Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Francis Dautle
Speaker 1: joins us right now, this is an important brief, really
Speaker 1: good at the minutia that adds up to our gross
Speaker 1: domestic product. Francis, if we don't get a recession, but
Speaker 1: we get sort of kind of like a muddle one
Speaker 1: point five percent, one point one percent, zero point seven
Speaker 1: percent GDP not under zero, what does that feel like?
Speaker 2: Well, it depends how the central banks respond to it.
Speaker 3: But Tom, I'm more concerned about that very slow but
Speaker 3: assistant weakness than I am about a garden variety recession.
Speaker 3: We know what to do in garden variety recessions, and
Speaker 3: we know that central banks historically pivot. But what we're
Speaker 3: witnessing is, yes, a COVID distorted economy where we're seeing
Speaker 3: desynchronized elements. We're seeing a consumer that hang or hung
Speaker 3: on much longer than they would have in other cycles.
Speaker 3: Housing is already starting to reaccelerate. I'm not sure we're
Speaker 3: going to get the same sort of response in things
Speaker 3: like GDP data to the traditional shocks that we've seen,
Speaker 3: and therefore the risk is that we continue to hear
Speaker 3: while there's no recession.
Speaker 2: Therefore you can go along.
Speaker 3: But it's the FED says, well, no recession means we
Speaker 3: hold that's a very different investment playbook.
Speaker 1: Francis, you got a colored dot chart. It looks like
Speaker 1: the new Louis Vutant purses that everybody's buying right now.
Speaker 1: Don't ask me, folks while I know about that. But
Speaker 1: the chart you mentioned is one of your great concerns
Speaker 1: is what Lisa mentioned earlier, which is M two growth.
Speaker 1: I'm surprised if Francis Donald is monitor astonis discuss that.
Speaker 2: Well, Actually, I'm not just a monitorist.
Speaker 3: We look at all elements that potentially lead to economy
Speaker 3: at doing poorly. And that's the problem here, Tom, is
Speaker 3: that no matter what way you assess where growth is going,
Speaker 3: basically every traditional leading indicator of recessions is flashing red.
Speaker 3: And some of these are flashing red not consistent with
Speaker 3: garden variety or small recessions. But some of the big
Speaker 3: problems that we had, like in two thousand and eight,
Speaker 3: Now is.
Speaker 2: That necessarily where you're going. No, But what I say
Speaker 2: to my team is.
Speaker 3: Even if we cut in half our concern about downsides
Speaker 3: in growth, we're still looking at a very difficult economic environment.
Speaker 3: And to ignore the breadth of the challenges that exist
Speaker 3: and the breadth of the weakness we see in leading indicators,
Speaker 3: I think it is going to be problematic.
Speaker 1: And what's interesting your release is liz An Sanders really
Speaker 1: underscoring this out on Twitter yesterday where you were on M.
Speaker 4: Two growth well, and John was mentioning earlier as well,
Speaker 4: this idea of what happened when suddenly the restriction by
Speaker 4: central banks starts to play out in markets. Francis you
Speaker 4: say that an economic muddle might not be so great.
Speaker 4: It's very difficult to read because we don't understand what
Speaker 4: the different inputs are and where we are in the
Speaker 4: economic cycle. But if you just take it at face value,
Speaker 4: why isn't it the Max Kuttner view of things, we're
Speaker 4: basically if it's not too hot, not too cold. The
Speaker 4: Fed's kind of stuck in the middle, and things can
Speaker 4: grind forward at least for a few more months.
Speaker 3: Because we're at extremely high levels of interest rates for
Speaker 3: this level of the economy and we're heading towards a
Speaker 3: sizeable credit crunch.
Speaker 2: And this is why data.
Speaker 3: Like the Senior Loan Officer Survey that we should be
Speaker 3: getting by May eight is going to be just so
Speaker 3: incredibly important, because even if GDP numbers are not negative,
Speaker 3: this is still an economy that's going to struggle to
Speaker 3: produce revenue.
Speaker 2: It's going to struggle to produce jobs. We're going to
Speaker 2: have to move away. Just like we've moved away from
Speaker 2: the concept of.
Speaker 3: The unemployment rate giving us a good sense of the
Speaker 3: health of the labor market, we're going to have to
Speaker 3: move away from GDP as giving us a good sense
Speaker 3: of general economic activity that exists. And if the subtle
Speaker 3: reserve is still going to be focused on these traditional
Speaker 3: indicators like GDP and unemployment and even the PCE inflation rate,
Speaker 3: then we're not going to get relief from them. And
Speaker 3: this is a market that has already priced in some relief.
Speaker 3: So the problem with slow growth that isn't a full
Speaker 3: blown recession. Is that we likely don't get relief on
Speaker 3: the rate size, and this is going to produce a
Speaker 3: challenging risk environment.
Speaker 4: So Francis, when you start talking about some of the
Speaker 4: challenge profits and things at corporations, this has been one
Speaker 4: of the most surprising aspects of this earning season. I
Speaker 4: was looking yesterday at Procter and Gamble at Kimberly Clark,
Speaker 4: and their profit margins expanded. They were able to raise
Speaker 4: prices on consumers more than their underlying inflationary inputs. What
Speaker 4: does this say about just how much weakness or not
Speaker 4: there is, how much tolerance there still is in consumers
Speaker 4: to absorb all of those price increases.
Speaker 3: Well, it speaks to the desynchronized nature of this environment.
Speaker 3: But as we move forward and we see credit pulled
Speaker 3: back even more sharply, and we see some of the
Speaker 3: challenges that flow through primarily to small businesses. I mean,
Speaker 3: let's remember that small businesses are heavily credit dependent, and
Speaker 3: they've created the majority of jobs since twenty twenty. So
Speaker 3: as companies start to feel the pinch through the credit channels,
Speaker 3: they're going to have to be cutting costs in some
Speaker 3: way and I think that's going to flow through into
Speaker 3: the labor market. So again we have a consumer that
Speaker 3: held on longer than it would have historically, but all
Speaker 3: evidence suggests xs savings are coming down.
Speaker 2: Credit is not going.
Speaker 3: To be available, and as you know, Lisa, there are
Speaker 3: already some signs that the labor market is going to weaken.
Speaker 3: So right now there's some ability to absorb those price increases,
Speaker 3: but six months from now, not so much. And this
Speaker 3: is when the story is going to change. And it
Speaker 3: comes back to our job is not to tell us
Speaker 3: what's happening right now. Right now we're okay, it's to
Speaker 3: look forward six months. This is why it's so key
Speaker 3: to disaggregate between coincident indicators, leading indicators and lagging indicators.
Speaker 3: And when you do that, sure coincident data is just fine,
Speaker 3: but the leading indicators is where the challenges and confusing
Speaker 3: those two I think.
Speaker 2: Muddels the story.
Speaker 5: Francis. The Bank of England has a message for us
Speaker 5: all we need to accept that we're poorer. Apparently, in
Speaker 5: one of the most insensitive remarks we've seen from a
Speaker 5: central banker since Governor Bailey told us all to stop
Speaker 5: asking for a pay rise. This is what Hugh Bill
Speaker 5: has got to say, what we're facing now is the
Speaker 5: reluctance to accept that, yes, we're all worse off and
Speaker 5: we all have to take our share, to try and
Speaker 5: pass that cost onto one of our compatriots and say
Speaker 5: we'll be all right, but they will have to take
Speaker 5: our share too. This is bizarre. He's effectively saying, Francis,
Speaker 5: we need to accept that inflation is high and that
Speaker 5: wage growth won't be enough, and we shouldn't push for
Speaker 5: higher wages. Francis, what do you make of those comments
Speaker 5: from Hugh pil of the Bank of England.
Speaker 2: Well, it's concerning in the sense that we.
Speaker 3: Know the bulk of these challenges have hit low income
Speaker 3: households across the world who have seen their share of
Speaker 3: spending on food and energy rise. You know, I do
Speaker 3: interviews where the person prior to me is talking about
Speaker 3: you know, record lines and food banks. So telling somebody
Speaker 3: that is struggling to some food on the table that
Speaker 3: they have to accept higher inflation is going to go
Speaker 3: down a little bit more problematically. However, the bigger investment
Speaker 3: concern here is that again we are used to in
Speaker 3: an environment where central banks provide relief a central bank
Speaker 3: put and comments like this keep me up at night
Speaker 3: because they say, you know, some of the difficulty we're
Speaker 3: seeing in you know, banks, some of the difficulty we're seeing.
Speaker 2: For household is a feature, not a bug.
Speaker 3: Of current central bank policy, and it suggests we have
Speaker 3: to reassess that decision making function for all central banks globally,
Speaker 3: and if we do that, we may not be getting
Speaker 3: the standard relief rally that comes when you see lower growth.
Speaker 3: It's effectively a stagflation response function and it is much
Speaker 3: more challenging for almost all asset classes than you know
Speaker 3: two quarter dip of FED cut or a Bank of
Speaker 3: England cut a reacceleration. I'm not sure the market is
Speaker 3: fully grasped on to the risk of a recession with
Speaker 3: no rate cuts.
Speaker 2: Comments like this worse than my concern.
Speaker 5: Francis, thank you, Francis Donald of Manual Life Investment Management.
Speaker 1: Peter sheer he gave the name Meta to Facebook. He's
Speaker 1: the when he called up Zuckerberg and said, you know,
Speaker 1: I think Meta has as a direct and name to
Speaker 1: I still don't know what Meta means joining us now.
Speaker 1: Peter Sheheer had a macro strategy Academy Securities pull together
Speaker 1: these narratives. I mean, you and I have never seen
Speaker 1: this before. Let's start with that, but pull together the
Speaker 1: narratives that are making radio and TV listeners and viewers headspin.
Speaker 6: I think we are on a slow bleed into the recession.
Speaker 6: It's going to it is coming. It's starting at the
Speaker 6: white collar level. I think almost go back to the
Speaker 6: simplest thing. It's someone's expense is someone else's income. And
Speaker 6: everything I read is about people cutting expenses, which is
Speaker 6: going to hit someone's income, which is going to cause
Speaker 6: them in turn to cut their expenses. And I don't
Speaker 6: see anything switching that trajectory. I think the China reopening
Speaker 6: was a headfake. It was never really a big reopening.
Speaker 6: And to me, when opek Plus really cut production, they
Speaker 6: were seeing what we were already seeing. Freight was down,
Speaker 6: we're seeing shipping down. There is an economic slowdown occurring
Speaker 6: just below the surface, and it's slowly taking effect. It's
Speaker 6: going to be a grind. It's not going to be
Speaker 6: like a great financial crisis or anything. And the fact
Speaker 6: that the banks are in struggling with how to keep
Speaker 6: deposits is going to hurt lending and that's going to
Speaker 6: hurt the small business, which has been a huge driver
Speaker 6: of success in the past, so much.
Speaker 5: To unpack their peat. So let's go with China. It's
Speaker 5: a pretty emphatic thing to say the reopening was a
Speaker 5: head fake. Why was it a head fake?
Speaker 6: First they were already partly open, so it wasn't like
Speaker 6: going from zero to one hundred. They were going from
Speaker 6: sixty to eighty, seventy to ninety whatever that was. But
Speaker 6: also they are focusing more and more on their own economy,
Speaker 6: right we don't First we already have this inventory I
Speaker 6: hesitate to say glut, but I think we have an
Speaker 6: inventory glut. We have overbuilt, we have supply chains that
Speaker 6: have stacked up, so we don't really need China's production
Speaker 6: right now. And more and more, or how I see
Speaker 6: this world shaping as you have China Again we've said before,
Speaker 6: aligning with the autocratic, resource rich nations, and what we're
Speaker 6: seeing we're talking about the shift from maid in China
Speaker 6: to made by China, and by that I mean China
Speaker 6: used to take US products manufacturer give them back to
Speaker 6: the US companies who sold them. Globally, I think you're
Speaker 6: going to start see China trying to sell Chinese products
Speaker 6: globally a little bit more and be a true competitor.
Speaker 6: I think that's going to be the scary shift over
Speaker 6: the next few years.
Speaker 5: We can build on that later in the conversation if
Speaker 5: we have time. If the reopening of China is a
Speaker 5: head fake, what's Europe? With the cat forty up by
Speaker 5: almost twenty percent, that tacks up by seventeen percent, what
Speaker 5: would you call that?
Speaker 1: You know?
Speaker 6: Europe to me has become a bit of a mess.
Speaker 6: They're trying to figure out I think where they fit
Speaker 6: in right macrons approach, g they're figuring out how they
Speaker 6: want to deal with Ukraine. So I'm not But the
Speaker 6: nice part is I think some of their companies were undervalue.
Speaker 6: They're mostly big global entities, so some of that catch
Speaker 6: up because they've been behind made sense. I'm kind of
Speaker 6: very neutral to burish on Europe. I think they've got
Speaker 6: their own set of problems. On the other hand, I'm
Speaker 6: fairly berrish to neutral globe right now.
Speaker 4: Well, that's where I was going to That's what I
Speaker 4: was going to say, is it really so much better
Speaker 4: in the US. One of the issues that you raised
Speaker 4: was smaller banks, regional banks, and the sort of ongoing
Speaker 4: grind that we see there. We've been talking about First
Speaker 4: Republic all morning. Is this a specific story or does
Speaker 4: it indicate something broader that is just going to grind
Speaker 4: out throughout the year.
Speaker 6: So I think there's two things going on. One is
Speaker 6: it's really been this shift away from this concern about
Speaker 6: losing your deposits or bankruptcy to much more what yield
Speaker 6: am I getting on those deposits? And is that yield
Speaker 6: still functional for these banks? And then I think they've
Speaker 6: also said on Wall Street on stay time, my boss
Speaker 6: is this. You know your assets walk out the door
Speaker 6: at five pm or six pm, whatever time your assets leave,
Speaker 6: it's your people. And if you start losing your people,
Speaker 6: that becomes very problematic. How do you retain those people
Speaker 6: in an environment where you're struggling?
Speaker 4: So is that really the key issue here that we're
Speaker 4: going to see that more broadly throughout regional banks as
Speaker 4: bigger banks try to basically parachute in take the best talent,
Speaker 4: and then they'll just be this drip, drip drip that
Speaker 4: will carry out and tighten credit throughout the year.
Speaker 5: Yeah.
Speaker 6: I think it's going to make people have to come
Speaker 6: up with solutions fairly quickly, whether it's mergers acquisitions, and
Speaker 6: they have some phenomenal relationships, some great business models at
Speaker 6: these places. Everyone I have talked to who ever banked
Speaker 6: with First Republics as they are phenomenal the treatment they got,
Speaker 6: So there's value to that, and I think someone's got
Speaker 6: to capture that before those acids do walk out the door.
Speaker 1: Let me digress. We don't need a history lesson on
Speaker 1: Milton Friedman one oh one. Does M two matter? Tell
Speaker 1: us what M two is and why people like you
Speaker 1: pay attention.
Speaker 6: I have not been paying close attention to it lately
Speaker 6: again it's been dropping off. But I think there's so
Speaker 6: many others.
Speaker 1: It was a rage thirty years ago.
Speaker 6: It was all the rage, you know, back when we
Speaker 6: had to figure out when Alan Greenspan was carrying his
Speaker 6: briefcase in the left or right hand. They didn't tell
Speaker 6: us what they were doing. Actually thought it was easier
Speaker 6: sometimes when the FED wasn't trying to do this forward guidance.
Speaker 6: They've gotten themselves in so much trouble, which is why
Speaker 6: I think they had to hike last time for twenty
Speaker 6: five BIPs when they should have already been stopping before that.
Speaker 6: So I'm watching all these things, but I do think
Speaker 6: the economy is slowing down and it's showing up in
Speaker 6: some of the M two declines.
Speaker 1: Are we super restrictive right now when you add in
Speaker 1: the interest rate dynamics and the greater economy dynamics, the
Speaker 1: balance sheet dynamics. Are we beyond restrictive?
Speaker 6: I think so, And part of this it doesn't show up.
Speaker 6: But again, people don't have car leases coming do every year.
Speaker 6: But over a year, two years, three years, everyone's going
Speaker 6: to have to reset. Corporations at a phenomenal job during
Speaker 6: COVID issuing long day to debts at very low interest rates.
Speaker 6: But some of that starts rolling off, and it's going
Speaker 6: to take time for the five percent rates to hit
Speaker 6: the consumer. I think we're at the early stages of that,
Speaker 6: and it only gets worse. It's not like anyone's rolling
Speaker 6: their five percent to five percent right now. We're still
Speaker 6: having people rolling three percent to six percent, and that's
Speaker 6: going to add weigh on this.
Speaker 5: So part of this conversation is about vulnerable parts of
Speaker 5: the market. And I promised you a pocket of time
Speaker 5: to come back to the point you made about the
Speaker 5: Chinese consumer and Chinese companies. Let's finish there. Who's vulnerable?
Speaker 5: Is it the Tesla's of this world? Is it the
Speaker 5: mvmh's of this world? Can they really go about creating
Speaker 5: something like a luxury brands compete with the European players
Speaker 5: and ev operator we know lots of names over in China.
Speaker 5: What's the competition going to be most fast?
Speaker 6: I think it's going to be for everyday items, So
Speaker 6: whether it's cars, dishwashers, it's not going to be our quality,
Speaker 6: but they are going to try and sell their brands.
Speaker 6: They've taken a lot of the IP, they've got the
Speaker 6: manufacturing know how. Now it's not as good as what
Speaker 6: we produce or they produce for us, but it will
Speaker 6: be cheaper and they will aggressively market that. One of
Speaker 6: the things that really struck me on this was they
Speaker 6: just struck a deal with Brazil where they're going to
Speaker 6: make their BYD cars in Brazil. Now, part of that's
Speaker 6: for tax reasons and stuff, but that to me is
Speaker 6: just the signal that China wants to sell their things,
Speaker 6: that we're really only consumed by Chinese broadly.
Speaker 5: Amazing conversation, Peipe, we can have for a long long time.
Speaker 5: Pitch their academic security is a head fake. The reopening
Speaker 5: in China, it's on a head fake.
Speaker 1: Christopher Marinac has not been a stranger. We really thank
Speaker 1: him for his participation. Seems like day after day. Director
Speaker 1: of Research, Jenny Montgomery Scott Christopher. What was out there yesterday?
Speaker 2: Article to article?
Speaker 1: Research note to research note was a guestimate of the
Speaker 1: haircut needed. Let's review. They have garbage loans, jumbo mortgages
Speaker 1: taken out of two percent. Whatever you can do the math.
Speaker 1: Is there a way for you to ascertain the required
Speaker 1: haircut for their management to find stability?
Speaker 7: I think there is.
Speaker 8: I mean, they have a lot of government securities and
Speaker 8: loans that are simply underwater because.
Speaker 7: Of interest rate. It's important that it's not a credit issue.
Speaker 7: It's more interest rates.
Speaker 8: And they've got fixed rate mortgages that were done to
Speaker 8: three three and a half percent. In the world's easily
Speaker 8: two points higher, if not three. So that is the
Speaker 8: reason for the haircut. And of course it's the uncertainty
Speaker 8: about the ability to raise capital. That's always where the
Speaker 8: challenge is for these banks, going back many many.
Speaker 7: Years in cycles.
Speaker 8: So I think that the lack of knowledge and of
Speaker 8: course the lack of questions Monday night didn't.
Speaker 7: Help matters, and so here we are.
Speaker 8: I think that the company needs a solution. There's three
Speaker 8: ways out of this. They can raise capital, they can sell,
Speaker 8: or they can fail.
Speaker 1: Well, what's interesting here, Christopher, is the optionality this morning
Speaker 1: for Secretary Yellen and other government institutions. Do you suggest
Speaker 1: it'll be a clean haircut, whether without government intrusion, or
Speaker 1: will they be able to negotiate some form of more
Speaker 1: full balance sheet takeout that includes some form of equity option.
Speaker 8: So the Treasury has a program in place for Community
Speaker 8: development Banks CDFIs where the Treasury actually invested preferred last
Speaker 8: year at a zero percent rate for two years and
Speaker 8: then it was two percent after that. They would have
Speaker 8: to make a special dispensation to make first republic of CDFI.
Speaker 7: But it's not a crazy solution.
Speaker 8: It would actually give them capital from the government a
Speaker 8: la tarp like we did in two thousand and eight.
Speaker 8: But that would be a one company solution. I'm not
Speaker 8: necessarily sure they're going to do that, but it is
Speaker 8: an option that our secretary has at her disposal if
Speaker 8: she wishes to.
Speaker 5: Chris, you said three options race capital, sell assets, or fail.
Speaker 5: Let's assume for good reason they don't want option three.
Speaker 5: Can you tell me what option one actually looks like?
Speaker 5: What would that look like? Raising capital?
Speaker 8: Sure, so they would have to do a combination of
Speaker 8: I think equity and preferred equity is the best alternative.
Speaker 8: It would most likely be done, of course below last
Speaker 8: night's price, but maybe not necessarily a lot below. It
Speaker 8: would allow the tangible capital to recover, take losses, move
Speaker 8: down the road, live to fight another day. I think
Speaker 8: the question is will the company dilute their shareholders existing
Speaker 8: shareholders by such a massive amount. I mean, we saw
Speaker 8: this happen in two thousand and eight, nine and ten,
Speaker 8: so it's not the first time we've been through this exercise.
Speaker 7: But I think it's a question of where.
Speaker 8: The board and the management team are willing to dilute
Speaker 8: their existing team. I think they're going to have to
Speaker 8: unless they can find a bid that's more reasonable.
Speaker 4: Christopher, we're talking about this particular company, which we're now
Speaker 4: debating whether it's idiosyncratic or whether it's representative of perhaps
Speaker 4: larger ills in the regional banking sector. A'll be it
Speaker 4: a more concentrated version of it. How do you look
Speaker 4: at this in terms of what it exposed about the
Speaker 4: broader sector.
Speaker 8: So overall, credit quality is still really good. You know,
Speaker 8: banks give out way better information today than they did
Speaker 8: fifteen years ago. So if we looked at substandard rated credits,
Speaker 8: special mentioned rated credits, anything that's not a pass you
Speaker 8: typically have two to two and a half percent today.
Speaker 7: That's problematic at a bank.
Speaker 8: That's you know, a long way away from where we
Speaker 8: were at eight, nine, ten percent back in the Great
Speaker 8: Financial Crisis. So we have a long way to go
Speaker 8: for credit quality to match the last cycle. So I
Speaker 8: feel like the credit's not the issue. This is an
Speaker 8: interest rate risk problem. And of course many banks have
Speaker 8: held in maturity securities available for sales, securities that are
Speaker 8: below water, and even though rates are down, there's still
Speaker 8: below water easily ten to twelve percent. So we have
Speaker 8: to either raise capital to create confidence around those losses,
Speaker 8: or we simply have to wait. In the case of Republic,
Speaker 8: it's impossible to wait. They need a solution, and they
Speaker 8: need one very quickly.
Speaker 4: We also have to think about what the implication is
Speaker 4: for lending and just loan creation. UBS analysts put this out.
Speaker 4: They say that bank commercial and industrial loan growth looks
Speaker 4: to drop about five percent in the last three months
Speaker 4: of the year and then ten percent in the first
Speaker 4: quarter of twenty twenty four, which is associated with recession
Speaker 4: like conditions. Do you agree, Are you starting to see
Speaker 4: that type of necessary response to the lack of deposits,
Speaker 4: to the concern around the balance sheet?
Speaker 8: So I would disagree with the percentage change. I think
Speaker 8: that the tightening is clearly on. Banks are going to
Speaker 8: be very careful about the standards that they make and
Speaker 8: the way that they allocate credit. However, the flip side
Speaker 8: is going to be that they're going to charge a
Speaker 8: lot more for that, and I think the earning asset
Speaker 8: repricing in the banks is actually better than folks realize,
Speaker 8: which could actually be a positive for Nenaitraist margins beyond
Speaker 8: this quarter.
Speaker 7: This quarter will be a challenge, but I think in third.
Speaker 8: And fourth quarter we could see not only stabilization but
Speaker 8: actually increases in margins.
Speaker 5: Chris, I get that this was only really kicked off
Speaker 5: in the middle of March March eighth with SVB, but
Speaker 5: we've understood the right story for a long time now.
Speaker 5: It's a pretty aggressive hiking cycle last year. I'm already
Speaker 5: getting messages from people saying what took so long to
Speaker 5: consider assets, sales, dis launch, what have management been doing right?
Speaker 7: Well, it's a great point.
Speaker 8: I think that a lot of companies thought that they
Speaker 8: could simply use their liquidity from the homelan banks and
Speaker 8: other sources to work through the issue. And I think
Speaker 8: that was a false, false narrative for sure. I think
Speaker 8: the reality is of banks would have been more likely
Speaker 8: to hold money at the FED all along instead of
Speaker 8: buying treasuries.
Speaker 7: It would have been an easier solution. They wouldn't have
Speaker 7: had the marked to market issue.
Speaker 8: I think the marked to market accounting is what has
Speaker 8: been harmful here. No different than two thousand and eight
Speaker 8: and nine, but it is what it is. We have
Speaker 8: to account for this every quarter, and of course, I
Speaker 8: think the lack of understanding about when banks would see
Speaker 8: either sales of their securities or simply just the natural amortization.
Speaker 7: I think it's been one of the challenges.
Speaker 8: We're getting better transparency, but I still think the issue
Speaker 8: is to raise incremental capital to create confidence around the
Speaker 8: issues that we still have these marked markets.
Speaker 5: Hey, Chris, just wonderful to get continued input from you
Speaker 5: on this stories that evolves. Thanks for bamdist Christopher Marnach
Speaker 5: of Genny Montgomery Scott on the latest from First Republic.
Speaker 1: What we know for certain is perhaps any president of
Speaker 1: the United States, even of the Democratic persuasion, maybe would
Speaker 1: like to talk to a banker in our legislative branch
Speaker 1: this morning. He would of course pick the Republican from Arkansas,
Speaker 1: french Hill. He have dealta trust years ago in Arkansas.
Speaker 1: The banker french Hill joins us this morning, French I
Speaker 1: think you, more than anyone in Congress, are qualified to
Speaker 1: talk about the contagion effect of what happened with these
Speaker 1: marketing exercises on the West Coast. There are seventy four
Speaker 1: banks in Arkansas. How are they affected by SVB and
Speaker 1: the alphabet soup that gets you to f.
Speaker 9: Well, Tom, it's good to be with you this morning,
Speaker 9: you know, and staying in touch with my bank commissioner
Speaker 9: in Arkansas and touching base with the industry there. Our
Speaker 9: bankers have done well. They've been able to maintain and
Speaker 9: grow deposits. They had excellent earnings reports for the companies
Speaker 9: that are public, so the business seems solid there. And
Speaker 9: that's why I feel like the contagion and challenges that
Speaker 9: we've had since the first week of March have been
Speaker 9: connected to these banks with unusual business strategies.
Speaker 1: Long ago and far away. Will you Isaac, Robert McTeer
Speaker 1: and others had to deal with a multiple bank national crisis,
Speaker 1: what action would you like to see from the executive
Speaker 1: branch to assist the troubled bank?
Speaker 9: You know, I think the Fed's taken quick action. I
Speaker 9: think they had the tools that they need to resolve
Speaker 9: the situations that we face right now, both in their
Speaker 9: temporary loan facilities, in their thirteen Section thirteen power that
Speaker 9: they have, and then the use of Dodd Frank's powers
Speaker 9: in deposit insurance coverage if they feel like it's a
Speaker 9: systemic risk.
Speaker 4: Congressman, we have to shift. Here is a little bit
Speaker 4: to the debt ceialing debate, which a lot of people
Speaker 4: in markets aren't as focused on, but will be probably
Speaker 4: in a couple months time or possibly sooner. Kevin McCarthy,
Speaker 4: the Leader of the House for Republicans, is trying to
Speaker 4: put together this Republican plan and push it through getting
Speaker 4: votes to have this be the unified agreement at time
Speaker 4: when a lot of people are pushing back in the
Speaker 4: Republican Party. Do you support this build you think it
Speaker 4: has what it means to cross the line.
Speaker 9: Lisa, I do. I think Kevin McCarthy has listened to
Speaker 9: his conference over the past sixty days and has created
Speaker 9: a consensus program where it meets his two standards. One
Speaker 9: that we would not support a clean debt seialing we
Speaker 9: just don't have the support for that in our conference,
Speaker 9: and we wouldn't support a tax increase. And so he's
Speaker 9: crafted a plan that has savings of four point eight
Speaker 9: trillion dollars over ten years and raises the debt ceiling
Speaker 9: until next year. I think it will pass. It could
Speaker 9: pass today, and I think he's done a good job
Speaker 9: listening to our conference. And what we need, Lisa, is
Speaker 9: for President Biden to answer Speaker McCarthy's call from February first,
Speaker 9: let's meet and discuss this on a bipartisan basis.
Speaker 4: Well, a lot of people would argue and push back,
Speaker 4: saying that basically this is a grab bag of Republican
Speaker 4: talking points sort of underneath the bill that Kevin McCarthy
Speaker 4: has put together. I mean, is it the right starting point?
Speaker 4: Do you feel like both sides, including the Republicans, are
Speaker 4: debating and arguing in good faith.
Speaker 9: Well, look, the Senate Democrats, led by Chuck Schumer can't
Speaker 9: pass a clean debt ceiling, and so it's to the
Speaker 9: House to lead by offering to increase the debt ceiling.
Speaker 9: But go back to some of the things we've been
Speaker 9: talking about now for two years, which is, let's stop
Speaker 9: the pandemic level of spending. Let's go back to controlling spending.
Speaker 9: We propose a spending cap on discretionary spending, and we
Speaker 9: propose things that will help the economy grow, get people
Speaker 9: back to work, and save time payers money. I think
Speaker 9: it's a good list. I understand your point about what's
Speaker 9: in it, but I think it's a very good starting point,
Speaker 9: and it unifies Republicans to pass a debt ceiling.
Speaker 1: In French, we've aged done this the late great Pete Peterson.
Speaker 1: Paul Song has lost way too early. Sam Nunn of Georgia,
Speaker 1: I've heard it all before. When are we going to
Speaker 1: get our act together, such as a commission that we'll
Speaker 1: get this done, where a commission will like you know,
Speaker 1: Simpson Bulls, where we'll get a commission that we'll do
Speaker 1: the job. Republicans and Democrats refuse to do.
Speaker 9: Boy, Tom, it's such a good point, and I do
Speaker 9: agree with you, particularly on mandatory spending in our programs
Speaker 9: like Social Security, medicare, the big programs that grow at
Speaker 9: six percent a year, sometimes three times the rate of
Speaker 9: growth in the economy. President Obama had that opportunity with
Speaker 9: Speaker Bayner, with Simpson Bowles, and no action took place.
Speaker 9: But when President Johnson started the Great Society programs and
Speaker 9: spent trillions, you had mandatory spending all a third of
Speaker 9: the budget then and obviously not a big interest cost.
Speaker 9: Now we have two thirds of the budget is mandatory spending,
Speaker 9: and we're facing ten trillion dollars in interest only over
Speaker 9: the next ten years. So I think a bipartisan commission
Speaker 9: we tackle up or down mandatory spending is critical and
Speaker 9: I would support that.
Speaker 1: Away from your remed Olivia Blanchard does the economics and
Speaker 1: says we got lucky. We got a set of low
Speaker 1: interest rates, a low sluggish regime where growth could stay
Speaker 1: above interestates. I don't want to go into the economics
Speaker 1: right now, but basically he's suggesting the government had a
Speaker 1: gift handed to them that allowed for this debt extension
Speaker 1: over the last ten years. Do you feel now that
Speaker 1: things have changed now the mathematics is different at the
Speaker 1: Congressional Budget Office.
Speaker 9: I think so, Tom. I mean you're facing interest costs
Speaker 9: that will exceed the annual expenditures on national defense in
Speaker 9: the coming year, and as I say, ten trillion dollars
Speaker 9: of interest over the next ten years the President's forecast.
Speaker 9: So we're talking about interest now truly crowding out spending
Speaker 9: priorities for Congress. I think that's a wake up call
Speaker 9: for the Congress, and a wake up call to go
Speaker 9: back to debating how do we have zero deficits and
Speaker 9: how do we reform mandatory spending programs.
Speaker 5: A congressman, I'm confused, maybe because it's because I'm a
Speaker 5: foreigner and have only lived here seven or eight years.
Speaker 5: So help me. I thought you had to raise the
Speaker 5: debt ceiling because of spending already approved by Congress. Is
Speaker 5: that not the case?
Speaker 9: Oh, Jonathan, you're very good this morning. Yes, of course,
Speaker 9: you're raising the debt ceiling to cover spending that's already
Speaker 9: taken place. But it gives us an opportunity to have
Speaker 9: this two way conversation between the executive branch and the
Speaker 9: legislative branch, and we've seen this all the time. This
Speaker 9: is why I think Joe Biden's a hypocrite on this issue,
Speaker 9: because he was the lead negotiator when he was Vice
Speaker 9: president on increasing the debt ceiling with budget reforms. Nancy
Speaker 9: Pelosi in twenty nineteen did the same thing to Donald Trump. Sorry,
Speaker 9: we can't raise the clean debt ceiling. We need budget reforms.
Speaker 9: So it's an opportunity for the two sides to have
Speaker 9: a conversation. That's why the debt sealing vote is important.
Speaker 5: I think I'd go one step further. It's a game
Speaker 5: that Congress seems to play, the misleads the public. I'm
Speaker 5: not here to advocate to say that we should have
Speaker 5: massive deficits and that the debt should carry on piling
Speaker 5: up to forty to fifty trillion. Congressman, I just think
Speaker 5: it's disingenuous to sit here and say we've got a
Speaker 5: debt problem, but at the same time, we can't raise
Speaker 5: the debt limit because ultimately, as you know, it's Congress,
Speaker 5: which you're a part of, that's alread approved this spending.
Speaker 5: It doesn't matter who's in charge of Congress, you keep
Speaker 5: approving this spending. We can at the same time. Can't
Speaker 5: we say that you need to raise the debt limit,
Speaker 5: but also we need to get debt under control. Can't
Speaker 5: you say both those same things simultaneously.
Speaker 9: Well, I think I have in this interview by answering
Speaker 9: Tom's question about a commission to get the long term
Speaker 9: drivers of debt and deficit down and also to your
Speaker 9: point about bringing the two parties together to work on
Speaker 9: a bipartisan basis. So I take your point technically, but
Speaker 9: politicians need deadlines. They work on deadlines, and the dead
Speaker 9: sailing is a hard deadline, and the budget ten year
Speaker 9: forecast can be a more amorphous deadline.
Speaker 5: Congressman, is a conversation we'll continue having notedown French show.
Speaker 5: Thank you, sir, Thank you very much.
Speaker 1: Timothy Horn is senior analyst at OpCo Oppenheimer and joins
Speaker 1: us this morning with a real gift here on Microsoft
Speaker 1: as well. Tim Let's go back to the time of
Speaker 1: Rick Sherland and an old Microsoft of old. Let's begin
Speaker 1: with a new Microsoft. How is this Microsoft different than
Speaker 1: the Microsoft Rick Sherlind covered years ago at Gold and Sachs.
Speaker 1: How's a new Microsoft different than our stereotype?
Speaker 7: Well, for one, it's not a monopoly anymore.
Speaker 10: So they've learned how to compete and create new products,
Speaker 10: and they totally position to the cloud where they were really.
Speaker 7: Far behind Amazon and as a result to be I
Speaker 7: think a lot more innovative.
Speaker 10: So you've seen them take the lead on AI and
Speaker 10: they kind of optimize their infrastructure, the whole business model.
Speaker 7: Right now around AI, which is very different.
Speaker 1: What is their use of cash picture? We saw a
Speaker 1: share a buyback from Google that was stunning. We see
Speaker 1: it frankly from others outside the sector. But do you
Speaker 1: look in the forward here with this good news, with margin, resiliency,
Speaker 1: with a defensiveness, a constructive tone, do you look for
Speaker 1: a new use of cash and share buyback and dividend.
Speaker 7: They're going to be pretty steady.
Speaker 10: They have a steady dividend, you know that's going to
Speaker 10: grow in line with earnings. They steady buybacks and the
Speaker 10: throwing in line with earnings. They say they're going to
Speaker 10: spend a lot more money on Capex.
Speaker 7: You know for AI.
Speaker 10: These new Nvidio chips are very expensive and they're buying
Speaker 10: an awful lot of them.
Speaker 4: Do you buy the promise of open aye tim.
Speaker 7: Totally completely and totally. I buy into it.
Speaker 10: I think it's going to be the most profound thing
Speaker 10: we've seen in ten, you know, maybe twenty years longer.
Speaker 7: I kind of think back when I first got on.
Speaker 10: The internet thirty years ago, you know, you know how
Speaker 10: much of a revolution that was and how much it
Speaker 10: changed my life, And I think we're going to look
Speaker 10: at the same thing.
Speaker 4: So then if that's the case, is it a reliability
Speaker 4: for alphabet that they kind of downplayed it, perhaps to
Speaker 4: get a competitive edge with respect to Microsoft, perhaps to
Speaker 4: downplay fears that they're going to lose some sort of
Speaker 4: pre eminence with their Google search engine to Microsoft. But
Speaker 4: do you think that they're going to be left behind
Speaker 4: because they're not emphasizing it to the same degree.
Speaker 10: It's going to be the critical six to nine months
Speaker 10: ahead of us because open ai gets better and better
Speaker 10: the more people they have using it. But we know
Speaker 10: that Google and Amazon are throwing billions of.
Speaker 7: Dollars at AI. We know they have very very good
Speaker 7: large language models.
Speaker 10: The key is I got to get them rolled out
Speaker 10: and get people using them, or else Microsoft will once
Speaker 10: again become the operative system, likely with the PC for
Speaker 10: one of the most important technologies for the next twenty years.
Speaker 4: I understand the promise of this purely from a technological
Speaker 4: point of view, and the promise of in terms of
Speaker 4: efficiency as well as productivity tim but what is the
Speaker 4: timeframe for this being actually profitable for the likes of Microsoft.
Speaker 7: For open Ai.
Speaker 10: For them, they have a problem of product called GitHub Copilot,
Speaker 10: which is helping people write software, and it's improved the
Speaker 10: amount of software any programer can break by fifty percent.
Speaker 10: They charged ten dollars a month for that, and they
Speaker 10: have ten thousand companies using that product. They're going to
Speaker 10: charge similar kind of add on for Office three sixty five,
Speaker 10: and that will probably be in.
Speaker 7: The next six to twelve months.
Speaker 10: They'll start really adding on prices on these different applications.
Speaker 10: But importantly, they're just bundling together a whole set of
Speaker 10: new products. They're getting a whole set of new customers
Speaker 10: they never would have gotten before new startups sort of
Speaker 10: gone to Amazon. Now they're going to Microsoft.
Speaker 1: Tim, you've been doing this for ages. Can you extrapolate
Speaker 1: what you witnessed yesterday with Microsoft pre market seven maybe
Speaker 1: even eight percent? Can you extrapolate that over to all
Speaker 1: the other texts, over to Apple, over to Nvidia over
Speaker 1: to Broadcom, et cetera.
Speaker 7: That's a great question.
Speaker 10: I think Microsoft's gaining share, so it's going to be
Speaker 10: a little difficult. I mean, Amazon's quarter is going to
Speaker 10: be very important. But I think this is company by company.
Speaker 10: You know, talking to the math of the call, they're
Speaker 10: not trying to say they're a leading indicator on Macro.
Speaker 10: You know, they don't really know where Macro's going. It's
Speaker 10: probably is slowing down if you listen to mister drug
Speaker 10: and Millery's calling as you were referencing before, for a
Speaker 10: hard landing. But they think they're gaining share on like
Speaker 10: six or seven different products.
Speaker 7: And they're probably right.
Speaker 10: So I'm not entirely sure what it means for the
Speaker 10: whole tech center sector at.
Speaker 4: This point, Tim, As you talk about this arms race
Speaker 4: and artificial intelligence, where are the ethical concerns, especially as
Speaker 4: a lot of tech giants have been talking about perhaps
Speaker 4: pumping the brakes a little bit and understanding it a
Speaker 4: little bit better before it gets rolled out in some
Speaker 4: sort of mass.
Speaker 7: It's a great question.
Speaker 10: I'm no expert on it, but you know, automobiles skill
Speaker 10: a lot of people, firearms skill a lot of people
Speaker 10: go on and on a lot of medicine kills a
Speaker 10: lot of people. You know, it doesn't mean that be
Speaker 10: kind of self developing medicines and I think the genie's
Speaker 10: out of the box here and AI we're moving forward.
Speaker 10: You know, whatever happens, we're just going to meet some
Speaker 10: regulatory I think guardrails around it.
Speaker 5: Hi, Tim, thanks for the like syst on Microsoft, Let's
Speaker 5: stuck us out by close to wit percent. That's the name.
Speaker 5: Will be focused on gotting to the opening bounty.
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