WEBVTT - Surveillance: Fed Pause with PGIM's Rosner 0:00:05.040 --> 0:00:08.880 This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyds, 0:00:08.880 --> 0:00:11.879 along with Tom Keane and Jonathan Farrell. Join us each 0:00:11.960 --> 0:00:15.720 day for insight from the best in economics, geopolitics, finance 0:00:15.760 --> 0:00:20.079 and investment. Subscribe to Bloomberg Surveillance Undermand on Apple, Spotify 0:00:20.160 --> 0:00:23.320 and anywhere you get your podcasts, and always on Bloomberg 0:00:23.360 --> 0:00:26.319 dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:26.560 --> 0:00:30.680 Lindsay Rosenan joins us now portfolio manager at PGIM Fixed Income. Lindsay, 0:00:30.760 --> 0:00:32.440 wonderful to catch up with you. We were lucky to 0:00:32.479 --> 0:00:34.920 catch up with your colleague Greg Peters on Sunday evening 0:00:34.920 --> 0:00:38.120 to talk about contingent convertibles, cocos, at ones, all those 0:00:38.159 --> 0:00:41.479 good things which turn out to be bad things. Lindsay, 0:00:42.000 --> 0:00:45.360 why have you managed your risk around those securities differently 0:00:45.440 --> 0:00:48.800 to maybe other shops and I'm thinking Investco PIMCO, which 0:00:48.960 --> 0:00:52.440 reportedly holding the bag on this one. Yeah. I think 0:00:52.479 --> 0:00:55.720 Greg said it best. The documentation around these kind of 0:00:55.760 --> 0:00:59.160 instruments have been particularly murky, and we had itself that 0:00:59.200 --> 0:01:01.760 we needed to go further down in the capital structure 0:01:01.800 --> 0:01:03.760 to really take advantage of the banks that we like. 0:01:04.480 --> 0:01:07.800 We really like US money center banks, particularly in the 0:01:07.800 --> 0:01:10.640 whold Co paper. We think that that looks really good, 0:01:10.640 --> 0:01:12.600 and we've had a lot of opportunities with a lot 0:01:12.600 --> 0:01:14.839 of conceptions in the past few months to buy banks 0:01:14.959 --> 0:01:17.840 much cheaper. Howd it needed to go into this risky thing, 0:01:17.880 --> 0:01:20.440 and obviously have been rewarded for staying away from it. 0:01:20.959 --> 0:01:23.360 That said, lindsay, there is a question about some of 0:01:23.360 --> 0:01:26.160 the regional banks and the credit of them, and whether 0:01:26.160 --> 0:01:28.440 there needs to be some sort of premium baked in 0:01:28.680 --> 0:01:33.360 because of the potential greater risks of less regulation and 0:01:33.440 --> 0:01:37.039 more deposit data. I think that's absolutely true, and that's 0:01:37.040 --> 0:01:38.880 also been our thesis that we want to be in 0:01:38.920 --> 0:01:41.160 the big US money center banks that got all that 0:01:41.280 --> 0:01:44.319 extra regulation after two thousand and eight. The idea that 0:01:44.360 --> 0:01:47.400 these regional banks were smaller may be less important to 0:01:47.440 --> 0:01:49.640 the structure. I think we've all learned that is not 0:01:49.720 --> 0:01:53.120 the case had it been compensated in terms of spreads, 0:01:53.480 --> 0:01:56.280 and haven't gone there specifically. I think something that you 0:01:56.320 --> 0:01:58.960 just talked about earlier, which is the kind of main 0:01:59.040 --> 0:02:02.560 street versus wolf mainstream banks at for regional banks, and 0:02:02.640 --> 0:02:04.760 I think going back to the whole idea of confidence. 0:02:05.160 --> 0:02:08.639 We have not solved that problem. There's fragility in the system, 0:02:08.680 --> 0:02:11.359 and a small business cannot operate with two hundred and 0:02:11.400 --> 0:02:14.760 fifty thousand at multiple regional banks. That is just not 0:02:14.800 --> 0:02:17.200 going to work. And so we very much are looking 0:02:17.200 --> 0:02:19.720 for a solution there, and it may take a while work. 0:02:19.720 --> 0:02:22.720 Hearing obviously that the government is studying. I was only 0:02:22.720 --> 0:02:25.640 a public policy major in college, so I don't know 0:02:25.680 --> 0:02:28.560 how long studying happens to last. But I can certainly 0:02:29.040 --> 0:02:32.360 say that small businesses are concerned. And you're actually seeing 0:02:32.400 --> 0:02:35.120 a lot of money moved to money market government funds, 0:02:35.360 --> 0:02:37.679 not the prime funds, and I think that's a big 0:02:37.720 --> 0:02:40.760 heads up that small businesses are very concerned with what's 0:02:40.800 --> 0:02:43.040 going on with regionals. This is a reason why Lenza. 0:02:43.120 --> 0:02:45.800 A lot of economists are trying to game out ongoing 0:02:45.880 --> 0:02:48.520 distress in the financial system and how many rate hikes 0:02:48.520 --> 0:02:51.919 that's equivalent to, right, what kind of credit tightening that implies? 0:02:52.040 --> 0:02:54.519 Bloomberg Economics coming out with fifty bases points of a 0:02:54.639 --> 0:02:57.720 rate hike from your vantage point, how much of a 0:02:57.720 --> 0:03:00.800 tightening feature is this? How much does it really impact 0:03:00.919 --> 0:03:04.880 credit quality that forces you to increase your expectation for 0:03:04.880 --> 0:03:09.800 credit spreads, for risks, for defaults. Yeah, it's hard to 0:03:09.800 --> 0:03:11.720 put an exact number on it. I think we're all 0:03:11.760 --> 0:03:14.320 trying to figure out what this looks like. But absolutely 0:03:14.360 --> 0:03:17.440 the credit box has tightened here. Lending standards are going 0:03:17.480 --> 0:03:21.240 to be much stricter going forward because you have this 0:03:21.480 --> 0:03:24.880 deposit flow. I think what's so different about the flavor 0:03:24.960 --> 0:03:26.920 of this crisis, if you want to call it that 0:03:27.000 --> 0:03:29.880 and banking this time around, is just how fast the 0:03:29.919 --> 0:03:32.200 money is and how digital it is. I mean, we 0:03:32.200 --> 0:03:34.920 can all move funny money in our own accounts from 0:03:34.920 --> 0:03:37.720 our phone with just a press on the screen. That 0:03:37.840 --> 0:03:41.080 was not the oad experience. So what we're seeing here 0:03:41.160 --> 0:03:44.480 is definitely that the risk of a recession has kicked up. 0:03:45.200 --> 0:03:48.160 It's a question of how much. Certainly we're seeing some 0:03:48.600 --> 0:03:52.480 resolve this morning in Europe European corporates or twenty basis 0:03:52.480 --> 0:03:54.960 points tighter this morning. Things feel better, as you mentioned, 0:03:55.000 --> 0:03:57.360 yields kind of across governments, whether it's in the US 0:03:57.480 --> 0:03:59.680 or abroad or higher. So there seems to be a 0:03:59.720 --> 0:04:04.000 little little bit of less concern. But we've got a 0:04:04.000 --> 0:04:06.000 lot to figure out as we wait here to hear 0:04:06.040 --> 0:04:08.000 what the FED is going to do tomorrow and what 0:04:08.040 --> 0:04:09.600 they kind of tell us they're going to do in 0:04:09.640 --> 0:04:12.600 the future. You mentioned speed. Matt Brood of Invesco talked 0:04:12.600 --> 0:04:14.880 about that with us yesterday and I think's an important point, 0:04:15.360 --> 0:04:17.880 just a reminder of how quickly some of these institutions 0:04:17.920 --> 0:04:20.479 can fail. And Lindsey, with that in mind, he pointed 0:04:20.520 --> 0:04:22.599 out that that's not the same as an industrial that's 0:04:22.600 --> 0:04:25.320 not the same story. There should be maybe a valuation 0:04:25.400 --> 0:04:29.039 gap between these different industries now, similar to what we 0:04:29.080 --> 0:04:31.640 saw after eight and then see the question I asked 0:04:31.640 --> 0:04:34.320 Matt was ultimately how long that can last? How long 0:04:34.320 --> 0:04:36.640 does that take to well ultimately resolve that gap that 0:04:36.720 --> 0:04:40.800 opens up between one industry and all the rest. Yeah, 0:04:40.800 --> 0:04:43.520 there is no reason that industrials and banks have to 0:04:43.560 --> 0:04:46.119 trade on top of each other. In fact, historically banks 0:04:46.320 --> 0:04:49.400 created ruin industrials. I create that we've really liked since 0:04:49.480 --> 0:04:53.039 last year was owning banks versus industrials because you're compensated 0:04:53.040 --> 0:04:54.680 with more spread. But I think, going back to what 0:04:54.680 --> 0:04:57.240 we said at the very beginning, what is crucial is 0:04:57.320 --> 0:05:00.000 that it's what banks that you own, and so much 0:05:00.120 --> 0:05:02.240 that I think we believe that in terms of active 0:05:02.279 --> 0:05:05.599 management is teasing out who are going which which balance 0:05:05.640 --> 0:05:07.719 sheets are going to do well, and I think we've 0:05:07.760 --> 0:05:10.880 just got a clear support here for the big banks 0:05:11.240 --> 0:05:14.240 and so the big banks can rally got to squeeze 0:05:14.240 --> 0:05:16.040 it in. Then you mentioned the FED. What are you 0:05:16.080 --> 0:05:20.760 in the team tomorrow twenty five? Nothink we are. Our 0:05:20.800 --> 0:05:23.760 base case is twenty five. I think that base case 0:05:23.880 --> 0:05:28.400 isn't with a major degree of confidence because there's there's 0:05:28.440 --> 0:05:31.160 a lot of concerns. I don't think, though we are 0:05:31.200 --> 0:05:33.560 in the camp that if the FED were too pause. 0:05:34.000 --> 0:05:37.039 We don't think that the suggestion there is that there 0:05:37.160 --> 0:05:39.400 is a crisis of brewing and they know something that 0:05:39.440 --> 0:05:41.479 we don't know. I think you discussed us with Greg 0:05:41.480 --> 0:05:45.040 on Sunday night. Instead, if they pause, I mean they 0:05:45.040 --> 0:05:47.560 can pause, right. They have another chance to hype six 0:05:47.600 --> 0:05:49.640 weeks from now, so it's not like they pause and 0:05:49.680 --> 0:05:53.039 they're never allowed to hype. They have that flexibility. That's 0:05:53.080 --> 0:05:55.560 part of their doctrine. And I think we shouldn't panic 0:05:55.600 --> 0:05:58.200 if we see them pause. Personally, I'd like them to pause. 0:05:58.440 --> 0:06:01.520 I'd like them to see sometime in between for us 0:06:01.520 --> 0:06:03.760 to work out what's been happening in the banking sector. 0:06:04.000 --> 0:06:06.400 All this happened in this past weekend last week, right, 0:06:06.640 --> 0:06:08.279 so we get a little bit of a breather to 0:06:08.320 --> 0:06:10.880 figure out what's going on with markets. That's just my 0:06:10.960 --> 0:06:18.560 two cents, Lindsay, thanks for that. Lindsay Rosener, the of PGM. 0:06:18.600 --> 0:06:20.960 I like your description of the FED meeting. I don't know, 0:06:21.040 --> 0:06:23.160 do you know? I don't know, you know, Christian will 0:06:23.200 --> 0:06:26.880 A Glissman might know, Managing director for Portfolio Strategy at 0:06:26.880 --> 0:06:29.400 Goldman Sachs. Christian joins us right now. Christian wanted for 0:06:29.520 --> 0:06:31.760 to hear from you, sir. Welcome to the program. This 0:06:31.880 --> 0:06:34.560 came from Dario Perkins over in London this morning from 0:06:34.600 --> 0:06:37.080 ts Lombardy said central banks are stuck between the ghosts 0:06:37.080 --> 0:06:40.440 of the seventies and their PTSD from two thousand and eight. 0:06:40.680 --> 0:06:46.159 He said, I reckon PTSD wins out. What do you reckon? Yeah, 0:06:46.200 --> 0:06:48.719 it certainly looks like that. I mean certainly near term. 0:06:48.760 --> 0:06:53.799 I mean, not to forget the inflation normalization progress would 0:06:53.800 --> 0:06:57.560 have been very slow anyhole, and I think to some extent, 0:06:58.279 --> 0:07:00.440 you know, we work quite confident in market, were quite 0:07:00.440 --> 0:07:05.240 confident inflation expectations never unanchored like they did in the seventies. 0:07:05.440 --> 0:07:08.400 And so there was this kind of calm and inflation 0:07:08.440 --> 0:07:11.720 credibility you carried on. So I think the bigger concern 0:07:11.840 --> 0:07:14.800 is really banking systemic stress Again, so I would also 0:07:14.880 --> 0:07:19.880 lean towards kind of GSC type concerns dominating right now. 0:07:20.480 --> 0:07:23.720 How do you play through the concern versus the opportunity, 0:07:24.000 --> 0:07:26.560 versus saying, Okay, when you smell blood in the water, 0:07:26.640 --> 0:07:30.280 sometimes it's time to pounds. Yeah. I mean, as always, 0:07:30.320 --> 0:07:33.120 you want to see some type of overshoots, you want 0:07:33.160 --> 0:07:36.840 to see some type of asymmetry arising, and I'm not 0:07:36.920 --> 0:07:39.760 quite sure we're there yet. The challenge you had was 0:07:39.880 --> 0:07:42.640 that coming into the year, people were getting quite excited, 0:07:43.120 --> 0:07:45.960 despite the fact that you're late cycle, despite the fact 0:07:45.960 --> 0:07:49.400 that the FETE has pushed up the cost of capital materially, 0:07:49.680 --> 0:07:52.080 there was the sense that the US can deal with it. 0:07:52.080 --> 0:07:54.880 It's resilient. As you showed earlier, the spot data is 0:07:54.880 --> 0:07:58.840 still resilient, and you're China reopening, Europe having less of 0:07:58.840 --> 0:08:02.600 an energy crisis. So our risk appetite indicator went up 0:08:02.640 --> 0:08:04.520 to kind of zero point seven, which is one of 0:08:04.520 --> 0:08:07.960 the higher levels. So that has no unwound, but you're 0:08:08.000 --> 0:08:10.720 not really at bearish levels, And I think what really 0:08:10.760 --> 0:08:14.280 worries me is risk premier. The rates markets are very 0:08:14.320 --> 0:08:17.040 clearly sending us a very bearish signal, Like you have 0:08:17.120 --> 0:08:19.520 the front and pricing cuts from the fat, you have 0:08:19.600 --> 0:08:22.960 bulls deepening in the two Stens curve. All of those 0:08:22.960 --> 0:08:26.320 are signals that recession risk is being pulled forward. But 0:08:26.360 --> 0:08:29.280 if you look at risk premier, especially equity risk PERIA, 0:08:29.320 --> 0:08:31.480 and they're quite low. So I'm not quite sure we 0:08:31.600 --> 0:08:35.200 have that type of asymmetry, that type of washout where 0:08:35.200 --> 0:08:37.720 you can really say, there's a huge amount of opportunity. 0:08:38.200 --> 0:08:40.679 What are you looking at though, to buy if that 0:08:40.800 --> 0:08:43.800 volatility does sort of start to wash out the European 0:08:43.840 --> 0:08:47.760 banks of the US banks. I mean, that's quite interesting 0:08:48.240 --> 0:08:51.880 discussion because banks there's clearly stress here, and there is 0:08:51.960 --> 0:08:54.720 more overshoots in terms of valuations, in terms of credit. 0:08:55.240 --> 0:08:58.400 So I think at the margin that is an area 0:08:58.440 --> 0:09:01.000 where you can look. But the uncertain is huge, and 0:09:01.040 --> 0:09:04.280 it's a very leverage business model, and and systemic stress 0:09:04.760 --> 0:09:07.760 is kind of going in waves at this juncture. So 0:09:07.800 --> 0:09:09.960 it's a bit early. But if you ask me which 0:09:09.960 --> 0:09:13.000 banks to go for it, fields, the European banks have 0:09:13.080 --> 0:09:15.599 a slightly different setup because they have less of a 0:09:15.640 --> 0:09:20.960 liquidity problem. They had a systemic capital concern, a profitability problem, 0:09:21.000 --> 0:09:24.160 and I think that seems to have been put under control. 0:09:25.000 --> 0:09:28.040 Whereas I think from a deposit side of things, you 0:09:28.080 --> 0:09:30.400 have less pressure, you have less liquidity pressure. As a 0:09:30.400 --> 0:09:33.720 different setup, there's not even that many money market funds 0:09:33.720 --> 0:09:36.920 in Europe where actually savers could park their cash. So 0:09:36.960 --> 0:09:39.640 it feels like there's a slightly different problem in the US. 0:09:39.720 --> 0:09:42.439 That problem might linger a bit longer, especially if the 0:09:42.520 --> 0:09:45.040 fat continuous tightening. Well, Christian, how much of a challenge 0:09:45.080 --> 0:09:47.280 is that both statement in the yield curve to the 0:09:47.320 --> 0:09:50.760 bank's code you're ultimately making. Yeah, I mean, like as 0:09:50.800 --> 0:09:52.800 I said, like the US banks, I don't think they're 0:09:52.800 --> 0:09:55.520 completely in the clean yet. I mean that bulls deepening, 0:09:55.559 --> 0:09:59.800 as you know, was probably exacerbated by positioning where you 0:09:59.840 --> 0:10:04.040 have this enormous rates volatility driven by macro investors unwinding 0:10:04.679 --> 0:10:07.880 these hawkish calls into the central bank season. So so 0:10:07.920 --> 0:10:09.719 we need to see where it does settles. If that 0:10:09.840 --> 0:10:13.600 bullis steepening continues, it also comes from very inverted levels. 0:10:13.880 --> 0:10:16.920 We find that the risk to equities increases the more 0:10:17.120 --> 0:10:19.839 they'd curve. Bulls steepens. So right now it's at very 0:10:19.840 --> 0:10:23.359 inverted levels. Has bullys stepened a bit? If that process continues, 0:10:23.800 --> 0:10:26.480 I would be careful to take any cyclical risk, and 0:10:26.880 --> 0:10:29.840 you would certainly expect equities will underperform bonds. Do you 0:10:29.840 --> 0:10:31.880 have a base case right now, though, Christian, because from 0:10:31.920 --> 0:10:34.240 what you're saying, it sounds like perhaps the situation in 0:10:34.280 --> 0:10:36.520 Europe might have been a head fake and you'd expect 0:10:36.559 --> 0:10:40.120 further inversion again. Yeah, I mean it looks a bit 0:10:40.160 --> 0:10:42.840 like that. Our base case from the economous you know, 0:10:42.920 --> 0:10:45.440 both in Europe and in the US, is that we're 0:10:45.480 --> 0:10:49.280 not done yet on the hiking cycles. There's this idea 0:10:49.280 --> 0:10:54.880 of separation between systemic stress and inflation fighting, and if 0:10:54.920 --> 0:10:58.600 that's true, it's a bit premature to see that bulls steepening. 0:10:58.880 --> 0:11:00.720 But we have to listen to the market a bit. 0:11:00.840 --> 0:11:03.680 I think the market certainly is worried that we reached 0:11:03.720 --> 0:11:07.400 a point where central banks are constrained to hike, and 0:11:07.480 --> 0:11:11.160 where this financial conditions tightening, which has been relatively controlled 0:11:11.440 --> 0:11:13.880 for most of last year, driven by front end rates, 0:11:14.160 --> 0:11:17.520 has become much less unpredictable, much less predictable and a 0:11:17.520 --> 0:11:20.640 bit more uncontrollable and that means that you have much 0:11:20.679 --> 0:11:22.640 more risk of an error, You have much more risk 0:11:22.800 --> 0:11:26.440 of central banks having having to back paddle like Christian. 0:11:26.520 --> 0:11:39.839 Thanks for that, Christian milliklishman of government. But let's really 0:11:39.880 --> 0:11:43.359 get into how we can understand the trajectory of inflation 0:11:43.640 --> 0:11:45.480 and how big of a battle it's going to be 0:11:45.520 --> 0:11:47.679 for the Federal Reserve even as they have an eye 0:11:47.720 --> 0:11:49.880 toward the banks. Dean Marki joining us right now, Chief 0:11:49.960 --> 0:11:53.200 US Economistic points seventy two. Dean, what's your take on that? 0:11:53.440 --> 0:11:56.280 How do you understand the inflationary impulse and how much 0:11:56.280 --> 0:12:02.319 it's actually been dampened. Well, the recent data have suggested 0:12:02.440 --> 0:12:05.680 that inflation is not coming down as fast as the 0:12:05.720 --> 0:12:08.880 previous data might have suggested, and this does interfere with 0:12:08.960 --> 0:12:13.800 the fed's narrative that we're headed down in a steady way, 0:12:13.840 --> 0:12:16.360 down to three and a half percent on core PC 0:12:16.559 --> 0:12:18.800 by the end of the year and even lower after that. 0:12:19.440 --> 0:12:22.200 The recent data just don't show much slowing and I 0:12:22.280 --> 0:12:25.240 do think that is important to the Fed's decision this week. 0:12:26.000 --> 0:12:28.800 So what does that mean in terms of them having 0:12:28.800 --> 0:12:31.040 to raise rates by twenty five basis points? So that 0:12:31.040 --> 0:12:35.360 that should be digestible for the markets. I do think 0:12:35.400 --> 0:12:37.679 it's that the FED is likely to raise rates by 0:12:37.679 --> 0:12:41.120 twenty five basis points this week. The data certainly point 0:12:41.160 --> 0:12:44.040 in that direction, whether it's the very strong employment data, 0:12:44.320 --> 0:12:47.440 the inflation data that's come out less favorable for the 0:12:47.440 --> 0:12:51.800 FED than expected, and actually GDP growth is picking up 0:12:51.800 --> 0:12:54.520 in the first quarter, it's not slowing down the way 0:12:54.640 --> 0:12:58.320 many have been expecting. So that economic data are telling 0:12:58.360 --> 0:13:00.760 us very clearly that the FED should be continuing to 0:13:00.840 --> 0:13:04.240 raise rates. Now, there's other factors the Fed's worried about, 0:13:04.760 --> 0:13:07.080 but I think that's what's going to be the dominant 0:13:07.160 --> 0:13:09.960 force for the FED. They think they have other tools 0:13:10.000 --> 0:13:13.480 to address banking system issues and problems at the banks, 0:13:13.960 --> 0:13:16.880 and that monetary policy should be aimed at getting inflation 0:13:16.920 --> 0:13:19.560 back to target. You know, my favorite thing about this 0:13:19.720 --> 0:13:21.760 momenting is that you have five guests on may all 0:13:21.800 --> 0:13:23.920 say something completely different and then say you're looking at 0:13:23.920 --> 0:13:26.160 the wrong data. And some people will come on and 0:13:26.200 --> 0:13:30.600 they'll say, Okay, sure, that backward looking data shows resilience 0:13:30.800 --> 0:13:34.040 and a sense of inflation that hasn't died down nearly enough. 0:13:34.080 --> 0:13:36.240 And other people say, yeah, you've got to keep looking 0:13:36.280 --> 0:13:38.679 at that because it's been right So where do you 0:13:38.800 --> 0:13:41.600 sort of make the argument that you have to consider 0:13:41.640 --> 0:13:44.560 this data that maybe backward looking, but really gives you 0:13:44.760 --> 0:13:47.600 some clean sense of where we are now. Well, I 0:13:47.600 --> 0:13:50.640 think the data tells us where we were coming into 0:13:50.679 --> 0:13:55.200 this past two weeks, and that where we were is 0:13:55.200 --> 0:13:58.760 an economy that was growing at a pretty strong rate, 0:14:00.000 --> 0:14:02.600 clayment rate very low, and inflation way above what the 0:14:02.600 --> 0:14:05.800 FED wants it to be. Now the FED has to 0:14:05.840 --> 0:14:09.040 think about does the last two weeks events mean that 0:14:09.520 --> 0:14:12.440 the data don't matter anymore? I think it's too strong 0:14:12.480 --> 0:14:14.760 to say that. I think the FED will be thinking 0:14:14.760 --> 0:14:17.440 about how much credit tightening is going to be happening 0:14:17.720 --> 0:14:20.040 as a result of the problems at the banks. But 0:14:20.160 --> 0:14:22.120 unless the FED is convinced that there's going to be 0:14:22.160 --> 0:14:25.320 a sudden and severe stop in credit that means no 0:14:25.400 --> 0:14:28.200 further rate hikes are required, I think the FED will 0:14:28.240 --> 0:14:31.720 go ahead with their steady rate hikes this week. So 0:14:31.840 --> 0:14:35.120 people argue that de facto there will be a credit 0:14:35.160 --> 0:14:37.640 tightening by some of these medium sized banks that are 0:14:37.640 --> 0:14:40.080 going to restrict who they loan to and how much 0:14:40.120 --> 0:14:43.480 they lend. You make it an argument that that doesn't 0:14:43.480 --> 0:14:47.560 necessarily mean some sort of sudden curtailing of economic activity. 0:14:47.600 --> 0:14:52.120 Can you elaborate on why that's an important important realization 0:14:52.560 --> 0:14:56.480 to inform what the FED has to do and respond well? 0:14:56.520 --> 0:14:58.800 I think, you know, one has to think about what's 0:14:58.920 --> 0:15:01.720 happening at the banks. You know that the very large 0:15:01.760 --> 0:15:05.200 banks don't seem to be having a problem with extending 0:15:05.240 --> 0:15:07.160 credit at this time, at least in a way that 0:15:07.200 --> 0:15:10.160 would cause a sudden stop and credit. There is credit 0:15:10.200 --> 0:15:12.440 tightening in general going on like there usually isn't a 0:15:12.520 --> 0:15:16.240 fad tightening cycle. But small and medium sized banks, the 0:15:16.280 --> 0:15:19.560 real question is does the typical small and medium sized 0:15:19.600 --> 0:15:22.960 bank out there have a severe deposit outflow right now 0:15:23.240 --> 0:15:25.840 that's going to cause them to make say we're not 0:15:25.880 --> 0:15:28.520 making more loans at all. You know, that would be 0:15:28.560 --> 0:15:31.200 what a severe and studden stop and credit would look like, 0:15:31.520 --> 0:15:35.160 and that would be in a sense positive to immediately 0:15:35.200 --> 0:15:40.800 stop tightening if that became apparent. My perception from various 0:15:40.840 --> 0:15:44.080 things is that that's not happening right now. It certainly 0:15:44.160 --> 0:15:46.320 is happening at some of the trouble banks, but most 0:15:46.360 --> 0:15:50.400 medium and small size banks do not have severe deposit 0:15:50.440 --> 0:15:54.000 outflow problems right now, and therefore they are likely to 0:15:54.000 --> 0:15:58.960 continue to bake some credit available to businesses and households. 0:15:59.000 --> 0:16:01.440 If that's right, and there is more of a gradual 0:16:01.480 --> 0:16:05.440 credit tightening process underway rather than a severe and sudden stop. 0:16:05.760 --> 0:16:08.480 So how far away are we from going back to 0:16:08.520 --> 0:16:11.440 a no landing discussion or going back to this idea 0:16:11.520 --> 0:16:15.040 that we could just softly glide path lower regardless of 0:16:15.080 --> 0:16:17.160 some of the recent troubles that we've seen at banks. 0:16:18.680 --> 0:16:20.560 You know, I think that's something that will be sorting 0:16:20.560 --> 0:16:23.840 out in the coming week. So, you know, if I'm 0:16:23.920 --> 0:16:27.240 right that this is more of a gradual credit tightening process, 0:16:27.720 --> 0:16:30.640 then the very strong economic data that we've been seeing 0:16:30.840 --> 0:16:33.480 does continue to matter, and this will be a headwind 0:16:33.520 --> 0:16:36.160 against that strength in the data. And I do think 0:16:36.160 --> 0:16:40.560 there are some forces pushing the economy forward that are underappreciated, 0:16:40.920 --> 0:16:44.280 like the continued normalization of the service sector, which continues 0:16:44.320 --> 0:16:47.960 to add jobs at a tremendous pace every month. And 0:16:48.040 --> 0:16:50.480 also I think that the strength of the consumer matters 0:16:50.520 --> 0:16:54.680 here as well. So you know, if those matter in 0:16:54.760 --> 0:16:57.120 terms of the momentum of the economy, the credit tightening 0:16:57.200 --> 0:16:59.520 is pushing against that, and what we'll be trying to 0:16:59.520 --> 0:17:02.640 do is way those two opposing forces going forward? So 0:17:02.640 --> 0:17:05.320 what do you make of this narrative table Tennis? As 0:17:05.400 --> 0:17:07.160 James Afy put it, I mean, what do you make 0:17:07.160 --> 0:17:10.600 of this idea that people are just basically turning themselves 0:17:10.640 --> 0:17:14.920 in circles trying to understand the moment to moment gyrations 0:17:14.960 --> 0:17:17.360 in a market that is more volatile than it's been 0:17:17.440 --> 0:17:22.800 for decades. I mean, to me, it just reflects the 0:17:22.840 --> 0:17:27.960 difficulty of the situation. We're dealing with an unknowable amount 0:17:28.160 --> 0:17:30.679 of financial stress. You know, how bad is it going 0:17:30.720 --> 0:17:32.960 to get in the next two weeks? How bad is 0:17:33.000 --> 0:17:35.840 the credit tightening that results from this financial stress going 0:17:35.880 --> 0:17:38.600 to be? It's these are very difficult things, and markets 0:17:38.600 --> 0:17:41.760 are struggling to figure it out. So we all have 0:17:41.840 --> 0:17:44.560 our own individual views on things, but the market's kind 0:17:44.600 --> 0:17:46.800 of bouncing back and forth trying to figure out which 0:17:46.880 --> 0:17:49.119 narrative is correct one of the biggest issues Dad, and 0:17:49.119 --> 0:17:51.239 I'd love to get your thoughts before we have to 0:17:51.280 --> 0:17:55.320 go about the longer term trajectory of inflation. This question 0:17:55.359 --> 0:17:58.160 of are we heading back to a two percent inflation 0:17:58.320 --> 0:18:00.359 kind of reality, which is really what the market is 0:18:00.359 --> 0:18:01.920 pricing in. If you take a look at the five 0:18:01.960 --> 0:18:05.359 and ten year inflation expectations, or are we heading into 0:18:05.400 --> 0:18:08.560 something where this FED reserve will tolerate a much higher 0:18:08.560 --> 0:18:11.280 pace of inflation to avoid some of the disruptions that 0:18:11.320 --> 0:18:14.800 we've seen in the banking sector. I mean, I think 0:18:14.880 --> 0:18:17.480 that's one of the reasons why this week will be 0:18:17.520 --> 0:18:20.960 an important signal from the FED. If the FED is 0:18:21.000 --> 0:18:24.439 actually putting inflation front and center, I think it is 0:18:24.480 --> 0:18:28.639 important for them to continue to tighten conditions and signal 0:18:28.720 --> 0:18:31.520 that that is our main focus at this point. If 0:18:31.520 --> 0:18:35.280 the FED does seem to be distracted and focused more 0:18:35.359 --> 0:18:38.679 on other issues then inflation, you know, then I do 0:18:38.760 --> 0:18:42.520 think this impression that the FED is going to allow 0:18:42.560 --> 0:18:47.000 inflation to persistently run above target will gain traction. Dean 0:18:47.080 --> 0:18:53.600 Mackey of Point seventy two, thank you so much. Alan Walt, 0:18:53.640 --> 0:18:56.120 join us now sending a fellow at the Atlantic Council. 0:18:56.400 --> 0:18:58.320 And then can you tell us how important it is 0:18:58.359 --> 0:19:03.600 how dependent show produces on regional banks in America? Well, 0:19:03.880 --> 0:19:07.000 I'm not going to totally speculate on just how dependent 0:19:07.080 --> 0:19:09.120 they are, but I'm going to guess that a lot 0:19:09.160 --> 0:19:13.200 of them have actually probably reduced some of the exposure 0:19:13.280 --> 0:19:16.639 that they might ordinarily have been facing, given the fact 0:19:16.640 --> 0:19:20.240 that for some time now, we've seen lenders tightening and 0:19:20.720 --> 0:19:24.080 not you know, shelling out capital to oil producers. You know, 0:19:24.640 --> 0:19:27.040 this is an industry that's gone through a huge amount 0:19:27.040 --> 0:19:31.480 of consolidation over the past you know, decade essentially, or 0:19:31.920 --> 0:19:34.200 or a little less in a decade, and so I 0:19:35.119 --> 0:19:38.600 venture that they're probably not quite as exposed as say, 0:19:38.760 --> 0:19:42.320 some of the startups in the Silicon Valley area are. 0:19:43.240 --> 0:19:47.080 My concern is definitely on the you know, the demand 0:19:47.119 --> 0:19:49.720 side and the supply side. It's it's a very interesting 0:19:49.760 --> 0:19:53.640 crisis because we're not really seeing that much in terms 0:19:53.680 --> 0:19:56.920 of a change in the supply demand forecast, but prices 0:19:57.119 --> 0:20:02.480 have moved substantially, and forecast for prices are also on 0:20:02.480 --> 0:20:06.000 the move. Talking about the read through from the banking crisis, 0:20:06.040 --> 0:20:10.600 I'll give you another, perhaps somewhat fantastical scenario. What happens 0:20:10.760 --> 0:20:14.159 if the Middle East investors that lost money and some 0:20:14.240 --> 0:20:16.520 of these banking issues I'm thinking of Muhammad bail and 0:20:16.520 --> 0:20:20.840 Soon and Saudi Arabia suddenly want prices to be higher 0:20:20.840 --> 0:20:23.120 if they've lost money in markets this year. What if 0:20:23.119 --> 0:20:25.960 they actually don't want to produce more oil because they 0:20:26.000 --> 0:20:28.239 want prices to go up. How much. Is that a 0:20:28.280 --> 0:20:31.520 feature in the OPEC response mechanism to all this, I 0:20:31.560 --> 0:20:35.400 would say that's definitely of concern. I think that OPEC, definitely, 0:20:35.640 --> 0:20:38.240 or at least Saudi Arabia, has a particular range that 0:20:38.320 --> 0:20:40.800 they like to see prices in. And I do think 0:20:40.800 --> 0:20:44.160 that the triple digits to them are too high because 0:20:44.400 --> 0:20:47.840 that then threatens them on the demand side. So you know, 0:20:47.880 --> 0:20:50.720 if prices hit eighty this summer, I think that that's 0:20:50.800 --> 0:20:53.359 still in a good range for them, and they're not 0:20:53.400 --> 0:20:56.360 going to be making any kinds of supply cuts. Now. 0:20:56.400 --> 0:20:59.760 If we see a sudden drop in oil prices due 0:20:59.800 --> 0:21:03.960 to say a major global financial crisis, then we should 0:21:04.000 --> 0:21:06.560 definitely look for OPEC to act just like they did 0:21:06.680 --> 0:21:10.680 in two thousand and eight to kind of protect oil prices. 0:21:10.880 --> 0:21:13.400 What I think is more interesting here is they definitely 0:21:13.440 --> 0:21:15.960 see this, and they came out with some comments last 0:21:15.960 --> 0:21:18.920 week that you know, this is mostly a financial issue. 0:21:18.920 --> 0:21:21.400