1 00:00:00,760 --> 00:00:04,040 Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 2 00:00:04,040 --> 00:00:06,920 Speaker 1: my co host Matt Miller. Every business day, we bring 3 00:00:06,960 --> 00:00:11,520 Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along 4 00:00:11,520 --> 00:00:15,560 Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast 5 00:00:15,600 --> 00:00:18,400 Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and 6 00:00:18,480 --> 00:00:22,120 Speaker 1: at Bloomberg dot com slash podcast. Let's talk markets here 7 00:00:22,239 --> 00:00:25,120 Speaker 1: and kind of where we go from here. What should 8 00:00:25,120 --> 00:00:27,639 Speaker 1: we expect maybe from this Federal Reserve next week after 9 00:00:27,640 --> 00:00:30,560 Speaker 1: we've had this move by the ECB. Bring in Jay Halfield. 10 00:00:30,600 --> 00:00:34,920 Speaker 1: He's the CEO, founder and portfolio manager at Infrastructure Capital Advisors. 11 00:00:34,920 --> 00:00:38,479 Speaker 1: And Jay, let's just start with Europe and the ECB. 12 00:00:38,800 --> 00:00:41,600 Speaker 1: I mean, they're still, like the US Federal Reserve, still 13 00:00:41,720 --> 00:00:45,400 Speaker 1: very much on this inflation fighting path, raising their benchmark 14 00:00:45,440 --> 00:00:48,040 Speaker 1: raak by fifty basis points where a lot of people said, 15 00:00:48,320 --> 00:00:52,160 Speaker 1: maybe pause, maybe just twenty five, but no, thanks Paul 16 00:00:52,200 --> 00:00:54,960 Speaker 1: for having me in again. You have to keep in 17 00:00:55,000 --> 00:01:00,440 Speaker 1: mind the European system is radically different in the US, 18 00:01:00,640 --> 00:01:04,400 Speaker 1: so they were way behind our FED full percentage point 19 00:01:04,440 --> 00:01:09,240 Speaker 1: bard our FED. And also their inflation is worse because 20 00:01:09,240 --> 00:01:11,440 Speaker 1: of their natural gas crisis. It's come down, but it's 21 00:01:11,440 --> 00:01:15,360 Speaker 1: still a huge problem. And then thirdly, all their banks 22 00:01:15,640 --> 00:01:18,760 Speaker 1: are essentially money center banks, like our money center banks 23 00:01:18,800 --> 00:01:21,000 Speaker 1: are killing it right now. They're getting all these deposits 24 00:01:21,040 --> 00:01:24,520 Speaker 1: in and keep in mind that that's free money right now. 25 00:01:24,560 --> 00:01:27,520 Speaker 1: So that's the real problem with our system is that 26 00:01:27,640 --> 00:01:31,039 Speaker 1: smaller banks are losing deposits, and that's every dollar that 27 00:01:31,080 --> 00:01:34,880 Speaker 1: goes out costs them roughly five percent, so paying fifty 28 00:01:34,920 --> 00:01:37,520 Speaker 1: base points or zero if it's a demand deposit, and 29 00:01:37,560 --> 00:01:40,280 Speaker 1: then you borrow from the Fed at libor plus spread, 30 00:01:40,480 --> 00:01:44,160 Speaker 1: and so their earnings are getting smashed as we speak. 31 00:01:44,360 --> 00:01:47,000 Speaker 1: And that's the core issue, and that's why we've been 32 00:01:47,000 --> 00:01:51,680 Speaker 1: calling for a rape cut to reduce that the inversion 33 00:01:51,720 --> 00:01:54,440 Speaker 1: in the Yelk curve. So when you compare that to 34 00:01:54,480 --> 00:01:56,360 Speaker 1: then what the Federal Reserve is doing the read through, 35 00:01:56,400 --> 00:01:58,640 Speaker 1: I think one of the takeaways from the ECB is 36 00:01:58,680 --> 00:02:02,880 Speaker 1: simply that they hiked regardless of the chaos for credit squeezes. 37 00:02:02,880 --> 00:02:05,720 Speaker 1: If credit squeeze is a bigger bank and a bigger 38 00:02:06,200 --> 00:02:08,840 Speaker 1: risk than say SPB as, which I think is the consensus, 39 00:02:09,200 --> 00:02:12,160 Speaker 1: then does that then insinuate the Federal Reserve is going 40 00:02:12,200 --> 00:02:14,240 Speaker 1: to stick to twenty five or fifty or whatever the 41 00:02:14,240 --> 00:02:18,280 Speaker 1: calls were pre SPB. Well, that's certainly possible because they 42 00:02:18,280 --> 00:02:22,519 Speaker 1: have shown zero ability to process real time data. So 43 00:02:22,639 --> 00:02:24,960 Speaker 1: and specifically I would point to oil, which is something 44 00:02:25,000 --> 00:02:29,640 Speaker 1: that we fast coming from Jay Hatfield broadcast. So the 45 00:02:29,680 --> 00:02:34,200 Speaker 1: two key indicators of inflation are housing in oil. Oil 46 00:02:34,280 --> 00:02:38,079 Speaker 1: has come down seventeen percent since the financial crisis started, 47 00:02:38,280 --> 00:02:41,200 Speaker 1: the bank runs started. And what I don't think the 48 00:02:41,320 --> 00:02:44,320 Speaker 1: FED appreciates, which is strange because they have research papers 49 00:02:44,360 --> 00:02:48,080 Speaker 1: that demonstrate this. There's a five percent bleed through of 50 00:02:48,200 --> 00:02:51,000 Speaker 1: energy prices the core. In fact, if you look in 51 00:02:51,040 --> 00:02:53,679 Speaker 1: the seventies and draw a line where the two gigantic 52 00:02:54,240 --> 00:02:57,720 Speaker 1: increases occurred, so two hundred and one fifty core went 53 00:02:57,800 --> 00:03:01,560 Speaker 1: up shot up within three or four months. So this 54 00:03:01,680 --> 00:03:05,200 Speaker 1: is not this research paper just proved it, you know, 55 00:03:05,320 --> 00:03:08,160 Speaker 1: through through econometric models, but you can see it in 56 00:03:08,200 --> 00:03:13,079 Speaker 1: the data. So now we have a significant deflation CPI 57 00:03:13,200 --> 00:03:16,519 Speaker 1: dash R as dropping at a two percent annual rate. 58 00:03:16,960 --> 00:03:20,280 Speaker 1: And now if you layer in this depreciation in oil, 59 00:03:21,000 --> 00:03:24,000 Speaker 1: we're headed for a pretty significant deflation. I mean, essentially 60 00:03:24,040 --> 00:03:26,280 Speaker 1: we're in deflation right now. It's just not going to 61 00:03:26,320 --> 00:03:28,440 Speaker 1: show up in the indices for a year because they're 62 00:03:28,480 --> 00:03:32,359 Speaker 1: lagged by a year. So, you know, do you think 63 00:03:32,360 --> 00:03:35,000 Speaker 1: this banking situation here in the US, this run on 64 00:03:35,040 --> 00:03:38,640 Speaker 1: these handful of banks will prompt the FED or should 65 00:03:38,680 --> 00:03:40,960 Speaker 1: it prompt the Fed the pause here? If not, maybe 66 00:03:40,960 --> 00:03:43,600 Speaker 1: being absolutely pause that's what they should. Well, they should 67 00:03:43,600 --> 00:03:47,080 Speaker 1: really cut right, but they are behind every Almost every 68 00:03:47,480 --> 00:03:51,920 Speaker 1: market participant would agree they're behind the curve. So the 69 00:03:51,960 --> 00:03:54,640 Speaker 1: best case is probably that they pause. They definitely should 70 00:03:54,640 --> 00:03:57,920 Speaker 1: not raise rates. That would be a disaster. And again 71 00:03:57,960 --> 00:04:00,520 Speaker 1: they're in a much different situation where they are already 72 00:04:00,600 --> 00:04:04,120 Speaker 1: raised much higher and we have a bigger inversion than 73 00:04:04,120 --> 00:04:06,640 Speaker 1: they do in Europe. Jay, one of the common piece 74 00:04:06,680 --> 00:04:09,400 Speaker 1: of commentary that came out of I believe Nomura off 75 00:04:09,400 --> 00:04:13,640 Speaker 1: the Fed FDIC move this past weekend was that's essentially 76 00:04:13,680 --> 00:04:17,120 Speaker 1: stimulative and you might then see the Fed end quantity 77 00:04:17,200 --> 00:04:20,240 Speaker 1: of tightening as a result. Do you view this kind 78 00:04:20,240 --> 00:04:23,719 Speaker 1: of banking fallout and what has the pre FED has 79 00:04:23,760 --> 00:04:28,320 Speaker 1: been prompted to do as stimulative. Well, in the long run, 80 00:04:28,320 --> 00:04:30,920 Speaker 1: it will be stimulative. And that's one reason that we 81 00:04:30,920 --> 00:04:34,800 Speaker 1: were saying before this banking crisis that the market would 82 00:04:34,800 --> 00:04:36,760 Speaker 1: be weak during this period and that we would be 83 00:04:36,760 --> 00:04:39,200 Speaker 1: in thirty eight hundred to forty two hundred. That's without 84 00:04:39,200 --> 00:04:42,080 Speaker 1: a banking crisis. So the fact that that range is 85 00:04:42,120 --> 00:04:45,400 Speaker 1: still working is remarkable. But there's a simple reason for it. 86 00:04:46,640 --> 00:04:50,640 Speaker 1: Long term rates are plummeting, and it's not actually true, 87 00:04:50,680 --> 00:04:53,560 Speaker 1: but everybody trades tech stocks like they have a longer duration. 88 00:04:53,600 --> 00:04:55,400 Speaker 1: They actually don't, but they still trade it that way. 89 00:04:55,520 --> 00:04:59,240 Speaker 1: They're all all publicly traded companies roughly have twenty two 90 00:04:59,279 --> 00:05:02,280 Speaker 1: year durations. But they're also a safe haven. They don't 91 00:05:02,279 --> 00:05:06,560 Speaker 1: borrow money, they have tremendous cash reserves, and they're very 92 00:05:06,600 --> 00:05:11,440 Speaker 1: powerful companies, so they're being used as safe haven there 93 00:05:11,520 --> 00:05:14,000 Speaker 1: dominate the market. So if you look, there's there's an 94 00:05:14,200 --> 00:05:20,160 Speaker 1: enormous rotation into large cap tech safety and out of 95 00:05:20,279 --> 00:05:23,320 Speaker 1: things that are related to financials, including rates, which is 96 00:05:23,360 --> 00:05:25,680 Speaker 1: irrational because rates are dropping. That's good for them. They're 97 00:05:25,720 --> 00:05:29,640 Speaker 1: well capitalized, so that's why the market's not crashing, But 98 00:05:29,760 --> 00:05:32,000 Speaker 1: underneath it, it really is crashing. Like if you look 99 00:05:32,040 --> 00:05:36,600 Speaker 1: at the regional banks for obviously, from your perspective, what 100 00:05:36,640 --> 00:05:40,039 Speaker 1: are we seeing with these regional banks, the svbs, the 101 00:05:40,200 --> 00:05:43,880 Speaker 1: maybe even the FRC today the signature bank are these 102 00:05:43,920 --> 00:05:48,160 Speaker 1: one offs or they have a systemic background to them. 103 00:05:48,200 --> 00:05:50,680 Speaker 1: Do you think, well, I think it's it's not fully 104 00:05:50,760 --> 00:05:54,760 Speaker 1: systemic because as I mentioned, money center banks and superregionals 105 00:05:54,800 --> 00:05:57,920 Speaker 1: are going to benefit, and that's the dominant portion of 106 00:05:57,960 --> 00:06:00,880 Speaker 1: the banking system. But and this is going to be 107 00:06:00,960 --> 00:06:04,440 Speaker 1: an issue for politicians hopefully, is that their banks are 108 00:06:04,480 --> 00:06:08,040 Speaker 1: getting crushed, so the community banks and the regular regional banks. 109 00:06:08,520 --> 00:06:12,240 Speaker 1: Because if you think about a CFO, so there's sort 110 00:06:12,279 --> 00:06:14,400 Speaker 1: of an implicit guarantee, but it's kind of like the 111 00:06:14,880 --> 00:06:17,400 Speaker 1: commercial sort of is not good enough. So if you're 112 00:06:17,480 --> 00:06:22,400 Speaker 1: CFO and a bank, I'll mention any names certain bank closes, 113 00:06:23,160 --> 00:06:25,120 Speaker 1: like my CFO call and say hey, should we move 114 00:06:25,160 --> 00:06:27,159 Speaker 1: all of our reserves? Because you have to make that 115 00:06:27,240 --> 00:06:30,400 Speaker 1: call because you're going to be fired if you said, oh, yeah, 116 00:06:30,400 --> 00:06:33,359 Speaker 1: I know, Silicon Valley Bank happened, but we thought that 117 00:06:33,600 --> 00:06:35,719 Speaker 1: the FTI C would step in and they decided not 118 00:06:35,800 --> 00:06:38,560 Speaker 1: to for political reasons. You're fired. So you have to 119 00:06:38,600 --> 00:06:43,320 Speaker 1: move your reserves, your checking spread it out, and you're 120 00:06:43,360 --> 00:06:45,200 Speaker 1: going to move it to super You probably don't want 121 00:06:45,240 --> 00:06:47,440 Speaker 1: fifty or five hundred accounts, so you're going to move 122 00:06:47,480 --> 00:06:49,800 Speaker 1: it to money center bank, where then you're not going 123 00:06:49,880 --> 00:06:52,160 Speaker 1: to get fired, Like if city groups goes bankrupt, you're 124 00:06:52,160 --> 00:06:54,680 Speaker 1: not gonna get fired. So there's going to be an 125 00:06:54,720 --> 00:06:58,479 Speaker 1: ongoing run on small banks. It's a huge problem because 126 00:06:58,520 --> 00:07:01,760 Speaker 1: they're going to become unprofit. They're going to get downgraded 127 00:07:01,880 --> 00:07:07,200 Speaker 1: by the rating age whis which that precipitated Silicon Valley's demise, 128 00:07:07,440 --> 00:07:11,720 Speaker 1: along with the worst equity offering ever executed in human history. 129 00:07:12,120 --> 00:07:15,040 Speaker 1: I don't I'm certain there's never been an equity offering 130 00:07:15,080 --> 00:07:17,640 Speaker 1: that resulted in bankruptcy, right, Like, you don't need to 131 00:07:17,680 --> 00:07:19,160 Speaker 1: do a post meeting to see if that was a 132 00:07:19,160 --> 00:07:21,920 Speaker 1: good That sounds like a Morgan Stanley bank are pitching 133 00:07:21,960 --> 00:07:27,320 Speaker 1: against think any on any particular firms. But that is 134 00:07:27,360 --> 00:07:30,280 Speaker 1: the worst equity offering in the history of human quick 135 00:07:30,360 --> 00:07:33,920 Speaker 1: question here, and forgive my ignorance on this. That doesn't 136 00:07:33,960 --> 00:07:36,640 Speaker 1: necessarily seem like a new concept here naturally that if 137 00:07:36,640 --> 00:07:38,280 Speaker 1: you want, the bigger banks are going to be safer 138 00:07:38,320 --> 00:07:41,160 Speaker 1: because essentially they're too big to fail, especially since oh wait, 139 00:07:41,800 --> 00:07:44,800 Speaker 1: why did a lot of folks invest in these smaller banks? Anyway? 140 00:07:44,840 --> 00:07:47,600 Speaker 1: Was the incentive there? Well? I think that there's also 141 00:07:47,720 --> 00:07:49,880 Speaker 1: too much heat being put on the san Francisco fed 142 00:07:50,440 --> 00:07:53,320 Speaker 1: because no stress test ever said you're going to lose 143 00:07:53,360 --> 00:07:56,360 Speaker 1: all of your deposits in twenty four hours. Yeah, there's 144 00:07:56,400 --> 00:07:58,440 Speaker 1: never been a situation like that. Even like during the 145 00:07:58,480 --> 00:08:02,000 Speaker 1: financial crisis, we did guarantee the deposits, so we created 146 00:08:02,040 --> 00:08:05,120 Speaker 1: a system. By accident, we're having this two hundred and 147 00:08:05,200 --> 00:08:07,720 Speaker 1: fifty limit, which is never hasn't been increased, and there 148 00:08:07,720 --> 00:08:11,800 Speaker 1: have been bills to increase. It really created a tinderbox 149 00:08:11,880 --> 00:08:15,800 Speaker 1: that exploded. It's just like mortgage the mortgage market. There's 150 00:08:15,840 --> 00:08:20,080 Speaker 1: always something that hasn't been addressed that a two rapid 151 00:08:20,200 --> 00:08:24,840 Speaker 1: fed tightening cycle will expose. And there's been like ten 152 00:08:24,880 --> 00:08:26,800 Speaker 1: of them, even in my career. You know, if you 153 00:08:26,800 --> 00:08:31,680 Speaker 1: think about junk bond crisis, SNL crisis, commercial real estate 154 00:08:31,680 --> 00:08:35,280 Speaker 1: crisis in the early eighties, there's always oh tech tech 155 00:08:35,360 --> 00:08:38,640 Speaker 1: crash after that tightening cycle. So this is just the 156 00:08:38,640 --> 00:08:41,720 Speaker 1: flaw that should have been fixed. Should have guaranteed all deposits. 157 00:08:41,720 --> 00:08:43,760 Speaker 1: It won't even cost so much because you get a 158 00:08:43,840 --> 00:08:45,959 Speaker 1: low you can have a lower rate on more deposits. 159 00:08:46,640 --> 00:08:49,160 Speaker 1: So you know, would it would hurt the money center 160 00:08:49,240 --> 00:08:52,200 Speaker 1: banks and it would benefit the regional banks. All right, 161 00:08:52,240 --> 00:08:55,800 Speaker 1: So what do you what what what? What do you 162 00:08:55,840 --> 00:08:57,680 Speaker 1: think folks should be doing in the market today. There's 163 00:08:57,720 --> 00:09:00,600 Speaker 1: a lot of cross currents here with the FED, um 164 00:09:00,800 --> 00:09:04,240 Speaker 1: with this banking crisis, if you will, is this just 165 00:09:04,280 --> 00:09:06,040 Speaker 1: stay on the sidelines here, because I'm looking at the 166 00:09:06,040 --> 00:09:08,240 Speaker 1: market here and it's kind of hanging in there. Yeah, 167 00:09:08,320 --> 00:09:11,280 Speaker 1: so that's the rotation going on. So I'm sure we'll 168 00:09:11,320 --> 00:09:13,960 Speaker 1: have the SNPF, but I'm sure the tech stocks are 169 00:09:14,000 --> 00:09:17,360 Speaker 1: starting to rip an offset the bit here. Yeah, right, 170 00:09:17,400 --> 00:09:21,280 Speaker 1: So I do think that ultimately this is bullish because 171 00:09:21,320 --> 00:09:23,520 Speaker 1: assuming the FED, but I would wait to have the 172 00:09:23,600 --> 00:09:28,240 Speaker 1: FED pause, not raise rate, and hopefully good commentary about 173 00:09:28,280 --> 00:09:31,560 Speaker 1: even being willing to cut, and then that will take 174 00:09:31,600 --> 00:09:33,640 Speaker 1: the key the key overhang on the market, which I've 175 00:09:33,640 --> 00:09:38,080 Speaker 1: said before on your shows, is that as the FED 176 00:09:38,160 --> 00:09:40,160 Speaker 1: because they were just completely out to lunch and thought 177 00:09:40,200 --> 00:09:43,120 Speaker 1: it was fine to raise rates at this unprecedented level. 178 00:09:43,160 --> 00:09:46,400 Speaker 1: So now because the FED regulates banks, they can't ignore it. 179 00:09:47,040 --> 00:09:49,240 Speaker 1: You know, they're getting the calls from the FDC, they're 180 00:09:49,240 --> 00:09:52,200 Speaker 1: getting the calls from Congress, and so it's not like 181 00:09:52,280 --> 00:09:55,640 Speaker 1: CSFB that none of our you know, our politicians, so 182 00:09:56,000 --> 00:09:59,640 Speaker 1: they have to focus on this and presumably they will 183 00:10:00,160 --> 00:10:04,000 Speaker 1: consider rate increases there won't be at their normal level 184 00:10:04,040 --> 00:10:06,280 Speaker 1: of being behind by about twelve months. They can't afford 185 00:10:06,280 --> 00:10:07,920 Speaker 1: to be behind twelve months here, they have to cut 186 00:10:08,000 --> 00:10:11,880 Speaker 1: rates more quicker than that. Well, doesn't that factor in 187 00:10:12,320 --> 00:10:15,000 Speaker 1: things like any of the retail data, any of the 188 00:10:15,080 --> 00:10:17,800 Speaker 1: Chinese story, any of the eco stuff that we I 189 00:10:17,840 --> 00:10:20,520 Speaker 1: feel like have been paying attention to as these tailwinds 190 00:10:20,559 --> 00:10:25,000 Speaker 1: for inflation in the face of this banking fallout. Does 191 00:10:25,000 --> 00:10:29,800 Speaker 1: the rest matter? Not really? No, That's why it's important 192 00:10:29,840 --> 00:10:32,640 Speaker 1: to focus on those two elements that drove inflation. I'm 193 00:10:32,679 --> 00:10:36,679 Speaker 1: talking high inflation by way, not one versus two versus three. Yeah, 194 00:10:36,920 --> 00:10:41,760 Speaker 1: is housing core and energy is only six and keeping 195 00:10:41,800 --> 00:10:45,040 Speaker 1: my natural gas presents during an eighty percent in the 196 00:10:45,120 --> 00:10:48,920 Speaker 1: last four months, highly deflationary. But every business the United 197 00:10:48,920 --> 00:10:53,960 Speaker 1: States uses energy, and so that's the key supply shock. 198 00:10:54,200 --> 00:10:57,920 Speaker 1: It's not necessarily the ports or chips. I mean, chips 199 00:10:58,000 --> 00:11:01,480 Speaker 1: was a problem because you can't build cars. But those 200 00:11:01,520 --> 00:11:03,760 Speaker 1: are the key drivers. And you should look at oil. 201 00:11:04,080 --> 00:11:06,679 Speaker 1: It's both an indicator of inflation and it's also an 202 00:11:06,720 --> 00:11:10,800 Speaker 1: indicator of the potential for a global recession. Jay, we 203 00:11:10,840 --> 00:11:13,120 Speaker 1: can't let you go without getting kind of your thoughts 204 00:11:13,160 --> 00:11:16,600 Speaker 1: on energy right here, I see WTI crude oil down again. Today, 205 00:11:16,600 --> 00:11:19,839 Speaker 1: we're sixty six dollars at barrel. What's kind of next 206 00:11:19,880 --> 00:11:22,760 Speaker 1: twelve eighteen months? What are you looking for an energy space? Well, 207 00:11:23,120 --> 00:11:26,440 Speaker 1: before the financial crisis, we were at seventy five to 208 00:11:26,600 --> 00:11:30,200 Speaker 1: ninety five on WTI. Because you do have a recovery 209 00:11:30,240 --> 00:11:34,960 Speaker 1: in China, you do have a pretty robust US economy, 210 00:11:35,000 --> 00:11:37,959 Speaker 1: which is shocking, but it's because of the pandemic, and 211 00:11:38,080 --> 00:11:40,680 Speaker 1: you still do have an energy crisis or at least 212 00:11:40,679 --> 00:11:43,600 Speaker 1: an energy deficit in Europe. So those are all supportive factors. 213 00:11:43,640 --> 00:11:48,040 Speaker 1: But investors treat oil as a risk asset, and this 214 00:11:48,120 --> 00:11:50,160 Speaker 1: is a risk off environment. So you're going to crash 215 00:11:50,200 --> 00:11:54,880 Speaker 1: bullet well below our level, and so it's all bets 216 00:11:54,880 --> 00:11:57,200 Speaker 1: are off until we get clarity on the FED and 217 00:11:57,520 --> 00:12:00,560 Speaker 1: possibly maybe a guarantee of all deposits. I mean, that's 218 00:12:00,559 --> 00:12:02,200 Speaker 1: going to be hard to get through Congress, but that's 219 00:12:02,200 --> 00:12:04,959 Speaker 1: what's needed, all right, Jake, great stuff, Really appreciate it 220 00:12:05,000 --> 00:12:09,359 Speaker 1: as always. Jay Haffield, CEO, founder and portfolio mentor Infrastructure 221 00:12:09,400 --> 00:12:12,520 Speaker 1: Capital Visors, joining us live here in our Bloomberg Interactive 222 00:12:12,840 --> 00:12:20,000 Speaker 1: Brokers studio. All right, Let's get back over to Europe 223 00:12:20,000 --> 00:12:21,680 Speaker 1: a little bit, get a sense of kind of what 224 00:12:21,800 --> 00:12:24,520 Speaker 1: the feeling is here with the ECB with Credit Swiss. 225 00:12:24,520 --> 00:12:28,280 Speaker 1: We could do that with doctor Vanya Straviakva, Professor of 226 00:12:28,320 --> 00:12:32,719 Speaker 1: economics at the London Business School. Doctor, thanks so much 227 00:12:32,720 --> 00:12:36,160 Speaker 1: for joining us here. Let's start with the European Central Bank. 228 00:12:36,679 --> 00:12:39,720 Speaker 1: They came out with a fifty basis point increase given 229 00:12:39,720 --> 00:12:42,720 Speaker 1: all that's going on over there with the banking situation 230 00:12:42,960 --> 00:12:46,439 Speaker 1: and namely Credit Swiss. Do you think that was a mistake. 231 00:12:46,480 --> 00:12:49,240 Speaker 1: Should they have paused or maybe just raised the rate 232 00:12:49,320 --> 00:12:52,880 Speaker 1: twenty five basis points? What do you think? So? Thank 233 00:12:52,920 --> 00:12:54,320 Speaker 1: you so much for having me. It's a pleasure to 234 00:12:54,360 --> 00:12:56,400 Speaker 1: be here. I think actually they did the right thing. 235 00:12:56,760 --> 00:12:59,520 Speaker 1: Given the numbers for inflation. They have to establish credibility 236 00:12:59,520 --> 00:13:01,960 Speaker 1: at this point, and I think the main concern in 237 00:13:02,000 --> 00:13:04,880 Speaker 1: Europe right now is to get inflation under control. I'm 238 00:13:04,960 --> 00:13:08,360 Speaker 1: less worried about solvency issues with the banks in Europe 239 00:13:08,400 --> 00:13:11,400 Speaker 1: at this point, and I think they're probably thinking the 240 00:13:11,480 --> 00:13:14,440 Speaker 1: same way. Of course, they will be liquidity issues on 241 00:13:14,480 --> 00:13:16,400 Speaker 1: the horizon, which is what we're seeing with Credit Swist 242 00:13:16,440 --> 00:13:19,720 Speaker 1: potentially at a banks, but they're ready to provide a backstop. 243 00:13:19,760 --> 00:13:23,080 Speaker 1: For example, the Swiss National bandit the same for creditswis is. 244 00:13:23,120 --> 00:13:25,960 Speaker 1: Of course we can do that for the Eurozone banks. 245 00:13:26,040 --> 00:13:27,920 Speaker 1: So I think treating it at the moment as a 246 00:13:27,960 --> 00:13:30,880 Speaker 1: liquidity rud and a solvency crisis is the right approach. 247 00:13:31,360 --> 00:13:35,120 Speaker 1: Regulation is quite strict, especially for the large banks in Europe, 248 00:13:35,120 --> 00:13:38,880 Speaker 1: so credit Swiss is very well regulated. For example, you 249 00:13:38,920 --> 00:13:42,360 Speaker 1: know the one correcting that was done by Switzerland, and 250 00:13:42,360 --> 00:13:44,960 Speaker 1: also the UK was ring fencing the retail banking of 251 00:13:45,000 --> 00:13:47,400 Speaker 1: the large banks. So both the UK and Switzer one 252 00:13:47,480 --> 00:13:50,160 Speaker 1: realize after the global financial crisis that these countries do 253 00:13:50,200 --> 00:13:53,480 Speaker 1: not have the physical capacity to bail out their massive banks, 254 00:13:53,559 --> 00:13:56,480 Speaker 1: so ring fencing the retail bank, which is essential for 255 00:13:56,480 --> 00:13:59,199 Speaker 1: the functioning of the economy, essentially is giving them the 256 00:13:59,360 --> 00:14:02,360 Speaker 1: freedom to not worry too much about having to put 257 00:14:02,400 --> 00:14:05,760 Speaker 1: in massive bailouts. And then liquidity can be dealt with 258 00:14:05,880 --> 00:14:09,400 Speaker 1: in many ways, such as providing loans against the phase 259 00:14:09,480 --> 00:14:11,840 Speaker 1: value of the collateral, which is what the FEDS started doing, 260 00:14:12,480 --> 00:14:14,880 Speaker 1: so that they don't have to worry about the decrease 261 00:14:14,960 --> 00:14:20,520 Speaker 1: in the evaluations of long term government that Professor, I'm 262 00:14:20,520 --> 00:14:23,920 Speaker 1: curious about the timeline here, it feels like the banking 263 00:14:23,960 --> 00:14:27,280 Speaker 1: fallout to your point two pause point as well, has 264 00:14:27,360 --> 00:14:30,920 Speaker 1: kind of thrown the idea of the energy crisis, this 265 00:14:31,080 --> 00:14:33,400 Speaker 1: kind of multi year recession we were expecting in the 266 00:14:33,520 --> 00:14:37,840 Speaker 1: UK out the window. To what extent are those still 267 00:14:37,840 --> 00:14:40,600 Speaker 1: the factors that the BOE and the ECB have be 268 00:14:40,720 --> 00:14:44,240 Speaker 1: watching well. So the problems in the UK area are 269 00:14:44,320 --> 00:14:46,760 Speaker 1: separate because they have to deal with the consequences of 270 00:14:46,800 --> 00:14:50,000 Speaker 1: Brexit as well mismanagement of the economy for many, many years, sadly, 271 00:14:50,960 --> 00:14:53,880 Speaker 1: so we are seeing that in the news. The public 272 00:14:53,920 --> 00:14:57,360 Speaker 1: sector is collapsing in the UK. We are seeing strikes 273 00:14:57,440 --> 00:15:01,240 Speaker 1: daily in the news. So those issues are not going away, 274 00:15:01,280 --> 00:15:03,960 Speaker 1: those structural issues that governments will have to deal with. 275 00:15:04,480 --> 00:15:07,600 Speaker 1: But getting inflation under control is absolutely crucial because if 276 00:15:07,600 --> 00:15:09,520 Speaker 1: we think that high interest rates are a problem for 277 00:15:09,560 --> 00:15:12,400 Speaker 1: the banking sector, imagine having high interest rates for a 278 00:15:12,440 --> 00:15:15,160 Speaker 1: very long period of time because we cannot get inflation 279 00:15:15,240 --> 00:15:18,520 Speaker 1: under control, Potentially the problems will be even more severe, 280 00:15:18,600 --> 00:15:21,920 Speaker 1: particularly for the mortgages of course, so Europe and the 281 00:15:22,040 --> 00:15:24,800 Speaker 1: UK the majority of the mortgages of floating rate mortgages, 282 00:15:24,840 --> 00:15:27,960 Speaker 1: and that's where the real problem will be because a 283 00:15:28,000 --> 00:15:30,280 Speaker 1: lot of the borrowers might not be able to soon 284 00:15:30,440 --> 00:15:33,880 Speaker 1: start repay their mortgages and that will generate a recession 285 00:15:33,920 --> 00:15:36,960 Speaker 1: down the road. So the longer the high interest rates remain, 286 00:15:37,080 --> 00:15:39,560 Speaker 1: which they will if we don't get inflation under control, 287 00:15:39,960 --> 00:15:43,400 Speaker 1: the bigger the cost on anyone that has a mortgage 288 00:15:43,400 --> 00:15:45,200 Speaker 1: in Europe and the UK, and that's where the real 289 00:15:45,200 --> 00:15:49,000 Speaker 1: recession is going to come. We're getting a little bit 290 00:15:49,080 --> 00:15:52,440 Speaker 1: of news. I just want to announce to our international 291 00:15:52,440 --> 00:15:55,280 Speaker 1: audience here JP Morgan and Morgan Stanley in tax to 292 00:15:55,440 --> 00:15:58,200 Speaker 1: bolster First Republic. This of course was the next bank 293 00:15:58,240 --> 00:16:00,920 Speaker 1: that was expected to kind of get down with signature 294 00:16:00,920 --> 00:16:03,120 Speaker 1: with Silicon Valley Bank. This is according to reports from 295 00:16:03,120 --> 00:16:05,560 Speaker 1: the Wall Street Journal. You are seeing farc those shares 296 00:16:05,920 --> 00:16:08,400 Speaker 1: up hair some of those losses still down twenty six percent, 297 00:16:08,440 --> 00:16:11,160 Speaker 1: but certainly off the lows of down about thirty percent. 298 00:16:11,560 --> 00:16:13,640 Speaker 1: Professor Vannia, I want to bring you back in here, 299 00:16:13,760 --> 00:16:16,040 Speaker 1: not to talk about First Republic, but perhaps a similar 300 00:16:16,040 --> 00:16:20,400 Speaker 1: situation with Credit Suis as well. Do the woes and 301 00:16:20,480 --> 00:16:23,920 Speaker 1: the European baking sector go away if someone takes over 302 00:16:24,160 --> 00:16:29,200 Speaker 1: parts of Credit Suis well? So the problem with Great 303 00:16:29,240 --> 00:16:32,520 Speaker 1: Swiss is effectively, they could never gain their footing after 304 00:16:32,520 --> 00:16:34,920 Speaker 1: the global financial crisis. They couldn't figure out what type 305 00:16:34,920 --> 00:16:36,960 Speaker 1: of bank they will be in the sense that they 306 00:16:36,960 --> 00:16:40,000 Speaker 1: were a massive bank. The asset management division and the 307 00:16:40,000 --> 00:16:42,360 Speaker 1: wealth management divisions who are a big part of the bank, however, 308 00:16:42,440 --> 00:16:45,360 Speaker 1: they're not competitive. The fees that they were charging couldn't 309 00:16:45,360 --> 00:16:47,680 Speaker 1: compete with the black Rocks and the vanguards of the world, 310 00:16:47,720 --> 00:16:51,560 Speaker 1: and essentially the decreasing fees due to the advancement of ETFs. 311 00:16:52,160 --> 00:16:55,040 Speaker 1: So I think that's a structural problem. So more generally, 312 00:16:55,160 --> 00:16:58,640 Speaker 1: people compare this stampede of depositors from banks now to 313 00:16:58,720 --> 00:17:01,360 Speaker 1: a classic bank run. I think that's not correct. So 314 00:17:01,360 --> 00:17:04,639 Speaker 1: the fundamental problem here is not about having deposit insurance 315 00:17:04,640 --> 00:17:08,400 Speaker 1: that's not credible or insufficient deposits insurance, as governments are 316 00:17:08,400 --> 00:17:10,840 Speaker 1: clearly willing to bank depositors in full, as the FAT 317 00:17:10,920 --> 00:17:14,360 Speaker 1: has shown. It's about final investors waking up and realizing 318 00:17:14,400 --> 00:17:17,320 Speaker 1: their alternatives to bank deposits that can give them both 319 00:17:17,320 --> 00:17:20,399 Speaker 1: liquidity and much high return. The banking sector will have 320 00:17:20,440 --> 00:17:23,880 Speaker 1: to shrink, so Credit Suite has been experiencing that true 321 00:17:23,920 --> 00:17:25,840 Speaker 1: the ass management division, but this will be true for 322 00:17:26,200 --> 00:17:29,480 Speaker 1: your standard depositors as well, because many banks will not 323 00:17:29,520 --> 00:17:31,359 Speaker 1: be able to afford to off a high interest rates 324 00:17:31,359 --> 00:17:34,719 Speaker 1: on depositors, right, So this is because on their assets 325 00:17:34,760 --> 00:17:36,840 Speaker 1: then they will not be able to make the interest 326 00:17:36,920 --> 00:17:40,120 Speaker 1: rates that depositors can make just by purchasing the government data. 327 00:17:40,160 --> 00:17:42,520 Speaker 1: This point, I think that's the big problem, and the 328 00:17:42,560 --> 00:17:47,600 Speaker 1: trend of bank disintermediation had already started, and the rate hikes, 329 00:17:47,640 --> 00:17:51,160 Speaker 1: together with the SVB collapse and the negative news around 330 00:17:51,160 --> 00:17:54,240 Speaker 1: credit suites, are just precipitating the adjustment. Yes, there'll be 331 00:17:54,320 --> 00:17:56,879 Speaker 1: some casualties along the way, but the old bank business 332 00:17:56,880 --> 00:17:59,840 Speaker 1: model is simply not sustainable in the new environment where 333 00:18:00,000 --> 00:18:02,919 Speaker 1: even small retail investors can open a bangered account overnight 334 00:18:02,960 --> 00:18:06,080 Speaker 1: and investing government data bays post to phrase. So now 335 00:18:06,080 --> 00:18:09,640 Speaker 1: to be honest, yeah, no, go ahead, professor. What I'm 336 00:18:09,680 --> 00:18:13,160 Speaker 1: particularly concerned about, and I don't hear being spoken about 337 00:18:13,359 --> 00:18:16,240 Speaker 1: enough in the news, is essentially there is someone on 338 00:18:16,320 --> 00:18:19,000 Speaker 1: the other end of these interest rate hedges. So the 339 00:18:19,040 --> 00:18:21,679 Speaker 1: interest rate indurvatives market is the most liquid market in 340 00:18:21,720 --> 00:18:25,240 Speaker 1: the world essentially, So presumably a lot of financial institutions 341 00:18:25,240 --> 00:18:28,240 Speaker 1: and banks are hedge induration risk, But who is providing 342 00:18:28,280 --> 00:18:30,680 Speaker 1: this hedge. So we know that this ended a very 343 00:18:30,680 --> 00:18:33,439 Speaker 1: badly for AG in two thousand and eight because there 344 00:18:33,440 --> 00:18:37,119 Speaker 1: were the sealers of insurance for the mortgage back securities. 345 00:18:37,640 --> 00:18:39,680 Speaker 1: If the risk is concentrated and there are a few 346 00:18:39,760 --> 00:18:44,840 Speaker 1: entities actually providing the interest rate essentially hedge, then I 347 00:18:44,880 --> 00:18:47,000 Speaker 1: think this will be the casualties this time. We don't 348 00:18:47,000 --> 00:18:48,960 Speaker 1: know yet where the risk is concentrated, which is a 349 00:18:48,960 --> 00:18:52,320 Speaker 1: big problem I think regulators. Okay, so professor, just kind 350 00:18:52,359 --> 00:18:56,160 Speaker 1: of getting back to the ECB here, I mean the risk. 351 00:18:56,359 --> 00:18:57,920 Speaker 1: You know, we've heard a lot of folks say, hey, 352 00:18:57,960 --> 00:19:01,280 Speaker 1: the ECB is making a stake here. They need the 353 00:19:01,400 --> 00:19:06,080 Speaker 1: pause if they're not necessarily just for the credit Swiss reason, 354 00:19:06,119 --> 00:19:08,760 Speaker 1: but for some of the reasons you outlined about you know, 355 00:19:08,760 --> 00:19:11,199 Speaker 1: there's some real stresses out there in the economy, and 356 00:19:11,240 --> 00:19:14,720 Speaker 1: then the ECB really risk breaking the European economy and 357 00:19:14,880 --> 00:19:19,400 Speaker 1: pushing into a deep recession. How viable are those risks 358 00:19:19,400 --> 00:19:23,320 Speaker 1: do you think? Well, it is true that people arguing 359 00:19:23,359 --> 00:19:25,040 Speaker 1: that they might be going at a pace that is 360 00:19:25,080 --> 00:19:27,959 Speaker 1: too fast, I think they are doing the right thing 361 00:19:28,000 --> 00:19:30,760 Speaker 1: to defend their credibility and whatever the issues there might 362 00:19:30,800 --> 00:19:33,000 Speaker 1: be with the financial sector which I don't. I do 363 00:19:33,040 --> 00:19:35,400 Speaker 1: believe they will be issues. As we discussed, they can 364 00:19:35,440 --> 00:19:37,919 Speaker 1: handle them in different ways, so they have a lot 365 00:19:37,960 --> 00:19:40,320 Speaker 1: of macropotential tools. It's not just the interest rates that 366 00:19:40,359 --> 00:19:43,240 Speaker 1: they can employ in order to handle any staguties in 367 00:19:43,240 --> 00:19:45,680 Speaker 1: the financial sector. And it's almost like time to give 368 00:19:45,720 --> 00:19:50,280 Speaker 1: the patient the essentially the medicine it needs, because the 369 00:19:50,359 --> 00:19:54,639 Speaker 1: longer we postpone normalization going back to normal interest rates, 370 00:19:54,800 --> 00:19:57,280 Speaker 1: these adjustments has to take place at some point. Okay, 371 00:19:58,080 --> 00:20:00,280 Speaker 1: all right, you just have to leave it there, doctor 372 00:20:00,520 --> 00:20:04,080 Speaker 1: doctor Vannier strev Stravia Kava, Professor of Economics of the 373 00:20:04,119 --> 00:20:06,320 Speaker 1: London School of Business. We really appreciate getting her time. 374 00:20:06,359 --> 00:20:10,520 Speaker 1: She's got some cutting edge research on the banking sector 375 00:20:10,560 --> 00:20:13,840 Speaker 1: and it's just absolutely at the forefront here as the 376 00:20:13,880 --> 00:20:17,159 Speaker 1: European regulators and the Swiss regulators look at you know, 377 00:20:17,200 --> 00:20:21,919 Speaker 1: look at credit Swiss and what to do there. All right, 378 00:20:22,000 --> 00:20:23,840 Speaker 1: let's get back to the story that just broke over 379 00:20:23,960 --> 00:20:26,399 Speaker 1: the last few minutes of Wall Street Journal reporting JP Morgan, 380 00:20:26,440 --> 00:20:30,119 Speaker 1: Morgan Stanley and others in talks to aid First Republic. 381 00:20:31,080 --> 00:20:33,520 Speaker 1: I mean, this is so obvious. I can't imagine these 382 00:20:33,520 --> 00:20:35,720 Speaker 1: bankers are actually gonna get paid this investment backers. You're 383 00:20:35,760 --> 00:20:38,440 Speaker 1: putting this deal to together. I could do this, but 384 00:20:38,520 --> 00:20:41,199 Speaker 1: let's bring in some of our banking experts, Herman Chang 385 00:20:41,240 --> 00:20:44,399 Speaker 1: and Arnod cale Kuda. Arnold covers the credit side and 386 00:20:44,640 --> 00:20:46,840 Speaker 1: Herman kind of more on the equity side. For so 387 00:20:46,880 --> 00:20:49,040 Speaker 1: we got you covered when it comes to these banks. 388 00:20:50,040 --> 00:20:53,240 Speaker 1: Herman to me, what do you make of this news? 389 00:20:53,280 --> 00:20:55,359 Speaker 1: It kind of makes complete sense to me. This isn't 390 00:20:55,640 --> 00:20:58,920 Speaker 1: I would think. And either if they're gonna put capital 391 00:20:58,960 --> 00:21:02,480 Speaker 1: in or outright buy parts are all of that seems 392 00:21:02,520 --> 00:21:04,600 Speaker 1: like an easy deal to do. Yeah, I think so. 393 00:21:06,000 --> 00:21:08,960 Speaker 1: We still think our First Republic is a really strong 394 00:21:09,040 --> 00:21:12,720 Speaker 1: franchise with a lot of wealth and managements assets that 395 00:21:12,760 --> 00:21:16,639 Speaker 1: are attractive to a potential buyer. And really it's been 396 00:21:16,640 --> 00:21:19,840 Speaker 1: sucking into the vortex with some of the uncertainty that 397 00:21:19,840 --> 00:21:24,920 Speaker 1: that proliferated with SVB and Signature. But the capitol infusion 398 00:21:25,280 --> 00:21:28,440 Speaker 1: news is definitely great news for the bank and management. 399 00:21:28,480 --> 00:21:31,800 Speaker 1: So we're looking to hear more on that front. All right, Arnold, 400 00:21:31,920 --> 00:21:33,800 Speaker 1: come on in here. We just had Alison Williams on 401 00:21:34,480 --> 00:21:37,000 Speaker 1: in the last hour we're talking about this deal, and 402 00:21:37,119 --> 00:21:39,760 Speaker 1: she said, look, this isn't an acquisition. This is a lifeline, 403 00:21:39,800 --> 00:21:43,679 Speaker 1: a lifeline that might not help the stock and bond investors. Well, 404 00:21:43,760 --> 00:21:45,320 Speaker 1: is it gonna help the bond investors at all? Do 405 00:21:45,400 --> 00:21:48,119 Speaker 1: they care? Well? I mean in terms of them. You know, 406 00:21:48,320 --> 00:21:51,720 Speaker 1: we had some big downgrade yesterday from like a you know, 407 00:21:51,840 --> 00:21:54,720 Speaker 1: A minus triple plus two you know, high yield. Yeah, 408 00:21:54,880 --> 00:21:56,600 Speaker 1: big deal. But but they only had an eight hundred 409 00:21:56,600 --> 00:21:59,040 Speaker 1: million of bonds. This is what this we call fallen 410 00:21:59,119 --> 00:22:02,119 Speaker 1: angel Yeah, but I mean relatively speaking, it's it's it's 411 00:22:02,160 --> 00:22:03,720 Speaker 1: pretty small, and they have about like three and a 412 00:22:03,720 --> 00:22:07,040 Speaker 1: half billion I preferred, So I think the risk is 413 00:22:07,080 --> 00:22:09,719 Speaker 1: contained for a lot of the investors. But definitely, Um, 414 00:22:09,880 --> 00:22:12,480 Speaker 1: you know, markets moving on all these defaults happening really 415 00:22:12,560 --> 00:22:15,560 Speaker 1: rapidly Credit Swiss. But um, you know, like you guys 416 00:22:15,560 --> 00:22:17,639 Speaker 1: have been talking about, this is a great franchise, but 417 00:22:17,880 --> 00:22:20,240 Speaker 1: I think, you know, the headlines can be sleading in 418 00:22:20,280 --> 00:22:22,720 Speaker 1: the sense of, you know, the crown jewel here is 419 00:22:22,720 --> 00:22:26,520 Speaker 1: this wealth manager's business and so and from that aspect, 420 00:22:26,920 --> 00:22:29,760 Speaker 1: you know, even the JP Morgan who's kind of prohibited 421 00:22:29,800 --> 00:22:32,560 Speaker 1: from buying any deposit franchises, they can kind of look 422 00:22:32,560 --> 00:22:35,719 Speaker 1: at the wealth franchise and say, hey, you know, Morge Stanley, 423 00:22:36,320 --> 00:22:38,560 Speaker 1: that's the crown jewel you you cannot acquire, you know, 424 00:22:38,600 --> 00:22:41,639 Speaker 1: wealth managing assets so um and and that you know, 425 00:22:42,240 --> 00:22:45,720 Speaker 1: wealth managing assets you know, um kind of spit off 426 00:22:45,840 --> 00:22:48,760 Speaker 1: fees and and that kind of stable business is great 427 00:22:48,760 --> 00:22:51,080 Speaker 1: that anybody would love to have. We did have some 428 00:22:51,240 --> 00:22:54,320 Speaker 1: or we're seeing some credit downgrades, Arnold. If I'm Moody's 429 00:22:54,440 --> 00:22:57,520 Speaker 1: or Fitch or whatever, it is one of the two 430 00:22:57,600 --> 00:22:59,880 Speaker 1: or three metrics I really look at when I think 431 00:23:00,000 --> 00:23:03,320 Speaker 1: about moving my rating. Yeah, so I think, you know, 432 00:23:03,520 --> 00:23:07,719 Speaker 1: looking at kind of what has transpired and the risks 433 00:23:07,720 --> 00:23:13,320 Speaker 1: of uninsured deposits possibly flowing out, and based on kind 434 00:23:13,320 --> 00:23:15,280 Speaker 1: of the fears that are out there, right, I think 435 00:23:15,280 --> 00:23:17,680 Speaker 1: that that's what why they made these moves. I guess 436 00:23:17,680 --> 00:23:21,639 Speaker 1: premptively for for um, for republic, given kind of all 437 00:23:21,640 --> 00:23:25,400 Speaker 1: the headlines out there. Um, you know, I think looking 438 00:23:25,440 --> 00:23:28,320 Speaker 1: at the stock reactions and people, you know, see the 439 00:23:28,440 --> 00:23:31,520 Speaker 1: uncertainty of you know, what happened with the uninsured deposits 440 00:23:31,600 --> 00:23:34,919 Speaker 1: of Silicon Valley Bank on Friday and Monday, right, you know, 441 00:23:35,000 --> 00:23:37,440 Speaker 1: a lot of the damage may have already been done 442 00:23:37,720 --> 00:23:39,360 Speaker 1: at this point. And so that's why when you see 443 00:23:39,400 --> 00:23:42,760 Speaker 1: these news things about like oh, we tapped extra liquidity 444 00:23:42,840 --> 00:23:47,480 Speaker 1: from the Fed FDIC O JP Morgan's extending US credit line. 445 00:23:47,480 --> 00:23:50,000 Speaker 1: It's like, oh, oh my god. You know it's it's 446 00:23:50,000 --> 00:23:51,440 Speaker 1: that whole thing of like, why are you saying that 447 00:23:51,480 --> 00:23:54,760 Speaker 1: if there isn't a problem? Right? So well, Hermann hop 448 00:23:54,800 --> 00:23:56,840 Speaker 1: back on in here, because we're talking about First Republic 449 00:23:56,920 --> 00:24:00,760 Speaker 1: obviously in this capital infusion, but another that is trading 450 00:24:00,920 --> 00:24:02,760 Speaker 1: the stock in terms of his trading tick by tick 451 00:24:02,880 --> 00:24:06,040 Speaker 1: is Western Alliance w AL Folks is the ticker there. 452 00:24:06,560 --> 00:24:08,800 Speaker 1: This is the company that recently got a five point 453 00:24:08,880 --> 00:24:11,320 Speaker 1: three percent stake from Ken Griffin of Citadel. Now we 454 00:24:11,359 --> 00:24:14,119 Speaker 1: know which in its own ways its own capital infusion. 455 00:24:15,080 --> 00:24:17,800 Speaker 1: What kind of numbers are we looking at here? I mean, 456 00:24:18,160 --> 00:24:21,240 Speaker 1: Alison was very careful about saying, look, First Republic is 457 00:24:21,280 --> 00:24:25,360 Speaker 1: not being acquired yet, right, will it be? Are we 458 00:24:25,359 --> 00:24:27,560 Speaker 1: looking for a potential stake still or is this kind 459 00:24:27,600 --> 00:24:30,600 Speaker 1: of lifeline going to be enough? Yeah, that's that's a 460 00:24:30,680 --> 00:24:35,399 Speaker 1: millionailar question at this point. Does the stake by potentially 461 00:24:35,480 --> 00:24:39,879 Speaker 1: JP Morgan and Morgan Stanley stabilize the market fears and 462 00:24:40,000 --> 00:24:44,520 Speaker 1: stabilize the deposit outflow If those two things happen, then 463 00:24:45,160 --> 00:24:47,480 Speaker 1: you know that that would be great news in terms 464 00:24:47,520 --> 00:24:51,040 Speaker 1: of Western Alliance. It's another bank that operates in the 465 00:24:51,160 --> 00:24:55,160 Speaker 1: western part of the United States, and they have branches 466 00:24:55,160 --> 00:24:59,760 Speaker 1: in California and Arizona and Nevada and does have some 467 00:25:00,000 --> 00:25:03,440 Speaker 1: exposure to the venture and start up community, but it's 468 00:25:03,560 --> 00:25:08,160 Speaker 1: very small relative to what SBB did, which is the 469 00:25:08,320 --> 00:25:11,480 Speaker 1: entirety of their business. So they are unfortunately lumped into 470 00:25:11,480 --> 00:25:16,280 Speaker 1: the same situation and not having some of the duration 471 00:25:16,400 --> 00:25:20,360 Speaker 1: risk that the SVB had, So there's unfortunately they get 472 00:25:20,359 --> 00:25:22,720 Speaker 1: thrown into the mix. All right, I'm gonna throw this 473 00:25:22,760 --> 00:25:24,560 Speaker 1: out for either of you, two or both of you, 474 00:25:24,640 --> 00:25:26,560 Speaker 1: whatever you want to do. I could care less all 475 00:25:26,600 --> 00:25:28,240 Speaker 1: I want to because I'm trying to figure out, and 476 00:25:28,240 --> 00:25:30,600 Speaker 1: I think a lot of investors are trying to figure out, 477 00:25:30,920 --> 00:25:34,240 Speaker 1: how systemic is this bank issue. We're all still scarred 478 00:25:34,240 --> 00:25:37,959 Speaker 1: from two thousand and eight when everybody got pulled into it. 479 00:25:38,640 --> 00:25:42,080 Speaker 1: When the FED races rates by like five hundred bases 480 00:25:42,119 --> 00:25:47,000 Speaker 1: points within a year, what does that mean for a bank? Sure? 481 00:25:47,800 --> 00:25:50,320 Speaker 1: What's it mean for a bank is that some things 482 00:25:50,359 --> 00:25:53,200 Speaker 1: get caught off sides. They weren't expecting such a rapid 483 00:25:53,280 --> 00:25:55,560 Speaker 1: rising rates and they get caught off side. Doesn't mean 484 00:25:55,600 --> 00:25:59,439 Speaker 1: you get caught off side. You purchase securities or you 485 00:25:59,480 --> 00:26:03,360 Speaker 1: do loan at a very low rate environment and aggressively. 486 00:26:04,000 --> 00:26:08,480 Speaker 1: And when rates rise, the value of those assets decline. 487 00:26:09,040 --> 00:26:12,159 Speaker 1: And when there's a loss in confidence in a bank, 488 00:26:12,680 --> 00:26:15,200 Speaker 1: that can just spur a lot of uncertainty the market, 489 00:26:15,320 --> 00:26:17,800 Speaker 1: you know, the share price come declines. And that's really 490 00:26:17,880 --> 00:26:20,880 Speaker 1: essentially what happened with SVB. All right, we'll hop back 491 00:26:20,920 --> 00:26:23,240 Speaker 1: on in here, Arnold, and and talk to us a 492 00:26:23,280 --> 00:26:25,119 Speaker 1: little bit about where we go from here. I mean 493 00:26:25,160 --> 00:26:29,320 Speaker 1: you already mentioned that we have seen this wave of downgrades. Uh, 494 00:26:29,440 --> 00:26:32,840 Speaker 1: these wave of kind of distress for some of these banks. 495 00:26:33,040 --> 00:26:35,119 Speaker 1: Are you seeing the show up and say the hedges 496 00:26:35,200 --> 00:26:38,159 Speaker 1: or the insurance the CDSS against some of these banks. Well, 497 00:26:38,200 --> 00:26:41,720 Speaker 1: I mean I think, um, we've seen spreads widen first 498 00:26:41,760 --> 00:26:44,160 Speaker 1: on this SVP and then Kretswiss you know a lot 499 00:26:44,240 --> 00:26:46,080 Speaker 1: lot more and yeah, and you know, one metric we 500 00:26:46,080 --> 00:26:48,480 Speaker 1: look at kind of in the corporate bond spaces, you know, 501 00:26:48,560 --> 00:26:51,399 Speaker 1: the financials, how do they trade versus the overall overate 502 00:26:51,400 --> 00:26:54,440 Speaker 1: bond index? And um, you know they had wind out 503 00:26:54,480 --> 00:26:57,240 Speaker 1: in twenty twenty two until October and then we rally 504 00:26:57,320 --> 00:27:00,280 Speaker 1: back almost a flat and then obviously not now they're 505 00:27:00,280 --> 00:27:02,880 Speaker 1: training about twenty five wider again. But I think it's 506 00:27:02,880 --> 00:27:04,960 Speaker 1: going to be tough for the financials to kind of 507 00:27:05,359 --> 00:27:07,520 Speaker 1: kind of regain that, you know, unless the markets really 508 00:27:07,560 --> 00:27:10,320 Speaker 1: calm down. I think it's gonna be tough, you know, 509 00:27:10,359 --> 00:27:12,560 Speaker 1: for the financials to kind of tighten back up again 510 00:27:12,600 --> 00:27:15,400 Speaker 1: compared to the role index, given kind of the default risk, 511 00:27:15,440 --> 00:27:17,960 Speaker 1: which is real. Yeah, so we were talking about systemic 512 00:27:18,040 --> 00:27:20,960 Speaker 1: risk broadly, but let's talk about the bond space specifically 513 00:27:21,000 --> 00:27:23,800 Speaker 1: in terms of contagion, in terms of trading and sympathy. 514 00:27:24,119 --> 00:27:28,680 Speaker 1: Are you seeing the credit Swiss situation bleed into kind 515 00:27:28,680 --> 00:27:31,480 Speaker 1: of the regional bank situation because in my mind they're 516 00:27:31,480 --> 00:27:35,480 Speaker 1: two separate issues. Yeah, no, I agree with that. Um So, 517 00:27:36,040 --> 00:27:38,199 Speaker 1: you know, with the regional banks stuff, I think, you know, 518 00:27:38,240 --> 00:27:40,920 Speaker 1: for the select regional banks that are having issues, um, 519 00:27:41,160 --> 00:27:44,119 Speaker 1: you know, it was like, okay, maybe the bigger US banks, 520 00:27:44,160 --> 00:27:47,160 Speaker 1: the biggest US banks like the JPMS ba AS, that's 521 00:27:47,240 --> 00:27:48,760 Speaker 1: kind of like a safe heaven. But then when you 522 00:27:48,920 --> 00:27:51,760 Speaker 1: deal with Credit Swiss and kind of the interconnectedness to 523 00:27:51,840 --> 00:27:54,280 Speaker 1: the counterparties and all this and that then it's like okay, well, 524 00:27:54,440 --> 00:27:56,520 Speaker 1: well then the bigger banks are kind of more exposed 525 00:27:56,560 --> 00:27:58,439 Speaker 1: to that, although we haven't really seen it in the 526 00:27:58,440 --> 00:28:02,280 Speaker 1: pricing yet, you know, something were to happen, I think 527 00:28:02,359 --> 00:28:04,000 Speaker 1: you know, that's where you're going to be like, hmm, 528 00:28:04,160 --> 00:28:06,119 Speaker 1: you know, who has kind of the most ties to 529 00:28:06,520 --> 00:28:08,960 Speaker 1: kind of a you know, global systemically for an entity, 530 00:28:09,400 --> 00:28:11,639 Speaker 1: It might be the trading desks and they might be 531 00:28:11,720 --> 00:28:14,520 Speaker 1: coutaparts here and there, although at least Credit Swiss, you know, 532 00:28:14,640 --> 00:28:18,760 Speaker 1: they had been kind of shrinking their trading portago platform, right, so, um, 533 00:28:18,920 --> 00:28:21,320 Speaker 1: maybe the risks are more contain there. But but if anything, 534 00:28:21,640 --> 00:28:23,119 Speaker 1: you know, you got to look at start looking at 535 00:28:23,160 --> 00:28:24,840 Speaker 1: the biggest banks again in terms of kind of the 536 00:28:24,840 --> 00:28:27,760 Speaker 1: systemic contagion risks from the Credit Swiss and on the 537 00:28:27,800 --> 00:28:30,919 Speaker 1: regional side, the contagion and the systemic risk and the 538 00:28:31,000 --> 00:28:34,760 Speaker 1: interconnectitivity really isn't there, So so that risk should be 539 00:28:34,760 --> 00:28:36,920 Speaker 1: off the table on the regional bank side. So herman 540 00:28:37,040 --> 00:28:39,360 Speaker 1: on the regional bank side, if I were an annals 541 00:28:39,720 --> 00:28:42,600 Speaker 1: and I know about you know, fifteen minutes of experience 542 00:28:42,640 --> 00:28:48,040 Speaker 1: in this um, what percentage of a bank's deposits are 543 00:28:48,120 --> 00:28:50,959 Speaker 1: enshort on average? Yeah, it really runs the gamut um. 544 00:28:51,160 --> 00:28:53,600 Speaker 1: So for I could just screen on that, right, Yeah, 545 00:28:53,600 --> 00:28:55,240 Speaker 1: you can. You can screen on that. You have to 546 00:28:55,280 --> 00:28:57,720 Speaker 1: dig deep into the regular portory filings, but you could 547 00:28:57,960 --> 00:29:00,680 Speaker 1: theoretically do it. Because I know you're a smart person. 548 00:29:01,560 --> 00:29:04,200 Speaker 1: I would say that it runs a gamut SBB was 549 00:29:04,240 --> 00:29:08,240 Speaker 1: about five percent, signature was about ten percent. You want 550 00:29:08,240 --> 00:29:11,240 Speaker 1: as an investor, I want as higher percentage as positive, correct, 551 00:29:11,400 --> 00:29:14,760 Speaker 1: because I would both because they had these big deposits, 552 00:29:14,880 --> 00:29:17,760 Speaker 1: well above to a big commercial deposits. Okay, and you 553 00:29:17,840 --> 00:29:23,200 Speaker 1: want fifteen minutes, I got ten together. It's twenty five exactly. 554 00:29:23,240 --> 00:29:28,280 Speaker 1: So you want them high. Your former employer, M ANDT Bank, 555 00:29:28,400 --> 00:29:31,000 Speaker 1: what was their insured deposit? It's more about the fifty 556 00:29:31,040 --> 00:29:34,000 Speaker 1: percent or around that level. Yep. See, that's what I'm 557 00:29:34,000 --> 00:29:36,000 Speaker 1: looking forward to see. Why can't I just screen on that. 558 00:29:36,080 --> 00:29:38,120 Speaker 1: I'm sure I can on the Bloomberg terminal and I 559 00:29:38,280 --> 00:29:40,200 Speaker 1: buy the good ones and I sell the bad ones. 560 00:29:41,000 --> 00:29:44,760 Speaker 1: That sounds like a very good idea. But I presume 561 00:29:44,840 --> 00:29:47,760 Speaker 1: that if with Silicon Valley Bank, I'm willing to take 562 00:29:47,800 --> 00:29:49,960 Speaker 1: that deposit risk. I just called it deposit risk. I 563 00:29:49,960 --> 00:29:51,760 Speaker 1: don't know what you guys call it. Why do I 564 00:29:51,840 --> 00:29:56,320 Speaker 1: take that deposit risk because you were not expecting a 565 00:29:56,360 --> 00:30:01,600 Speaker 1: deposit flight, because you know, a week ago the strength 566 00:30:01,680 --> 00:30:05,240 Speaker 1: of the institution was the venture capital relationships and the 567 00:30:05,280 --> 00:30:08,240 Speaker 1: startup relationships. That became a weakness when there was a 568 00:30:08,280 --> 00:30:12,840 Speaker 1: loss in confidence. Boy, I could now be a bank's analyst. 569 00:30:13,000 --> 00:30:18,080 Speaker 1: I think I've learned so much. Paul Sweeney here with 570 00:30:18,160 --> 00:30:22,040 Speaker 1: Pretty Gupta Matt Miller out Today we've been focusing on 571 00:30:23,000 --> 00:30:26,560 Speaker 1: testimony from Secretary General Secretary of the Treasury Jennet Yellen. 572 00:30:27,040 --> 00:30:29,200 Speaker 1: She is testifying in front of Congress. We started off 573 00:30:29,200 --> 00:30:32,840 Speaker 1: the day with some news out of the European Central 574 00:30:32,880 --> 00:30:35,840 Speaker 1: Bank raising the benchmark rate by fifty basis points, and 575 00:30:35,840 --> 00:30:38,360 Speaker 1: there were calls for maybe a pause, maybe just a 576 00:30:38,440 --> 00:30:41,480 Speaker 1: twenty five twenty five basis point increase, if for no 577 00:30:41,560 --> 00:30:44,040 Speaker 1: other reason than to just cool the market's given some 578 00:30:44,080 --> 00:30:46,640 Speaker 1: of the turmoil we've seen in there with the banking sector. 579 00:30:46,720 --> 00:30:48,160 Speaker 1: Let's go back to Europe and get a sense of 580 00:30:48,480 --> 00:30:50,920 Speaker 1: kind of how the market's dealing with it today. Marianne Squadell, 581 00:30:51,200 --> 00:30:54,600 Speaker 1: founder of Bougeville Consulting, joins us. Marianne, I'd love to 582 00:30:54,600 --> 00:30:57,840 Speaker 1: get your thoughts, so kind of what you believe or 583 00:30:57,920 --> 00:31:01,680 Speaker 1: kind of your takeaways from Steam regards fifty basis point 584 00:31:01,680 --> 00:31:05,560 Speaker 1: move at the ECB. Yes, well, you know, I've been reading. 585 00:31:05,680 --> 00:31:07,720 Speaker 1: I used to work as a regulator a very long 586 00:31:07,760 --> 00:31:10,600 Speaker 1: time ago, and what I'm hearing from my previous colleagues 587 00:31:10,680 --> 00:31:13,600 Speaker 1: is that the regulators are quite confident that the banking 588 00:31:13,640 --> 00:31:16,320 Speaker 1: sector is a little bit stronger in Europe because I 589 00:31:16,400 --> 00:31:20,720 Speaker 1: didn't realize the rules, you know, on a mid sized landers. 590 00:31:20,760 --> 00:31:24,120 Speaker 1: So in the stress test, they're confident that they're strong enough. 591 00:31:24,280 --> 00:31:27,480 Speaker 1: And so I think there's there's this sense in Europe 592 00:31:27,520 --> 00:31:31,320 Speaker 1: at the moment. I think that's what that's might take 593 00:31:31,320 --> 00:31:34,000 Speaker 1: on it. Obviously nobody knows what's going to happen, and 594 00:31:34,040 --> 00:31:37,400 Speaker 1: it's obviously a question of confidence at this stage. So 595 00:31:38,080 --> 00:31:41,960 Speaker 1: you know, the backdrop of some concerns, obviously a major 596 00:31:42,000 --> 00:31:44,800 Speaker 1: concerns a credit Swiss. How do you think that played 597 00:31:44,840 --> 00:31:48,280 Speaker 1: into the ECB's decision here, because there are a lot 598 00:31:48,280 --> 00:31:49,920 Speaker 1: of people saying, boy, if you take a look at 599 00:31:49,920 --> 00:31:54,080 Speaker 1: some of the potential wider risk from continued challenges a 600 00:31:54,440 --> 00:31:57,160 Speaker 1: credit Swiss, that in and of itself might suggest that 601 00:31:57,200 --> 00:32:00,400 Speaker 1: they pause. So I don't know, but you know, in 602 00:32:00,440 --> 00:32:03,240 Speaker 1: the UK we still have this memory of like there 603 00:32:03,320 --> 00:32:06,320 Speaker 1: was even before the financial the financial crisis in two 604 00:32:06,320 --> 00:32:08,720 Speaker 1: thousand and seven, there was a run on a bank 605 00:32:08,760 --> 00:32:10,760 Speaker 1: which I'm don't know in the US if you heard 606 00:32:10,840 --> 00:32:12,880 Speaker 1: much about it. It was Northern Rocket was a big 607 00:32:12,960 --> 00:32:15,680 Speaker 1: lander and we saw in the streets of London people 608 00:32:15,840 --> 00:32:18,720 Speaker 1: lining up to get their money back, and that was 609 00:32:18,840 --> 00:32:22,040 Speaker 1: something major. So the governments in the UK, in the 610 00:32:22,040 --> 00:32:24,880 Speaker 1: European Union, it's maybe a bit different, but in the UK, 611 00:32:25,440 --> 00:32:28,080 Speaker 1: which at the time was part of the European Union obviously, 612 00:32:28,880 --> 00:32:33,800 Speaker 1: So in the UK, you know, the government worked throughout 613 00:32:33,840 --> 00:32:39,640 Speaker 1: the weekend. There's HSBC that bought SVB for one pound 614 00:32:40,480 --> 00:32:45,000 Speaker 1: and I have a friend who invest in a startup. 615 00:32:45,040 --> 00:32:49,040 Speaker 1: The startup decided to stay a client of SVB, and 616 00:32:49,720 --> 00:32:52,880 Speaker 1: they feel from a client's perspective, but deposit takers perspective, 617 00:32:52,960 --> 00:32:56,240 Speaker 1: they are feeling fairly reassured and the sentiment at the 618 00:32:56,280 --> 00:33:00,680 Speaker 1: moment is not as panicky as as you know. Maybe, 619 00:33:00,800 --> 00:33:03,680 Speaker 1: so that may have played a part obviously in the 620 00:33:03,720 --> 00:33:07,200 Speaker 1: decision of the Central Bank. So, Marian, you know, I'm 621 00:33:07,200 --> 00:33:10,320 Speaker 1: a former employee of Credit Swiss, so I'm paying very 622 00:33:10,320 --> 00:33:14,280 Speaker 1: close attention there. Um yeah, and I do, and I 623 00:33:14,920 --> 00:33:16,200 Speaker 1: a lot of things that I think a lot of 624 00:33:16,280 --> 00:33:19,480 Speaker 1: us learned during the financial crisis is, particularly for these 625 00:33:19,480 --> 00:33:24,440 Speaker 1: investment banks, is counterparty risk and that concept that at boy, 626 00:33:24,480 --> 00:33:27,080 Speaker 1: if the market doesn't have confidence in your institution, it 627 00:33:27,320 --> 00:33:29,800 Speaker 1: is game over. I don't care who you are and 628 00:33:29,800 --> 00:33:32,560 Speaker 1: what the name is on the door. How do you 629 00:33:32,600 --> 00:33:37,160 Speaker 1: assess that risk for credit Swiss at this point? Hmm, 630 00:33:37,520 --> 00:33:40,080 Speaker 1: that's a very good question. That's it's really too early 631 00:33:40,120 --> 00:33:44,040 Speaker 1: to tell. I think, Um, it's it's a very good question. Um, 632 00:33:44,120 --> 00:33:48,880 Speaker 1: we don't know. That's that's SIANSO. Um, right, we don't know. 633 00:33:49,120 --> 00:33:52,080 Speaker 1: All right. So what's the next step here for the 634 00:33:52,600 --> 00:34:00,280 Speaker 1: central bank? Do you believe? Um? In Frankfurt? Um? Well, 635 00:34:00,320 --> 00:34:02,520 Speaker 1: I don't know what they're going to decide, of course, 636 00:34:02,560 --> 00:34:05,280 Speaker 1: but at the moment everybody is kind of weighing up 637 00:34:05,280 --> 00:34:08,479 Speaker 1: the poison cons you know of what's going to happen. 638 00:34:08,520 --> 00:34:10,800 Speaker 1: But as you said, it's a question of confidence. If 639 00:34:10,880 --> 00:34:14,359 Speaker 1: you know depositors stay put, you know, there's the risk 640 00:34:14,760 --> 00:34:18,400 Speaker 1: the inflation becomes obviously more of a priority. Otherwise it 641 00:34:18,480 --> 00:34:21,520 Speaker 1: would be you know, the confidence of deposit takers. That 642 00:34:21,920 --> 00:34:24,680 Speaker 1: is a priority. All right, Marian, thank you so much. 643 00:34:24,800 --> 00:34:27,080 Speaker 1: We appreciate getting some of your time. Marian Scordell, founder 644 00:34:27,120 --> 00:34:33,560 Speaker 1: of Bougeville Consulting. We started out the day we want 645 00:34:33,560 --> 00:34:34,799 Speaker 1: to get back to We start off the day with 646 00:34:34,840 --> 00:34:39,319 Speaker 1: the ECB really focusing on Christine Lagarde. The ECB, they 647 00:34:39,360 --> 00:34:42,920 Speaker 1: stayed true to what they were saying, fifty basis point move. 648 00:34:43,239 --> 00:34:45,759 Speaker 1: So whenever we get news out of the Bank of 649 00:34:45,800 --> 00:34:48,160 Speaker 1: England or the ECB, there are two people we have 650 00:34:48,239 --> 00:34:50,759 Speaker 1: to talk to. Marcus Ashworth Boom we take that off 651 00:34:50,760 --> 00:34:54,280 Speaker 1: this morning, Bloomberg Surveillance and John Authors. These are two 652 00:34:55,080 --> 00:34:57,839 Speaker 1: cranky Brits who if they've got something to say, they 653 00:34:57,840 --> 00:35:00,640 Speaker 1: don't mind saying it. Folks, John, what do you make 654 00:35:00,840 --> 00:35:06,120 Speaker 1: of Christine Leguard that European Central banks fifty basis points move. 655 00:35:06,719 --> 00:35:08,719 Speaker 1: Don't we have the risk of a recession. Don't we 656 00:35:08,760 --> 00:35:12,879 Speaker 1: have a big bank that's in trouble? What's going on? Well, 657 00:35:12,920 --> 00:35:15,120 Speaker 1: I'm not feeling that cranky just at this moment, just 658 00:35:15,239 --> 00:35:18,600 Speaker 1: to get that on the record, and it's also rather 659 00:35:18,640 --> 00:35:21,680 Speaker 1: wonderful just watching Bloomberg Technology on Bloomberg TV at the 660 00:35:21,719 --> 00:35:24,360 Speaker 1: moment where for some reason we have two cranky Brits 661 00:35:24,520 --> 00:35:29,560 Speaker 1: introducing the America curmudgeonly. Yeah, I like that. I like that. 662 00:35:29,640 --> 00:35:32,680 Speaker 1: I might go with being a curmudgeon, if not a crank. 663 00:35:34,000 --> 00:35:38,000 Speaker 1: In terms of what the CB has done, they have 664 00:35:38,840 --> 00:35:42,880 Speaker 1: you know, they have a dilemma and they've decided to 665 00:35:43,040 --> 00:35:48,320 Speaker 1: go all out on the belief a inflation really matters 666 00:35:48,360 --> 00:35:52,600 Speaker 1: and it isn't beaten yet and B and this is 667 00:35:52,640 --> 00:35:58,200 Speaker 1: the critical one that you can separate the functions of 668 00:35:58,440 --> 00:36:06,520 Speaker 1: fighting inflation and maintaining financial stability. Certainly it ought to 669 00:36:06,560 --> 00:36:11,040 Speaker 1: be the case if credit suisses issue, and of the 670 00:36:11,120 --> 00:36:15,000 Speaker 1: different banks that have fallen in this country is if 671 00:36:15,200 --> 00:36:21,880 Speaker 1: that issue is merely liquidity as opposed to solvency, then 672 00:36:22,120 --> 00:36:26,360 Speaker 1: they should be safe. They should be within their rights 673 00:36:27,160 --> 00:36:32,800 Speaker 1: to carry on tightening rates. That said, the fact I 674 00:36:32,880 --> 00:36:37,640 Speaker 1: personally gasped when the news came this morning, and I 675 00:36:37,680 --> 00:36:39,680 Speaker 1: think plenty of other people have done as well, it 676 00:36:39,960 --> 00:36:45,239 Speaker 1: is pretty seriously courageous that they've pressed ahead with this. 677 00:36:47,360 --> 00:36:51,840 Speaker 1: They are very strongly signaling that they don't think the 678 00:36:51,920 --> 00:36:58,560 Speaker 1: banking sector is in that much trouble, and courageous is 679 00:36:58,640 --> 00:37:02,440 Speaker 1: not always something you want to be as a central banker. 680 00:37:02,680 --> 00:37:05,120 Speaker 1: But what measure do they come up with that conclusion 681 00:37:05,200 --> 00:37:08,080 Speaker 1: that the banking sector is not in that much of 682 00:37:08,080 --> 00:37:12,440 Speaker 1: a crisis. Well, if you look at priced book multiple, 683 00:37:12,480 --> 00:37:16,160 Speaker 1: suggected in my column last night for the year of 684 00:37:16,200 --> 00:37:21,600 Speaker 1: the Eurozone banks, Yeah, they're trading below book but they've 685 00:37:21,640 --> 00:37:26,799 Speaker 1: been trading below book value for fifteen years and there's 686 00:37:26,920 --> 00:37:32,640 Speaker 1: really nothing particularly crisis written or scary about the trading 687 00:37:32,640 --> 00:37:35,719 Speaker 1: in those in fact, in the actual share price given 688 00:37:36,120 --> 00:37:39,839 Speaker 1: the greatest risk here is buying the stock in one 689 00:37:39,880 --> 00:37:44,920 Speaker 1: of these banks rather than taking out a deposit. Plainly, 690 00:37:44,960 --> 00:37:49,440 Speaker 1: shareholders are much greater risk of being wiped out than depositors. 691 00:37:50,640 --> 00:37:54,400 Speaker 1: Oddly enough, we are still not showing as much stress 692 00:37:54,560 --> 00:38:00,880 Speaker 1: as either eight or eleven twelve, which for the European 693 00:38:01,000 --> 00:38:04,080 Speaker 1: banks was actually in many ways a bigger deal than 694 00:38:04,640 --> 00:38:06,799 Speaker 1: O eight was. And I think in a way we 695 00:38:06,840 --> 00:38:10,560 Speaker 1: all became experts on the TED spread. Can you give 696 00:38:10,600 --> 00:38:15,640 Speaker 1: us the dummies explanation spread the TED spreads? It's the 697 00:38:15,760 --> 00:38:20,839 Speaker 1: TED spreads is the comparison between the short term rates 698 00:38:20,840 --> 00:38:26,680 Speaker 1: at which which banks lend to each other. Still, although 699 00:38:27,560 --> 00:38:30,759 Speaker 1: libel has had an interesting history in the years since 700 00:38:30,760 --> 00:38:33,240 Speaker 1: the global financial crisis, it's what we think of as libel. 701 00:38:33,280 --> 00:38:34,759 Speaker 1: It's the rate at which they lent to each other 702 00:38:35,520 --> 00:38:39,880 Speaker 1: compared to the rate you can get on T bills. 703 00:38:41,400 --> 00:38:44,120 Speaker 1: So generally those two numbers are very close to each other, 704 00:38:44,200 --> 00:38:47,840 Speaker 1: and the banks are very slightly higher. When the spread rises, 705 00:38:48,040 --> 00:38:52,080 Speaker 1: it indicates that banks really have a problem trusting each other. 706 00:38:52,960 --> 00:38:58,800 Speaker 1: The TED spread at the moment is still unremarkable. Banks 707 00:38:59,080 --> 00:39:03,319 Speaker 1: don't have any great degree of distrust with each other. 708 00:39:04,920 --> 00:39:08,239 Speaker 1: There is a danger in taking O eight, which most 709 00:39:08,280 --> 00:39:10,560 Speaker 1: of us who lived through eight find it difficult not 710 00:39:10,600 --> 00:39:13,319 Speaker 1: to take O eight as a base of comparison. What 711 00:39:13,440 --> 00:39:15,600 Speaker 1: happened to the TED spread, what happened to banks trust 712 00:39:15,640 --> 00:39:20,480 Speaker 1: in each other in a eight was extreme. Because we've 713 00:39:20,600 --> 00:39:23,400 Speaker 1: gone through all this, just nobody knew who was sitting 714 00:39:23,400 --> 00:39:25,440 Speaker 1: on the bad loans. They didn't even know whether they 715 00:39:25,440 --> 00:39:27,680 Speaker 1: themselves were sitting on the bad loans, and trust was 716 00:39:28,320 --> 00:39:34,360 Speaker 1: completely destroyed. There is nothing like O eight on the picture. 717 00:39:34,440 --> 00:39:40,400 Speaker 1: The possibility that this is a liquidity problem that will 718 00:39:40,440 --> 00:39:43,600 Speaker 1: require banks to put up with far less in the 719 00:39:43,640 --> 00:39:46,400 Speaker 1: way of profits and will be part of a slowdown 720 00:39:46,400 --> 00:39:52,280 Speaker 1: in the economy, that's a really serious issue. There really 721 00:39:52,320 --> 00:39:57,640 Speaker 1: shouldn't be any risk of a true repetition of two 722 00:39:57,680 --> 00:40:02,120 Speaker 1: thousand and eight, and again I'm startled that they had 723 00:40:02,120 --> 00:40:04,600 Speaker 1: the courage to go through with this, But perhaps the 724 00:40:04,680 --> 00:40:09,640 Speaker 1: ECB view is by being deviated from the path Fate's 725 00:40:09,719 --> 00:40:13,760 Speaker 1: clearly spelt out before, they would have increased the risks 726 00:40:14,560 --> 00:40:18,640 Speaker 1: that people would say, Okay, BCB is running scared. They 727 00:40:18,719 --> 00:40:22,760 Speaker 1: must know something. We should run for the hills. John, 728 00:40:22,760 --> 00:40:27,040 Speaker 1: you mentioned your reference to your opinion piece, and folks, 729 00:40:27,040 --> 00:40:29,240 Speaker 1: you can find that at Bloomberg dot com slash opinion 730 00:40:29,440 --> 00:40:34,360 Speaker 1: or OPI n go on the terminal. John's pieces entitled 731 00:40:34,400 --> 00:40:40,160 Speaker 1: move along, there's no crisis to see here? Um headline 732 00:40:40,960 --> 00:40:44,640 Speaker 1: exactly yes. Um. Here in the United States, I would 733 00:40:44,640 --> 00:40:48,520 Speaker 1: say the consensus is soft landing, no landing, something on 734 00:40:49,000 --> 00:40:52,920 Speaker 1: those lines. Probably not a hard landing. Isn't the same 735 00:40:53,360 --> 00:40:56,959 Speaker 1: in Europe? Would you say? Or it seems a little 736 00:40:57,000 --> 00:41:00,080 Speaker 1: bit more precarious there. I'm not sure that consensus this 737 00:41:00,200 --> 00:41:03,680 Speaker 1: is quite so clearly that we get a soft landing 738 00:41:03,800 --> 00:41:06,359 Speaker 1: here as it was a couple of weeks ago, And 739 00:41:07,600 --> 00:41:09,760 Speaker 1: if it is, I don't quite know why people are 740 00:41:09,800 --> 00:41:13,480 Speaker 1: expecting rates to come down quite as aggressively as they 741 00:41:13,520 --> 00:41:19,280 Speaker 1: do in Europe. The situation is very much murkier because 742 00:41:19,320 --> 00:41:25,000 Speaker 1: of this big extra factor of the energy crisis, So 743 00:41:25,120 --> 00:41:28,360 Speaker 1: at one point that was a big reason to expect 744 00:41:28,400 --> 00:41:33,960 Speaker 1: a really serious slowdown in economic activity this year, a 745 00:41:34,040 --> 00:41:40,040 Speaker 1: perfectly reasonable one. And because the weather in Europe turns 746 00:41:40,040 --> 00:41:43,840 Speaker 1: out to have been I gather to standard deviations better 747 00:41:43,880 --> 00:41:47,520 Speaker 1: than you would normally expect a really mild winter, that's 748 00:41:47,600 --> 00:41:51,400 Speaker 1: had much less of a drastic impact than would have 749 00:41:51,400 --> 00:41:57,640 Speaker 1: been expected. So the risk of a hard landing has 750 00:41:58,520 --> 00:42:03,960 Speaker 1: moved out of the well, sorry it hasn't gone away, 751 00:42:04,000 --> 00:42:08,320 Speaker 1: but it is reduced very significantly, and that in turn 752 00:42:08,640 --> 00:42:12,560 Speaker 1: has increased the pressure on the ECB to be somewhat 753 00:42:12,640 --> 00:42:16,000 Speaker 1: more hawkish than they were previously setting out to be. 754 00:42:16,640 --> 00:42:22,279 Speaker 1: But that, certainly, that energy factor, plus the way that 755 00:42:22,320 --> 00:42:28,799 Speaker 1: the the the European financial system works through banks more 756 00:42:28,840 --> 00:42:31,360 Speaker 1: than it does through markets, and its banks have never 757 00:42:31,400 --> 00:42:34,400 Speaker 1: really totally recovered from what happened to it at the 758 00:42:34,400 --> 00:42:37,360 Speaker 1: turn of the last decade, that that does make the 759 00:42:37,440 --> 00:42:41,839 Speaker 1: situation very different. Usually it's the feather goes first, right, 760 00:42:42,840 --> 00:42:46,520 Speaker 1: the timing of the calendar that has the ECB going first. 761 00:42:46,560 --> 00:42:49,360 Speaker 1: Does J Powell take any queue from Christine Legard this 762 00:42:49,520 --> 00:42:52,240 Speaker 1: time around? It makes it harder for him to pause altogether, 763 00:42:52,640 --> 00:42:54,799 Speaker 1: I think, But we don't know what's going to happen 764 00:42:54,840 --> 00:42:57,799 Speaker 1: in the next I've still got We've still got four 765 00:42:57,840 --> 00:43:02,240 Speaker 1: and a half days before before he he. The FOMC 766 00:43:02,400 --> 00:43:10,240 Speaker 1: has to make its decision absent a significant new banking 767 00:43:10,480 --> 00:43:14,400 Speaker 1: issue flaring up somewhere, and I have no opinion on 768 00:43:14,680 --> 00:43:19,359 Speaker 1: right the probability of that is, but absent that, I 769 00:43:19,400 --> 00:43:24,719 Speaker 1: think twenty five basis points hike next week is very 770 00:43:24,800 --> 00:43:29,319 Speaker 1: likely that the we don't need to get into all 771 00:43:29,360 --> 00:43:35,320 Speaker 1: of it. The data does not suggest that that inflation 772 00:43:35,360 --> 00:43:38,600 Speaker 1: on its own is still too high for them to 773 00:43:39,800 --> 00:43:44,680 Speaker 1: stop hiking. Then the folks that are pricing in cuts 774 00:43:44,800 --> 00:43:46,879 Speaker 1: for next year, for this year, I'm sorry, the back 775 00:43:46,880 --> 00:43:48,920 Speaker 1: half of this year again, that's what we see on 776 00:43:48,960 --> 00:43:51,719 Speaker 1: the bloomer term of the futures market very much. So, yeah, 777 00:43:51,760 --> 00:43:53,400 Speaker 1: I mean, what do you make of that? And for 778 00:43:53,560 --> 00:43:56,400 Speaker 1: thirty seconds, like I said, that's why I'm nervous about 779 00:43:56,480 --> 00:43:59,719 Speaker 1: you're saying, soft landing is still the is still the 780 00:44:00,160 --> 00:44:02,799 Speaker 1: dominant scenario if we need to cut rates the way 781 00:44:02,880 --> 00:44:05,080 Speaker 1: the monket currently implies before the end of the year, 782 00:44:05,120 --> 00:44:11,920 Speaker 1: that's in plies a landing with somewhat op and obviously 783 00:44:11,920 --> 00:44:15,160 Speaker 1: there's a risk of that and a banking crisis would 784 00:44:15,200 --> 00:44:17,759 Speaker 1: deliver that. It's still not clear to me that we 785 00:44:17,840 --> 00:44:21,520 Speaker 1: have as serious a banking crisis as something all right, 786 00:44:21,719 --> 00:44:24,160 Speaker 1: very very good as always. We got Marcus Ashworth, we 787 00:44:24,280 --> 00:44:28,399 Speaker 1: got John Authors, We've got the euro and UK cover. 788 00:44:28,560 --> 00:44:30,600 Speaker 1: That's how I like to think about it. John Authors, 789 00:44:30,600 --> 00:44:33,080 Speaker 1: thanks so much for joining us here from Bloomberg Opinion. 790 00:44:33,120 --> 00:44:34,799 Speaker 1: He works on the Markets team, does all that kind 791 00:44:34,840 --> 00:44:37,160 Speaker 1: of great stuff. He joins us here on our Bloomberg 792 00:44:37,200 --> 00:44:40,440 Speaker 1: Interactive Broker Studio, so he gets that gold star for 793 00:44:40,520 --> 00:44:43,400 Speaker 1: showing up as opposed to phoning it in. Thanks for 794 00:44:43,400 --> 00:44:46,840 Speaker 1: listening to the Bloomberg Markets podcast. You can subscribe and 795 00:44:46,960 --> 00:44:51,040 Speaker 1: listen to interviews an Apple Podcasts or whatever podcast platform 796 00:44:51,080 --> 00:44:54,440 Speaker 1: you prefer. I'm Matt Miller. I'm on Twitter at Matt 797 00:44:54,440 --> 00:44:57,760 Speaker 1: Miller nineteen seventy three. On ball Sweeney, I'm on Twitter 798 00:44:57,800 --> 00:45:00,840 Speaker 1: at pt Sweeney. Before the podcast, you can always catches 799 00:45:00,880 --> 00:45:02,320 Speaker 1: worldwide at Bloomberg Radient