Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyds,
Speaker 1: along with Tom Keane and Jonathan Farrell. Join us each
Speaker 1: day for insight from the best in economics, geopolitics, finance
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Speaker 1: Lindsay Rosenan joins us now portfolio manager at PGIM Fixed Income. Lindsay,
Speaker 1: wonderful to catch up with you. We were lucky to
Speaker 1: catch up with your colleague Greg Peters on Sunday evening
Speaker 1: to talk about contingent convertibles, cocos, at ones, all those
Speaker 1: good things which turn out to be bad things. Lindsay,
Speaker 1: why have you managed your risk around those securities differently
Speaker 1: to maybe other shops and I'm thinking Investco PIMCO, which
Speaker 1: reportedly holding the bag on this one. Yeah. I think
Speaker 1: Greg said it best. The documentation around these kind of
Speaker 1: instruments have been particularly murky, and we had itself that
Speaker 1: we needed to go further down in the capital structure
Speaker 1: to really take advantage of the banks that we like.
Speaker 1: We really like US money center banks, particularly in the
Speaker 1: whold Co paper. We think that that looks really good,
Speaker 1: and we've had a lot of opportunities with a lot
Speaker 1: of conceptions in the past few months to buy banks
Speaker 1: much cheaper. Howd it needed to go into this risky thing,
Speaker 1: and obviously have been rewarded for staying away from it.
Speaker 1: That said, lindsay, there is a question about some of
Speaker 1: the regional banks and the credit of them, and whether
Speaker 1: there needs to be some sort of premium baked in
Speaker 1: because of the potential greater risks of less regulation and
Speaker 1: more deposit data. I think that's absolutely true, and that's
Speaker 1: also been our thesis that we want to be in
Speaker 1: the big US money center banks that got all that
Speaker 1: extra regulation after two thousand and eight. The idea that
Speaker 1: these regional banks were smaller may be less important to
Speaker 1: the structure. I think we've all learned that is not
Speaker 1: the case had it been compensated in terms of spreads,
Speaker 1: and haven't gone there specifically. I think something that you
Speaker 1: just talked about earlier, which is the kind of main
Speaker 1: street versus wolf mainstream banks at for regional banks, and
Speaker 1: I think going back to the whole idea of confidence.
Speaker 1: We have not solved that problem. There's fragility in the system,
Speaker 1: and a small business cannot operate with two hundred and
Speaker 1: fifty thousand at multiple regional banks. That is just not
Speaker 1: going to work. And so we very much are looking
Speaker 1: for a solution there, and it may take a while work.
Speaker 1: Hearing obviously that the government is studying. I was only
Speaker 1: a public policy major in college, so I don't know
Speaker 1: how long studying happens to last. But I can certainly
Speaker 1: say that small businesses are concerned. And you're actually seeing
Speaker 1: a lot of money moved to money market government funds,
Speaker 1: not the prime funds, and I think that's a big
Speaker 1: heads up that small businesses are very concerned with what's
Speaker 1: going on with regionals. This is a reason why Lenza.
Speaker 1: A lot of economists are trying to game out ongoing
Speaker 1: distress in the financial system and how many rate hikes
Speaker 1: that's equivalent to, right, what kind of credit tightening that implies?
Speaker 1: Bloomberg Economics coming out with fifty bases points of a
Speaker 1: rate hike from your vantage point, how much of a
Speaker 1: tightening feature is this? How much does it really impact
Speaker 1: credit quality that forces you to increase your expectation for
Speaker 1: credit spreads, for risks, for defaults. Yeah, it's hard to
Speaker 1: put an exact number on it. I think we're all
Speaker 1: trying to figure out what this looks like. But absolutely
Speaker 1: the credit box has tightened here. Lending standards are going
Speaker 1: to be much stricter going forward because you have this
Speaker 1: deposit flow. I think what's so different about the flavor
Speaker 1: of this crisis, if you want to call it that
Speaker 1: and banking this time around, is just how fast the
Speaker 1: money is and how digital it is. I mean, we
Speaker 1: can all move funny money in our own accounts from
Speaker 1: our phone with just a press on the screen. That
Speaker 1: was not the oad experience. So what we're seeing here
Speaker 1: is definitely that the risk of a recession has kicked up.
Speaker 1: It's a question of how much. Certainly we're seeing some
Speaker 1: resolve this morning in Europe European corporates or twenty basis
Speaker 1: points tighter this morning. Things feel better, as you mentioned,
Speaker 1: yields kind of across governments, whether it's in the US
Speaker 1: or abroad or higher. So there seems to be a
Speaker 1: little little bit of less concern. But we've got a
Speaker 1: lot to figure out as we wait here to hear
Speaker 1: what the FED is going to do tomorrow and what
Speaker 1: they kind of tell us they're going to do in
Speaker 1: the future. You mentioned speed. Matt Brood of Invesco talked
Speaker 1: about that with us yesterday and I think's an important point,
Speaker 1: just a reminder of how quickly some of these institutions
Speaker 1: can fail. And Lindsey, with that in mind, he pointed
Speaker 1: out that that's not the same as an industrial that's
Speaker 1: not the same story. There should be maybe a valuation
Speaker 1: gap between these different industries now, similar to what we
Speaker 1: saw after eight and then see the question I asked
Speaker 1: Matt was ultimately how long that can last? How long
Speaker 1: does that take to well ultimately resolve that gap that
Speaker 1: opens up between one industry and all the rest. Yeah,
Speaker 1: there is no reason that industrials and banks have to
Speaker 1: trade on top of each other. In fact, historically banks
Speaker 1: created ruin industrials. I create that we've really liked since
Speaker 1: last year was owning banks versus industrials because you're compensated
Speaker 1: with more spread. But I think, going back to what
Speaker 1: we said at the very beginning, what is crucial is
Speaker 1: that it's what banks that you own, and so much
Speaker 1: that I think we believe that in terms of active
Speaker 1: management is teasing out who are going which which balance
Speaker 1: sheets are going to do well, and I think we've
Speaker 1: just got a clear support here for the big banks
Speaker 1: and so the big banks can rally got to squeeze
Speaker 1: it in. Then you mentioned the FED. What are you
Speaker 1: in the team tomorrow twenty five? Nothink we are. Our
Speaker 1: base case is twenty five. I think that base case
Speaker 1: isn't with a major degree of confidence because there's there's
Speaker 1: a lot of concerns. I don't think, though we are
Speaker 1: in the camp that if the FED were too pause.
Speaker 1: We don't think that the suggestion there is that there
Speaker 1: is a crisis of brewing and they know something that
Speaker 1: we don't know. I think you discussed us with Greg
Speaker 1: on Sunday night. Instead, if they pause, I mean they
Speaker 1: can pause, right. They have another chance to hype six
Speaker 1: weeks from now, so it's not like they pause and
Speaker 1: they're never allowed to hype. They have that flexibility. That's
Speaker 1: part of their doctrine. And I think we shouldn't panic
Speaker 1: if we see them pause. Personally, I'd like them to pause.
Speaker 1: I'd like them to see sometime in between for us
Speaker 1: to work out what's been happening in the banking sector.
Speaker 1: All this happened in this past weekend last week, right,
Speaker 1: so we get a little bit of a breather to
Speaker 1: figure out what's going on with markets. That's just my
Speaker 1: two cents, Lindsay, thanks for that. Lindsay Rosener, the of PGM.
Speaker 1: I like your description of the FED meeting. I don't know,
Speaker 1: do you know? I don't know, you know, Christian will
Speaker 1: A Glissman might know, Managing director for Portfolio Strategy at
Speaker 1: Goldman Sachs. Christian joins us right now. Christian wanted for
Speaker 1: to hear from you, sir. Welcome to the program. This
Speaker 1: came from Dario Perkins over in London this morning from
Speaker 1: ts Lombardy said central banks are stuck between the ghosts
Speaker 1: of the seventies and their PTSD from two thousand and eight.
Speaker 1: He said, I reckon PTSD wins out. What do you reckon? Yeah,
Speaker 1: it certainly looks like that. I mean certainly near term.
Speaker 1: I mean, not to forget the inflation normalization progress would
Speaker 1: have been very slow anyhole, and I think to some extent,
Speaker 1: you know, we work quite confident in market, were quite
Speaker 1: confident inflation expectations never unanchored like they did in the seventies.
Speaker 1: And so there was this kind of calm and inflation
Speaker 1: credibility you carried on. So I think the bigger concern
Speaker 1: is really banking systemic stress Again, so I would also
Speaker 1: lean towards kind of GSC type concerns dominating right now.
Speaker 1: How do you play through the concern versus the opportunity,
Speaker 1: versus saying, Okay, when you smell blood in the water,
Speaker 1: sometimes it's time to pounds. Yeah. I mean, as always,
Speaker 1: you want to see some type of overshoots, you want
Speaker 1: to see some type of asymmetry arising, and I'm not
Speaker 1: quite sure we're there yet. The challenge you had was
Speaker 1: that coming into the year, people were getting quite excited,
Speaker 1: despite the fact that you're late cycle, despite the fact
Speaker 1: that the FETE has pushed up the cost of capital materially,
Speaker 1: there was the sense that the US can deal with it.
Speaker 1: It's resilient. As you showed earlier, the spot data is
Speaker 1: still resilient, and you're China reopening, Europe having less of
Speaker 1: an energy crisis. So our risk appetite indicator went up
Speaker 1: to kind of zero point seven, which is one of
Speaker 1: the higher levels. So that has no unwound, but you're
Speaker 1: not really at bearish levels, And I think what really
Speaker 1: worries me is risk premier. The rates markets are very
Speaker 1: clearly sending us a very bearish signal, Like you have
Speaker 1: the front and pricing cuts from the fat, you have
Speaker 1: bulls deepening in the two Stens curve. All of those
Speaker 1: are signals that recession risk is being pulled forward. But
Speaker 1: if you look at risk premier, especially equity risk PERIA,
Speaker 1: and they're quite low. So I'm not quite sure we
Speaker 1: have that type of asymmetry, that type of washout where
Speaker 1: you can really say, there's a huge amount of opportunity.
Speaker 1: What are you looking at though, to buy if that
Speaker 1: volatility does sort of start to wash out the European
Speaker 1: banks of the US banks. I mean, that's quite interesting
Speaker 1: discussion because banks there's clearly stress here, and there is
Speaker 1: more overshoots in terms of valuations, in terms of credit.
Speaker 1: So I think at the margin that is an area
Speaker 1: where you can look. But the uncertain is huge, and
Speaker 1: it's a very leverage business model, and and systemic stress
Speaker 1: is kind of going in waves at this juncture. So
Speaker 1: it's a bit early. But if you ask me which
Speaker 1: banks to go for it, fields, the European banks have
Speaker 1: a slightly different setup because they have less of a
Speaker 1: liquidity problem. They had a systemic capital concern, a profitability problem,
Speaker 1: and I think that seems to have been put under control.
Speaker 1: Whereas I think from a deposit side of things, you
Speaker 1: have less pressure, you have less liquidity pressure. As a
Speaker 1: different setup, there's not even that many money market funds
Speaker 1: in Europe where actually savers could park their cash. So
Speaker 1: it feels like there's a slightly different problem in the US.
Speaker 1: That problem might linger a bit longer, especially if the
Speaker 1: fat continuous tightening. Well, Christian, how much of a challenge
Speaker 1: is that both statement in the yield curve to the
Speaker 1: bank's code you're ultimately making. Yeah, I mean, like as
Speaker 1: I said, like the US banks, I don't think they're
Speaker 1: completely in the clean yet. I mean that bulls deepening,
Speaker 1: as you know, was probably exacerbated by positioning where you
Speaker 1: have this enormous rates volatility driven by macro investors unwinding
Speaker 1: these hawkish calls into the central bank season. So so
Speaker 1: we need to see where it does settles. If that
Speaker 1: bullis steepening continues, it also comes from very inverted levels.
Speaker 1: We find that the risk to equities increases the more
Speaker 1: they'd curve. Bulls steepens. So right now it's at very
Speaker 1: inverted levels. Has bullys stepened a bit? If that process continues,
Speaker 1: I would be careful to take any cyclical risk, and
Speaker 1: you would certainly expect equities will underperform bonds. Do you
Speaker 1: have a base case right now, though, Christian, because from
Speaker 1: what you're saying, it sounds like perhaps the situation in
Speaker 1: Europe might have been a head fake and you'd expect
Speaker 1: further inversion again. Yeah, I mean it looks a bit
Speaker 1: like that. Our base case from the economous you know,
Speaker 1: both in Europe and in the US, is that we're
Speaker 1: not done yet on the hiking cycles. There's this idea
Speaker 1: of separation between systemic stress and inflation fighting, and if
Speaker 1: that's true, it's a bit premature to see that bulls steepening.
Speaker 1: But we have to listen to the market a bit.
Speaker 1: I think the market certainly is worried that we reached
Speaker 1: a point where central banks are constrained to hike, and
Speaker 1: where this financial conditions tightening, which has been relatively controlled
Speaker 1: for most of last year, driven by front end rates,
Speaker 1: has become much less unpredictable, much less predictable and a
Speaker 1: bit more uncontrollable and that means that you have much
Speaker 1: more risk of an error, You have much more risk
Speaker 1: of central banks having having to back paddle like Christian.
Speaker 1: Thanks for that, Christian milliklishman of government. But let's really
Speaker 1: get into how we can understand the trajectory of inflation
Speaker 1: and how big of a battle it's going to be
Speaker 1: for the Federal Reserve even as they have an eye
Speaker 1: toward the banks. Dean Marki joining us right now, Chief
Speaker 1: US Economistic points seventy two. Dean, what's your take on that?
Speaker 1: How do you understand the inflationary impulse and how much
Speaker 1: it's actually been dampened. Well, the recent data have suggested
Speaker 1: that inflation is not coming down as fast as the
Speaker 1: previous data might have suggested, and this does interfere with
Speaker 1: the fed's narrative that we're headed down in a steady way,
Speaker 1: down to three and a half percent on core PC
Speaker 1: by the end of the year and even lower after that.
Speaker 1: The recent data just don't show much slowing and I
Speaker 1: do think that is important to the Fed's decision this week.
Speaker 1: So what does that mean in terms of them having
Speaker 1: to raise rates by twenty five basis points? So that
Speaker 1: that should be digestible for the markets. I do think
Speaker 1: it's that the FED is likely to raise rates by
Speaker 1: twenty five basis points this week. The data certainly point
Speaker 1: in that direction, whether it's the very strong employment data,
Speaker 1: the inflation data that's come out less favorable for the
Speaker 1: FED than expected, and actually GDP growth is picking up
Speaker 1: in the first quarter, it's not slowing down the way
Speaker 1: many have been expecting. So that economic data are telling
Speaker 1: us very clearly that the FED should be continuing to
Speaker 1: raise rates. Now, there's other factors the Fed's worried about,
Speaker 1: but I think that's what's going to be the dominant
Speaker 1: force for the FED. They think they have other tools
Speaker 1: to address banking system issues and problems at the banks,
Speaker 1: and that monetary policy should be aimed at getting inflation
Speaker 1: back to target. You know, my favorite thing about this
Speaker 1: momenting is that you have five guests on may all
Speaker 1: say something completely different and then say you're looking at
Speaker 1: the wrong data. And some people will come on and
Speaker 1: they'll say, Okay, sure, that backward looking data shows resilience
Speaker 1: and a sense of inflation that hasn't died down nearly enough.
Speaker 1: And other people say, yeah, you've got to keep looking
Speaker 1: at that because it's been right So where do you
Speaker 1: sort of make the argument that you have to consider
Speaker 1: this data that maybe backward looking, but really gives you
Speaker 1: some clean sense of where we are now. Well, I
Speaker 1: think the data tells us where we were coming into
Speaker 1: this past two weeks, and that where we were is
Speaker 1: an economy that was growing at a pretty strong rate,
Speaker 1: clayment rate very low, and inflation way above what the
Speaker 1: FED wants it to be. Now the FED has to
Speaker 1: think about does the last two weeks events mean that
Speaker 1: the data don't matter anymore? I think it's too strong
Speaker 1: to say that. I think the FED will be thinking
Speaker 1: about how much credit tightening is going to be happening
Speaker 1: as a result of the problems at the banks. But
Speaker 1: unless the FED is convinced that there's going to be
Speaker 1: a sudden and severe stop in credit that means no
Speaker 1: further rate hikes are required, I think the FED will
Speaker 1: go ahead with their steady rate hikes this week. So
Speaker 1: people argue that de facto there will be a credit
Speaker 1: tightening by some of these medium sized banks that are
Speaker 1: going to restrict who they loan to and how much
Speaker 1: they lend. You make it an argument that that doesn't
Speaker 1: necessarily mean some sort of sudden curtailing of economic activity.
Speaker 1: Can you elaborate on why that's an important important realization
Speaker 1: to inform what the FED has to do and respond well?
Speaker 1: I think, you know, one has to think about what's
Speaker 1: happening at the banks. You know that the very large
Speaker 1: banks don't seem to be having a problem with extending
Speaker 1: credit at this time, at least in a way that
Speaker 1: would cause a sudden stop and credit. There is credit
Speaker 1: tightening in general going on like there usually isn't a
Speaker 1: fad tightening cycle. But small and medium sized banks, the
Speaker 1: real question is does the typical small and medium sized
Speaker 1: bank out there have a severe deposit outflow right now
Speaker 1: that's going to cause them to make say we're not
Speaker 1: making more loans at all. You know, that would be
Speaker 1: what a severe and studden stop and credit would look like,
Speaker 1: and that would be in a sense positive to immediately
Speaker 1: stop tightening if that became apparent. My perception from various
Speaker 1: things is that that's not happening right now. It certainly
Speaker 1: is happening at some of the trouble banks, but most
Speaker 1: medium and small size banks do not have severe deposit
Speaker 1: outflow problems right now, and therefore they are likely to
Speaker 1: continue to bake some credit available to businesses and households.
Speaker 1: If that's right, and there is more of a gradual
Speaker 1: credit tightening process underway rather than a severe and sudden stop.
Speaker 1: So how far away are we from going back to
Speaker 1: a no landing discussion or going back to this idea
Speaker 1: that we could just softly glide path lower regardless of
Speaker 1: some of the recent troubles that we've seen at banks.
Speaker 1: You know, I think that's something that will be sorting
Speaker 1: out in the coming week. So, you know, if I'm
Speaker 1: right that this is more of a gradual credit tightening process,
Speaker 1: then the very strong economic data that we've been seeing
Speaker 1: does continue to matter, and this will be a headwind
Speaker 1: against that strength in the data. And I do think
Speaker 1: there are some forces pushing the economy forward that are underappreciated,
Speaker 1: like the continued normalization of the service sector, which continues
Speaker 1: to add jobs at a tremendous pace every month. And
Speaker 1: also I think that the strength of the consumer matters
Speaker 1: here as well. So you know, if those matter in
Speaker 1: terms of the momentum of the economy, the credit tightening
Speaker 1: is pushing against that, and what we'll be trying to
Speaker 1: do is way those two opposing forces going forward? So
Speaker 1: what do you make of this narrative table Tennis? As
Speaker 1: James Afy put it, I mean, what do you make
Speaker 1: of this idea that people are just basically turning themselves
Speaker 1: in circles trying to understand the moment to moment gyrations
Speaker 1: in a market that is more volatile than it's been
Speaker 1: for decades. I mean, to me, it just reflects the
Speaker 1: difficulty of the situation. We're dealing with an unknowable amount
Speaker 1: of financial stress. You know, how bad is it going
Speaker 1: to get in the next two weeks? How bad is
Speaker 1: the credit tightening that results from this financial stress going
Speaker 1: to be? It's these are very difficult things, and markets
Speaker 1: are struggling to figure it out. So we all have
Speaker 1: our own individual views on things, but the market's kind
Speaker 1: of bouncing back and forth trying to figure out which
Speaker 1: narrative is correct one of the biggest issues Dad, and
Speaker 1: I'd love to get your thoughts before we have to
Speaker 1: go about the longer term trajectory of inflation. This question
Speaker 1: of are we heading back to a two percent inflation
Speaker 1: kind of reality, which is really what the market is
Speaker 1: pricing in. If you take a look at the five
Speaker 1: and ten year inflation expectations, or are we heading into
Speaker 1: something where this FED reserve will tolerate a much higher
Speaker 1: pace of inflation to avoid some of the disruptions that
Speaker 1: we've seen in the banking sector. I mean, I think
Speaker 1: that's one of the reasons why this week will be
Speaker 1: an important signal from the FED. If the FED is
Speaker 1: actually putting inflation front and center, I think it is
Speaker 1: important for them to continue to tighten conditions and signal
Speaker 1: that that is our main focus at this point. If
Speaker 1: the FED does seem to be distracted and focused more
Speaker 1: on other issues then inflation, you know, then I do
Speaker 1: think this impression that the FED is going to allow
Speaker 1: inflation to persistently run above target will gain traction. Dean
Speaker 1: Mackey of Point seventy two, thank you so much. Alan Walt,
Speaker 1: join us now sending a fellow at the Atlantic Council.
Speaker 1: And then can you tell us how important it is
Speaker 1: how dependent show produces on regional banks in America? Well,
Speaker 1: I'm not going to totally speculate on just how dependent
Speaker 1: they are, but I'm going to guess that a lot
Speaker 1: of them have actually probably reduced some of the exposure
Speaker 1: that they might ordinarily have been facing, given the fact
Speaker 1: that for some time now, we've seen lenders tightening and
Speaker 1: not you know, shelling out capital to oil producers. You know,
Speaker 1: this is an industry that's gone through a huge amount
Speaker 1: of consolidation over the past you know, decade essentially, or
Speaker 1: or a little less in a decade, and so I
Speaker 1: venture that they're probably not quite as exposed as say,
Speaker 1: some of the startups in the Silicon Valley area are.
Speaker 1: My concern is definitely on the you know, the demand
Speaker 1: side and the supply side. It's it's a very interesting
Speaker 1: crisis because we're not really seeing that much in terms
Speaker 1: of a change in the supply demand forecast, but prices
Speaker 1: have moved substantially, and forecast for prices are also on
Speaker 1: the move. Talking about the read through from the banking crisis,
Speaker 1: I'll give you another, perhaps somewhat fantastical scenario. What happens
Speaker 1: if the Middle East investors that lost money and some
Speaker 1: of these banking issues I'm thinking of Muhammad bail and
Speaker 1: Soon and Saudi Arabia suddenly want prices to be higher
Speaker 1: if they've lost money in markets this year. What if
Speaker 1: they actually don't want to produce more oil because they
Speaker 1: want prices to go up. How much. Is that a
Speaker 1: feature in the OPEC response mechanism to all this, I
Speaker 1: would say that's definitely of concern. I think that OPEC, definitely,
Speaker 1: or at least Saudi Arabia, has a particular range that
Speaker 1: they like to see prices in. And I do think
Speaker 1: that the triple digits to them are too high because
Speaker 1: that then threatens them on the demand side. So you know,
Speaker 1: if prices hit eighty this summer, I think that that's
Speaker 1: still in a good range for them, and they're not
Speaker 1: going to be making any kinds of supply cuts. Now.
Speaker 1: If we see a sudden drop in oil prices due
Speaker 1: to say a major global financial crisis, then we should
Speaker 1: definitely look for OPEC to act just like they did
Speaker 1: in two thousand and eight to kind of protect oil prices.
Speaker 1: What I think is more interesting here is they definitely
Speaker 1: see this, and they came out with some comments last
Speaker 1: week that you know, this is mostly a financial issue.
Speaker 1: They don't see it as a supply demand issue. So
Speaker 1: how would changing supply and demand impact the market. What
Speaker 1: I see is an interesting potential, though, is the US
Speaker 1: as a potential to impact the demand side, Because we've
Speaker 1: got the US government having said that when oil gets
Speaker 1: to a certain range they want to rebuy for the
Speaker 1: spr Could you imagine what a major influx of demand
Speaker 1: from the US government could do to oil prices right now?
Speaker 1: Would essentially be saying, you know, here's a huge surgeon
Speaker 1: demand that we weren't necessarily expecting, and we are in
Speaker 1: a situation where supply demand is pretty tight, or at
Speaker 1: least expected to be pretty tight, and that could definitely
Speaker 1: be a factor that could push oil prices up if
Speaker 1: you know, nothing else is. And I'm really happy that
Speaker 1: Lisa brought up the Middle East because we talked about
Speaker 1: a quote in the Financial Times this morning. I'm going
Speaker 1: to share that quote with you. Ultimately, the FT put
Speaker 1: together this wonderful story of developments over the weekend to
Speaker 1: secure that deal between UBS and Credit Suite, and the
Speaker 1: Saudis have been burnt. Let's be clear about that. They
Speaker 1: were the top shareholder Saudi National Bank. This is a
Speaker 1: quote in the story, according to one person close to
Speaker 1: one of the three major shareholders of Credit suits. You
Speaker 1: make fun of dictatorships and then you can change the
Speaker 1: law over the weekend. What's the difference between Saudi Arabia
Speaker 1: and Switzerland. Now it's really bad you know about the
Speaker 1: kingdom you wrote the book. How do you think this
Speaker 1: might change investment decisions from Saudi Arabia. Yeah, that's a
Speaker 1: very interesting perspective, and I definitely think that the idea
Speaker 1: of changing a lot over the weekend is absolutely something
Speaker 1: that we see, you know, that we expect to come
Speaker 1: from a dictatorship. We don't expect, you know, this is
Speaker 1: a monarchy. They don't really run by rule of law,
Speaker 1: you know. They they generally, I think, because they want
Speaker 1: to be seen as a stable force, and they want
Speaker 1: to be seen like like other Western economies tend to
Speaker 1: try to adhere to kind of global principles, but when
Speaker 1: it comes down to it, they're not. They don't have
Speaker 1: to go through any kind of you know, real legal processes.
Speaker 1: And I think that if the Saudi government or the
Speaker 1: Saudi royal family is hurting for money due to you know,
Speaker 1: investments or particularly bad investments, I definitely think that you
Speaker 1: could look to see them potentially try to recoup that
Speaker 1: from what really is the Saudi cash cow, Aramco. Aramco
Speaker 1: had a banner year, their flush with cash, and would
Speaker 1: it really be surprised to see if the you know,
Speaker 1: Saudi's tried to or the royal family or the the
Speaker 1: government try to kind of raise their you know, their
Speaker 1: dividend or whatnot from the company in order to make
Speaker 1: up for a potential shortfall caused by some bad investments. Ellen,
Speaker 1: just real quick here thirty seconds. Is there another implication
Speaker 1: in terms of what Saudi Arabia is willing to invest
Speaker 1: in globally as they try to diversify away from just
Speaker 1: oil streams of revenue. Yeah. I think that they are
Speaker 1: investing all over the place, and I don't think that
Speaker 1: this is going to stop them. In fact, I think
Speaker 1: that this probably speaks to the fact that they need
Speaker 1: more diversity and they feel like they've got a lot
Speaker 1: of cash and they want to invest it. Ellen, thanks
Speaker 1: for joining usanz wieni Wold. They put in enem Wold
Speaker 1: with the Atlantic Council on a situation with Saudi Arabia.
Speaker 1: We are joined by somebody who with intimate knowledge through
Speaker 1: the cycles as well as understanding how to play in
Speaker 1: some difficult moments. Dan Greenhouse, Chief Strategistic SOULS Alternative Asset Management,
Speaker 1: How are you understanding, Dan, the bank distress that we've
Speaker 1: seen so far and how far it goes well? Listen,
Speaker 1: we're still in the early stages of this. I think
Speaker 1: it's pretty clear we've got a couple of banks having
Speaker 1: already failed, another couple of cheetering, but it's pretty clear
Speaker 1: that there are these I don't want to use the
Speaker 1: word systemic, but there are these issues that are plaguing
Speaker 1: in a number of banks that a result in a
Speaker 1: number of outcomes. It's going to be a compression, and
Speaker 1: that it just margins as these banks have to pay
Speaker 1: up to attract deposits. It's going to be a decrease
Speaker 1: in loan growth, which, while not necessarily a substitute for
Speaker 1: rate hikes, is going to somewhat do the Fed's job
Speaker 1: for it and curtailing economic activity. It's going to be
Speaker 1: a higher regulatory burden on those mids I dare I
Speaker 1: say midsize but one hundred billion plus size banks, and
Speaker 1: it's probably going to mean consolidation in the sector as well.
Speaker 1: What it means for the economy at large, it is,
Speaker 1: in my mind, probably only going to be negative through
Speaker 1: that loan channel. I think there's a lot of people
Speaker 1: running around talking about how this is in two thousand
Speaker 1: and eight, as if that's somehow okay. But while the
Speaker 1: issue itself is not at all arise the two thousand
Speaker 1: and eight levels. I think, in an environment that is
Speaker 1: now characterized by elevated interest rates, what's happen puting in
Speaker 1: the banks isn't going to make things any better from
Speaker 1: an economic standpoint either. You raise a really important point
Speaker 1: in and I don't think that this has been emphasized enough.
Speaker 1: People talk about what's going on as being a sort
Speaker 1: of temporary tightening that they're going to pull back on
Speaker 1: some of their credit expansion, at least the near term,
Speaker 1: as some of these banks decide how much they can
Speaker 1: count on deposits. But you're talking about a longer term
Speaker 1: consequence of less lending. Can you talk a little bit
Speaker 1: about which sectors of the economy that affects the most,
Speaker 1: which sectors of the economy these banks tend to dominate
Speaker 1: in when it comes to credit expansion. Well, we know,
Speaker 1: and I'm certainly that the first one to say it,
Speaker 1: and I won't be the last, but we know that
Speaker 1: the commercial real estate market, which is already weak, is
Speaker 1: probably going to be weaker. A lot of the smaller
Speaker 1: and midsized banks do most of the lending. I forget
Speaker 1: the exact number, but even though smaller banks have only
Speaker 1: about forty of the bank existence, they represent about fifty
Speaker 1: percent of the total loan book for the economy as
Speaker 1: a whole, So they punch above their weight in that respect,
Speaker 1: certainly with relation to their deposits. And the first point
Speaker 1: you have to look at is the office market, in
Speaker 1: the commercial real estate market, there are there's something going
Speaker 1: on in the cities right now that's going to have
Speaker 1: it's going to take multiple quarters, if not multiple years,
Speaker 1: to fully play out as some of these leases reset.
Speaker 1: And you can see this in the public markets for
Speaker 1: those very large office rates. They're they're telling you something
Speaker 1: is not right. And this type of a situation obviously
Speaker 1: doesn't aid that aspect of the economy at all. It's
Speaker 1: it's it's quite negative to say the least. What is
Speaker 1: something is not right? Mean when it comes to the
Speaker 1: trajectory of the economy in terms of when we see
Speaker 1: a recession, how deep it will be, what we look
Speaker 1: like on the other side, Well, from an office standpoint, specifically,
Speaker 1: we know that depending on which city we're talking about,
Speaker 1: the return to office, if you will, is running anywhere
Speaker 1: from forty to sixty percent. There are some cities that
Speaker 1: are there are some cities that are more. But let's
Speaker 1: round and say that on balance, in the office market
Speaker 1: across the country, and certainly in the call it the ten,
Speaker 1: twenty or thirty largest markets, you only have about half
Speaker 1: people back to work in any regular capacity at all.
Speaker 1: So so that that as those leases roll off, everyone's
Speaker 1: going to be dealing with the repercussions of what that
Speaker 1: means from from a lending standpoint, from from an occupancy standpoint,
Speaker 1: from a bank regulatory standpoint, that's that sector specifically for
Speaker 1: the economy as a whole. I even't done the work myself,
Speaker 1: so I'm not going to lie and say that I
Speaker 1: know exactly how it pans out. But the curtailment of
Speaker 1: loan activity, which is probably going to persist for several
Speaker 1: quarters now, is not going to take a week econot
Speaker 1: or an increasingly weak economic environment and make it any better.
Speaker 1: The FED is we know, has interest rates at elevated levels.
Speaker 1: I don't think they should raise rates tomorrow, but neither
Speaker 1: do I think that that is the end of the
Speaker 1: tightening cycle, because inflation is still running at quite elevated levels.
Speaker 1: And to repeat a point I've made numerous times, and
Speaker 1: it can't be said enough. Yes, the year of the
Speaker 1: year rate is coming down, but the month over month rate,
Speaker 1: either at the headline or the core supercore, is a
Speaker 1: concerning levels from the FED standpoint, and that's much more
Speaker 1: consequential for what the FED should do. So So, even
Speaker 1: though in the immediate they may pause raising rates tomorrow
Speaker 1: and I think ultimately that would be the right decision,
Speaker 1: when you're dealing with point four point five point six
Speaker 1: percent readings on CPI, there's very little they can do
Speaker 1: in terms of easing to alleviate this crisis at all.
Speaker 1: So your vantage point is coming from Soulis, which is
Speaker 1: an alternative asset management company that oversees distressed debt opportunities
Speaker 1: as well as long opportunities. I'm curious where you're sort
Speaker 1: of seeing the most potential at a time when a
Speaker 1: lot of people are struggling to get their hands around
Speaker 1: exactly what the end result will be. Well, I don't
Speaker 1: think the full ramifications of this episode has fully played
Speaker 1: out as of yet, and that's going to take a
Speaker 1: couple of quarters to do so, in what form and
Speaker 1: exactly what sectors obviously will be on guard for In
Speaker 1: the meantime, I think there are plenty of opportunities for
Speaker 1: fun like ours. I mean, obviously you would like to
Speaker 1: see exponentially more distress, exponentially more default, which we don't
Speaker 1: have as of today. But there are still plenty of
Speaker 1: sectors of the economy that look attracted to us without
Speaker 1: weighing in at all about what we own or what
Speaker 1: we may be doing. There's the change in behavior at
Speaker 1: office I mentioned is something worth exploring. Who are the
Speaker 1: winners and losers there? On the content and the media
Speaker 1: and distribution side of things, there's a change in behavior
Speaker 1: there that I don't think people are appreciating with what
Speaker 1: it means for the streaming services and the movie theaters
Speaker 1: and the vendors and those types of companies. In the
Speaker 1: travel and leisure space hotel cruises, skiing, and those sorts
Speaker 1: of sectors of the economy, there's a tremendous shift going
Speaker 1: on in consumer behavior. And so in each one of
Speaker 1: those sectors and others, there are clear winners and losers
Speaker 1: on both the debt and the equity side of things,
Speaker 1: and our job is obviously to sit through them to
Speaker 1: find out whether or miss pricings and exploit them. And again,
Speaker 1: even though we haven't seen the full ramifications of this episode.
Speaker 1: In the meantime, I think we're we're actually pretty busy,
Speaker 1: and I think there's plenty of stuff to be looking
Speaker 1: at an explorery. In the aftermath of the Great Financial Crisis,
Speaker 1: one of the most lucrative trades was Lehman claims. They
Speaker 1: were claims from Lehman Brothers after they collapsed, and the
Speaker 1: returns were pretty astronomical. I'm wondering, Dan, if there's an
Speaker 1: analog here with the at ones with the contingent capital bonds,
Speaker 1: maybe not from Credit Suis, but from other banks that
Speaker 1: possibly don't look money good for a second, and then
Speaker 1: all of a sudden the regulator step in and say, actually,
Speaker 1: it's a pretty bad precedence to set. Is that something
Speaker 1: that looks like it has potential as other investors see
Speaker 1: this as uninvestable, Well, if there's as I'm now midlife
Speaker 1: financially in terms of my work and career, I will
Speaker 1: say that the bad precedent to be set is set
Speaker 1: in every crisis, and never put it past allmakers to
Speaker 1: set bad precedent and exploit these opportunities to quote unquote
Speaker 1: change the rules with respect to the eighty one market.
Speaker 1: Listen that story is clearly unfolding. You can see in
Speaker 1: the performance of the various bank end of these who
Speaker 1: has better language in their documents than others. I don't
Speaker 1: know that we're not traditionally a financial fund, so I
Speaker 1: don't want to say that we have any particular expertise
Speaker 1: in this, but clearly that market is going to be
Speaker 1: right for exploitation going forward. I think it's going to
Speaker 1: be very I mean, at the outset, it looks like
Speaker 1: it's going to be very difficult for investors to not
Speaker 1: think that there is additional downside, to say the least,
Speaker 1: to those investments. And again, that's not a small market.
Speaker 1: That's two hundred fifty two hundred and seventy billion depending
Speaker 1: on how you measure it, and considering sixteen seventeen billions
Speaker 1: of them were just wiped out when people did not
Speaker 1: think that was what was going to happen. I think
Speaker 1: people are going to be taking a much closer look
Speaker 1: at the rest of that market just real quick. Here,
Speaker 1: does it also change the investment investing landscape for all
Speaker 1: things Switzerland if they're willing to change the documents on
Speaker 1: something like this or perhaps interpret it creatively. Well to
Speaker 1: get back to my another point, I wouldn't I wouldn't
Speaker 1: comment about Switzerland specifically, since that's no particular expertise of mine,
Speaker 1: but but for governments as a whole, there's a very
Speaker 1: famous saying, if you don't like the law, get a
Speaker 1: new lawyer. And I think, whether it was OH eight,
Speaker 1: or the European debt crisis early in the twenty ten
Speaker 1: excuse me, or what's happening now, among others, lawmakers and
Speaker 1: policymakers and politicians have never failed to change the rules
Speaker 1: to suit their needs. And in some cases that's the
Speaker 1: right course, in some cases it's not. But I think
Speaker 1: everybody has to understand that that in the crisis is
Speaker 1: likely to be the outcome. Dan Greenhouse, thank you so
Speaker 1: much for being with us. Dan Greenhouse of Soli's Alternative
Speaker 1: Asset Management. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
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