of another piece of
Speaker 5: evidence that says that's not what we're really seeing in
Speaker 5: the economy yet. So the disconnect between what the Fed
Speaker 5: has been saying, what Powell said earlier this week in
Speaker 5: terms of a lot more cautionary tale relative to what
Speaker 5: you see in the yield curve, the inversion, the lack
Speaker 5: of a term premium that your question was just asking about,
Speaker 5: that's very much still the tension that we're dealing with it.
Speaker 2: Toper, Carnegie, Mellon, you had Allan Meltzer, Marvin Goodfriend, and
Speaker 2: the ginormous Bennett McCollum, who we lost late last year
Speaker 2: at eighty seven years old, and they harken to what
Speaker 2: some people are looking at now, which is M two
Speaker 2: exploding with the Biden stimulus and M two coming out
Speaker 2: for Blackrock. How disruptive is this huge variability of M
Speaker 2: two and now signaling a real almost like thick oil
Speaker 2: within the system. The engine oil is getting thicker and thicker.
Speaker 5: Yeah, it's a huge deal in terms of the structure
Speaker 5: of interest rates of monetary policy. We went from a
Speaker 5: restrictive reserve system to a excess reserve system to a
Speaker 5: plentiful reserve system. And you've seen that in the banking statistics,
Speaker 5: for example, in terms of loans to deposit ratios. Part
Speaker 5: of the increase in uninsured deposits that is kind of
Speaker 5: part of the source of what we saw is because
Speaker 5: you flooded the system with so much liquidity and that
Speaker 5: M two and so we're seeing that there are some
Speaker 5: unintended consequences. The role of RRP and creating competitiveness to deposits.
Speaker 5: That's all part of the newness of what does it
Speaker 5: mean to operate with a balance sheet that went from
Speaker 5: six percent of GDP to thirty five percent of GDP
Speaker 5: and a lot of things that we just don't know
Speaker 5: how it works when.
Speaker 2: Real world folks, I mean what Jeff Rosenberg is really doing.
Speaker 2: Here is the bondboard folio from sixty thousand feet. What's
Speaker 2: your conviction three years out looking at a holistic blackrock
Speaker 2: bond world.
Speaker 5: Well, the first conviction three years out, the big change
Speaker 5: is we've reset the level, the starting level of yield. Right,
Speaker 5: so when you think about bonds, bonds are about income,
Speaker 5: and when there was no income, it was very hard
Speaker 5: to kind of really hold on to bonds. So that
Speaker 5: restoration and the FED getting off of zero interest rates
Speaker 5: and really this focus on inflation. Well the starting point
Speaker 5: of that is now five to five and a quarter
Speaker 5: interest rate yields, and so that resets the bond market.
Speaker 5: And that's why you've seen a lot of flows and
Speaker 5: a lot of interest come back to bonds. And that's
Speaker 5: remember we had a ten year or longer period of
Speaker 5: several episodes of negative interest rates, zero interest rates. We
Speaker 5: talked about that word out lack of yield. So you're
Speaker 5: seeing a restoration of bonds in the portfolio. Because there
Speaker 5: I'm going to steal that word.
Speaker 2: I'm gonna be saying restoration one got it. I got
Speaker 2: it from Jeff Rosenberg.
Speaker 4: This is the this is the issue is that we're
Speaker 4: looking at the practicality of it, which is you are
Speaker 4: getting yield and you're looking at the practicality of the data,
Speaker 4: which is that the economy is still strong. And the
Speaker 4: two ideas are kind of getting to be in conflict
Speaker 4: with one another a little bit, where we're having to
Speaker 4: either see the Fed step in a little bit more
Speaker 4: aggressively to bring things back to where they want, or
Speaker 4: you have to see something change in terms of people's
Speaker 4: assumption of the longer term inflation rate. What data are
Speaker 4: you looking at. If it's not the labor market report,
Speaker 4: If it's not what the Fed said this week, this
Speaker 4: all doesn't seem to matter anymore as people to sort
Speaker 4: of hunker down with their narratives.
Speaker 5: So a couple of data points. So let's come back
Speaker 5: to your favorite data point, average hourly earnings in this
Speaker 5: report and zero point five. And you know why that
Speaker 5: one is a hard one to anchor on is because
Speaker 5: it's so subjective, it's so sensitive to the mix shift.
Speaker 5: So part of what you saw in the internals of
Speaker 5: today's labor report is a little bit less boost from
Speaker 5: leisure and hospitality, a little bit more spread. Those tend
Speaker 5: to be small, lower income changes. So when that mixed
Speaker 5: shifts that helps to boost That's not giving us a
Speaker 5: good picture of inflation and wage inflation. That's just changing
Speaker 5: the mixture of what is in that component. Last week's
Speaker 5: ECI a much better measure at LANTA FED Wage tracker,
Speaker 5: much better measure, And next week we'll look at core
Speaker 5: services X housing as the kind of mapping to the
Speaker 5: labor market and the more stable long run indicator of
Speaker 5: where is inflation going to settle down. No one doubts
Speaker 5: that peak inflation has occurred. Inflation is declining, the shelter
Speaker 5: piece is gonna decline and help push everything down. It's
Speaker 5: about do we get to two percent the way the
Speaker 5: bond market expects, or do we maybe get to three?
Speaker 5: And because this way or dynamic, you end up having
Speaker 5: a lot harder time, and the debate shifts to the
Speaker 5: cost of getting to three to two versus three versus the.
Speaker 6: Benefits in the here and now.
Speaker 4: Historically, how hard is it to get to recession with
Speaker 4: a labor market report like what we just got.
Speaker 5: We're that's a three point four percent on employment right now. Yes,
Speaker 5: it's a lagging indicator, and we get that. But again,
Speaker 5: what Powell said earlier this week is a little bit
Speaker 5: of surprise that with five hundred basis points of tightening,
Speaker 5: you haven't really seen that much slowing. And you know,
Speaker 5: you look at earnings and what the companies are saying,
Speaker 5: You look at what credit markets are saying, high yield spreads,
Speaker 5: investment grade spreads away from the banking sector, of course,
Speaker 5: and this is still a very robust economy. So the
Speaker 5: tightening has yet to show up. We expected to show up,
Speaker 5: but it hasn't yet.
Speaker 2: Now you said that eight months ago too as well.
Speaker 4: On the JO shocking thing is that people were talking
Speaker 4: about the lag effects, some people saying it's eighteen months now,
Speaker 4: twelve to eighteen months. But it is a serious thing,
Speaker 4: especially given the fastest pace of tightening.
Speaker 2: Going back to go from Randy Cross under Jeff Rosenberger's
Speaker 2: wonderful Jeff, thank you so much, particularly for those thoughts
Speaker 2: on Ben at McCollum and Carne Mellan, Paul and I
Speaker 2: and John and Lisa have been remiss and that it's
Speaker 2: been distraction.
Speaker 1: May it has been nuts this week. I'm not going
Speaker 1: to mince words on that.
Speaker 2: And what we're going to do right now is slow
Speaker 2: down and actually talk about the American labor economy. Tiffany
Speaker 2: Welding can do this, she joins us right now from PIMCO,
Speaker 2: is there, chief us, I only talk about the jobs
Speaker 2: report economists right as well, Tiffany.
Speaker 1: Are we fully employed?
Speaker 7: Yeah? I think that for the most part, we think
Speaker 7: we're fully employed, you know, But I would say that
Speaker 7: it seems like every labor market report, we're finding more
Speaker 7: and more people who can come back to the labor market,
Speaker 7: or maybe we're unemployed and get jobs, or you know,
Speaker 7: maybe they're switching jobs. So you know, the labor market
Speaker 7: remains pretty strong and resilient.
Speaker 2: Here I quoted with an Marie Hoarded today, folks, Bloomberg
Speaker 2: balance of power. Look for that an re Hoarden, our
Speaker 2: chief Washington correspondent, and Tiffany I was quoting out of
Speaker 2: the Washington Post about how states beleaguered with sub three
Speaker 2: percent unemployment rates are trying to change their child labor laws,
Speaker 2: which which I find just like throwing us back to
Speaker 2: Dickens in the nineteenth century, is an exaggeration. But hey,
Speaker 2: stay with me, folks, It's Friday. Are we in such
Speaker 2: dire straits for labor that we're going to employ kids?
Speaker 7: Well, you know, I don't. I don't know about that
Speaker 7: in particular, but I mean, I think the bottom line is,
Speaker 7: from a longer term perspective, the demographics in the United States,
Speaker 7: you know, would would point to lower labor supply over
Speaker 7: the medium term, you know, And that's regardless of those
Speaker 7: kinds of policies. I think, you know, one of the
Speaker 7: other policies that might make our sense is immigration. You know,
Speaker 7: our neighbor country, Canada has obviously been able to achieve
Speaker 7: much more immigration more recently than in the US, you know,
Speaker 7: and as a result, their labor markets are are looking
Speaker 7: a little bit less tight than ours. So you know,
Speaker 7: I think that, I know, it's really difficult to get
Speaker 7: labor to get immigration reform, but looking towards those policies,
Speaker 7: you know, also, I think would be would be very
Speaker 7: helpful for the labor market.
Speaker 2: Can I have a yeah, Paul that the reason we're
Speaker 2: having this conversation with Tiffany Wilding is over the success
Speaker 2: of America.
Speaker 8: Yep.
Speaker 9: Absolutely, And this is the other names it's that's a
Speaker 9: very good taken and Tiffany, my point to Tomas, we
Speaker 9: were just talking off air before you came on, is
Speaker 9: how can we entertain recession? Recession discussions when we've got
Speaker 9: such a strong labor market, how do you think about that?
Speaker 7: Yeah, No, I mean I think that's a really good question.
Speaker 7: And the way I've been characterizing it, I guess a
Speaker 7: little tongue in cheek is is I think we have
Speaker 7: a two handed economy right now. Obviously, economists are famous for,
Speaker 7: on the one hand, on the other hand statements, But
Speaker 7: you know, I do think that the decline in bank
Speaker 7: stocks is quite concerning, you know, and that's because, you know,
Speaker 7: historically there's been a lot of academic analysis that's been
Speaker 7: done that suggests when you have bank stocks that are
Speaker 7: falling you know, thirty percent forty percent on average, like
Speaker 7: what we've seen more recently, that tends to be indicative
Speaker 7: of higher cost of capital for that industry. Obviously, that
Speaker 7: tends to slow their loan growth, and that's really important
Speaker 7: for the economy for future growth. So statistical analysis suggests
Speaker 7: that when we have stock declines like what we've seen,
Speaker 7: you do tend to see you know, one to two
Speaker 7: percentage point drags on GDP relative to what you otherwise
Speaker 7: would have gotten. So, you know, I think that is
Speaker 7: that is concerning, and that does cloud the outlook you know,
Speaker 7: and I think that comes on the heels of just
Speaker 7: the fact that monetary policy is tight. Demand for loans
Speaker 7: should also be declining as you have higher interest rates, So,
Speaker 7: you know, I think all of this would still suggest
Speaker 7: monetary policy works with long and variable lags. That's still
Speaker 7: working its way through the economy, and there is still
Speaker 7: a recession that's that's probably quite likely on the horizon,
Speaker 7: even though labor markets are strong now. Inflation is obviously
Speaker 7: very strong now, you know, and it may may seem
Speaker 7: farther away.
Speaker 9: Tiffany, what was your takeaway from what we heard from
Speaker 9: Fetcherman j Pal this week on raising the rates the
Speaker 9: base rate twenty five basis points. What was your take
Speaker 9: key takeaway if.
Speaker 7: Anything, Well, I mean, I do think that, as I mentioned,
Speaker 7: with this banking sector stress, I think the balance of
Speaker 7: risks are changing. You know, we've been talking about solely
Speaker 7: elevated upside risk for you know, over you know, I
Speaker 7: would say maybe two years now and now that monetary
Speaker 7: policy is solidly and restrictive territory, we do have this
Speaker 7: banking sector stress that can result in a bigger downturn.
Speaker 10: The risks.
Speaker 7: The balance of risks have just changed, and I think
Speaker 7: the Fuberle reserve is responding to that. Monetary policy is
Speaker 7: a risk management exercise. Powell has said that multiple times,
Speaker 7: and so they see I think for the most part,
Speaker 7: the FED officials that feel like we're in restrictive territory.
Speaker 7: Let's just take a little break. We're going to go
Speaker 7: on hold for a little while and just see how
Speaker 7: the data plays out, see how these long and variable
Speaker 7: lags work out, you know. And of course, if things
Speaker 7: continue to be this robust by the end of this year,
Speaker 7: I would expect the FED to hike again or potentially more.
Speaker 7: But if it's not right and you know, then then
Speaker 7: we're we're you know, in the world that the bond
Speaker 7: market is pricing in right now, which is recuse.
Speaker 2: Take the unit labor cost part of a three ratio
Speaker 2: six dynamic parts productivity study and take the unit labor
Speaker 2: costs and pull that over to the worries the angst
Speaker 2: of Chairman Powell and the team. Does that signal a
Speaker 2: persistency to elevated wage increases even if it's not a
Speaker 2: real wage.
Speaker 7: Increase, Yes, no, it absolutely does. The fact that unit
Speaker 7: labor costs are kind of around, you know, it looks
Speaker 7: like maybe five six percent, you know, is very concerning.
Speaker 7: I mean because that you know, that does have a
Speaker 7: leading quality for core inflation. If you have you know,
Speaker 7: wages that you know, whatever your labor costs are there increasing,
Speaker 7: you know that will be passed on for the most
Speaker 7: part usually to consumers into price inflation. If I look
Speaker 7: across a range of a wage statistics, the core PCEE,
Speaker 7: you know, labor costs, as you say, I think the
Speaker 7: underlying trend and inflation right now, you know, it looks
Speaker 7: like four maybe even four and a half percent, and
Speaker 7: that's well above the two percent target. You know, so
Speaker 7: hopefully over time that comes down, you know, but there's
Speaker 7: a little bit of a you know, there's a little
Speaker 7: the other side of that coin is that you know,
Speaker 7: the Fed probably actually needs to engineer a recession. They
Speaker 7: need they've said they need some pain in the labor
Speaker 7: market in order to get that down. But you probably
Speaker 7: need that type of economically unfortunately, to solve that problem.
Speaker 2: Is there any study in your economic history, Tiffany Wilding
Speaker 2: where a central bank quote unquote engineered a recession?
Speaker 7: Yeah, I mean there's a there's a lot of times
Speaker 7: right where you where you see recession, you know, I
Speaker 7: would say over no, you see it.
Speaker 2: But does the central bank wake up and go, let's
Speaker 2: engineer a recession.
Speaker 7: Well, they obviously never say that, you know, but if
Speaker 7: you look, you know, so we've looked over seventy years
Speaker 7: fourteen developed markets. When a central bank starts hiking interest rates,
Speaker 7: usually you get a recession on average about two to
Speaker 7: two and a half years after the start of a
Speaker 7: rate hiking cycle, you know. So there is something certainly
Speaker 7: to when central banks start to tighten policy. You do
Speaker 7: see economies you know, weakend and eventually you know, go
Speaker 7: into recession. Now, these these issues tend to be nonlinear.
Speaker 7: These periods tend to be kind of nonlinear in the
Speaker 7: sense that, like, the central Bank's probably not trying to
Speaker 7: do that, but you have financial market accidents, you know,
Speaker 7: Jeremy Stein, it gets in the you know, higher interest
Speaker 7: rates you know famously get in the cracks, and you
Speaker 7: just don't understand where the pockets of vulnerability are until
Speaker 7: you get to these higher levels, you know, and that
Speaker 7: again results in an economy that weakens in kind of
Speaker 7: a nonlinear way. So that's always a risk here, thank.
Speaker 1: You, Tiffany Wilder. So that wasn't Nicer, We didn't really
Speaker 1: do bank stress. We can talk about it. She's a PIMCO.
Speaker 2: It seems like Monday was two years ago, but I
Speaker 2: believe I tweeted out on Monday about the Fifth Bank
Speaker 2: of the United States, and ultimately that is what the
Speaker 2: liberals and conservatives are arguing about.
Speaker 1: Is this scope and scale John in this banking system.
Speaker 1: Should we talk to somebody as an.
Speaker 6: Expert Plat Yeah's that on the.
Speaker 2: Second Bank of the United States and the Fifth Bank
Speaker 2: of the United States.
Speaker 1: Chris Marrinack is an expert.
Speaker 2: He's director of Research Jenny Montgomery Scott, and has really
Speaker 2: been excellent force. My theme on this Friday, Chris Marrinnack
Speaker 2: is let's get to the weekend and Friday the banks
Speaker 2: have to get to the weekend. What should we see
Speaker 2: into Friday afternoon in this weekend from troubled banks with
Speaker 2: new book value valuations that are shocking.
Speaker 10: Well, Tom, I think the reality is most of these
Speaker 10: banks just have security losses that are unrealized, and those
Speaker 10: are getting better as treasury rates fall. I think you
Speaker 10: could see some action from the Fed or Treasury to
Speaker 10: reinstute the TAG program from two thousand and eight that
Speaker 10: was guaranteeing transaction accounts.
Speaker 8: That would be very helpful.
Speaker 10: I think most of these companies have much more stable
Speaker 10: deposit flows than anyone realizes. And that's been the challenge
Speaker 10: all week, is that we've had this temper tantrum against
Speaker 10: the FED in using bank stocks as a weapon against
Speaker 10: the Fed to try to get the Fed to change.
Speaker 6: Hey, Chris Well said, when you listen to some of
Speaker 6: the numbers coming out of the banks, they're telling you
Speaker 6: the deposits are stable. So when you hear people like
Speaker 6: Senator Warren say that we need changes to the limits
Speaker 6: for deposit insurance, that's actually changed this story this week,
Speaker 6: not really.
Speaker 10: I mean, I think it's good that she's supporting the
Speaker 10: changes in the limits, but I think the rest of
Speaker 10: the rhetoric correct is incorrect.
Speaker 4: What do you think is going to be the circuit breaker, Chris,
Speaker 4: to really prevent this temper tantrum from rearing its head
Speaker 4: again as we talk about the otherwise resilient economy, Well,
Speaker 4: changing the.
Speaker 8: Short sale rule would help.
Speaker 10: I think also instituting, to some extent going back to
Speaker 10: the tag program would be helpful.
Speaker 8: I'd like to.
Speaker 10: See the FED change the stress test program to accelerate
Speaker 10: the timing.
Speaker 8: The stress test results were already filed.
Speaker 10: In April, and the FED as an army of folks
Speaker 10: that they could stick out to put this out next week.
Speaker 8: It would be very useful to know that most of
Speaker 8: the banks, if not all, the banks, have passed the
Speaker 8: stress test.
Speaker 10: The reality is, if you look at the next eighteen
Speaker 10: to twenty four months of cash flow that the banks have,
Speaker 10: it covers five hundred to six hundred points of loan losses,
Speaker 10: which is just as much as we had in the
Speaker 10: Great Financial Crisis. I don't think those credit issues exist today,
Speaker 10: despite all of the worries on commercial real estate.
Speaker 8: If most banks really looked at.
Speaker 10: Their portfolio did a default loss given default analysis, you'll
Speaker 10: find that the credit marks and the credit losses are
Speaker 10: very moderate in the industry.
Speaker 8: I think we should recognize those and what.
Speaker 10: They are, and the ability for banks to absorb those
Speaker 10: losses with existing earnings and capital, and then we can
Speaker 10: reinstitute confidence back in the sector.
Speaker 4: You said short sellers should be investigated. What do you
Speaker 4: make of the back and forth with Western Alliance, in
Speaker 4: particular yesterday with shares plunging after the Financial Times report
Speaker 4: and then them coming out and saying this is just
Speaker 4: a tool of short selling. Is there validity to that?
Speaker 4: Do you think that people are going to exploit the
Speaker 4: jitters the temper tantrum?
Speaker 8: Absolutely.
Speaker 10: I mean we've seen stories that were rehashed from six
Speaker 10: weeks earlier on pack West and again with Western Alliance.
Speaker 8: There was no news there. PacWest hired an advisor at
Speaker 8: the end.
Speaker 10: Of March, so that was completely fail I don't know
Speaker 10: why we continue to kind of create new narratives just.
Speaker 8: To help justify the positions.
Speaker 10: The facts are these banks have very good cash flow,
Speaker 10: they have deposits that are much more stable, and really
Speaker 10: Quity has served in the past two months.
Speaker 2: Chris, your note is blistering. You say the press reports
Speaker 2: are stale. Just for instance, I know a guy, he's
Speaker 2: a guy that he's with the show quite often through
Speaker 2: the week.
Speaker 1: He's going to sit with.
Speaker 2: His barons open on Saturday and try to figure out
Speaker 2: which bank to buy. How do you select the good
Speaker 2: banks from the troubled banks on a Saturday morning, as
Speaker 2: we've crashed, So.
Speaker 10: We start with tangible book value and then we apply
Speaker 10: the unrealized marks from HTM held the maturity portfolios that's
Speaker 10: now disclosed in the FDIC call reports, and we've provided
Speaker 10: and so of some of our peers around the street.
Speaker 10: That gets you to adjust a tangible book. That's the
Speaker 10: first place to start. Then I think you look at
Speaker 10: the cash flow that banks have the pre tax pre
Speaker 10: provision or what we call ppn R. It's the cornerstone
Speaker 10: of the FED stress test, and then you apply that
Speaker 10: for the next twelve to twenty four months, and that
Speaker 10: gives you a loss absorption of the current lawn portfolio
Speaker 10: edition of that. Banks have got very well disclosed information
Speaker 10: on their loan loss allowances, on their credit marks, and
Speaker 10: particularly the amount of real estate that they have. Banks
Speaker 10: have been a wide open commona this time, which is
Speaker 10: massively different than what we saw in two thousand and
Speaker 10: eight nine.
Speaker 6: Chris, what I hear from you is that the price
Speaker 6: sanction is divorced from the fundamentals, and I've heard that
Speaker 6: a lot from a lot of analysts on a lot
Speaker 6: of banks this week. The problem I think that a
Speaker 6: lot of other people have though, Chris, is that the
Speaker 6: fundamentals will be shaped by the price action. So even
Speaker 6: if you think the price action is divorced from the fundamentals,
Speaker 6: the price sanction is going to shape the fundamentals, Chris,
Speaker 6: does that not concern you?
Speaker 10: Well, I lived it through two thousand and nine. Fifth
Speaker 10: Third is my favorite example. It hit a dollar in
Speaker 10: late February two thousand and nine, they came back three
Speaker 10: months later and raised capital at six dollars, and then
Speaker 10: at the end of two thousand and nine the stock
Speaker 10: was fourteen sixty. So I've seen that happen with many
Speaker 10: regional banks and all their other large companies as well.
Speaker 10: So I feel like that is the repeat event that
Speaker 10: is going on in my world. So I think we
Speaker 10: just have to have the confidence to move forward that
Speaker 10: the facts are that the banks have better credit quality,
Speaker 10: better cash flow than the investors. Understand I realize that
Speaker 10: the barecase always sounds more intelligent, but it doesn't make
Speaker 10: it correct.
Speaker 6: So you think that these banks, I'm viable with five
Speaker 6: percent interest rights for the rest of this year.
Speaker 10: Absolutely, it's difficult, it's not ideal, but they can make
Speaker 10: a spread. The spread overly narrower, but they can. And
Speaker 10: we think that deposit flows are much more stable than
Speaker 10: the market.
Speaker 8: It understands.
Speaker 6: Hey, Chris, wonderfully get your perspective. Thank you, sir. A
Speaker 6: constructive view from Chris Marinak of Jenny Montgomery Scotch.
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