WEBVTT - Surveillance: Flashing Red with Donald 0:00:05.160 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.360 --> 0:00:16.880 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.119 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.880 the Bloomberg Terminal, and the Bloomberg Business App. Francis Dautle 0:00:30.960 --> 0:00:33.720 joins us right now, this is an important brief, really 0:00:33.720 --> 0:00:36.400 good at the minutia that adds up to our gross 0:00:36.520 --> 0:00:40.400 domestic product. Francis, if we don't get a recession, but 0:00:40.440 --> 0:00:42.640 we get sort of kind of like a muddle one 0:00:42.680 --> 0:00:46.600 point five percent, one point one percent, zero point seven 0:00:46.680 --> 0:00:50.760 percent GDP not under zero, what does that feel like? 0:00:53.240 --> 0:00:56.240 Well, it depends how the central banks respond to it. 0:00:56.360 --> 0:00:59.680 But Tom, I'm more concerned about that very slow but 0:01:00.120 --> 0:01:04.880 assistant weakness than I am about a garden variety recession. 0:01:04.959 --> 0:01:07.920 We know what to do in garden variety recessions, and 0:01:07.959 --> 0:01:11.120 we know that central banks historically pivot. But what we're 0:01:11.160 --> 0:01:14.720 witnessing is, yes, a COVID distorted economy where we're seeing 0:01:14.760 --> 0:01:18.880 desynchronized elements. We're seeing a consumer that hang or hung 0:01:18.920 --> 0:01:21.600 on much longer than they would have in other cycles. 0:01:21.800 --> 0:01:25.000 Housing is already starting to reaccelerate. I'm not sure we're 0:01:25.000 --> 0:01:27.920 going to get the same sort of response in things 0:01:28.000 --> 0:01:31.080 like GDP data to the traditional shocks that we've seen, 0:01:31.360 --> 0:01:34.560 and therefore the risk is that we continue to hear 0:01:34.600 --> 0:01:35.759 while there's no recession. 0:01:35.840 --> 0:01:36.920 Therefore you can go along. 0:01:37.080 --> 0:01:39.600 But it's the FED says, well, no recession means we 0:01:39.720 --> 0:01:42.200 hold that's a very different investment playbook. 0:01:42.400 --> 0:01:45.280 Francis, you got a colored dot chart. It looks like 0:01:45.319 --> 0:01:48.800 the new Louis Vutant purses that everybody's buying right now. 0:01:48.840 --> 0:01:51.240 Don't ask me, folks while I know about that. But 0:01:51.360 --> 0:01:54.080 the chart you mentioned is one of your great concerns 0:01:54.200 --> 0:01:57.440 is what Lisa mentioned earlier, which is M two growth. 0:01:58.000 --> 0:02:02.320 I'm surprised if Francis Donald is monitor astonis discuss that. 0:02:03.720 --> 0:02:05.880 Well, Actually, I'm not just a monitorist. 0:02:05.960 --> 0:02:09.000 We look at all elements that potentially lead to economy 0:02:09.120 --> 0:02:12.320 at doing poorly. And that's the problem here, Tom, is 0:02:12.320 --> 0:02:16.560 that no matter what way you assess where growth is going, 0:02:17.160 --> 0:02:22.280 basically every traditional leading indicator of recessions is flashing red. 0:02:22.560 --> 0:02:25.280 And some of these are flashing red not consistent with 0:02:25.360 --> 0:02:28.400 garden variety or small recessions. But some of the big 0:02:28.520 --> 0:02:30.720 problems that we had, like in two thousand and eight, 0:02:30.960 --> 0:02:31.200 Now is. 0:02:31.200 --> 0:02:33.440 That necessarily where you're going. No, But what I say 0:02:33.480 --> 0:02:34.200 to my team is. 0:02:34.440 --> 0:02:38.079 Even if we cut in half our concern about downsides 0:02:38.080 --> 0:02:42.280 in growth, we're still looking at a very difficult economic environment. 0:02:42.560 --> 0:02:45.840 And to ignore the breadth of the challenges that exist 0:02:45.880 --> 0:02:48.519 and the breadth of the weakness we see in leading indicators, 0:02:48.680 --> 0:02:50.440 I think it is going to be problematic. 0:02:50.520 --> 0:02:53.080 And what's interesting your release is liz An Sanders really 0:02:53.200 --> 0:02:56.040 underscoring this out on Twitter yesterday where you were on M. 0:02:56.000 --> 0:02:58.600 Two growth well, and John was mentioning earlier as well, 0:02:58.639 --> 0:03:02.840 this idea of what happened when suddenly the restriction by 0:03:02.919 --> 0:03:06.200 central banks starts to play out in markets. Francis you 0:03:06.240 --> 0:03:08.920 say that an economic muddle might not be so great. 0:03:09.000 --> 0:03:11.400 It's very difficult to read because we don't understand what 0:03:11.480 --> 0:03:13.360 the different inputs are and where we are in the 0:03:13.400 --> 0:03:16.600 economic cycle. But if you just take it at face value, 0:03:16.720 --> 0:03:19.040 why isn't it the Max Kuttner view of things, we're 0:03:19.080 --> 0:03:21.480 basically if it's not too hot, not too cold. The 0:03:21.480 --> 0:03:23.400 Fed's kind of stuck in the middle, and things can 0:03:23.400 --> 0:03:25.519 grind forward at least for a few more months. 0:03:26.760 --> 0:03:29.680 Because we're at extremely high levels of interest rates for 0:03:29.840 --> 0:03:32.400 this level of the economy and we're heading towards a 0:03:32.560 --> 0:03:34.440 sizeable credit crunch. 0:03:34.560 --> 0:03:36.240 And this is why data. 0:03:36.040 --> 0:03:38.240 Like the Senior Loan Officer Survey that we should be 0:03:38.280 --> 0:03:40.400 getting by May eight is going to be just so 0:03:40.560 --> 0:03:45.480 incredibly important, because even if GDP numbers are not negative, 0:03:45.600 --> 0:03:48.440 this is still an economy that's going to struggle to 0:03:48.520 --> 0:03:49.440 produce revenue. 0:03:49.480 --> 0:03:52.120 It's going to struggle to produce jobs. We're going to 0:03:52.240 --> 0:03:54.320 have to move away. Just like we've moved away from 0:03:54.360 --> 0:03:55.000 the concept of. 0:03:54.960 --> 0:03:57.520 The unemployment rate giving us a good sense of the 0:03:57.520 --> 0:03:59.360 health of the labor market, we're going to have to 0:03:59.400 --> 0:04:02.280 move away from GDP as giving us a good sense 0:04:02.440 --> 0:04:05.680 of general economic activity that exists. And if the subtle 0:04:05.680 --> 0:04:08.200 reserve is still going to be focused on these traditional 0:04:08.200 --> 0:04:12.520 indicators like GDP and unemployment and even the PCE inflation rate, 0:04:12.680 --> 0:04:14.720 then we're not going to get relief from them. And 0:04:14.800 --> 0:04:17.599 this is a market that has already priced in some relief. 0:04:17.880 --> 0:04:20.960 So the problem with slow growth that isn't a full 0:04:20.960 --> 0:04:23.599 blown recession. Is that we likely don't get relief on 0:04:23.640 --> 0:04:25.880 the rate size, and this is going to produce a 0:04:26.000 --> 0:04:27.360 challenging risk environment. 0:04:27.680 --> 0:04:30.039 So Francis, when you start talking about some of the 0:04:30.400 --> 0:04:33.479 challenge profits and things at corporations, this has been one 0:04:33.520 --> 0:04:36.240 of the most surprising aspects of this earning season. I 0:04:36.279 --> 0:04:38.680 was looking yesterday at Procter and Gamble at Kimberly Clark, 0:04:38.839 --> 0:04:42.000 and their profit margins expanded. They were able to raise 0:04:42.000 --> 0:04:46.680 prices on consumers more than their underlying inflationary inputs. What 0:04:46.720 --> 0:04:49.320 does this say about just how much weakness or not 0:04:49.400 --> 0:04:52.080 there is, how much tolerance there still is in consumers 0:04:52.080 --> 0:04:54.280 to absorb all of those price increases. 0:04:55.120 --> 0:04:58.240 Well, it speaks to the desynchronized nature of this environment. 0:04:58.279 --> 0:05:00.479 But as we move forward and we see credit pulled 0:05:00.480 --> 0:05:03.200 back even more sharply, and we see some of the 0:05:03.279 --> 0:05:06.240 challenges that flow through primarily to small businesses. I mean, 0:05:06.400 --> 0:05:09.479 let's remember that small businesses are heavily credit dependent, and 0:05:09.480 --> 0:05:12.640 they've created the majority of jobs since twenty twenty. So 0:05:12.760 --> 0:05:15.880 as companies start to feel the pinch through the credit channels, 0:05:15.920 --> 0:05:17.800 they're going to have to be cutting costs in some 0:05:17.920 --> 0:05:19.800 way and I think that's going to flow through into 0:05:19.800 --> 0:05:22.240 the labor market. So again we have a consumer that 0:05:22.320 --> 0:05:25.400 held on longer than it would have historically, but all 0:05:25.480 --> 0:05:28.400 evidence suggests xs savings are coming down. 0:05:28.520 --> 0:05:29.560 Credit is not going. 0:05:29.440 --> 0:05:31.720 To be available, and as you know, Lisa, there are 0:05:31.760 --> 0:05:34.240 already some signs that the labor market is going to weaken. 0:05:34.520 --> 0:05:37.400 So right now there's some ability to absorb those price increases, 0:05:37.440 --> 0:05:39.599 but six months from now, not so much. And this 0:05:39.680 --> 0:05:41.440 is when the story is going to change. And it 0:05:41.480 --> 0:05:43.520 comes back to our job is not to tell us 0:05:43.560 --> 0:05:46.839 what's happening right now. Right now we're okay, it's to 0:05:46.920 --> 0:05:49.360 look forward six months. This is why it's so key 0:05:49.560 --> 0:05:54.720 to disaggregate between coincident indicators, leading indicators and lagging indicators. 0:05:54.720 --> 0:05:58.239 And when you do that, sure coincident data is just fine, 0:05:58.279 --> 0:06:01.240 but the leading indicators is where the challenges and confusing 0:06:01.279 --> 0:06:02.360 those two I think. 0:06:02.240 --> 0:06:03.039 Muddels the story. 0:06:03.200 --> 0:06:05.320 Francis. The Bank of England has a message for us 0:06:05.360 --> 0:06:09.360 all we need to accept that we're poorer. Apparently, in 0:06:09.360 --> 0:06:12.720 one of the most insensitive remarks we've seen from a 0:06:12.800 --> 0:06:14.960 central banker since Governor Bailey told us all to stop 0:06:15.000 --> 0:06:17.200 asking for a pay rise. This is what Hugh Bill 0:06:17.240 --> 0:06:19.440 has got to say, what we're facing now is the 0:06:19.560 --> 0:06:23.000 reluctance to accept that, yes, we're all worse off and 0:06:23.040 --> 0:06:25.400 we all have to take our share, to try and 0:06:25.480 --> 0:06:28.240 pass that cost onto one of our compatriots and say 0:06:28.320 --> 0:06:30.560 we'll be all right, but they will have to take 0:06:30.600 --> 0:06:35.400 our share too. This is bizarre. He's effectively saying, Francis, 0:06:35.440 --> 0:06:39.600 we need to accept that inflation is high and that 0:06:39.680 --> 0:06:42.520 wage growth won't be enough, and we shouldn't push for 0:06:42.600 --> 0:06:45.320 higher wages. Francis, what do you make of those comments 0:06:45.360 --> 0:06:47.480 from Hugh pil of the Bank of England. 0:06:48.600 --> 0:06:51.200 Well, it's concerning in the sense that we. 0:06:51.240 --> 0:06:54.680 Know the bulk of these challenges have hit low income 0:06:55.400 --> 0:06:58.520 households across the world who have seen their share of 0:06:58.560 --> 0:07:02.000 spending on food and energy rise. You know, I do 0:07:02.120 --> 0:07:04.760 interviews where the person prior to me is talking about 0:07:04.880 --> 0:07:08.200 you know, record lines and food banks. So telling somebody 0:07:08.320 --> 0:07:10.160 that is struggling to some food on the table that 0:07:10.200 --> 0:07:12.520 they have to accept higher inflation is going to go 0:07:12.600 --> 0:07:17.000 down a little bit more problematically. However, the bigger investment 0:07:17.080 --> 0:07:19.920 concern here is that again we are used to in 0:07:19.920 --> 0:07:23.400 an environment where central banks provide relief a central bank 0:07:23.520 --> 0:07:26.320 put and comments like this keep me up at night 0:07:26.320 --> 0:07:29.080 because they say, you know, some of the difficulty we're 0:07:29.120 --> 0:07:33.440 seeing in you know, banks, some of the difficulty we're seeing. 0:07:33.200 --> 0:07:36.560 For household is a feature, not a bug. 0:07:36.360 --> 0:07:39.040 Of current central bank policy, and it suggests we have 0:07:39.080 --> 0:07:43.160 to reassess that decision making function for all central banks globally, 0:07:43.200 --> 0:07:45.560 and if we do that, we may not be getting 0:07:45.600 --> 0:07:49.040 the standard relief rally that comes when you see lower growth. 0:07:49.200 --> 0:07:52.800 It's effectively a stagflation response function and it is much 0:07:52.840 --> 0:07:56.800 more challenging for almost all asset classes than you know 0:07:56.880 --> 0:07:59.320 two quarter dip of FED cut or a Bank of 0:07:59.320 --> 0:08:02.400 England cut a reacceleration. I'm not sure the market is 0:08:02.400 --> 0:08:06.120 fully grasped on to the risk of a recession with 0:08:06.200 --> 0:08:07.040 no rate cuts. 0:08:07.200 --> 0:08:09.760 Comments like this worse than my concern. 0:08:09.960 --> 0:08:13.320 Francis, thank you, Francis Donald of Manual Life Investment Management. 0:08:17.760 --> 0:08:20.240 Peter sheer he gave the name Meta to Facebook. He's 0:08:20.280 --> 0:08:22.120 the when he called up Zuckerberg and said, you know, 0:08:22.160 --> 0:08:24.920 I think Meta has as a direct and name to 0:08:25.040 --> 0:08:27.720 I still don't know what Meta means joining us now. 0:08:27.840 --> 0:08:30.960 Peter Sheheer had a macro strategy Academy Securities pull together 0:08:31.000 --> 0:08:33.040 these narratives. I mean, you and I have never seen 0:08:33.080 --> 0:08:35.760 this before. Let's start with that, but pull together the 0:08:35.840 --> 0:08:39.760 narratives that are making radio and TV listeners and viewers headspin. 0:08:40.080 --> 0:08:42.800 I think we are on a slow bleed into the recession. 0:08:42.920 --> 0:08:45.840 It's going to it is coming. It's starting at the 0:08:45.880 --> 0:08:48.960 white collar level. I think almost go back to the 0:08:48.960 --> 0:08:53.080 simplest thing. It's someone's expense is someone else's income. And 0:08:53.160 --> 0:08:55.920 everything I read is about people cutting expenses, which is 0:08:55.920 --> 0:08:57.720 going to hit someone's income, which is going to cause 0:08:57.760 --> 0:09:00.200 them in turn to cut their expenses. And I don't 0:09:00.200 --> 0:09:03.480 see anything switching that trajectory. I think the China reopening 0:09:03.559 --> 0:09:06.440 was a headfake. It was never really a big reopening. 0:09:06.840 --> 0:09:10.400 And to me, when opek Plus really cut production, they 0:09:10.400 --> 0:09:12.520 were seeing what we were already seeing. Freight was down, 0:09:12.559 --> 0:09:16.000 we're seeing shipping down. There is an economic slowdown occurring 0:09:16.160 --> 0:09:19.439 just below the surface, and it's slowly taking effect. It's 0:09:19.480 --> 0:09:20.679 going to be a grind. It's not going to be 0:09:20.720 --> 0:09:23.080 like a great financial crisis or anything. And the fact 0:09:23.120 --> 0:09:26.199 that the banks are in struggling with how to keep 0:09:26.240 --> 0:09:28.439 deposits is going to hurt lending and that's going to 0:09:28.520 --> 0:09:30.600 hurt the small business, which has been a huge driver 0:09:30.920 --> 0:09:32.280 of success in the past, so much. 0:09:32.200 --> 0:09:34.319 To unpack their peat. So let's go with China. It's 0:09:34.320 --> 0:09:36.760 a pretty emphatic thing to say the reopening was a 0:09:36.760 --> 0:09:38.120 head fake. Why was it a head fake? 0:09:38.360 --> 0:09:40.920 First they were already partly open, so it wasn't like 0:09:41.120 --> 0:09:42.839 going from zero to one hundred. They were going from 0:09:42.840 --> 0:09:45.920 sixty to eighty, seventy to ninety whatever that was. But 0:09:46.000 --> 0:09:48.440 also they are focusing more and more on their own economy, 0:09:48.480 --> 0:09:51.240 right we don't First we already have this inventory I 0:09:51.280 --> 0:09:52.720 hesitate to say glut, but I think we have an 0:09:52.760 --> 0:09:55.800 inventory glut. We have overbuilt, we have supply chains that 0:09:55.840 --> 0:09:58.760 have stacked up, so we don't really need China's production 0:09:58.880 --> 0:10:00.640 right now. And more and more, or how I see 0:10:00.640 --> 0:10:03.400 this world shaping as you have China Again we've said before, 0:10:03.600 --> 0:10:06.960 aligning with the autocratic, resource rich nations, and what we're 0:10:06.960 --> 0:10:09.440 seeing we're talking about the shift from maid in China 0:10:09.760 --> 0:10:12.199 to made by China, and by that I mean China 0:10:12.280 --> 0:10:15.000 used to take US products manufacturer give them back to 0:10:15.000 --> 0:10:17.199 the US companies who sold them. Globally, I think you're 0:10:17.200 --> 0:10:19.680 going to start see China trying to sell Chinese products 0:10:19.679 --> 0:10:21.840 globally a little bit more and be a true competitor. 0:10:21.840 --> 0:10:23.520 I think that's going to be the scary shift over 0:10:23.559 --> 0:10:24.400 the next few years. 0:10:24.440 --> 0:10:26.160 We can build on that later in the conversation if 0:10:26.200 --> 0:10:28.480 we have time. If the reopening of China is a 0:10:28.480 --> 0:10:31.839 head fake, what's Europe? With the cat forty up by 0:10:32.040 --> 0:10:34.760 almost twenty percent, that tacks up by seventeen percent, what 0:10:34.800 --> 0:10:35.520 would you call that? 0:10:35.760 --> 0:10:35.920 You know? 0:10:35.960 --> 0:10:37.360 Europe to me has become a bit of a mess. 0:10:37.440 --> 0:10:39.040 They're trying to figure out I think where they fit 0:10:39.080 --> 0:10:41.880 in right macrons approach, g they're figuring out how they 0:10:41.880 --> 0:10:45.960 want to deal with Ukraine. So I'm not But the 0:10:46.040 --> 0:10:48.319 nice part is I think some of their companies were undervalue. 0:10:48.360 --> 0:10:51.560 They're mostly big global entities, so some of that catch 0:10:51.640 --> 0:10:54.360 up because they've been behind made sense. I'm kind of 0:10:54.440 --> 0:10:56.600 very neutral to burish on Europe. I think they've got 0:10:56.600 --> 0:10:58.319 their own set of problems. On the other hand, I'm 0:10:58.320 --> 0:11:00.600 fairly berrish to neutral globe right now. 0:11:00.640 --> 0:11:02.160 Well, that's where I was going to That's what I 0:11:02.200 --> 0:11:03.839 was going to say, is it really so much better 0:11:03.920 --> 0:11:06.760 in the US. One of the issues that you raised 0:11:07.000 --> 0:11:09.680 was smaller banks, regional banks, and the sort of ongoing 0:11:09.720 --> 0:11:12.680 grind that we see there. We've been talking about First 0:11:12.679 --> 0:11:16.120 Republic all morning. Is this a specific story or does 0:11:16.120 --> 0:11:19.920 it indicate something broader that is just going to grind 0:11:19.920 --> 0:11:20.720 out throughout the year. 0:11:20.840 --> 0:11:22.560 So I think there's two things going on. One is 0:11:22.600 --> 0:11:25.640 it's really been this shift away from this concern about 0:11:25.679 --> 0:11:28.640 losing your deposits or bankruptcy to much more what yield 0:11:28.640 --> 0:11:30.680 am I getting on those deposits? And is that yield 0:11:30.760 --> 0:11:32.840 still functional for these banks? And then I think they've 0:11:32.840 --> 0:11:34.800 also said on Wall Street on stay time, my boss 0:11:34.840 --> 0:11:36.439 is this. You know your assets walk out the door 0:11:36.480 --> 0:11:38.960 at five pm or six pm, whatever time your assets leave, 0:11:39.160 --> 0:11:41.600 it's your people. And if you start losing your people, 0:11:41.960 --> 0:11:44.720 that becomes very problematic. How do you retain those people 0:11:44.960 --> 0:11:46.400 in an environment where you're struggling? 0:11:46.520 --> 0:11:48.880 So is that really the key issue here that we're 0:11:48.880 --> 0:11:51.360 going to see that more broadly throughout regional banks as 0:11:51.400 --> 0:11:54.640 bigger banks try to basically parachute in take the best talent, 0:11:54.720 --> 0:11:56.440 and then they'll just be this drip, drip drip that 0:11:56.440 --> 0:11:58.280 will carry out and tighten credit throughout the year. 0:11:58.400 --> 0:11:58.600 Yeah. 0:11:58.600 --> 0:12:00.360 I think it's going to make people have to come 0:12:00.400 --> 0:12:03.520 up with solutions fairly quickly, whether it's mergers acquisitions, and 0:12:03.600 --> 0:12:06.280 they have some phenomenal relationships, some great business models at 0:12:06.320 --> 0:12:08.199 these places. Everyone I have talked to who ever banked 0:12:08.200 --> 0:12:10.880 with First Republics as they are phenomenal the treatment they got, 0:12:11.280 --> 0:12:14.679 So there's value to that, and I think someone's got 0:12:14.720 --> 0:12:16.920 to capture that before those acids do walk out the door. 0:12:17.040 --> 0:12:19.360 Let me digress. We don't need a history lesson on 0:12:19.400 --> 0:12:23.400 Milton Friedman one oh one. Does M two matter? Tell 0:12:23.480 --> 0:12:26.320 us what M two is and why people like you 0:12:26.400 --> 0:12:27.080 pay attention. 0:12:27.640 --> 0:12:29.600 I have not been paying close attention to it lately 0:12:29.679 --> 0:12:31.640 again it's been dropping off. But I think there's so 0:12:31.640 --> 0:12:32.080 many others. 0:12:32.200 --> 0:12:33.880 It was a rage thirty years ago. 0:12:34.320 --> 0:12:35.800 It was all the rage, you know, back when we 0:12:35.800 --> 0:12:37.559 had to figure out when Alan Greenspan was carrying his 0:12:37.640 --> 0:12:39.800 briefcase in the left or right hand. They didn't tell 0:12:39.880 --> 0:12:41.520 us what they were doing. Actually thought it was easier 0:12:41.600 --> 0:12:44.199 sometimes when the FED wasn't trying to do this forward guidance. 0:12:44.200 --> 0:12:46.040 They've gotten themselves in so much trouble, which is why 0:12:46.080 --> 0:12:47.760 I think they had to hike last time for twenty 0:12:47.760 --> 0:12:50.280 five BIPs when they should have already been stopping before that. 0:12:50.440 --> 0:12:52.280 So I'm watching all these things, but I do think 0:12:52.280 --> 0:12:54.960 the economy is slowing down and it's showing up in 0:12:54.960 --> 0:12:56.000 some of the M two declines. 0:12:56.120 --> 0:12:58.760 Are we super restrictive right now when you add in 0:12:59.000 --> 0:13:03.280 the interest rate dynamics and the greater economy dynamics, the 0:13:03.360 --> 0:13:06.440 balance sheet dynamics. Are we beyond restrictive? 0:13:06.720 --> 0:13:08.800 I think so, And part of this it doesn't show up. 0:13:08.800 --> 0:13:11.920 But again, people don't have car leases coming do every year. 0:13:12.040 --> 0:13:14.760 But over a year, two years, three years, everyone's going 0:13:14.800 --> 0:13:18.040 to have to reset. Corporations at a phenomenal job during 0:13:18.080 --> 0:13:21.240 COVID issuing long day to debts at very low interest rates. 0:13:21.240 --> 0:13:23.800 But some of that starts rolling off, and it's going 0:13:23.840 --> 0:13:26.360 to take time for the five percent rates to hit 0:13:26.920 --> 0:13:29.640 the consumer. I think we're at the early stages of that, 0:13:29.720 --> 0:13:32.160 and it only gets worse. It's not like anyone's rolling 0:13:32.200 --> 0:13:34.160 their five percent to five percent right now. We're still 0:13:34.160 --> 0:13:36.440 having people rolling three percent to six percent, and that's 0:13:36.480 --> 0:13:37.360 going to add weigh on this. 0:13:37.760 --> 0:13:40.160 So part of this conversation is about vulnerable parts of 0:13:40.200 --> 0:13:41.959 the market. And I promised you a pocket of time 0:13:41.960 --> 0:13:43.800 to come back to the point you made about the 0:13:43.920 --> 0:13:48.920 Chinese consumer and Chinese companies. Let's finish there. Who's vulnerable? 0:13:49.240 --> 0:13:51.840 Is it the Tesla's of this world? Is it the 0:13:51.920 --> 0:13:54.520 mvmh's of this world? Can they really go about creating 0:13:54.600 --> 0:13:57.520 something like a luxury brands compete with the European players 0:13:57.920 --> 0:14:00.680 and ev operator we know lots of names over in China. 0:14:00.920 --> 0:14:02.920 What's the competition going to be most fast? 0:14:03.120 --> 0:14:05.960 I think it's going to be for everyday items, So 0:14:06.000 --> 0:14:10.360 whether it's cars, dishwashers, it's not going to be our quality, 0:14:10.360 --> 0:14:12.320 but they are going to try and sell their brands. 0:14:12.520 --> 0:14:14.200 They've taken a lot of the IP, they've got the 0:14:14.240 --> 0:14:16.760 manufacturing know how. Now it's not as good as what 0:14:16.800 --> 0:14:19.400 we produce or they produce for us, but it will 0:14:19.400 --> 0:14:21.520 be cheaper and they will aggressively market that. One of 0:14:21.560 --> 0:14:23.680 the things that really struck me on this was they 0:14:23.720 --> 0:14:25.280 just struck a deal with Brazil where they're going to 0:14:25.320 --> 0:14:27.960 make their BYD cars in Brazil. Now, part of that's 0:14:28.000 --> 0:14:29.560 for tax reasons and stuff, but that to me is 0:14:29.600 --> 0:14:32.280 just the signal that China wants to sell their things, 0:14:32.280 --> 0:14:35.200 that we're really only consumed by Chinese broadly. 0:14:35.920 --> 0:14:38.160 Amazing conversation, Peipe, we can have for a long long time. 0:14:38.200 --> 0:14:41.760 Pitch their academic security is a head fake. The reopening 0:14:41.800 --> 0:14:43.360 in China, it's on a head fake. 0:14:54.120 --> 0:14:56.640 Christopher Marinac has not been a stranger. We really thank 0:14:56.680 --> 0:14:59.520 him for his participation. Seems like day after day. Director 0:14:59.520 --> 0:15:04.359 of Research, Jenny Montgomery Scott Christopher. What was out there yesterday? 0:15:05.200 --> 0:15:06.320 Article to article? 0:15:06.560 --> 0:15:10.320 Research note to research note was a guestimate of the 0:15:10.440 --> 0:15:16.600 haircut needed. Let's review. They have garbage loans, jumbo mortgages 0:15:16.680 --> 0:15:19.760 taken out of two percent. Whatever you can do the math. 0:15:20.320 --> 0:15:23.120 Is there a way for you to ascertain the required 0:15:23.400 --> 0:15:27.360 haircut for their management to find stability? 0:15:27.640 --> 0:15:28.360 I think there is. 0:15:28.400 --> 0:15:30.480 I mean, they have a lot of government securities and 0:15:30.560 --> 0:15:32.640 loans that are simply underwater because. 0:15:32.360 --> 0:15:34.920 Of interest rate. It's important that it's not a credit issue. 0:15:34.920 --> 0:15:36.040 It's more interest rates. 0:15:36.040 --> 0:15:38.680 And they've got fixed rate mortgages that were done to 0:15:38.760 --> 0:15:41.320 three three and a half percent. In the world's easily 0:15:41.360 --> 0:15:44.760 two points higher, if not three. So that is the 0:15:44.800 --> 0:15:47.400 reason for the haircut. And of course it's the uncertainty 0:15:47.440 --> 0:15:49.960 about the ability to raise capital. That's always where the 0:15:50.000 --> 0:15:52.360 challenge is for these banks, going back many many. 0:15:52.240 --> 0:15:53.120 Years in cycles. 0:15:53.520 --> 0:15:55.640 So I think that the lack of knowledge and of 0:15:55.640 --> 0:15:57.840 course the lack of questions Monday night didn't. 0:15:57.640 --> 0:16:00.000 Help matters, and so here we are. 0:16:00.120 --> 0:16:02.360 I think that the company needs a solution. There's three 0:16:02.400 --> 0:16:04.760 ways out of this. They can raise capital, they can sell, 0:16:04.880 --> 0:16:05.520 or they can fail. 0:16:05.800 --> 0:16:09.160 Well, what's interesting here, Christopher, is the optionality this morning 0:16:09.240 --> 0:16:13.760 for Secretary Yellen and other government institutions. Do you suggest 0:16:13.800 --> 0:16:18.320 it'll be a clean haircut, whether without government intrusion, or 0:16:18.400 --> 0:16:22.120 will they be able to negotiate some form of more 0:16:22.240 --> 0:16:27.080 full balance sheet takeout that includes some form of equity option. 0:16:28.520 --> 0:16:31.320 So the Treasury has a program in place for Community 0:16:31.360 --> 0:16:36.280 development Banks CDFIs where the Treasury actually invested preferred last 0:16:36.360 --> 0:16:38.680 year at a zero percent rate for two years and 0:16:38.680 --> 0:16:40.920 then it was two percent after that. They would have 0:16:40.960 --> 0:16:44.800 to make a special dispensation to make first republic of CDFI. 0:16:45.000 --> 0:16:46.760 But it's not a crazy solution. 0:16:47.160 --> 0:16:49.360 It would actually give them capital from the government a 0:16:49.440 --> 0:16:51.560 la tarp like we did in two thousand and eight. 0:16:51.880 --> 0:16:54.600 But that would be a one company solution. I'm not 0:16:54.680 --> 0:16:56.760 necessarily sure they're going to do that, but it is 0:16:56.800 --> 0:17:01.080 an option that our secretary has at her disposal if 0:17:01.080 --> 0:17:01.640 she wishes to. 0:17:01.880 --> 0:17:05.720 Chris, you said three options race capital, sell assets, or fail. 0:17:06.119 --> 0:17:08.960 Let's assume for good reason they don't want option three. 0:17:09.200 --> 0:17:11.280 Can you tell me what option one actually looks like? 0:17:11.520 --> 0:17:13.680 What would that look like? Raising capital? 0:17:14.400 --> 0:17:16.679 Sure, so they would have to do a combination of 0:17:16.760 --> 0:17:20.360 I think equity and preferred equity is the best alternative. 0:17:20.640 --> 0:17:23.080 It would most likely be done, of course below last 0:17:23.119 --> 0:17:26.760 night's price, but maybe not necessarily a lot below. It 0:17:26.760 --> 0:17:30.720 would allow the tangible capital to recover, take losses, move 0:17:30.760 --> 0:17:34.200 down the road, live to fight another day. I think 0:17:34.240 --> 0:17:37.480 the question is will the company dilute their shareholders existing 0:17:37.520 --> 0:17:40.480 shareholders by such a massive amount. I mean, we saw 0:17:40.520 --> 0:17:42.480 this happen in two thousand and eight, nine and ten, 0:17:42.600 --> 0:17:46.040 so it's not the first time we've been through this exercise. 0:17:46.040 --> 0:17:47.400 But I think it's a question of where. 0:17:47.200 --> 0:17:49.040 The board and the management team are willing to dilute 0:17:49.080 --> 0:17:51.199 their existing team. I think they're going to have to 0:17:51.280 --> 0:17:53.920 unless they can find a bid that's more reasonable. 0:17:54.080 --> 0:17:56.919 Christopher, we're talking about this particular company, which we're now 0:17:57.000 --> 0:18:01.000 debating whether it's idiosyncratic or whether it's representative of perhaps 0:18:01.280 --> 0:18:03.760 larger ills in the regional banking sector. A'll be it 0:18:03.840 --> 0:18:06.560 a more concentrated version of it. How do you look 0:18:06.560 --> 0:18:09.080 at this in terms of what it exposed about the 0:18:09.119 --> 0:18:09.919 broader sector. 0:18:11.200 --> 0:18:13.679 So overall, credit quality is still really good. You know, 0:18:13.760 --> 0:18:16.240 banks give out way better information today than they did 0:18:16.280 --> 0:18:20.440 fifteen years ago. So if we looked at substandard rated credits, 0:18:20.520 --> 0:18:23.679 special mentioned rated credits, anything that's not a pass you 0:18:23.760 --> 0:18:26.040 typically have two to two and a half percent today. 0:18:26.040 --> 0:18:27.359 That's problematic at a bank. 0:18:27.400 --> 0:18:30.280 That's you know, a long way away from where we 0:18:30.280 --> 0:18:33.880 were at eight, nine, ten percent back in the Great 0:18:33.880 --> 0:18:35.679 Financial Crisis. So we have a long way to go 0:18:35.760 --> 0:18:38.760 for credit quality to match the last cycle. So I 0:18:38.800 --> 0:18:41.000 feel like the credit's not the issue. This is an 0:18:41.000 --> 0:18:43.879 interest rate risk problem. And of course many banks have 0:18:44.040 --> 0:18:47.080