1 00:00:05,040 --> 00:00:08,880 Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyds, 2 00:00:08,880 --> 00:00:11,879 Speaker 1: along with Tom Keane and Jonathan Farrell. Join us each 3 00:00:11,960 --> 00:00:15,720 Speaker 1: day for insight from the best in economics, geopolitics, finance 4 00:00:15,760 --> 00:00:20,079 Speaker 1: and investment. Subscribe to Bloomberg Surveillance Undermand on Apple, Spotify 5 00:00:20,160 --> 00:00:23,320 Speaker 1: and anywhere you get your podcasts, and always on Bloomberg 6 00:00:23,360 --> 00:00:26,319 Speaker 1: dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 7 00:00:26,560 --> 00:00:30,680 Speaker 1: Lindsay Rosenan joins us now portfolio manager at PGIM Fixed Income. Lindsay, 8 00:00:30,760 --> 00:00:32,440 Speaker 1: wonderful to catch up with you. We were lucky to 9 00:00:32,479 --> 00:00:34,920 Speaker 1: catch up with your colleague Greg Peters on Sunday evening 10 00:00:34,920 --> 00:00:38,120 Speaker 1: to talk about contingent convertibles, cocos, at ones, all those 11 00:00:38,159 --> 00:00:41,479 Speaker 1: good things which turn out to be bad things. Lindsay, 12 00:00:42,000 --> 00:00:45,360 Speaker 1: why have you managed your risk around those securities differently 13 00:00:45,440 --> 00:00:48,800 Speaker 1: to maybe other shops and I'm thinking Investco PIMCO, which 14 00:00:48,960 --> 00:00:52,440 Speaker 1: reportedly holding the bag on this one. Yeah. I think 15 00:00:52,479 --> 00:00:55,720 Speaker 1: Greg said it best. The documentation around these kind of 16 00:00:55,760 --> 00:00:59,160 Speaker 1: instruments have been particularly murky, and we had itself that 17 00:00:59,200 --> 00:01:01,760 Speaker 1: we needed to go further down in the capital structure 18 00:01:01,800 --> 00:01:03,760 Speaker 1: to really take advantage of the banks that we like. 19 00:01:04,480 --> 00:01:07,800 Speaker 1: We really like US money center banks, particularly in the 20 00:01:07,800 --> 00:01:10,640 Speaker 1: whold Co paper. We think that that looks really good, 21 00:01:10,640 --> 00:01:12,600 Speaker 1: and we've had a lot of opportunities with a lot 22 00:01:12,600 --> 00:01:14,839 Speaker 1: of conceptions in the past few months to buy banks 23 00:01:14,959 --> 00:01:17,840 Speaker 1: much cheaper. Howd it needed to go into this risky thing, 24 00:01:17,880 --> 00:01:20,440 Speaker 1: and obviously have been rewarded for staying away from it. 25 00:01:20,959 --> 00:01:23,360 Speaker 1: That said, lindsay, there is a question about some of 26 00:01:23,360 --> 00:01:26,160 Speaker 1: the regional banks and the credit of them, and whether 27 00:01:26,160 --> 00:01:28,440 Speaker 1: there needs to be some sort of premium baked in 28 00:01:28,680 --> 00:01:33,360 Speaker 1: because of the potential greater risks of less regulation and 29 00:01:33,440 --> 00:01:37,039 Speaker 1: more deposit data. I think that's absolutely true, and that's 30 00:01:37,040 --> 00:01:38,880 Speaker 1: also been our thesis that we want to be in 31 00:01:38,920 --> 00:01:41,160 Speaker 1: the big US money center banks that got all that 32 00:01:41,280 --> 00:01:44,319 Speaker 1: extra regulation after two thousand and eight. The idea that 33 00:01:44,360 --> 00:01:47,400 Speaker 1: these regional banks were smaller may be less important to 34 00:01:47,440 --> 00:01:49,640 Speaker 1: the structure. I think we've all learned that is not 35 00:01:49,720 --> 00:01:53,120 Speaker 1: the case had it been compensated in terms of spreads, 36 00:01:53,480 --> 00:01:56,280 Speaker 1: and haven't gone there specifically. I think something that you 37 00:01:56,320 --> 00:01:58,960 Speaker 1: just talked about earlier, which is the kind of main 38 00:01:59,040 --> 00:02:02,560 Speaker 1: street versus wolf mainstream banks at for regional banks, and 39 00:02:02,640 --> 00:02:04,760 Speaker 1: I think going back to the whole idea of confidence. 40 00:02:05,160 --> 00:02:08,639 Speaker 1: We have not solved that problem. There's fragility in the system, 41 00:02:08,680 --> 00:02:11,359 Speaker 1: and a small business cannot operate with two hundred and 42 00:02:11,400 --> 00:02:14,760 Speaker 1: fifty thousand at multiple regional banks. That is just not 43 00:02:14,800 --> 00:02:17,200 Speaker 1: going to work. And so we very much are looking 44 00:02:17,200 --> 00:02:19,720 Speaker 1: for a solution there, and it may take a while work. 45 00:02:19,720 --> 00:02:22,720 Speaker 1: Hearing obviously that the government is studying. I was only 46 00:02:22,720 --> 00:02:25,640 Speaker 1: a public policy major in college, so I don't know 47 00:02:25,680 --> 00:02:28,560 Speaker 1: how long studying happens to last. But I can certainly 48 00:02:29,040 --> 00:02:32,360 Speaker 1: say that small businesses are concerned. And you're actually seeing 49 00:02:32,400 --> 00:02:35,120 Speaker 1: a lot of money moved to money market government funds, 50 00:02:35,360 --> 00:02:37,679 Speaker 1: not the prime funds, and I think that's a big 51 00:02:37,720 --> 00:02:40,760 Speaker 1: heads up that small businesses are very concerned with what's 52 00:02:40,800 --> 00:02:43,040 Speaker 1: going on with regionals. This is a reason why Lenza. 53 00:02:43,120 --> 00:02:45,800 Speaker 1: A lot of economists are trying to game out ongoing 54 00:02:45,880 --> 00:02:48,520 Speaker 1: distress in the financial system and how many rate hikes 55 00:02:48,520 --> 00:02:51,919 Speaker 1: that's equivalent to, right, what kind of credit tightening that implies? 56 00:02:52,040 --> 00:02:54,519 Speaker 1: Bloomberg Economics coming out with fifty bases points of a 57 00:02:54,639 --> 00:02:57,720 Speaker 1: rate hike from your vantage point, how much of a 58 00:02:57,720 --> 00:03:00,800 Speaker 1: tightening feature is this? How much does it really impact 59 00:03:00,919 --> 00:03:04,880 Speaker 1: credit quality that forces you to increase your expectation for 60 00:03:04,880 --> 00:03:09,800 Speaker 1: credit spreads, for risks, for defaults. Yeah, it's hard to 61 00:03:09,800 --> 00:03:11,720 Speaker 1: put an exact number on it. I think we're all 62 00:03:11,760 --> 00:03:14,320 Speaker 1: trying to figure out what this looks like. But absolutely 63 00:03:14,360 --> 00:03:17,440 Speaker 1: the credit box has tightened here. Lending standards are going 64 00:03:17,480 --> 00:03:21,240 Speaker 1: to be much stricter going forward because you have this 65 00:03:21,480 --> 00:03:24,880 Speaker 1: deposit flow. I think what's so different about the flavor 66 00:03:24,960 --> 00:03:26,920 Speaker 1: of this crisis, if you want to call it that 67 00:03:27,000 --> 00:03:29,880 Speaker 1: and banking this time around, is just how fast the 68 00:03:29,919 --> 00:03:32,200 Speaker 1: money is and how digital it is. I mean, we 69 00:03:32,200 --> 00:03:34,920 Speaker 1: can all move funny money in our own accounts from 70 00:03:34,920 --> 00:03:37,720 Speaker 1: our phone with just a press on the screen. That 71 00:03:37,840 --> 00:03:41,080 Speaker 1: was not the oad experience. So what we're seeing here 72 00:03:41,160 --> 00:03:44,480 Speaker 1: is definitely that the risk of a recession has kicked up. 73 00:03:45,200 --> 00:03:48,160 Speaker 1: It's a question of how much. Certainly we're seeing some 74 00:03:48,600 --> 00:03:52,480 Speaker 1: resolve this morning in Europe European corporates or twenty basis 75 00:03:52,480 --> 00:03:54,960 Speaker 1: points tighter this morning. Things feel better, as you mentioned, 76 00:03:55,000 --> 00:03:57,360 Speaker 1: yields kind of across governments, whether it's in the US 77 00:03:57,480 --> 00:03:59,680 Speaker 1: or abroad or higher. So there seems to be a 78 00:03:59,720 --> 00:04:04,000 Speaker 1: little little bit of less concern. But we've got a 79 00:04:04,000 --> 00:04:06,000 Speaker 1: lot to figure out as we wait here to hear 80 00:04:06,040 --> 00:04:08,000 Speaker 1: what the FED is going to do tomorrow and what 81 00:04:08,040 --> 00:04:09,600 Speaker 1: they kind of tell us they're going to do in 82 00:04:09,640 --> 00:04:12,600 Speaker 1: the future. You mentioned speed. Matt Brood of Invesco talked 83 00:04:12,600 --> 00:04:14,880 Speaker 1: about that with us yesterday and I think's an important point, 84 00:04:15,360 --> 00:04:17,880 Speaker 1: just a reminder of how quickly some of these institutions 85 00:04:17,920 --> 00:04:20,479 Speaker 1: can fail. And Lindsey, with that in mind, he pointed 86 00:04:20,520 --> 00:04:22,599 Speaker 1: out that that's not the same as an industrial that's 87 00:04:22,600 --> 00:04:25,320 Speaker 1: not the same story. There should be maybe a valuation 88 00:04:25,400 --> 00:04:29,039 Speaker 1: gap between these different industries now, similar to what we 89 00:04:29,080 --> 00:04:31,640 Speaker 1: saw after eight and then see the question I asked 90 00:04:31,640 --> 00:04:34,320 Speaker 1: Matt was ultimately how long that can last? How long 91 00:04:34,320 --> 00:04:36,640 Speaker 1: does that take to well ultimately resolve that gap that 92 00:04:36,720 --> 00:04:40,800 Speaker 1: opens up between one industry and all the rest. Yeah, 93 00:04:40,800 --> 00:04:43,520 Speaker 1: there is no reason that industrials and banks have to 94 00:04:43,560 --> 00:04:46,119 Speaker 1: trade on top of each other. In fact, historically banks 95 00:04:46,320 --> 00:04:49,400 Speaker 1: created ruin industrials. I create that we've really liked since 96 00:04:49,480 --> 00:04:53,039 Speaker 1: last year was owning banks versus industrials because you're compensated 97 00:04:53,040 --> 00:04:54,680 Speaker 1: with more spread. But I think, going back to what 98 00:04:54,680 --> 00:04:57,240 Speaker 1: we said at the very beginning, what is crucial is 99 00:04:57,320 --> 00:05:00,000 Speaker 1: that it's what banks that you own, and so much 100 00:05:00,120 --> 00:05:02,240 Speaker 1: that I think we believe that in terms of active 101 00:05:02,279 --> 00:05:05,599 Speaker 1: management is teasing out who are going which which balance 102 00:05:05,640 --> 00:05:07,719 Speaker 1: sheets are going to do well, and I think we've 103 00:05:07,760 --> 00:05:10,880 Speaker 1: just got a clear support here for the big banks 104 00:05:11,240 --> 00:05:14,240 Speaker 1: and so the big banks can rally got to squeeze 105 00:05:14,240 --> 00:05:16,040 Speaker 1: it in. Then you mentioned the FED. What are you 106 00:05:16,080 --> 00:05:20,760 Speaker 1: in the team tomorrow twenty five? Nothink we are. Our 107 00:05:20,800 --> 00:05:23,760 Speaker 1: base case is twenty five. I think that base case 108 00:05:23,880 --> 00:05:28,400 Speaker 1: isn't with a major degree of confidence because there's there's 109 00:05:28,440 --> 00:05:31,160 Speaker 1: a lot of concerns. I don't think, though we are 110 00:05:31,200 --> 00:05:33,560 Speaker 1: in the camp that if the FED were too pause. 111 00:05:34,000 --> 00:05:37,039 Speaker 1: We don't think that the suggestion there is that there 112 00:05:37,160 --> 00:05:39,400 Speaker 1: is a crisis of brewing and they know something that 113 00:05:39,440 --> 00:05:41,479 Speaker 1: we don't know. I think you discussed us with Greg 114 00:05:41,480 --> 00:05:45,040 Speaker 1: on Sunday night. Instead, if they pause, I mean they 115 00:05:45,040 --> 00:05:47,560 Speaker 1: can pause, right. They have another chance to hype six 116 00:05:47,600 --> 00:05:49,640 Speaker 1: weeks from now, so it's not like they pause and 117 00:05:49,680 --> 00:05:53,039 Speaker 1: they're never allowed to hype. They have that flexibility. That's 118 00:05:53,080 --> 00:05:55,560 Speaker 1: part of their doctrine. And I think we shouldn't panic 119 00:05:55,600 --> 00:05:58,200 Speaker 1: if we see them pause. Personally, I'd like them to pause. 120 00:05:58,440 --> 00:06:01,520 Speaker 1: I'd like them to see sometime in between for us 121 00:06:01,520 --> 00:06:03,760 Speaker 1: to work out what's been happening in the banking sector. 122 00:06:04,000 --> 00:06:06,400 Speaker 1: All this happened in this past weekend last week, right, 123 00:06:06,640 --> 00:06:08,279 Speaker 1: so we get a little bit of a breather to 124 00:06:08,320 --> 00:06:10,880 Speaker 1: figure out what's going on with markets. That's just my 125 00:06:10,960 --> 00:06:18,560 Speaker 1: two cents, Lindsay, thanks for that. Lindsay Rosener, the of PGM. 126 00:06:18,600 --> 00:06:20,960 Speaker 1: I like your description of the FED meeting. I don't know, 127 00:06:21,040 --> 00:06:23,160 Speaker 1: do you know? I don't know, you know, Christian will 128 00:06:23,200 --> 00:06:26,880 Speaker 1: A Glissman might know, Managing director for Portfolio Strategy at 129 00:06:26,880 --> 00:06:29,400 Speaker 1: Goldman Sachs. Christian joins us right now. Christian wanted for 130 00:06:29,520 --> 00:06:31,760 Speaker 1: to hear from you, sir. Welcome to the program. This 131 00:06:31,880 --> 00:06:34,560 Speaker 1: came from Dario Perkins over in London this morning from 132 00:06:34,600 --> 00:06:37,080 Speaker 1: ts Lombardy said central banks are stuck between the ghosts 133 00:06:37,080 --> 00:06:40,440 Speaker 1: of the seventies and their PTSD from two thousand and eight. 134 00:06:40,680 --> 00:06:46,159 Speaker 1: He said, I reckon PTSD wins out. What do you reckon? Yeah, 135 00:06:46,200 --> 00:06:48,719 Speaker 1: it certainly looks like that. I mean certainly near term. 136 00:06:48,760 --> 00:06:53,799 Speaker 1: I mean, not to forget the inflation normalization progress would 137 00:06:53,800 --> 00:06:57,560 Speaker 1: have been very slow anyhole, and I think to some extent, 138 00:06:58,279 --> 00:07:00,440 Speaker 1: you know, we work quite confident in market, were quite 139 00:07:00,440 --> 00:07:05,240 Speaker 1: confident inflation expectations never unanchored like they did in the seventies. 140 00:07:05,440 --> 00:07:08,400 Speaker 1: And so there was this kind of calm and inflation 141 00:07:08,440 --> 00:07:11,720 Speaker 1: credibility you carried on. So I think the bigger concern 142 00:07:11,840 --> 00:07:14,800 Speaker 1: is really banking systemic stress Again, so I would also 143 00:07:14,880 --> 00:07:19,880 Speaker 1: lean towards kind of GSC type concerns dominating right now. 144 00:07:20,480 --> 00:07:23,720 Speaker 1: How do you play through the concern versus the opportunity, 145 00:07:24,000 --> 00:07:26,560 Speaker 1: versus saying, Okay, when you smell blood in the water, 146 00:07:26,640 --> 00:07:30,280 Speaker 1: sometimes it's time to pounds. Yeah. I mean, as always, 147 00:07:30,320 --> 00:07:33,120 Speaker 1: you want to see some type of overshoots, you want 148 00:07:33,160 --> 00:07:36,840 Speaker 1: to see some type of asymmetry arising, and I'm not 149 00:07:36,920 --> 00:07:39,760 Speaker 1: quite sure we're there yet. The challenge you had was 150 00:07:39,880 --> 00:07:42,640 Speaker 1: that coming into the year, people were getting quite excited, 151 00:07:43,120 --> 00:07:45,960 Speaker 1: despite the fact that you're late cycle, despite the fact 152 00:07:45,960 --> 00:07:49,400 Speaker 1: that the FETE has pushed up the cost of capital materially, 153 00:07:49,680 --> 00:07:52,080 Speaker 1: there was the sense that the US can deal with it. 154 00:07:52,080 --> 00:07:54,880 Speaker 1: It's resilient. As you showed earlier, the spot data is 155 00:07:54,880 --> 00:07:58,840 Speaker 1: still resilient, and you're China reopening, Europe having less of 156 00:07:58,840 --> 00:08:02,600 Speaker 1: an energy crisis. So our risk appetite indicator went up 157 00:08:02,640 --> 00:08:04,520 Speaker 1: to kind of zero point seven, which is one of 158 00:08:04,520 --> 00:08:07,960 Speaker 1: the higher levels. So that has no unwound, but you're 159 00:08:08,000 --> 00:08:10,720 Speaker 1: not really at bearish levels, And I think what really 160 00:08:10,760 --> 00:08:14,280 Speaker 1: worries me is risk premier. The rates markets are very 161 00:08:14,320 --> 00:08:17,040 Speaker 1: clearly sending us a very bearish signal, Like you have 162 00:08:17,120 --> 00:08:19,520 Speaker 1: the front and pricing cuts from the fat, you have 163 00:08:19,600 --> 00:08:22,960 Speaker 1: bulls deepening in the two Stens curve. All of those 164 00:08:22,960 --> 00:08:26,320 Speaker 1: are signals that recession risk is being pulled forward. But 165 00:08:26,360 --> 00:08:29,280 Speaker 1: if you look at risk premier, especially equity risk PERIA, 166 00:08:29,320 --> 00:08:31,480 Speaker 1: and they're quite low. So I'm not quite sure we 167 00:08:31,600 --> 00:08:35,200 Speaker 1: have that type of asymmetry, that type of washout where 168 00:08:35,200 --> 00:08:37,720 Speaker 1: you can really say, there's a huge amount of opportunity. 169 00:08:38,200 --> 00:08:40,679 Speaker 1: What are you looking at though, to buy if that 170 00:08:40,800 --> 00:08:43,800 Speaker 1: volatility does sort of start to wash out the European 171 00:08:43,840 --> 00:08:47,760 Speaker 1: banks of the US banks. I mean, that's quite interesting 172 00:08:48,240 --> 00:08:51,880 Speaker 1: discussion because banks there's clearly stress here, and there is 173 00:08:51,960 --> 00:08:54,720 Speaker 1: more overshoots in terms of valuations, in terms of credit. 174 00:08:55,240 --> 00:08:58,400 Speaker 1: So I think at the margin that is an area 175 00:08:58,440 --> 00:09:01,000 Speaker 1: where you can look. But the uncertain is huge, and 176 00:09:01,040 --> 00:09:04,280 Speaker 1: it's a very leverage business model, and and systemic stress 177 00:09:04,760 --> 00:09:07,760 Speaker 1: is kind of going in waves at this juncture. So 178 00:09:07,800 --> 00:09:09,960 Speaker 1: it's a bit early. But if you ask me which 179 00:09:09,960 --> 00:09:13,000 Speaker 1: banks to go for it, fields, the European banks have 180 00:09:13,080 --> 00:09:15,599 Speaker 1: a slightly different setup because they have less of a 181 00:09:15,640 --> 00:09:20,960 Speaker 1: liquidity problem. They had a systemic capital concern, a profitability problem, 182 00:09:21,000 --> 00:09:24,160 Speaker 1: and I think that seems to have been put under control. 183 00:09:25,000 --> 00:09:28,040 Speaker 1: Whereas I think from a deposit side of things, you 184 00:09:28,080 --> 00:09:30,400 Speaker 1: have less pressure, you have less liquidity pressure. As a 185 00:09:30,400 --> 00:09:33,720 Speaker 1: different setup, there's not even that many money market funds 186 00:09:33,720 --> 00:09:36,920 Speaker 1: in Europe where actually savers could park their cash. So 187 00:09:36,960 --> 00:09:39,640 Speaker 1: it feels like there's a slightly different problem in the US. 188 00:09:39,720 --> 00:09:42,439 Speaker 1: That problem might linger a bit longer, especially if the 189 00:09:42,520 --> 00:09:45,040 Speaker 1: fat continuous tightening. Well, Christian, how much of a challenge 190 00:09:45,080 --> 00:09:47,280 Speaker 1: is that both statement in the yield curve to the 191 00:09:47,320 --> 00:09:50,760 Speaker 1: bank's code you're ultimately making. Yeah, I mean, like as 192 00:09:50,800 --> 00:09:52,800 Speaker 1: I said, like the US banks, I don't think they're 193 00:09:52,800 --> 00:09:55,520 Speaker 1: completely in the clean yet. I mean that bulls deepening, 194 00:09:55,559 --> 00:09:59,800 Speaker 1: as you know, was probably exacerbated by positioning where you 195 00:09:59,840 --> 00:10:04,040 Speaker 1: have this enormous rates volatility driven by macro investors unwinding 196 00:10:04,679 --> 00:10:07,880 Speaker 1: these hawkish calls into the central bank season. So so 197 00:10:07,920 --> 00:10:09,719 Speaker 1: we need to see where it does settles. If that 198 00:10:09,840 --> 00:10:13,600 Speaker 1: bullis steepening continues, it also comes from very inverted levels. 199 00:10:13,880 --> 00:10:16,920 Speaker 1: We find that the risk to equities increases the more 200 00:10:17,120 --> 00:10:19,839 Speaker 1: they'd curve. Bulls steepens. So right now it's at very 201 00:10:19,840 --> 00:10:23,359 Speaker 1: inverted levels. Has bullys stepened a bit? If that process continues, 202 00:10:23,800 --> 00:10:26,480 Speaker 1: I would be careful to take any cyclical risk, and 203 00:10:26,880 --> 00:10:29,840 Speaker 1: you would certainly expect equities will underperform bonds. Do you 204 00:10:29,840 --> 00:10:31,880 Speaker 1: have a base case right now, though, Christian, because from 205 00:10:31,920 --> 00:10:34,240 Speaker 1: what you're saying, it sounds like perhaps the situation in 206 00:10:34,280 --> 00:10:36,520 Speaker 1: Europe might have been a head fake and you'd expect 207 00:10:36,559 --> 00:10:40,120 Speaker 1: further inversion again. Yeah, I mean it looks a bit 208 00:10:40,160 --> 00:10:42,840 Speaker 1: like that. Our base case from the economous you know, 209 00:10:42,920 --> 00:10:45,440 Speaker 1: both in Europe and in the US, is that we're 210 00:10:45,480 --> 00:10:49,280 Speaker 1: not done yet on the hiking cycles. There's this idea 211 00:10:49,280 --> 00:10:54,880 Speaker 1: of separation between systemic stress and inflation fighting, and if 212 00:10:54,920 --> 00:10:58,600 Speaker 1: that's true, it's a bit premature to see that bulls steepening. 213 00:10:58,880 --> 00:11:00,720 Speaker 1: But we have to listen to the market a bit. 214 00:11:00,840 --> 00:11:03,680 Speaker 1: I think the market certainly is worried that we reached 215 00:11:03,720 --> 00:11:07,400 Speaker 1: a point where central banks are constrained to hike, and 216 00:11:07,480 --> 00:11:11,160 Speaker 1: where this financial conditions tightening, which has been relatively controlled 217 00:11:11,440 --> 00:11:13,880 Speaker 1: for most of last year, driven by front end rates, 218 00:11:14,160 --> 00:11:17,520 Speaker 1: has become much less unpredictable, much less predictable and a 219 00:11:17,520 --> 00:11:20,640 Speaker 1: bit more uncontrollable and that means that you have much 220 00:11:20,679 --> 00:11:22,640 Speaker 1: more risk of an error, You have much more risk 221 00:11:22,800 --> 00:11:26,440 Speaker 1: of central banks having having to back paddle like Christian. 222 00:11:26,520 --> 00:11:39,839 Speaker 1: Thanks for that, Christian milliklishman of government. But let's really 223 00:11:39,880 --> 00:11:43,359 Speaker 1: get into how we can understand the trajectory of inflation 224 00:11:43,640 --> 00:11:45,480 Speaker 1: and how big of a battle it's going to be 225 00:11:45,520 --> 00:11:47,679 Speaker 1: for the Federal Reserve even as they have an eye 226 00:11:47,720 --> 00:11:49,880 Speaker 1: toward the banks. Dean Marki joining us right now, Chief 227 00:11:49,960 --> 00:11:53,200 Speaker 1: US Economistic points seventy two. Dean, what's your take on that? 228 00:11:53,440 --> 00:11:56,280 Speaker 1: How do you understand the inflationary impulse and how much 229 00:11:56,280 --> 00:12:02,319 Speaker 1: it's actually been dampened. Well, the recent data have suggested 230 00:12:02,440 --> 00:12:05,680 Speaker 1: that inflation is not coming down as fast as the 231 00:12:05,720 --> 00:12:08,880 Speaker 1: previous data might have suggested, and this does interfere with 232 00:12:08,960 --> 00:12:13,800 Speaker 1: the fed's narrative that we're headed down in a steady way, 233 00:12:13,840 --> 00:12:16,360 Speaker 1: down to three and a half percent on core PC 234 00:12:16,559 --> 00:12:18,800 Speaker 1: by the end of the year and even lower after that. 235 00:12:19,440 --> 00:12:22,200 Speaker 1: The recent data just don't show much slowing and I 236 00:12:22,280 --> 00:12:25,240 Speaker 1: do think that is important to the Fed's decision this week. 237 00:12:26,000 --> 00:12:28,800 Speaker 1: So what does that mean in terms of them having 238 00:12:28,800 --> 00:12:31,040 Speaker 1: to raise rates by twenty five basis points? So that 239 00:12:31,040 --> 00:12:35,360 Speaker 1: that should be digestible for the markets. I do think 240 00:12:35,400 --> 00:12:37,679 Speaker 1: it's that the FED is likely to raise rates by 241 00:12:37,679 --> 00:12:41,120 Speaker 1: twenty five basis points this week. The data certainly point 242 00:12:41,160 --> 00:12:44,040 Speaker 1: in that direction, whether it's the very strong employment data, 243 00:12:44,320 --> 00:12:47,440 Speaker 1: the inflation data that's come out less favorable for the 244 00:12:47,440 --> 00:12:51,800 Speaker 1: FED than expected, and actually GDP growth is picking up 245 00:12:51,800 --> 00:12:54,520 Speaker 1: in the first quarter, it's not slowing down the way 246 00:12:54,640 --> 00:12:58,320 Speaker 1: many have been expecting. So that economic data are telling 247 00:12:58,360 --> 00:13:00,760 Speaker 1: us very clearly that the FED should be continuing to 248 00:13:00,840 --> 00:13:04,240 Speaker 1: raise rates. Now, there's other factors the Fed's worried about, 249 00:13:04,760 --> 00:13:07,080 Speaker 1: but I think that's what's going to be the dominant 250 00:13:07,160 --> 00:13:09,960 Speaker 1: force for the FED. They think they have other tools 251 00:13:10,000 --> 00:13:13,480 Speaker 1: to address banking system issues and problems at the banks, 252 00:13:13,960 --> 00:13:16,880 Speaker 1: and that monetary policy should be aimed at getting inflation 253 00:13:16,920 --> 00:13:19,560 Speaker 1: back to target. You know, my favorite thing about this 254 00:13:19,720 --> 00:13:21,760 Speaker 1: momenting is that you have five guests on may all 255 00:13:21,800 --> 00:13:23,920 Speaker 1: say something completely different and then say you're looking at 256 00:13:23,920 --> 00:13:26,160 Speaker 1: the wrong data. And some people will come on and 257 00:13:26,200 --> 00:13:30,600 Speaker 1: they'll say, Okay, sure, that backward looking data shows resilience 258 00:13:30,800 --> 00:13:34,040 Speaker 1: and a sense of inflation that hasn't died down nearly enough. 259 00:13:34,080 --> 00:13:36,240 Speaker 1: And other people say, yeah, you've got to keep looking 260 00:13:36,280 --> 00:13:38,679 Speaker 1: at that because it's been right So where do you 261 00:13:38,800 --> 00:13:41,600 Speaker 1: sort of make the argument that you have to consider 262 00:13:41,640 --> 00:13:44,560 Speaker 1: this data that maybe backward looking, but really gives you 263 00:13:44,760 --> 00:13:47,600 Speaker 1: some clean sense of where we are now. Well, I 264 00:13:47,600 --> 00:13:50,640 Speaker 1: think the data tells us where we were coming into 265 00:13:50,679 --> 00:13:55,200 Speaker 1: this past two weeks, and that where we were is 266 00:13:55,200 --> 00:13:58,760 Speaker 1: an economy that was growing at a pretty strong rate, 267 00:14:00,000 --> 00:14:02,600 Speaker 1: clayment rate very low, and inflation way above what the 268 00:14:02,600 --> 00:14:05,800 Speaker 1: FED wants it to be. Now the FED has to 269 00:14:05,840 --> 00:14:09,040 Speaker 1: think about does the last two weeks events mean that 270 00:14:09,520 --> 00:14:12,440 Speaker 1: the data don't matter anymore? I think it's too strong 271 00:14:12,480 --> 00:14:14,760 Speaker 1: to say that. I think the FED will be thinking 272 00:14:14,760 --> 00:14:17,440 Speaker 1: about how much credit tightening is going to be happening 273 00:14:17,720 --> 00:14:20,040 Speaker 1: as a result of the problems at the banks. But 274 00:14:20,160 --> 00:14:22,120 Speaker 1: unless the FED is convinced that there's going to be 275 00:14:22,160 --> 00:14:25,320 Speaker 1: a sudden and severe stop in credit that means no 276 00:14:25,400 --> 00:14:28,200 Speaker 1: further rate hikes are required, I think the FED will 277 00:14:28,240 --> 00:14:31,720 Speaker 1: go ahead with their steady rate hikes this week. So 278 00:14:31,840 --> 00:14:35,120 Speaker 1: people argue that de facto there will be a credit 279 00:14:35,160 --> 00:14:37,640 Speaker 1: tightening by some of these medium sized banks that are 280 00:14:37,640 --> 00:14:40,080 Speaker 1: going to restrict who they loan to and how much 281 00:14:40,120 --> 00:14:43,480 Speaker 1: they lend. You make it an argument that that doesn't 282 00:14:43,480 --> 00:14:47,560 Speaker 1: necessarily mean some sort of sudden curtailing of economic activity. 283 00:14:47,600 --> 00:14:52,120 Speaker 1: Can you elaborate on why that's an important important realization 284 00:14:52,560 --> 00:14:56,480 Speaker 1: to inform what the FED has to do and respond well? 285 00:14:56,520 --> 00:14:58,800 Speaker 1: I think, you know, one has to think about what's 286 00:14:58,920 --> 00:15:01,720 Speaker 1: happening at the banks. You know that the very large 287 00:15:01,760 --> 00:15:05,200 Speaker 1: banks don't seem to be having a problem with extending 288 00:15:05,240 --> 00:15:07,160 Speaker 1: credit at this time, at least in a way that 289 00:15:07,200 --> 00:15:10,160 Speaker 1: would cause a sudden stop and credit. There is credit 290 00:15:10,200 --> 00:15:12,440 Speaker 1: tightening in general going on like there usually isn't a 291 00:15:12,520 --> 00:15:16,240 Speaker 1: fad tightening cycle. But small and medium sized banks, the 292 00:15:16,280 --> 00:15:19,560 Speaker 1: real question is does the typical small and medium sized 293 00:15:19,600 --> 00:15:22,960 Speaker 1: bank out there have a severe deposit outflow right now 294 00:15:23,240 --> 00:15:25,840 Speaker 1: that's going to cause them to make say we're not 295 00:15:25,880 --> 00:15:28,520 Speaker 1: making more loans at all. You know, that would be 296 00:15:28,560 --> 00:15:31,200 Speaker 1: what a severe and studden stop and credit would look like, 297 00:15:31,520 --> 00:15:35,160 Speaker 1: and that would be in a sense positive to immediately 298 00:15:35,200 --> 00:15:40,800 Speaker 1: stop tightening if that became apparent. My perception from various 299 00:15:40,840 --> 00:15:44,080 Speaker 1: things is that that's not happening right now. It certainly 300 00:15:44,160 --> 00:15:46,320 Speaker 1: is happening at some of the trouble banks, but most 301 00:15:46,360 --> 00:15:50,400 Speaker 1: medium and small size banks do not have severe deposit 302 00:15:50,440 --> 00:15:54,000 Speaker 1: outflow problems right now, and therefore they are likely to 303 00:15:54,000 --> 00:15:58,960 Speaker 1: continue to bake some credit available to businesses and households. 304 00:15:59,000 --> 00:16:01,440 Speaker 1: If that's right, and there is more of a gradual 305 00:16:01,480 --> 00:16:05,440 Speaker 1: credit tightening process underway rather than a severe and sudden stop. 306 00:16:05,760 --> 00:16:08,480 Speaker 1: So how far away are we from going back to 307 00:16:08,520 --> 00:16:11,440 Speaker 1: a no landing discussion or going back to this idea 308 00:16:11,520 --> 00:16:15,040 Speaker 1: that we could just softly glide path lower regardless of 309 00:16:15,080 --> 00:16:17,160 Speaker 1: some of the recent troubles that we've seen at banks. 310 00:16:18,680 --> 00:16:20,560 Speaker 1: You know, I think that's something that will be sorting 311 00:16:20,560 --> 00:16:23,840 Speaker 1: out in the coming week. So, you know, if I'm 312 00:16:23,920 --> 00:16:27,240 Speaker 1: right that this is more of a gradual credit tightening process, 313 00:16:27,720 --> 00:16:30,640 Speaker 1: then the very strong economic data that we've been seeing 314 00:16:30,840 --> 00:16:33,480 Speaker 1: does continue to matter, and this will be a headwind 315 00:16:33,520 --> 00:16:36,160 Speaker 1: against that strength in the data. And I do think 316 00:16:36,160 --> 00:16:40,560 Speaker 1: there are some forces pushing the economy forward that are underappreciated, 317 00:16:40,920 --> 00:16:44,280 Speaker 1: like the continued normalization of the service sector, which continues 318 00:16:44,320 --> 00:16:47,960 Speaker 1: to add jobs at a tremendous pace every month. And 319 00:16:48,040 --> 00:16:50,480 Speaker 1: also I think that the strength of the consumer matters 320 00:16:50,520 --> 00:16:54,680 Speaker 1: here as well. So you know, if those matter in 321 00:16:54,760 --> 00:16:57,120 Speaker 1: terms of the momentum of the economy, the credit tightening 322 00:16:57,200 --> 00:16:59,520 Speaker 1: is pushing against that, and what we'll be trying to 323 00:16:59,520 --> 00:17:02,640 Speaker 1: do is way those two opposing forces going forward? So 324 00:17:02,640 --> 00:17:05,320 Speaker 1: what do you make of this narrative table Tennis? As 325 00:17:05,400 --> 00:17:07,160 Speaker 1: James Afy put it, I mean, what do you make 326 00:17:07,160 --> 00:17:10,600 Speaker 1: of this idea that people are just basically turning themselves 327 00:17:10,640 --> 00:17:14,920 Speaker 1: in circles trying to understand the moment to moment gyrations 328 00:17:14,960 --> 00:17:17,360 Speaker 1: in a market that is more volatile than it's been 329 00:17:17,440 --> 00:17:22,800 Speaker 1: for decades. I mean, to me, it just reflects the 330 00:17:22,840 --> 00:17:27,960 Speaker 1: difficulty of the situation. We're dealing with an unknowable amount 331 00:17:28,160 --> 00:17:30,679 Speaker 1: of financial stress. You know, how bad is it going 332 00:17:30,720 --> 00:17:32,960 Speaker 1: to get in the next two weeks? How bad is 333 00:17:33,000 --> 00:17:35,840 Speaker 1: the credit tightening that results from this financial stress going 334 00:17:35,880 --> 00:17:38,600 Speaker 1: to be? It's these are very difficult things, and markets 335 00:17:38,600 --> 00:17:41,760 Speaker 1: are struggling to figure it out. So we all have 336 00:17:41,840 --> 00:17:44,560 Speaker 1: our own individual views on things, but the market's kind 337 00:17:44,600 --> 00:17:46,800 Speaker 1: of bouncing back and forth trying to figure out which 338 00:17:46,880 --> 00:17:49,119 Speaker 1: narrative is correct one of the biggest issues Dad, and 339 00:17:49,119 --> 00:17:51,239 Speaker 1: I'd love to get your thoughts before we have to 340 00:17:51,280 --> 00:17:55,320 Speaker 1: go about the longer term trajectory of inflation. This question 341 00:17:55,359 --> 00:17:58,160 Speaker 1: of are we heading back to a two percent inflation 342 00:17:58,320 --> 00:18:00,359 Speaker 1: kind of reality, which is really what the market is 343 00:18:00,359 --> 00:18:01,920 Speaker 1: pricing in. If you take a look at the five 344 00:18:01,960 --> 00:18:05,359 Speaker 1: and ten year inflation expectations, or are we heading into 345 00:18:05,400 --> 00:18:08,560 Speaker 1: something where this FED reserve will tolerate a much higher 346 00:18:08,560 --> 00:18:11,280 Speaker 1: pace of inflation to avoid some of the disruptions that 347 00:18:11,320 --> 00:18:14,800 Speaker 1: we've seen in the banking sector. I mean, I think 348 00:18:14,880 --> 00:18:17,480 Speaker 1: that's one of the reasons why this week will be 349 00:18:17,520 --> 00:18:20,960 Speaker 1: an important signal from the FED. If the FED is 350 00:18:21,000 --> 00:18:24,439 Speaker 1: actually putting inflation front and center, I think it is 351 00:18:24,480 --> 00:18:28,639 Speaker 1: important for them to continue to tighten conditions and signal 352 00:18:28,720 --> 00:18:31,520 Speaker 1: that that is our main focus at this point. If 353 00:18:31,520 --> 00:18:35,280 Speaker 1: the FED does seem to be distracted and focused more 354 00:18:35,359 --> 00:18:38,679 Speaker 1: on other issues then inflation, you know, then I do 355 00:18:38,760 --> 00:18:42,520 Speaker 1: think this impression that the FED is going to allow 356 00:18:42,560 --> 00:18:47,000 Speaker 1: inflation to persistently run above target will gain traction. Dean 357 00:18:47,080 --> 00:18:53,600 Speaker 1: Mackey of Point seventy two, thank you so much. Alan Walt, 358 00:18:53,640 --> 00:18:56,120 Speaker 1: join us now sending a fellow at the Atlantic Council. 359 00:18:56,400 --> 00:18:58,320 Speaker 1: And then can you tell us how important it is 360 00:18:58,359 --> 00:19:03,600 Speaker 1: how dependent show produces on regional banks in America? Well, 361 00:19:03,880 --> 00:19:07,000 Speaker 1: I'm not going to totally speculate on just how dependent 362 00:19:07,080 --> 00:19:09,120 Speaker 1: they are, but I'm going to guess that a lot 363 00:19:09,160 --> 00:19:13,200 Speaker 1: of them have actually probably reduced some of the exposure 364 00:19:13,280 --> 00:19:16,639 Speaker 1: that they might ordinarily have been facing, given the fact 365 00:19:16,640 --> 00:19:20,240 Speaker 1: that for some time now, we've seen lenders tightening and 366 00:19:20,720 --> 00:19:24,080 Speaker 1: not you know, shelling out capital to oil producers. You know, 367 00:19:24,640 --> 00:19:27,040 Speaker 1: this is an industry that's gone through a huge amount 368 00:19:27,040 --> 00:19:31,480 Speaker 1: of consolidation over the past you know, decade essentially, or 369 00:19:31,920 --> 00:19:34,200 Speaker 1: or a little less in a decade, and so I 370 00:19:35,119 --> 00:19:38,600 Speaker 1: venture that they're probably not quite as exposed as say, 371 00:19:38,760 --> 00:19:42,320 Speaker 1: some of the startups in the Silicon Valley area are. 372 00:19:43,240 --> 00:19:47,080 Speaker 1: My concern is definitely on the you know, the demand 373 00:19:47,119 --> 00:19:49,720 Speaker 1: side and the supply side. It's it's a very interesting 374 00:19:49,760 --> 00:19:53,640 Speaker 1: crisis because we're not really seeing that much in terms 375 00:19:53,680 --> 00:19:56,920 Speaker 1: of a change in the supply demand forecast, but prices 376 00:19:57,119 --> 00:20:02,480 Speaker 1: have moved substantially, and forecast for prices are also on 377 00:20:02,480 --> 00:20:06,000 Speaker 1: the move. Talking about the read through from the banking crisis, 378 00:20:06,040 --> 00:20:10,600 Speaker 1: I'll give you another, perhaps somewhat fantastical scenario. What happens 379 00:20:10,760 --> 00:20:14,159 Speaker 1: if the Middle East investors that lost money and some 380 00:20:14,240 --> 00:20:16,520 Speaker 1: of these banking issues I'm thinking of Muhammad bail and 381 00:20:16,520 --> 00:20:20,840 Speaker 1: Soon and Saudi Arabia suddenly want prices to be higher 382 00:20:20,840 --> 00:20:23,120 Speaker 1: if they've lost money in markets this year. What if 383 00:20:23,119 --> 00:20:25,960 Speaker 1: they actually don't want to produce more oil because they 384 00:20:26,000 --> 00:20:28,239 Speaker 1: want prices to go up. How much. Is that a 385 00:20:28,280 --> 00:20:31,520 Speaker 1: feature in the OPEC response mechanism to all this, I 386 00:20:31,560 --> 00:20:35,400 Speaker 1: would say that's definitely of concern. I think that OPEC, definitely, 387 00:20:35,640 --> 00:20:38,240 Speaker 1: or at least Saudi Arabia, has a particular range that 388 00:20:38,320 --> 00:20:40,800 Speaker 1: they like to see prices in. And I do think 389 00:20:40,800 --> 00:20:44,160 Speaker 1: that the triple digits to them are too high because 390 00:20:44,400 --> 00:20:47,840 Speaker 1: that then threatens them on the demand side. So you know, 391 00:20:47,880 --> 00:20:50,720 Speaker 1: if prices hit eighty this summer, I think that that's 392 00:20:50,800 --> 00:20:53,359 Speaker 1: still in a good range for them, and they're not 393 00:20:53,400 --> 00:20:56,360 Speaker 1: going to be making any kinds of supply cuts. Now. 394 00:20:56,400 --> 00:20:59,760 Speaker 1: If we see a sudden drop in oil prices due 395 00:20:59,800 --> 00:21:03,960 Speaker 1: to say a major global financial crisis, then we should 396 00:21:04,000 --> 00:21:06,560 Speaker 1: definitely look for OPEC to act just like they did 397 00:21:06,680 --> 00:21:10,680 Speaker 1: in two thousand and eight to kind of protect oil prices. 398 00:21:10,880 --> 00:21:13,400 Speaker 1: What I think is more interesting here is they definitely 399 00:21:13,440 --> 00:21:15,960 Speaker 1: see this, and they came out with some comments last 400 00:21:15,960 --> 00:21:18,920 Speaker 1: week that you know, this is mostly a financial issue. 401 00:21:18,920 --> 00:21:21,400 Speaker 1: They don't see it as a supply demand issue. So 402 00:21:21,600 --> 00:21:27,160 Speaker 1: how would changing supply and demand impact the market. What 403 00:21:27,240 --> 00:21:30,800 Speaker 1: I see is an interesting potential, though, is the US 404 00:21:30,880 --> 00:21:34,240 Speaker 1: as a potential to impact the demand side, Because we've 405 00:21:34,320 --> 00:21:37,240 Speaker 1: got the US government having said that when oil gets 406 00:21:37,240 --> 00:21:39,560 Speaker 1: to a certain range they want to rebuy for the 407 00:21:39,760 --> 00:21:43,760 Speaker 1: spr Could you imagine what a major influx of demand 408 00:21:43,840 --> 00:21:47,560 Speaker 1: from the US government could do to oil prices right now? 409 00:21:47,680 --> 00:21:50,679 Speaker 1: Would essentially be saying, you know, here's a huge surgeon 410 00:21:50,760 --> 00:21:54,600 Speaker 1: demand that we weren't necessarily expecting, and we are in 411 00:21:54,640 --> 00:21:57,840 Speaker 1: a situation where supply demand is pretty tight, or at 412 00:21:57,880 --> 00:22:01,119 Speaker 1: least expected to be pretty tight, and that could definitely 413 00:22:01,440 --> 00:22:04,480 Speaker 1: be a factor that could push oil prices up if 414 00:22:04,920 --> 00:22:07,080 Speaker 1: you know, nothing else is. And I'm really happy that 415 00:22:07,200 --> 00:22:09,120 Speaker 1: Lisa brought up the Middle East because we talked about 416 00:22:09,160 --> 00:22:12,239 Speaker 1: a quote in the Financial Times this morning. I'm going 417 00:22:12,280 --> 00:22:14,520 Speaker 1: to share that quote with you. Ultimately, the FT put 418 00:22:14,520 --> 00:22:18,000 Speaker 1: together this wonderful story of developments over the weekend to 419 00:22:18,000 --> 00:22:20,920 Speaker 1: secure that deal between UBS and Credit Suite, and the 420 00:22:21,000 --> 00:22:23,199 Speaker 1: Saudis have been burnt. Let's be clear about that. They 421 00:22:23,240 --> 00:22:26,040 Speaker 1: were the top shareholder Saudi National Bank. This is a 422 00:22:26,119 --> 00:22:29,200 Speaker 1: quote in the story, according to one person close to 423 00:22:29,200 --> 00:22:32,000 Speaker 1: one of the three major shareholders of Credit suits. You 424 00:22:32,080 --> 00:22:34,720 Speaker 1: make fun of dictatorships and then you can change the 425 00:22:34,760 --> 00:22:38,000 Speaker 1: law over the weekend. What's the difference between Saudi Arabia 426 00:22:38,040 --> 00:22:41,480 Speaker 1: and Switzerland. Now it's really bad you know about the 427 00:22:41,560 --> 00:22:43,840 Speaker 1: kingdom you wrote the book. How do you think this 428 00:22:43,960 --> 00:22:48,240 Speaker 1: might change investment decisions from Saudi Arabia. Yeah, that's a 429 00:22:48,400 --> 00:22:52,119 Speaker 1: very interesting perspective, and I definitely think that the idea 430 00:22:52,200 --> 00:22:55,200 Speaker 1: of changing a lot over the weekend is absolutely something 431 00:22:55,240 --> 00:22:58,640 Speaker 1: that we see, you know, that we expect to come 432 00:22:58,680 --> 00:23:01,159 Speaker 1: from a dictatorship. We don't expect, you know, this is 433 00:23:01,200 --> 00:23:03,760 Speaker 1: a monarchy. They don't really run by rule of law, 434 00:23:04,600 --> 00:23:07,280 Speaker 1: you know. They they generally, I think, because they want 435 00:23:07,320 --> 00:23:09,600 Speaker 1: to be seen as a stable force, and they want 436 00:23:09,640 --> 00:23:12,440 Speaker 1: to be seen like like other Western economies tend to 437 00:23:12,480 --> 00:23:16,080 Speaker 1: try to adhere to kind of global principles, but when 438 00:23:16,119 --> 00:23:18,280 Speaker 1: it comes down to it, they're not. They don't have 439 00:23:18,359 --> 00:23:21,840 Speaker 1: to go through any kind of you know, real legal processes. 440 00:23:22,119 --> 00:23:25,359 Speaker 1: And I think that if the Saudi government or the 441 00:23:25,400 --> 00:23:29,199 Speaker 1: Saudi royal family is hurting for money due to you know, 442 00:23:29,280 --> 00:23:33,119 Speaker 1: investments or particularly bad investments, I definitely think that you 443 00:23:33,160 --> 00:23:36,000 Speaker 1: could look to see them potentially try to recoup that 444 00:23:36,240 --> 00:23:40,639 Speaker 1: from what really is the Saudi cash cow, Aramco. Aramco 445 00:23:40,800 --> 00:23:45,040 Speaker 1: had a banner year, their flush with cash, and would 446 00:23:45,080 --> 00:23:47,560 Speaker 1: it really be surprised to see if the you know, 447 00:23:47,600 --> 00:23:50,240 Speaker 1: Saudi's tried to or the royal family or the the 448 00:23:50,960 --> 00:23:54,840 Speaker 1: government try to kind of raise their you know, their 449 00:23:54,920 --> 00:23:57,720 Speaker 1: dividend or whatnot from the company in order to make 450 00:23:57,800 --> 00:24:02,639 Speaker 1: up for a potential shortfall caused by some bad investments. Ellen, 451 00:24:02,720 --> 00:24:05,960 Speaker 1: just real quick here thirty seconds. Is there another implication 452 00:24:06,040 --> 00:24:09,639 Speaker 1: in terms of what Saudi Arabia is willing to invest 453 00:24:09,680 --> 00:24:12,600 Speaker 1: in globally as they try to diversify away from just 454 00:24:12,840 --> 00:24:16,520 Speaker 1: oil streams of revenue. Yeah. I think that they are 455 00:24:16,600 --> 00:24:19,159 Speaker 1: investing all over the place, and I don't think that 456 00:24:19,200 --> 00:24:21,120 Speaker 1: this is going to stop them. In fact, I think 457 00:24:21,119 --> 00:24:23,720 Speaker 1: that this probably speaks to the fact that they need 458 00:24:24,200 --> 00:24:26,840 Speaker 1: more diversity and they feel like they've got a lot 459 00:24:26,840 --> 00:24:29,920 Speaker 1: of cash and they want to invest it. Ellen, thanks 460 00:24:29,920 --> 00:24:32,880 Speaker 1: for joining usanz wieni Wold. They put in enem Wold 461 00:24:32,920 --> 00:24:44,560 Speaker 1: with the Atlantic Council on a situation with Saudi Arabia. 462 00:24:46,760 --> 00:24:48,960 Speaker 1: We are joined by somebody who with intimate knowledge through 463 00:24:49,000 --> 00:24:52,520 Speaker 1: the cycles as well as understanding how to play in 464 00:24:52,560 --> 00:24:57,080 Speaker 1: some difficult moments. Dan Greenhouse, Chief Strategistic SOULS Alternative Asset Management, 465 00:24:57,520 --> 00:25:00,160 Speaker 1: How are you understanding, Dan, the bank distress that we've 466 00:25:00,160 --> 00:25:04,119 Speaker 1: seen so far and how far it goes well? Listen, 467 00:25:04,119 --> 00:25:05,879 Speaker 1: we're still in the early stages of this. I think 468 00:25:05,920 --> 00:25:08,520 Speaker 1: it's pretty clear we've got a couple of banks having 469 00:25:08,560 --> 00:25:12,760 Speaker 1: already failed, another couple of cheetering, but it's pretty clear 470 00:25:12,800 --> 00:25:14,600 Speaker 1: that there are these I don't want to use the 471 00:25:14,640 --> 00:25:16,840 Speaker 1: word systemic, but there are these issues that are plaguing 472 00:25:16,840 --> 00:25:19,040 Speaker 1: in a number of banks that a result in a 473 00:25:19,119 --> 00:25:20,960 Speaker 1: number of outcomes. It's going to be a compression, and 474 00:25:21,040 --> 00:25:23,480 Speaker 1: that it just margins as these banks have to pay 475 00:25:23,560 --> 00:25:26,440 Speaker 1: up to attract deposits. It's going to be a decrease 476 00:25:26,480 --> 00:25:29,919 Speaker 1: in loan growth, which, while not necessarily a substitute for 477 00:25:30,000 --> 00:25:32,200 Speaker 1: rate hikes, is going to somewhat do the Fed's job 478 00:25:32,240 --> 00:25:34,920 Speaker 1: for it and curtailing economic activity. It's going to be 479 00:25:34,920 --> 00:25:37,960 Speaker 1: a higher regulatory burden on those mids I dare I 480 00:25:37,960 --> 00:25:41,240 Speaker 1: say midsize but one hundred billion plus size banks, and 481 00:25:41,280 --> 00:25:43,840 Speaker 1: it's probably going to mean consolidation in the sector as well. 482 00:25:43,880 --> 00:25:47,199 Speaker 1: What it means for the economy at large, it is, 483 00:25:47,200 --> 00:25:49,720 Speaker 1: in my mind, probably only going to be negative through 484 00:25:49,760 --> 00:25:52,720 Speaker 1: that loan channel. I think there's a lot of people 485 00:25:52,800 --> 00:25:54,720 Speaker 1: running around talking about how this is in two thousand 486 00:25:54,720 --> 00:25:58,080 Speaker 1: and eight, as if that's somehow okay. But while the 487 00:25:58,119 --> 00:26:00,639 Speaker 1: issue itself is not at all arise the two thousand 488 00:26:00,640 --> 00:26:03,600 Speaker 1: and eight levels. I think, in an environment that is 489 00:26:03,640 --> 00:26:07,159 Speaker 1: now characterized by elevated interest rates, what's happen puting in 490 00:26:07,160 --> 00:26:08,800 Speaker 1: the banks isn't going to make things any better from 491 00:26:08,840 --> 00:26:11,720 Speaker 1: an economic standpoint either. You raise a really important point 492 00:26:11,760 --> 00:26:14,000 Speaker 1: in and I don't think that this has been emphasized enough. 493 00:26:14,240 --> 00:26:17,240 Speaker 1: People talk about what's going on as being a sort 494 00:26:17,240 --> 00:26:20,399 Speaker 1: of temporary tightening that they're going to pull back on 495 00:26:20,440 --> 00:26:23,800 Speaker 1: some of their credit expansion, at least the near term, 496 00:26:23,960 --> 00:26:26,560 Speaker 1: as some of these banks decide how much they can 497 00:26:26,560 --> 00:26:29,560 Speaker 1: count on deposits. But you're talking about a longer term 498 00:26:29,600 --> 00:26:32,959 Speaker 1: consequence of less lending. Can you talk a little bit 499 00:26:33,000 --> 00:26:35,920 Speaker 1: about which sectors of the economy that affects the most, 500 00:26:35,960 --> 00:26:38,720 Speaker 1: which sectors of the economy these banks tend to dominate 501 00:26:38,760 --> 00:26:42,719 Speaker 1: in when it comes to credit expansion. Well, we know, 502 00:26:43,320 --> 00:26:44,720 Speaker 1: and I'm certainly that the first one to say it, 503 00:26:44,720 --> 00:26:46,000 Speaker 1: and I won't be the last, but we know that 504 00:26:46,040 --> 00:26:48,399 Speaker 1: the commercial real estate market, which is already weak, is 505 00:26:48,400 --> 00:26:50,440 Speaker 1: probably going to be weaker. A lot of the smaller 506 00:26:50,440 --> 00:26:55,080 Speaker 1: and midsized banks do most of the lending. I forget 507 00:26:55,119 --> 00:26:57,760 Speaker 1: the exact number, but even though smaller banks have only 508 00:26:57,760 --> 00:27:01,879 Speaker 1: about forty of the bank existence, they represent about fifty 509 00:27:01,880 --> 00:27:03,919 Speaker 1: percent of the total loan book for the economy as 510 00:27:03,960 --> 00:27:06,480 Speaker 1: a whole, So they punch above their weight in that respect, 511 00:27:06,520 --> 00:27:10,040 Speaker 1: certainly with relation to their deposits. And the first point 512 00:27:10,040 --> 00:27:12,760 Speaker 1: you have to look at is the office market, in 513 00:27:12,760 --> 00:27:15,400 Speaker 1: the commercial real estate market, there are there's something going 514 00:27:15,400 --> 00:27:17,840 Speaker 1: on in the cities right now that's going to have 515 00:27:18,960 --> 00:27:21,639 Speaker 1: it's going to take multiple quarters, if not multiple years, 516 00:27:21,640 --> 00:27:24,679 Speaker 1: to fully play out as some of these leases reset. 517 00:27:24,720 --> 00:27:26,800 Speaker 1: And you can see this in the public markets for 518 00:27:27,080 --> 00:27:30,879 Speaker 1: those very large office rates. They're they're telling you something 519 00:27:30,960 --> 00:27:33,720 Speaker 1: is not right. And this type of a situation obviously 520 00:27:33,760 --> 00:27:36,840 Speaker 1: doesn't aid that aspect of the economy at all. It's 521 00:27:37,240 --> 00:27:39,800 Speaker 1: it's it's quite negative to say the least. What is 522 00:27:39,960 --> 00:27:42,399 Speaker 1: something is not right? Mean when it comes to the 523 00:27:42,400 --> 00:27:44,680 Speaker 1: trajectory of the economy in terms of when we see 524 00:27:44,680 --> 00:27:47,160 Speaker 1: a recession, how deep it will be, what we look 525 00:27:47,200 --> 00:27:51,480 Speaker 1: like on the other side, Well, from an office standpoint, specifically, 526 00:27:51,800 --> 00:27:54,920 Speaker 1: we know that depending on which city we're talking about, 527 00:27:54,600 --> 00:27:57,439 Speaker 1: the return to office, if you will, is running anywhere 528 00:27:57,440 --> 00:27:59,639 Speaker 1: from forty to sixty percent. There are some cities that 529 00:27:59,680 --> 00:28:02,360 Speaker 1: are there are some cities that are more. But let's 530 00:28:02,440 --> 00:28:04,720 Speaker 1: round and say that on balance, in the office market 531 00:28:04,760 --> 00:28:07,160 Speaker 1: across the country, and certainly in the call it the ten, 532 00:28:07,240 --> 00:28:10,520 Speaker 1: twenty or thirty largest markets, you only have about half 533 00:28:10,680 --> 00:28:13,240 Speaker 1: people back to work in any regular capacity at all. 534 00:28:13,320 --> 00:28:17,560 Speaker 1: So so that that as those leases roll off, everyone's 535 00:28:17,600 --> 00:28:19,919 Speaker 1: going to be dealing with the repercussions of what that 536 00:28:19,960 --> 00:28:23,680 Speaker 1: means from from a lending standpoint, from from an occupancy standpoint, 537 00:28:23,760 --> 00:28:27,159 Speaker 1: from a bank regulatory standpoint, that's that sector specifically for 538 00:28:27,200 --> 00:28:30,159 Speaker 1: the economy as a whole. I even't done the work myself, 539 00:28:30,240 --> 00:28:31,679 Speaker 1: so I'm not going to lie and say that I 540 00:28:31,720 --> 00:28:35,520 Speaker 1: know exactly how it pans out. But the curtailment of 541 00:28:35,560 --> 00:28:37,800 Speaker 1: loan activity, which is probably going to persist for several 542 00:28:37,880 --> 00:28:42,719 Speaker 1: quarters now, is not going to take a week econot 543 00:28:42,840 --> 00:28:45,560 Speaker 1: or an increasingly weak economic environment and make it any better. 544 00:28:45,920 --> 00:28:49,160 Speaker 1: The FED is we know, has interest rates at elevated levels. 545 00:28:49,440 --> 00:28:52,280 Speaker 1: I don't think they should raise rates tomorrow, but neither 546 00:28:52,320 --> 00:28:53,840 Speaker 1: do I think that that is the end of the 547 00:28:53,880 --> 00:28:57,680 Speaker 1: tightening cycle, because inflation is still running at quite elevated levels. 548 00:28:57,720 --> 00:29:01,400 Speaker 1: And to repeat a point I've made numerous times, and 549 00:29:01,440 --> 00:29:03,640 Speaker 1: it can't be said enough. Yes, the year of the 550 00:29:03,680 --> 00:29:06,040 Speaker 1: year rate is coming down, but the month over month rate, 551 00:29:06,320 --> 00:29:09,240 Speaker 1: either at the headline or the core supercore, is a 552 00:29:09,360 --> 00:29:12,160 Speaker 1: concerning levels from the FED standpoint, and that's much more 553 00:29:12,160 --> 00:29:14,800 Speaker 1: consequential for what the FED should do. So So, even 554 00:29:14,800 --> 00:29:18,760 Speaker 1: though in the immediate they may pause raising rates tomorrow 555 00:29:18,960 --> 00:29:21,000 Speaker 1: and I think ultimately that would be the right decision, 556 00:29:21,440 --> 00:29:23,880 Speaker 1: when you're dealing with point four point five point six 557 00:29:23,920 --> 00:29:27,600 Speaker 1: percent readings on CPI, there's very little they can do 558 00:29:27,680 --> 00:29:30,520 Speaker 1: in terms of easing to alleviate this crisis at all. 559 00:29:30,920 --> 00:29:33,440 Speaker 1: So your vantage point is coming from Soulis, which is 560 00:29:33,480 --> 00:29:38,560 Speaker 1: an alternative asset management company that oversees distressed debt opportunities 561 00:29:38,880 --> 00:29:43,200 Speaker 1: as well as long opportunities. I'm curious where you're sort 562 00:29:43,200 --> 00:29:46,640 Speaker 1: of seeing the most potential at a time when a 563 00:29:46,680 --> 00:29:48,560 Speaker 1: lot of people are struggling to get their hands around 564 00:29:48,600 --> 00:29:53,040 Speaker 1: exactly what the end result will be. Well, I don't 565 00:29:53,040 --> 00:29:57,440 Speaker 1: think the full ramifications of this episode has fully played 566 00:29:57,440 --> 00:29:59,080 Speaker 1: out as of yet, and that's going to take a 567 00:29:59,120 --> 00:30:01,600 Speaker 1: couple of quarters to do so, in what form and 568 00:30:01,680 --> 00:30:05,000 Speaker 1: exactly what sectors obviously will be on guard for In 569 00:30:05,040 --> 00:30:08,280 Speaker 1: the meantime, I think there are plenty of opportunities for 570 00:30:08,400 --> 00:30:10,280 Speaker 1: fun like ours. I mean, obviously you would like to 571 00:30:10,320 --> 00:30:14,960 Speaker 1: see exponentially more distress, exponentially more default, which we don't 572 00:30:15,000 --> 00:30:17,320 Speaker 1: have as of today. But there are still plenty of 573 00:30:17,320 --> 00:30:19,440 Speaker 1: sectors of the economy that look attracted to us without 574 00:30:19,440 --> 00:30:21,480 Speaker 1: weighing in at all about what we own or what 575 00:30:22,080 --> 00:30:26,560 Speaker 1: we may be doing. There's the change in behavior at 576 00:30:26,600 --> 00:30:29,240 Speaker 1: office I mentioned is something worth exploring. Who are the 577 00:30:29,240 --> 00:30:32,200 Speaker 1: winners and losers there? On the content and the media 578 00:30:32,160 --> 00:30:34,880 Speaker 1: and distribution side of things, there's a change in behavior 579 00:30:34,920 --> 00:30:37,320 Speaker 1: there that I don't think people are appreciating with what 580 00:30:37,360 --> 00:30:40,120 Speaker 1: it means for the streaming services and the movie theaters 581 00:30:40,120 --> 00:30:43,480 Speaker 1: and the vendors and those types of companies. In the 582 00:30:43,520 --> 00:30:48,200 Speaker 1: travel and leisure space hotel cruises, skiing, and those sorts 583 00:30:48,200 --> 00:30:51,120 Speaker 1: of sectors of the economy, there's a tremendous shift going 584 00:30:51,120 --> 00:30:53,880 Speaker 1: on in consumer behavior. And so in each one of 585 00:30:53,880 --> 00:30:57,480 Speaker 1: those sectors and others, there are clear winners and losers 586 00:30:57,760 --> 00:31:00,000 Speaker 1: on both the debt and the equity side of things, 587 00:30:59,800 --> 00:31:01,760 Speaker 1: and our job is obviously to sit through them to 588 00:31:01,800 --> 00:31:04,840 Speaker 1: find out whether or miss pricings and exploit them. And again, 589 00:31:04,920 --> 00:31:08,320 Speaker 1: even though we haven't seen the full ramifications of this episode. 590 00:31:08,520 --> 00:31:11,600 Speaker 1: In the meantime, I think we're we're actually pretty busy, 591 00:31:11,800 --> 00:31:14,240 Speaker 1: and I think there's plenty of stuff to be looking 592 00:31:14,240 --> 00:31:17,760 Speaker 1: at an explorery. In the aftermath of the Great Financial Crisis, 593 00:31:17,960 --> 00:31:20,840 Speaker 1: one of the most lucrative trades was Lehman claims. They 594 00:31:20,840 --> 00:31:23,760 Speaker 1: were claims from Lehman Brothers after they collapsed, and the 595 00:31:23,800 --> 00:31:26,480 Speaker 1: returns were pretty astronomical. I'm wondering, Dan, if there's an 596 00:31:26,520 --> 00:31:30,480 Speaker 1: analog here with the at ones with the contingent capital bonds, 597 00:31:30,680 --> 00:31:33,360 Speaker 1: maybe not from Credit Suis, but from other banks that 598 00:31:33,520 --> 00:31:36,200 Speaker 1: possibly don't look money good for a second, and then 599 00:31:36,200 --> 00:31:38,280 Speaker 1: all of a sudden the regulator step in and say, actually, 600 00:31:38,440 --> 00:31:41,080 Speaker 1: it's a pretty bad precedence to set. Is that something 601 00:31:41,120 --> 00:31:44,040 Speaker 1: that looks like it has potential as other investors see 602 00:31:44,080 --> 00:31:49,600 Speaker 1: this as uninvestable, Well, if there's as I'm now midlife 603 00:31:49,960 --> 00:31:52,120 Speaker 1: financially in terms of my work and career, I will 604 00:31:52,160 --> 00:31:56,400 Speaker 1: say that the bad precedent to be set is set 605 00:31:56,480 --> 00:32:00,600 Speaker 1: in every crisis, and never put it past allmakers to 606 00:32:00,640 --> 00:32:04,120 Speaker 1: set bad precedent and exploit these opportunities to quote unquote 607 00:32:04,160 --> 00:32:07,200 Speaker 1: change the rules with respect to the eighty one market. 608 00:32:07,200 --> 00:32:10,360 Speaker 1: Listen that story is clearly unfolding. You can see in 609 00:32:10,360 --> 00:32:13,400 Speaker 1: the performance of the various bank end of these who 610 00:32:13,520 --> 00:32:18,040 Speaker 1: has better language in their documents than others. I don't 611 00:32:18,040 --> 00:32:21,240 Speaker 1: know that we're not traditionally a financial fund, so I 612 00:32:21,280 --> 00:32:23,280 Speaker 1: don't want to say that we have any particular expertise 613 00:32:23,280 --> 00:32:26,480 Speaker 1: in this, but clearly that market is going to be 614 00:32:26,560 --> 00:32:28,640 Speaker 1: right for exploitation going forward. I think it's going to 615 00:32:28,720 --> 00:32:31,280 Speaker 1: be very I mean, at the outset, it looks like 616 00:32:31,280 --> 00:32:34,320 Speaker 1: it's going to be very difficult for investors to not 617 00:32:34,520 --> 00:32:37,440 Speaker 1: think that there is additional downside, to say the least, 618 00:32:38,080 --> 00:32:40,080 Speaker 1: to those investments. And again, that's not a small market. 619 00:32:40,120 --> 00:32:42,840 Speaker 1: That's two hundred fifty two hundred and seventy billion depending 620 00:32:42,880 --> 00:32:46,200 Speaker 1: on how you measure it, and considering sixteen seventeen billions 621 00:32:46,200 --> 00:32:48,400 Speaker 1: of them were just wiped out when people did not 622 00:32:48,480 --> 00:32:50,800 Speaker 1: think that was what was going to happen. I think 623 00:32:50,800 --> 00:32:52,440 Speaker 1: people are going to be taking a much closer look 624 00:32:52,440 --> 00:32:54,520 Speaker 1: at the rest of that market just real quick. Here, 625 00:32:54,680 --> 00:32:58,040 Speaker 1: does it also change the investment investing landscape for all 626 00:32:58,040 --> 00:33:01,640 Speaker 1: things Switzerland if they're willing to change the documents on 627 00:33:01,880 --> 00:33:06,600 Speaker 1: something like this or perhaps interpret it creatively. Well to 628 00:33:06,640 --> 00:33:08,680 Speaker 1: get back to my another point, I wouldn't I wouldn't 629 00:33:08,680 --> 00:33:12,000 Speaker 1: comment about Switzerland specifically, since that's no particular expertise of mine, 630 00:33:12,080 --> 00:33:15,000 Speaker 1: but but for governments as a whole, there's a very 631 00:33:15,000 --> 00:33:16,560 Speaker 1: famous saying, if you don't like the law, get a 632 00:33:16,600 --> 00:33:19,520 Speaker 1: new lawyer. And I think, whether it was OH eight, 633 00:33:20,240 --> 00:33:22,400 Speaker 1: or the European debt crisis early in the twenty ten 634 00:33:22,840 --> 00:33:27,200 Speaker 1: excuse me, or what's happening now, among others, lawmakers and 635 00:33:27,200 --> 00:33:31,400 Speaker 1: policymakers and politicians have never failed to change the rules 636 00:33:31,400 --> 00:33:34,160 Speaker 1: to suit their needs. And in some cases that's the 637 00:33:34,240 --> 00:33:36,880 Speaker 1: right course, in some cases it's not. But I think 638 00:33:36,880 --> 00:33:39,200 Speaker 1: everybody has to understand that that in the crisis is 639 00:33:39,560 --> 00:33:42,000 Speaker 1: likely to be the outcome. Dan Greenhouse, thank you so 640 00:33:42,080 --> 00:33:44,880 Speaker 1: much for being with us. Dan Greenhouse of Soli's Alternative 641 00:33:44,920 --> 00:33:49,640 Speaker 1: Asset Management. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, 642 00:33:49,680 --> 00:33:52,840 Speaker 1: and anywhere else you get your podcasts. Listen live every 643 00:33:52,880 --> 00:33:55,800 Speaker 1: weekday starting at seven am Eastern on Bloomberg dot Com, 644 00:33:55,800 --> 00:33:59,280 Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app. 645 00:33:59,560 --> 00:34:02,880 Speaker 1: You can watch us live on Bloomberg Television and always 646 00:34:02,960 --> 00:34:06,400 Speaker 1: on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, 647 00:34:06,440 --> 00:34:07,480 Speaker 1: and this is Bloomberg.