Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: at Bloomberg dot com slash podcast. Let's talk markets here
Speaker 1: and kind of where we go from here. What should
Speaker 1: we expect maybe from this Federal Reserve next week after
Speaker 1: we've had this move by the ECB. Bring in Jay Halfield.
Speaker 1: He's the CEO, founder and portfolio manager at Infrastructure Capital Advisors.
Speaker 1: And Jay, let's just start with Europe and the ECB.
Speaker 1: I mean, they're still, like the US Federal Reserve, still
Speaker 1: very much on this inflation fighting path, raising their benchmark
Speaker 1: raak by fifty basis points where a lot of people said,
Speaker 1: maybe pause, maybe just twenty five, but no, thanks Paul
Speaker 1: for having me in again. You have to keep in
Speaker 1: mind the European system is radically different in the US,
Speaker 1: so they were way behind our FED full percentage point
Speaker 1: bard our FED. And also their inflation is worse because
Speaker 1: of their natural gas crisis. It's come down, but it's
Speaker 1: still a huge problem. And then thirdly, all their banks
Speaker 1: are essentially money center banks, like our money center banks
Speaker 1: are killing it right now. They're getting all these deposits
Speaker 1: in and keep in mind that that's free money right now.
Speaker 1: So that's the real problem with our system is that
Speaker 1: smaller banks are losing deposits, and that's every dollar that
Speaker 1: goes out costs them roughly five percent, so paying fifty
Speaker 1: base points or zero if it's a demand deposit, and
Speaker 1: then you borrow from the Fed at libor plus spread,
Speaker 1: and so their earnings are getting smashed as we speak.
Speaker 1: And that's the core issue, and that's why we've been
Speaker 1: calling for a rape cut to reduce that the inversion
Speaker 1: in the Yelk curve. So when you compare that to
Speaker 1: then what the Federal Reserve is doing the read through,
Speaker 1: I think one of the takeaways from the ECB is
Speaker 1: simply that they hiked regardless of the chaos for credit squeezes.
Speaker 1: If credit squeeze is a bigger bank and a bigger
Speaker 1: risk than say SPB as, which I think is the consensus,
Speaker 1: then does that then insinuate the Federal Reserve is going
Speaker 1: to stick to twenty five or fifty or whatever the
Speaker 1: calls were pre SPB. Well, that's certainly possible because they
Speaker 1: have shown zero ability to process real time data. So
Speaker 1: and specifically I would point to oil, which is something
Speaker 1: that we fast coming from Jay Hatfield broadcast. So the
Speaker 1: two key indicators of inflation are housing in oil. Oil
Speaker 1: has come down seventeen percent since the financial crisis started,
Speaker 1: the bank runs started. And what I don't think the
Speaker 1: FED appreciates, which is strange because they have research papers
Speaker 1: that demonstrate this. There's a five percent bleed through of
Speaker 1: energy prices the core. In fact, if you look in
Speaker 1: the seventies and draw a line where the two gigantic
Speaker 1: increases occurred, so two hundred and one fifty core went
Speaker 1: up shot up within three or four months. So this
Speaker 1: is not this research paper just proved it, you know,
Speaker 1: through through econometric models, but you can see it in
Speaker 1: the data. So now we have a significant deflation CPI
Speaker 1: dash R as dropping at a two percent annual rate.
Speaker 1: And now if you layer in this depreciation in oil,
Speaker 1: we're headed for a pretty significant deflation. I mean, essentially
Speaker 1: we're in deflation right now. It's just not going to
Speaker 1: show up in the indices for a year because they're
Speaker 1: lagged by a year. So, you know, do you think
Speaker 1: this banking situation here in the US, this run on
Speaker 1: these handful of banks will prompt the FED or should
Speaker 1: it prompt the Fed the pause here? If not, maybe
Speaker 1: being absolutely pause that's what they should. Well, they should
Speaker 1: really cut right, but they are behind every Almost every
Speaker 1: market participant would agree they're behind the curve. So the
Speaker 1: best case is probably that they pause. They definitely should
Speaker 1: not raise rates. That would be a disaster. And again
Speaker 1: they're in a much different situation where they are already
Speaker 1: raised much higher and we have a bigger inversion than
Speaker 1: they do in Europe. Jay, one of the common piece
Speaker 1: of commentary that came out of I believe Nomura off
Speaker 1: the Fed FDIC move this past weekend was that's essentially
Speaker 1: stimulative and you might then see the Fed end quantity
Speaker 1: of tightening as a result. Do you view this kind
Speaker 1: of banking fallout and what has the pre FED has
Speaker 1: been prompted to do as stimulative. Well, in the long run,
Speaker 1: it will be stimulative. And that's one reason that we
Speaker 1: were saying before this banking crisis that the market would
Speaker 1: be weak during this period and that we would be
Speaker 1: in thirty eight hundred to forty two hundred. That's without
Speaker 1: a banking crisis. So the fact that that range is
Speaker 1: still working is remarkable. But there's a simple reason for it.
Speaker 1: Long term rates are plummeting, and it's not actually true,
Speaker 1: but everybody trades tech stocks like they have a longer duration.
Speaker 1: They actually don't, but they still trade it that way.
Speaker 1: They're all all publicly traded companies roughly have twenty two
Speaker 1: year durations. But they're also a safe haven. They don't
Speaker 1: borrow money, they have tremendous cash reserves, and they're very
Speaker 1: powerful companies, so they're being used as safe haven there
Speaker 1: dominate the market. So if you look, there's there's an
Speaker 1: enormous rotation into large cap tech safety and out of
Speaker 1: things that are related to financials, including rates, which is
Speaker 1: irrational because rates are dropping. That's good for them. They're
Speaker 1: well capitalized, so that's why the market's not crashing, But
Speaker 1: underneath it, it really is crashing. Like if you look
Speaker 1: at the regional banks for obviously, from your perspective, what
Speaker 1: are we seeing with these regional banks, the svbs, the
Speaker 1: maybe even the FRC today the signature bank are these
Speaker 1: one offs or they have a systemic background to them.
Speaker 1: Do you think, well, I think it's it's not fully
Speaker 1: systemic because as I mentioned, money center banks and superregionals
Speaker 1: are going to benefit, and that's the dominant portion of
Speaker 1: the banking system. But and this is going to be
Speaker 1: an issue for politicians hopefully, is that their banks are
Speaker 1: getting crushed, so the community banks and the regular regional banks.
Speaker 1: Because if you think about a CFO, so there's sort
Speaker 1: of an implicit guarantee, but it's kind of like the
Speaker 1: commercial sort of is not good enough. So if you're
Speaker 1: CFO and a bank, I'll mention any names certain bank closes,
Speaker 1: like my CFO call and say hey, should we move
Speaker 1: all of our reserves? Because you have to make that
Speaker 1: call because you're going to be fired if you said, oh, yeah,
Speaker 1: I know, Silicon Valley Bank happened, but we thought that
Speaker 1: the FTI C would step in and they decided not
Speaker 1: to for political reasons. You're fired. So you have to
Speaker 1: move your reserves, your checking spread it out, and you're
Speaker 1: going to move it to super You probably don't want
Speaker 1: fifty or five hundred accounts, so you're going to move
Speaker 1: it to money center bank, where then you're not going
Speaker 1: to get fired, Like if city groups goes bankrupt, you're
Speaker 1: not gonna get fired. So there's going to be an
Speaker 1: ongoing run on small banks. It's a huge problem because
Speaker 1: they're going to become unprofit. They're going to get downgraded
Speaker 1: by the rating age whis which that precipitated Silicon Valley's demise,
Speaker 1: along with the worst equity offering ever executed in human history.
Speaker 1: I don't I'm certain there's never been an equity offering
Speaker 1: that resulted in bankruptcy, right, Like, you don't need to
Speaker 1: do a post meeting to see if that was a
Speaker 1: good That sounds like a Morgan Stanley bank are pitching
Speaker 1: against think any on any particular firms. But that is
Speaker 1: the worst equity offering in the history of human quick
Speaker 1: question here, and forgive my ignorance on this. That doesn't
Speaker 1: necessarily seem like a new concept here naturally that if
Speaker 1: you want, the bigger banks are going to be safer
Speaker 1: because essentially they're too big to fail, especially since oh wait,
Speaker 1: why did a lot of folks invest in these smaller banks? Anyway?
Speaker 1: Was the incentive there? Well? I think that there's also
Speaker 1: too much heat being put on the san Francisco fed
Speaker 1: because no stress test ever said you're going to lose
Speaker 1: all of your deposits in twenty four hours. Yeah, there's
Speaker 1: never been a situation like that. Even like during the
Speaker 1: financial crisis, we did guarantee the deposits, so we created
Speaker 1: a system. By accident, we're having this two hundred and
Speaker 1: fifty limit, which is never hasn't been increased, and there
Speaker 1: have been bills to increase. It really created a tinderbox
Speaker 1: that exploded. It's just like mortgage the mortgage market. There's
Speaker 1: always something that hasn't been addressed that a two rapid
Speaker 1: fed tightening cycle will expose. And there's been like ten
Speaker 1: of them, even in my career. You know, if you
Speaker 1: think about junk bond crisis, SNL crisis, commercial real estate
Speaker 1: crisis in the early eighties, there's always oh tech tech
Speaker 1: crash after that tightening cycle. So this is just the
Speaker 1: flaw that should have been fixed. Should have guaranteed all deposits.
Speaker 1: It won't even cost so much because you get a
Speaker 1: low you can have a lower rate on more deposits.
Speaker 1: So you know, would it would hurt the money center
Speaker 1: banks and it would benefit the regional banks. All right,
Speaker 1: So what do you what what what? What do you
Speaker 1: think folks should be doing in the market today. There's
Speaker 1: a lot of cross currents here with the FED, um
Speaker 1: with this banking crisis, if you will, is this just
Speaker 1: stay on the sidelines here, because I'm looking at the
Speaker 1: market here and it's kind of hanging in there. Yeah,
Speaker 1: so that's the rotation going on. So I'm sure we'll
Speaker 1: have the SNPF, but I'm sure the tech stocks are
Speaker 1: starting to rip an offset the bit here. Yeah, right,
Speaker 1: So I do think that ultimately this is bullish because
Speaker 1: assuming the FED, but I would wait to have the
Speaker 1: FED pause, not raise rate, and hopefully good commentary about
Speaker 1: even being willing to cut, and then that will take
Speaker 1: the key the key overhang on the market, which I've
Speaker 1: said before on your shows, is that as the FED
Speaker 1: because they were just completely out to lunch and thought
Speaker 1: it was fine to raise rates at this unprecedented level.
Speaker 1: So now because the FED regulates banks, they can't ignore it.
Speaker 1: You know, they're getting the calls from the FDC, they're
Speaker 1: getting the calls from Congress, and so it's not like
Speaker 1: CSFB that none of our you know, our politicians, so
Speaker 1: they have to focus on this and presumably they will
Speaker 1: consider rate increases there won't be at their normal level
Speaker 1: of being behind by about twelve months. They can't afford
Speaker 1: to be behind twelve months here, they have to cut
Speaker 1: rates more quicker than that. Well, doesn't that factor in
Speaker 1: things like any of the retail data, any of the
Speaker 1: Chinese story, any of the eco stuff that we I
Speaker 1: feel like have been paying attention to as these tailwinds
Speaker 1: for inflation in the face of this banking fallout. Does
Speaker 1: the rest matter? Not really? No, That's why it's important
Speaker 1: to focus on those two elements that drove inflation. I'm
Speaker 1: talking high inflation by way, not one versus two versus three. Yeah,
Speaker 1: is housing core and energy is only six and keeping
Speaker 1: my natural gas presents during an eighty percent in the
Speaker 1: last four months, highly deflationary. But every business the United
Speaker 1: States uses energy, and so that's the key supply shock.
Speaker 1: It's not necessarily the ports or chips. I mean, chips
Speaker 1: was a problem because you can't build cars. But those
Speaker 1: are the key drivers. And you should look at oil.
Speaker 1: It's both an indicator of inflation and it's also an
Speaker 1: indicator of the potential for a global recession. Jay, we
Speaker 1: can't let you go without getting kind of your thoughts
Speaker 1: on energy right here, I see WTI crude oil down again. Today,
Speaker 1: we're sixty six dollars at barrel. What's kind of next
Speaker 1: twelve eighteen months? What are you looking for an energy space? Well,
Speaker 1: before the financial crisis, we were at seventy five to
Speaker 1: ninety five on WTI. Because you do have a recovery
Speaker 1: in China, you do have a pretty robust US economy,
Speaker 1: which is shocking, but it's because of the pandemic, and
Speaker 1: you still do have an energy crisis or at least
Speaker 1: an energy deficit in Europe. So those are all supportive factors.
Speaker 1: But investors treat oil as a risk asset, and this
Speaker 1: is a risk off environment. So you're going to crash
Speaker 1: bullet well below our level, and so it's all bets
Speaker 1: are off until we get clarity on the FED and
Speaker 1: possibly maybe a guarantee of all deposits. I mean, that's
Speaker 1: going to be hard to get through Congress, but that's
Speaker 1: what's needed, all right, Jake, great stuff, Really appreciate it
Speaker 1: as always. Jay Haffield, CEO, founder and portfolio mentor Infrastructure
Speaker 1: Capital Visors, joining us live here in our Bloomberg Interactive
Speaker 1: Brokers studio. All right, Let's get back over to Europe
Speaker 1: a little bit, get a sense of kind of what
Speaker 1: the feeling is here with the ECB with Credit Swiss.
Speaker 1: We could do that with doctor Vanya Straviakva, Professor of
Speaker 1: economics at the London Business School. Doctor, thanks so much
Speaker 1: for joining us here. Let's start with the European Central Bank.
Speaker 1: They came out with a fifty basis point increase given
Speaker 1: all that's going on over there with the banking situation
Speaker 1: and namely Credit Swiss. Do you think that was a mistake.
Speaker 1: Should they have paused or maybe just raised the rate
Speaker 1: twenty five basis points? What do you think? So? Thank
Speaker 1: you so much for having me. It's a pleasure to
Speaker 1: be here. I think actually they did the right thing.
Speaker 1: Given the numbers for inflation. They have to establish credibility
Speaker 1: at this point, and I think the main concern in
Speaker 1: Europe right now is to get inflation under control. I'm
Speaker 1: less worried about solvency issues with the banks in Europe
Speaker 1: at this point, and I think they're probably thinking the
Speaker 1: same way. Of course, they will be liquidity issues on
Speaker 1: the horizon, which is what we're seeing with Credit Swist
Speaker 1: potentially at a banks, but they're ready to provide a backstop.
Speaker 1: For example, the Swiss National bandit the same for creditswis is.
Speaker 1: Of course we can do that for the Eurozone banks.
Speaker 1: So I think treating it at the moment as a
Speaker 1: liquidity rud and a solvency crisis is the right approach.
Speaker 1: Regulation is quite strict, especially for the large banks in Europe,
Speaker 1: so credit Swiss is very well regulated. For example, you
Speaker 1: know the one correcting that was done by Switzerland, and
Speaker 1: also the UK was ring fencing the retail banking of
Speaker 1: the large banks. So both the UK and Switzer one
Speaker 1: realize after the global financial crisis that these countries do
Speaker 1: not have the physical capacity to bail out their massive banks,
Speaker 1: so ring fencing the retail bank, which is essential for
Speaker 1: the functioning of the economy, essentially is giving them the
Speaker 1: freedom to not worry too much about having to put
Speaker 1: in massive bailouts. And then liquidity can be dealt with
Speaker 1: in many ways, such as providing loans against the phase
Speaker 1: value of the collateral, which is what the FEDS started doing,
Speaker 1: so that they don't have to worry about the decrease
Speaker 1: in the evaluations of long term government that Professor, I'm
Speaker 1: curious about the timeline here, it feels like the banking
Speaker 1: fallout to your point two pause point as well, has
Speaker 1: kind of thrown the idea of the energy crisis, this
Speaker 1: kind of multi year recession we were expecting in the
Speaker 1: UK out the window. To what extent are those still
Speaker 1: the factors that the BOE and the ECB have be
Speaker 1: watching well. So the problems in the UK area are
Speaker 1: separate because they have to deal with the consequences of
Speaker 1: Brexit as well mismanagement of the economy for many, many years, sadly,
Speaker 1: so we are seeing that in the news. The public
Speaker 1: sector is collapsing in the UK. We are seeing strikes
Speaker 1: daily in the news. So those issues are not going away,
Speaker 1: those structural issues that governments will have to deal with.
Speaker 1: But getting inflation under control is absolutely crucial because if
Speaker 1: we think that high interest rates are a problem for
Speaker 1: the banking sector, imagine having high interest rates for a
Speaker 1: very long period of time because we cannot get inflation
Speaker 1: under control, Potentially the problems will be even more severe,
Speaker 1: particularly for the mortgages of course, so Europe and the
Speaker 1: UK the majority of the mortgages of floating rate mortgages,
Speaker 1: and that's where the real problem will be because a
Speaker 1: lot of the borrowers might not be able to soon
Speaker 1: start repay their mortgages and that will generate a recession
Speaker 1: down the road. So the longer the high interest rates remain,
Speaker 1: which they will if we don't get inflation under control,
Speaker 1: the bigger the cost on anyone that has a mortgage
Speaker 1: in Europe and the UK, and that's where the real
Speaker 1: recession is going to come. We're getting a little bit
Speaker 1: of news. I just want to announce to our international
Speaker 1: audience here JP Morgan and Morgan Stanley in tax to
Speaker 1: bolster First Republic. This of course was the next bank
Speaker 1: that was expected to kind of get down with signature
Speaker 1: with Silicon Valley Bank. This is according to reports from
Speaker 1: the Wall Street Journal. You are seeing farc those shares
Speaker 1: up hair some of those losses still down twenty six percent,
Speaker 1: but certainly off the lows of down about thirty percent.
Speaker 1: Professor Vannia, I want to bring you back in here,
Speaker 1: not to talk about First Republic, but perhaps a similar
Speaker 1: situation with Credit Suis as well. Do the woes and
Speaker 1: the European baking sector go away if someone takes over
Speaker 1: parts of Credit Suis well? So the problem with Great
Speaker 1: Swiss is effectively, they could never gain their footing after
Speaker 1: the global financial crisis. They couldn't figure out what type
Speaker 1: of bank they will be in the sense that they
Speaker 1: were a massive bank. The asset management division and the
Speaker 1: wealth management divisions who are a big part of the bank, however,
Speaker 1: they're not competitive. The fees that they were charging couldn't
Speaker 1: compete with the black Rocks and the vanguards of the world,
Speaker 1: and essentially the decreasing fees due to the advancement of ETFs.
Speaker 1: So I think that's a structural problem. So more generally,
Speaker 1: people compare this stampede of depositors from banks now to
Speaker 1: a classic bank run. I think that's not correct. So
Speaker 1: the fundamental problem here is not about having deposit insurance
Speaker 1: that's not credible or insufficient deposits insurance, as governments are
Speaker 1: clearly willing to bank depositors in full, as the FAT
Speaker 1: has shown. It's about final investors waking up and realizing
Speaker 1: their alternatives to bank deposits that can give them both
Speaker 1: liquidity and much high return. The banking sector will have
Speaker 1: to shrink, so Credit Suite has been experiencing that true
Speaker 1: the ass management division, but this will be true for
Speaker 1: your standard depositors as well, because many banks will not
Speaker 1: be able to afford to off a high interest rates
Speaker 1: on depositors, right, So this is because on their assets
Speaker 1: then they will not be able to make the interest
Speaker 1: rates that depositors can make just by purchasing the government data.
Speaker 1: This point, I think that's the big problem, and the
Speaker 1: trend of bank disintermediation had already started, and the rate hikes,
Speaker 1: together with the SVB collapse and the negative news around
Speaker 1: credit suites, are just precipitating the adjustment. Yes, there'll be
Speaker 1: some casualties along the way, but the old bank business
Speaker 1: model is simply not sustainable in the new environment where
Speaker 1: even small retail investors can open a bangered account overnight
Speaker 1: and investing government data bays post to phrase. So now
Speaker 1: to be honest, yeah, no, go ahead, professor. What I'm
Speaker 1: particularly concerned about, and I don't hear being spoken about
Speaker 1: enough in the news, is essentially there is someone on
Speaker 1: the other end of these interest rate hedges. So the
Speaker 1: interest rate indurvatives market is the most liquid market in
Speaker 1: the world essentially, So presumably a lot of financial institutions
Speaker 1: and banks are hedge induration risk, But who is providing
Speaker 1: this hedge. So we know that this ended a very
Speaker 1: badly for AG in two thousand and eight because there
Speaker 1: were the sealers of insurance for the mortgage back securities.
Speaker 1: If the risk is concentrated and there are a few
Speaker 1: entities actually providing the interest rate essentially hedge, then I
Speaker 1: think this will be the casualties this time. We don't
Speaker 1: know yet where the risk is concentrated, which is a
Speaker 1: big problem I think regulators. Okay, so professor, just kind
Speaker 1: of getting back to the ECB here, I mean the risk.
Speaker 1: You know, we've heard a lot of folks say, hey,
Speaker 1: the ECB is making a stake here. They need the
Speaker 1: pause if they're not necessarily just for the credit Swiss reason,
Speaker 1: but for some of the reasons you outlined about you know,
Speaker 1: there's some real stresses out there in the economy, and
Speaker 1: then the ECB really risk breaking the European economy and
Speaker 1: pushing into a deep recession. How viable are those risks
Speaker 1: do you think? Well, it is true that people arguing
Speaker 1: that they might be going at a pace that is
Speaker 1: too fast, I think they are doing the right thing
Speaker 1: to defend their credibility and whatever the issues there might
Speaker 1: be with the financial sector which I don't. I do
Speaker 1: believe they will be issues. As we discussed, they can
Speaker 1: handle them in different ways, so they have a lot
Speaker 1: of macropotential tools. It's not just the interest rates that
Speaker 1: they can employ in order to handle any staguties in
Speaker 1: the financial sector. And it's almost like time to give
Speaker 1: the patient the essentially the medicine it needs, because the
Speaker 1: longer we postpone normalization going back to normal interest rates,
Speaker 1: these adjustments has to take place at some point. Okay,
Speaker 1: all right, you just have to leave it there, doctor
Speaker 1: doctor Vannier strev Stravia Kava, Professor of Economics of the
Speaker 1: London School of Business. We really appreciate getting her time.
Speaker 1: She's got some cutting edge research on the banking sector
Speaker 1: and it's just absolutely at the forefront here as the
Speaker 1: European regulators and the Swiss regulators look at you know,
Speaker 1: look at credit Swiss and what to do there. All right,
Speaker 1: let's get back to the story that just broke over
Speaker 1: the last few minutes of Wall Street Journal reporting JP Morgan,
Speaker 1: Morgan Stanley and others in talks to aid First Republic.
Speaker 1: I mean, this is so obvious. I can't imagine these
Speaker 1: bankers are actually gonna get paid this investment backers. You're
Speaker 1: putting this deal to together. I could do this, but
Speaker 1: let's bring in some of our banking experts, Herman Chang
Speaker 1: and Arnod cale Kuda. Arnold covers the credit side and
Speaker 1: Herman kind of more on the equity side. For so
Speaker 1: we got you covered when it comes to these banks.
Speaker 1: Herman to me, what do you make of this news?
Speaker 1: It kind of makes complete sense to me. This isn't
Speaker 1: I would think. And either if they're gonna put capital
Speaker 1: in or outright buy parts are all of that seems
Speaker 1: like an easy deal to do. Yeah, I think so.
Speaker 1: We still think our First Republic is a really strong
Speaker 1: franchise with a lot of wealth and managements assets that
Speaker 1: are attractive to a potential buyer. And really it's been
Speaker 1: sucking into the vortex with some of the uncertainty that
Speaker 1: that proliferated with SVB and Signature. But the capitol infusion
Speaker 1: news is definitely great news for the bank and management.
Speaker 1: So we're looking to hear more on that front. All right, Arnold,
Speaker 1: come on in here. We just had Alison Williams on
Speaker 1: in the last hour we're talking about this deal, and
Speaker 1: she said, look, this isn't an acquisition. This is a lifeline,
Speaker 1: a lifeline that might not help the stock and bond investors. Well,
Speaker 1: is it gonna help the bond investors at all? Do
Speaker 1: they care? Well? I mean in terms of them. You know,
Speaker 1: we had some big downgrade yesterday from like a you know,
Speaker 1: A minus triple plus two you know, high yield. Yeah,
Speaker 1: big deal. But but they only had an eight hundred
Speaker 1: million of bonds. This is what this we call fallen
Speaker 1: angel Yeah, but I mean relatively speaking, it's it's it's
Speaker 1: pretty small, and they have about like three and a
Speaker 1: half billion I preferred, So I think the risk is
Speaker 1: contained for a lot of the investors. But definitely, Um,
Speaker 1: you know, markets moving on all these defaults happening really
Speaker 1: rapidly Credit Swiss. But um, you know, like you guys
Speaker 1: have been talking about, this is a great franchise, but
Speaker 1: I think, you know, the headlines can be sleading in
Speaker 1: the sense of, you know, the crown jewel here is
Speaker 1: this wealth manager's business and so and from that aspect,
Speaker 1: you know, even the JP Morgan who's kind of prohibited
Speaker 1: from buying any deposit franchises, they can kind of look
Speaker 1: at the wealth franchise and say, hey, you know, Morge Stanley,
Speaker 1: that's the crown jewel you you cannot acquire, you know,
Speaker 1: wealth managing assets so um and and that you know,
Speaker 1: wealth managing assets you know, um kind of spit off
Speaker 1: fees and and that kind of stable business is great
Speaker 1: that anybody would love to have. We did have some
Speaker 1: or we're seeing some credit downgrades, Arnold. If I'm Moody's
Speaker 1: or Fitch or whatever, it is one of the two
Speaker 1: or three metrics I really look at when I think
Speaker 1: about moving my rating. Yeah, so I think, you know,
Speaker 1: looking at kind of what has transpired and the risks
Speaker 1: of uninsured deposits possibly flowing out, and based on kind
Speaker 1: of the fears that are out there, right, I think
Speaker 1: that that's what why they made these moves. I guess
Speaker 1: premptively for for um, for republic, given kind of all
Speaker 1: the headlines out there. Um, you know, I think looking
Speaker 1: at the stock reactions and people, you know, see the
Speaker 1: uncertainty of you know, what happened with the uninsured deposits
Speaker 1: of Silicon Valley Bank on Friday and Monday, right, you know,
Speaker 1: a lot of the damage may have already been done
Speaker 1: at this point. And so that's why when you see
Speaker 1: these news things about like oh, we tapped extra liquidity
Speaker 1: from the Fed FDIC O JP Morgan's extending US credit line.
Speaker 1: It's like, oh, oh my god. You know it's it's
Speaker 1: that whole thing of like, why are you saying that
Speaker 1: if there isn't a problem? Right? So well, Hermann hop
Speaker 1: back on in here, because we're talking about First Republic
Speaker 1: obviously in this capital infusion, but another that is trading
Speaker 1: the stock in terms of his trading tick by tick
Speaker 1: is Western Alliance w AL Folks is the ticker there.
Speaker 1: This is the company that recently got a five point
Speaker 1: three percent stake from Ken Griffin of Citadel. Now we
Speaker 1: know which in its own ways its own capital infusion.
Speaker 1: What kind of numbers are we looking at here? I mean,
Speaker 1: Alison was very careful about saying, look, First Republic is
Speaker 1: not being acquired yet, right, will it be? Are we
Speaker 1: looking for a potential stake still or is this kind
Speaker 1: of lifeline going to be enough? Yeah, that's that's a
Speaker 1: millionailar question at this point. Does the stake by potentially
Speaker 1: JP Morgan and Morgan Stanley stabilize the market fears and
Speaker 1: stabilize the deposit outflow If those two things happen, then
Speaker 1: you know that that would be great news in terms
Speaker 1: of Western Alliance. It's another bank that operates in the
Speaker 1: western part of the United States, and they have branches
Speaker 1: in California and Arizona and Nevada and does have some
Speaker 1: exposure to the venture and start up community, but it's
Speaker 1: very small relative to what SBB did, which is the
Speaker 1: entirety of their business. So they are unfortunately lumped into
Speaker 1: the same situation and not having some of the duration
Speaker 1: risk that the SVB had, So there's unfortunately they get
Speaker 1: thrown into the mix. All right, I'm gonna throw this
Speaker 1: out for either of you, two or both of you,
Speaker 1: whatever you want to do. I could care less all
Speaker 1: I want to because I'm trying to figure out, and
Speaker 1: I think a lot of investors are trying to figure out,
Speaker 1: how systemic is this bank issue. We're all still scarred
Speaker 1: from two thousand and eight when everybody got pulled into it.
Speaker 1: When the FED races rates by like five hundred bases
Speaker 1: points within a year, what does that mean for a bank? Sure?
Speaker 1: What's it mean for a bank is that some things
Speaker 1: get caught off sides. They weren't expecting such a rapid
Speaker 1: rising rates and they get caught off side. Doesn't mean
Speaker 1: you get caught off side. You purchase securities or you
Speaker 1: do loan at a very low rate environment and aggressively.
Speaker 1: And when rates rise, the value of those assets decline.
Speaker 1: And when there's a loss in confidence in a bank,
Speaker 1: that can just spur a lot of uncertainty the market,
Speaker 1: you know, the share price come declines. And that's really
Speaker 1: essentially what happened with SVB. All right, we'll hop back
Speaker 1: on in here, Arnold, and and talk to us a
Speaker 1: little bit about where we go from here. I mean
Speaker 1: you already mentioned that we have seen this wave of downgrades. Uh,
Speaker 1: these wave of kind of distress for some of these banks.
Speaker 1: Are you seeing the show up and say the hedges
Speaker 1: or the insurance the CDSS against some of these banks. Well,
Speaker 1: I mean I think, um, we've seen spreads widen first
Speaker 1: on this SVP and then Kretswiss you know a lot
Speaker 1: lot more and yeah, and you know, one metric we
Speaker 1: look at kind of in the corporate bond spaces, you know,
Speaker 1: the financials, how do they trade versus the overall overate
Speaker 1: bond index? And um, you know they had wind out
Speaker 1: in twenty twenty two until October and then we rally
Speaker 1: back almost a flat and then obviously not now they're
Speaker 1: training about twenty five wider again. But I think it's
Speaker 1: going to be tough for the financials to kind of
Speaker 1: kind of regain that, you know, unless the markets really
Speaker 1: calm down. I think it's gonna be tough, you know,
Speaker 1: for the financials to kind of tighten back up again
Speaker 1: compared to the role index, given kind of the default risk,
Speaker 1: which is real. Yeah, so we were talking about systemic
Speaker 1: risk broadly, but let's talk about the bond space specifically
Speaker 1: in terms of contagion, in terms of trading and sympathy.
Speaker 1: Are you seeing the credit Swiss situation bleed into kind
Speaker 1: of the regional bank situation because in my mind they're
Speaker 1: two separate issues. Yeah, no, I agree with that. Um So,
Speaker 1: you know, with the regional banks stuff, I think, you know,
Speaker 1: for the select regional banks that are having issues, um,
Speaker 1: you know, it was like, okay, maybe the bigger US banks,
Speaker 1: the biggest US banks like the JPMS ba AS, that's
Speaker 1: kind of like a safe heaven. But then when you
Speaker 1: deal with Credit Swiss and kind of the interconnectedness to
Speaker 1: the counterparties and all this and that then it's like okay, well,
Speaker 1: well then the bigger banks are kind of more exposed
Speaker 1: to that, although we haven't really seen it in the
Speaker 1: pricing yet, you know, something were to happen, I think
Speaker 1: you know, that's where you're going to be like, hmm,
Speaker 1: you know, who has kind of the most ties to
Speaker 1: kind of a you know, global systemically for an entity,
Speaker 1: It might be the trading desks and they might be
Speaker 1: coutaparts here and there, although at least Credit Swiss, you know,
Speaker 1: they had been kind of shrinking their trading portago platform, right, so, um,
Speaker 1: maybe the risks are more contain there. But but if anything,
Speaker 1: you know, you got to look at start looking at
Speaker 1: the biggest banks again in terms of kind of the
Speaker 1: systemic contagion risks from the Credit Swiss and on the
Speaker 1: regional side, the contagion and the systemic risk and the
Speaker 1: interconnectitivity really isn't there, So so that risk should be
Speaker 1: off the table on the regional bank side. So herman
Speaker 1: on the regional bank side, if I were an annals
Speaker 1: and I know about you know, fifteen minutes of experience
Speaker 1: in this um, what percentage of a bank's deposits are
Speaker 1: enshort on average? Yeah, it really runs the gamut um.
Speaker 1: So for I could just screen on that, right, Yeah,
Speaker 1: you can. You can screen on that. You have to
Speaker 1: dig deep into the regular portory filings, but you could
Speaker 1: theoretically do it. Because I know you're a smart person.
Speaker 1: I would say that it runs a gamut SBB was
Speaker 1: about five percent, signature was about ten percent. You want
Speaker 1: as an investor, I want as higher percentage as positive, correct,
Speaker 1: because I would both because they had these big deposits,
Speaker 1: well above to a big commercial deposits. Okay, and you
Speaker 1: want fifteen minutes, I got ten together. It's twenty five exactly.
Speaker 1: So you want them high. Your former employer, M ANDT Bank,
Speaker 1: what was their insured deposit? It's more about the fifty
Speaker 1: percent or around that level. Yep. See, that's what I'm
Speaker 1: looking forward to see. Why can't I just screen on that.
Speaker 1: I'm sure I can on the Bloomberg terminal and I
Speaker 1: buy the good ones and I sell the bad ones.
Speaker 1: That sounds like a very good idea. But I presume
Speaker 1: that if with Silicon Valley Bank, I'm willing to take
Speaker 1: that deposit risk. I just called it deposit risk. I
Speaker 1: don't know what you guys call it. Why do I
Speaker 1: take that deposit risk because you were not expecting a
Speaker 1: deposit flight, because you know, a week ago the strength
Speaker 1: of the institution was the venture capital relationships and the
Speaker 1: startup relationships. That became a weakness when there was a
Speaker 1: loss in confidence. Boy, I could now be a bank's analyst.
Speaker 1: I think I've learned so much. Paul Sweeney here with
Speaker 1: Pretty Gupta Matt Miller out Today we've been focusing on
Speaker 1: testimony from Secretary General Secretary of the Treasury Jennet Yellen.
Speaker 1: She is testifying in front of Congress. We started off
Speaker 1: the day with some news out of the European Central
Speaker 1: Bank raising the benchmark rate by fifty basis points, and
Speaker 1: there were calls for maybe a pause, maybe just a
Speaker 1: twenty five twenty five basis point increase, if for no
Speaker 1: other reason than to just cool the market's given some
Speaker 1: of the turmoil we've seen in there with the banking sector.
Speaker 1: Let's go back to Europe and get a sense of
Speaker 1: kind of how the market's dealing with it today. Marianne Squadell,
Speaker 1: founder of Bougeville Consulting, joins us. Marianne, I'd love to
Speaker 1: get your thoughts, so kind of what you believe or
Speaker 1: kind of your takeaways from Steam regards fifty basis point
Speaker 1: move at the ECB. Yes, well, you know, I've been reading.
Speaker 1: I used to work as a regulator a very long
Speaker 1: time ago, and what I'm hearing from my previous colleagues
Speaker 1: is that the regulators are quite confident that the banking
Speaker 1: sector is a little bit stronger in Europe because I
Speaker 1: didn't realize the rules, you know, on a mid sized landers.
Speaker 1: So in the stress test, they're confident that they're strong enough.
Speaker 1: And so I think there's there's this sense in Europe
Speaker 1: at the moment. I think that's what that's might take
Speaker 1: on it. Obviously nobody knows what's going to happen, and
Speaker 1: it's obviously a question of confidence at this stage. So
Speaker 1: you know, the backdrop of some concerns, obviously a major
Speaker 1: concerns a credit Swiss. How do you think that played
Speaker 1: into the ECB's decision here, because there are a lot
Speaker 1: of people saying, boy, if you take a look at
Speaker 1: some of the potential wider risk from continued challenges a
Speaker 1: credit Swiss, that in and of itself might suggest that
Speaker 1: they pause. So I don't know, but you know, in
Speaker 1: the UK we still have this memory of like there
Speaker 1: was even before the financial the financial crisis in two
Speaker 1: thousand and seven, there was a run on a bank
Speaker 1: which I'm don't know in the US if you heard
Speaker 1: much about it. It was Northern Rocket was a big
Speaker 1: lander and we saw in the streets of London people
Speaker 1: lining up to get their money back, and that was
Speaker 1: something major. So the governments in the UK, in the
Speaker 1: European Union, it's maybe a bit different, but in the UK,
Speaker 1: which at the time was part of the European Union obviously,
Speaker 1: So in the UK, you know, the government worked throughout
Speaker 1: the weekend. There's HSBC that bought SVB for one pound
Speaker 1: and I have a friend who invest in a startup.
Speaker 1: The startup decided to stay a client of SVB, and
Speaker 1: they feel from a client's perspective, but deposit takers perspective,
Speaker 1: they are feeling fairly reassured and the sentiment at the
Speaker 1: moment is not as panicky as as you know. Maybe,
Speaker 1: so that may have played a part obviously in the
Speaker 1: decision of the Central Bank. So, Marian, you know, I'm
Speaker 1: a former employee of Credit Swiss, so I'm paying very
Speaker 1: close attention there. Um yeah, and I do, and I
Speaker 1: a lot of things that I think a lot of
Speaker 1: us learned during the financial crisis is, particularly for these
Speaker 1: investment banks, is counterparty risk and that concept that at boy,
Speaker 1: if the market doesn't have confidence in your institution, it
Speaker 1: is game over. I don't care who you are and
Speaker 1: what the name is on the door. How do you
Speaker 1: assess that risk for credit Swiss at this point? Hmm,
Speaker 1: that's a very good question. That's it's really too early
Speaker 1: to tell. I think, Um, it's it's a very good question. Um,
Speaker 1: we don't know. That's that's SIANSO. Um, right, we don't know.
Speaker 1: All right. So what's the next step here for the
Speaker 1: central bank? Do you believe? Um? In Frankfurt? Um? Well,
Speaker 1: I don't know what they're going to decide, of course,
Speaker 1: but at the moment everybody is kind of weighing up
Speaker 1: the poison cons you know of what's going to happen.
Speaker 1: But as you said, it's a question of confidence. If
Speaker 1: you know depositors stay put, you know, there's the risk
Speaker 1: the inflation becomes obviously more of a priority. Otherwise it
Speaker 1: would be you know, the confidence of deposit takers. That
Speaker 1: is a priority. All right, Marian, thank you so much.
Speaker 1: We appreciate getting some of your time. Marian Scordell, founder
Speaker 1: of Bougeville Consulting. We started out the day we want
Speaker 1: to get back to We start off the day with
Speaker 1: the ECB really focusing on Christine Lagarde. The ECB, they
Speaker 1: stayed true to what they were saying, fifty basis point move.
Speaker 1: So whenever we get news out of the Bank of
Speaker 1: England or the ECB, there are two people we have
Speaker 1: to talk to. Marcus Ashworth Boom we take that off
Speaker 1: this morning, Bloomberg Surveillance and John Authors. These are two
Speaker 1: cranky Brits who if they've got something to say, they
Speaker 1: don't mind saying it. Folks, John, what do you make
Speaker 1: of Christine Leguard that European Central banks fifty basis points move.
Speaker 1: Don't we have the risk of a recession. Don't we
Speaker 1: have a big bank that's in trouble? What's going on? Well,
Speaker 1: I'm not feeling that cranky just at this moment, just
Speaker 1: to get that on the record, and it's also rather
Speaker 1: wonderful just watching Bloomberg Technology on Bloomberg TV at the
Speaker 1: moment where for some reason we have two cranky Brits
Speaker 1: introducing the America curmudgeonly. Yeah, I like that. I like that.
Speaker 1: I might go with being a curmudgeon, if not a crank.
Speaker 1: In terms of what the CB has done, they have
Speaker 1: you know, they have a dilemma and they've decided to
Speaker 1: go all out on the belief a inflation really matters
Speaker 1: and it isn't beaten yet and B and this is
Speaker 1: the critical one that you can separate the functions of
Speaker 1: fighting inflation and maintaining financial stability. Certainly it ought to
Speaker 1: be the case if credit suisses issue, and of the
Speaker 1: different banks that have fallen in this country is if
Speaker 1: that issue is merely liquidity as opposed to solvency, then
Speaker 1: they should be safe. They should be within their rights
Speaker 1: to carry on tightening rates. That said, the fact I
Speaker 1: personally gasped when the news came this morning, and I
Speaker 1: think plenty of other people have done as well, it
Speaker 1: is pretty seriously courageous that they've pressed ahead with this.
Speaker 1: They are very strongly signaling that they don't think the
Speaker 1: banking sector is in that much trouble, and courageous is
Speaker 1: not always something you want to be as a central banker.
Speaker 1: But what measure do they come up with that conclusion
Speaker 1: that the banking sector is not in that much of
Speaker 1: a crisis. Well, if you look at priced book multiple,
Speaker 1: suggected in my column last night for the year of
Speaker 1: the Eurozone banks, Yeah, they're trading below book but they've
Speaker 1: been trading below book value for fifteen years and there's
Speaker 1: really nothing particularly crisis written or scary about the trading
Speaker 1: in those in fact, in the actual share price given
Speaker 1: the greatest risk here is buying the stock in one
Speaker 1: of these banks rather than taking out a deposit. Plainly,
Speaker 1: shareholders are much greater risk of being wiped out than depositors.
Speaker 1: Oddly enough, we are still not showing as much stress
Speaker 1: as either eight or eleven twelve, which for the European
Speaker 1: banks was actually in many ways a bigger deal than
Speaker 1: O eight was. And I think in a way we
Speaker 1: all became experts on the TED spread. Can you give
Speaker 1: us the dummies explanation spread the TED spreads? It's the
Speaker 1: TED spreads is the comparison between the short term rates
Speaker 1: at which which banks lend to each other. Still, although
Speaker 1: libel has had an interesting history in the years since
Speaker 1: the global financial crisis, it's what we think of as libel.
Speaker 1: It's the rate at which they lent to each other
Speaker 1: compared to the rate you can get on T bills.
Speaker 1: So generally those two numbers are very close to each other,
Speaker 1: and the banks are very slightly higher. When the spread rises,
Speaker 1: it indicates that banks really have a problem trusting each other.
Speaker 1: The TED spread at the moment is still unremarkable. Banks
Speaker 1: don't have any great degree of distrust with each other.
Speaker 1: There is a danger in taking O eight, which most
Speaker 1: of us who lived through eight find it difficult not
Speaker 1: to take O eight as a base of comparison. What
Speaker 1: happened to the TED spread, what happened to banks trust
Speaker 1: in each other in a eight was extreme. Because we've
Speaker 1: gone through all this, just nobody knew who was sitting
Speaker 1: on the bad loans. They didn't even know whether they
Speaker 1: themselves were sitting on the bad loans, and trust was
Speaker 1: completely destroyed. There is nothing like O eight on the picture.
Speaker 1: The possibility that this is a liquidity problem that will
Speaker 1: require banks to put up with far less in the
Speaker 1: way of profits and will be part of a slowdown
Speaker 1: in the economy, that's a really serious issue. There really
Speaker 1: shouldn't be any risk of a true repetition of two
Speaker 1: thousand and eight, and again I'm startled that they had
Speaker 1: the courage to go through with this, But perhaps the
Speaker 1: ECB view is by being deviated from the path Fate's
Speaker 1: clearly spelt out before, they would have increased the risks
Speaker 1: that people would say, Okay, BCB is running scared. They
Speaker 1: must know something. We should run for the hills. John,
Speaker 1: you mentioned your reference to your opinion piece, and folks,
Speaker 1: you can find that at Bloomberg dot com slash opinion
Speaker 1: or OPI n go on the terminal. John's pieces entitled
Speaker 1: move along, there's no crisis to see here? Um headline
Speaker 1: exactly yes. Um. Here in the United States, I would
Speaker 1: say the consensus is soft landing, no landing, something on
Speaker 1: those lines. Probably not a hard landing. Isn't the same
Speaker 1: in Europe? Would you say? Or it seems a little
Speaker 1: bit more precarious there. I'm not sure that consensus this
Speaker 1: is quite so clearly that we get a soft landing
Speaker 1: here as it was a couple of weeks ago, And
Speaker 1: if it is, I don't quite know why people are
Speaker 1: expecting rates to come down quite as aggressively as they
Speaker 1: do in Europe. The situation is very much murkier because
Speaker 1: of this big extra factor of the energy crisis, So
Speaker 1: at one point that was a big reason to expect
Speaker 1: a really serious slowdown in economic activity this year, a
Speaker 1: perfectly reasonable one. And because the weather in Europe turns
Speaker 1: out to have been I gather to standard deviations better
Speaker 1: than you would normally expect a really mild winter, that's
Speaker 1: had much less of a drastic impact than would have
Speaker 1: been expected. So the risk of a hard landing has
Speaker 1: moved out of the well, sorry it hasn't gone away,
Speaker 1: but it is reduced very significantly, and that in turn
Speaker 1: has increased the pressure on the ECB to be somewhat
Speaker 1: more hawkish than they were previously setting out to be.
Speaker 1: But that, certainly, that energy factor, plus the way that
Speaker 1: the the the European financial system works through banks more
Speaker 1: than it does through markets, and its banks have never
Speaker 1: really totally recovered from what happened to it at the
Speaker 1: turn of the last decade, that that does make the
Speaker 1: situation very different. Usually it's the feather goes first, right,
Speaker 1: the timing of the calendar that has the ECB going first.
Speaker 1: Does J Powell take any queue from Christine Legard this
Speaker 1: time around? It makes it harder for him to pause altogether,
Speaker 1: I think, But we don't know what's going to happen
Speaker 1: in the next I've still got We've still got four
Speaker 1: and a half days before before he he. The FOMC
Speaker 1: has to make its decision absent a significant new banking
Speaker 1: issue flaring up somewhere, and I have no opinion on
Speaker 1: right the probability of that is, but absent that, I
Speaker 1: think twenty five basis points hike next week is very
Speaker 1: likely that the we don't need to get into all
Speaker 1: of it. The data does not suggest that that inflation
Speaker 1: on its own is still too high for them to
Speaker 1: stop hiking. Then the folks that are pricing in cuts
Speaker 1: for next year, for this year, I'm sorry, the back
Speaker 1: half of this year again, that's what we see on
Speaker 1: the bloomer term of the futures market very much. So, yeah,
Speaker 1: I mean, what do you make of that? And for
Speaker 1: thirty seconds, like I said, that's why I'm nervous about
Speaker 1: you're saying, soft landing is still the is still the
Speaker 1: dominant scenario if we need to cut rates the way
Speaker 1: the monket currently implies before the end of the year,
Speaker 1: that's in plies a landing with somewhat op and obviously
Speaker 1: there's a risk of that and a banking crisis would
Speaker 1: deliver that. It's still not clear to me that we
Speaker 1: have as serious a banking crisis as something all right,
Speaker 1: very very good as always. We got Marcus Ashworth, we
Speaker 1: got John Authors, We've got the euro and UK cover.
Speaker 1: That's how I like to think about it. John Authors,
Speaker 1: thanks so much for joining us here from Bloomberg Opinion.
Speaker 1: He works on the Markets team, does all that kind
Speaker 1: of great stuff. He joins us here on our Bloomberg
Speaker 1: Interactive Broker Studio, so he gets that gold star for
Speaker 1: showing up as opposed to phoning it in. Thanks for
Speaker 1: listening to the Bloomberg Markets podcast. You can subscribe and
Speaker 1: listen to interviews an Apple Podcasts or whatever podcast platform
Speaker 1: you prefer. I'm Matt Miller. I'm on Twitter at Matt
Speaker 1: Miller nineteen seventy three. On ball Sweeney, I'm on Twitter
Speaker 1: at pt Sweeney. Before the podcast, you can always catches
Speaker 1: worldwide at Bloomberg Radient