WEBVTT - Credit Suisse, Financial Instability, the ECB, and Rate Hikes 0:00:00.760 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day, we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.520 --> 0:00:15.560 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.400 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.120 at Bloomberg dot com slash podcast. Let's talk markets here 0:00:22.239 --> 0:00:25.120 and kind of where we go from here. What should 0:00:25.120 --> 0:00:27.639 we expect maybe from this Federal Reserve next week after 0:00:27.640 --> 0:00:30.560 we've had this move by the ECB. Bring in Jay Halfield. 0:00:30.600 --> 0:00:34.920 He's the CEO, founder and portfolio manager at Infrastructure Capital Advisors. 0:00:34.920 --> 0:00:38.479 And Jay, let's just start with Europe and the ECB. 0:00:38.800 --> 0:00:41.600 I mean, they're still, like the US Federal Reserve, still 0:00:41.720 --> 0:00:45.400 very much on this inflation fighting path, raising their benchmark 0:00:45.440 --> 0:00:48.040 raak by fifty basis points where a lot of people said, 0:00:48.320 --> 0:00:52.160 maybe pause, maybe just twenty five, but no, thanks Paul 0:00:52.200 --> 0:00:54.960 for having me in again. You have to keep in 0:00:55.000 --> 0:01:00.440 mind the European system is radically different in the US, 0:01:00.640 --> 0:01:04.400 so they were way behind our FED full percentage point 0:01:04.440 --> 0:01:09.240 bard our FED. And also their inflation is worse because 0:01:09.240 --> 0:01:11.440 of their natural gas crisis. It's come down, but it's 0:01:11.440 --> 0:01:15.360 still a huge problem. And then thirdly, all their banks 0:01:15.640 --> 0:01:18.760 are essentially money center banks, like our money center banks 0:01:18.800 --> 0:01:21.000 are killing it right now. They're getting all these deposits 0:01:21.040 --> 0:01:24.520 in and keep in mind that that's free money right now. 0:01:24.560 --> 0:01:27.520 So that's the real problem with our system is that 0:01:27.640 --> 0:01:31.039 smaller banks are losing deposits, and that's every dollar that 0:01:31.080 --> 0:01:34.880 goes out costs them roughly five percent, so paying fifty 0:01:34.920 --> 0:01:37.520 base points or zero if it's a demand deposit, and 0:01:37.560 --> 0:01:40.280 then you borrow from the Fed at libor plus spread, 0:01:40.480 --> 0:01:44.160 and so their earnings are getting smashed as we speak. 0:01:44.360 --> 0:01:47.000 And that's the core issue, and that's why we've been 0:01:47.000 --> 0:01:51.680 calling for a rape cut to reduce that the inversion 0:01:51.720 --> 0:01:54.440 in the Yelk curve. So when you compare that to 0:01:54.480 --> 0:01:56.360 then what the Federal Reserve is doing the read through, 0:01:56.400 --> 0:01:58.640 I think one of the takeaways from the ECB is 0:01:58.680 --> 0:02:02.880 simply that they hiked regardless of the chaos for credit squeezes. 0:02:02.880 --> 0:02:05.720 If credit squeeze is a bigger bank and a bigger 0:02:06.200 --> 0:02:08.840 risk than say SPB as, which I think is the consensus, 0:02:09.200 --> 0:02:12.160 then does that then insinuate the Federal Reserve is going 0:02:12.200 --> 0:02:14.240 to stick to twenty five or fifty or whatever the 0:02:14.240 --> 0:02:18.280 calls were pre SPB. Well, that's certainly possible because they 0:02:18.280 --> 0:02:22.519 have shown zero ability to process real time data. So 0:02:22.639 --> 0:02:24.960 and specifically I would point to oil, which is something 0:02:25.000 --> 0:02:29.640 that we fast coming from Jay Hatfield broadcast. So the 0:02:29.680 --> 0:02:34.200 two key indicators of inflation are housing in oil. Oil 0:02:34.280 --> 0:02:38.079 has come down seventeen percent since the financial crisis started, 0:02:38.280 --> 0:02:41.200 the bank runs started. And what I don't think the 0:02:41.320 --> 0:02:44.320 FED appreciates, which is strange because they have research papers 0:02:44.360 --> 0:02:48.080 that demonstrate this. There's a five percent bleed through of 0:02:48.200 --> 0:02:51.000 energy prices the core. In fact, if you look in 0:02:51.040 --> 0:02:53.679 the seventies and draw a line where the two gigantic 0:02:54.240 --> 0:02:57.720 increases occurred, so two hundred and one fifty core went 0:02:57.800 --> 0:03:01.560 up shot up within three or four months. So this 0:03:01.680 --> 0:03:05.200 is not this research paper just proved it, you know, 0:03:05.320 --> 0:03:08.160 through through econometric models, but you can see it in 0:03:08.200 --> 0:03:13.079 the data. So now we have a significant deflation CPI 0:03:13.200 --> 0:03:16.519 dash R as dropping at a two percent annual rate. 0:03:16.960 --> 0:03:20.280 And now if you layer in this depreciation in oil, 0:03:21.000 --> 0:03:24.000 we're headed for a pretty significant deflation. I mean, essentially 0:03:24.040 --> 0:03:26.280 we're in deflation right now. It's just not going to 0:03:26.320 --> 0:03:28.440 show up in the indices for a year because they're 0:03:28.480 --> 0:03:32.359 lagged by a year. So, you know, do you think 0:03:32.360 --> 0:03:35.000 this banking situation here in the US, this run on 0:03:35.040 --> 0:03:38.640 these handful of banks will prompt the FED or should 0:03:38.680 --> 0:03:40.960 it prompt the Fed the pause here? If not, maybe 0:03:40.960 --> 0:03:43.600 being absolutely pause that's what they should. Well, they should 0:03:43.600 --> 0:03:47.080 really cut right, but they are behind every Almost every 0:03:47.480 --> 0:03:51.920 market participant would agree they're behind the curve. So the 0:03:51.960 --> 0:03:54.640 best case is probably that they pause. They definitely should 0:03:54.640 --> 0:03:57.920 not raise rates. That would be a disaster. And again 0:03:57.960 --> 0:04:00.520 they're in a much different situation where they are already 0:04:00.600 --> 0:04:04.120 raised much higher and we have a bigger inversion than 0:04:04.120 --> 0:04:06.640 they do in Europe. Jay, one of the common piece 0:04:06.680 --> 0:04:09.400 of commentary that came out of I believe Nomura off 0:04:09.400 --> 0:04:13.640 the Fed FDIC move this past weekend was that's essentially 0:04:13.680 --> 0:04:17.120 stimulative and you might then see the Fed end quantity 0:04:17.200 --> 0:04:20.240 of tightening as a result. Do you view this kind 0:04:20.240 --> 0:04:23.719 of banking fallout and what has the pre FED has 0:04:23.760 --> 0:04:28.320 been prompted to do as stimulative. Well, in the long run, 0:04:28.320 --> 0:04:30.920 it will be stimulative. And that's one reason that we 0:04:30.920 --> 0:04:34.800 were saying before this banking crisis that the market would 0:04:34.800 --> 0:04:36.760 be weak during this period and that we would be 0:04:36.760 --> 0:04:39.200 in thirty eight hundred to forty two hundred. That's without 0:04:39.200 --> 0:04:42.080 a banking crisis. So the fact that that range is 0:04:42.120 --> 0:04:45.400 still working is remarkable. But there's a simple reason for it. 0:04:46.640 --> 0:04:50.640 Long term rates are plummeting, and it's not actually true, 0:04:50.680 --> 0:04:53.560 but everybody trades tech stocks like they have a longer duration. 0:04:53.600 --> 0:04:55.400 They actually don't, but they still trade it that way. 0:04:55.520 --> 0:04:59.240 They're all all publicly traded companies roughly have twenty two 0:04:59.279 --> 0:05:02.280 year durations. But they're also a safe haven. They don't 0:05:02.279 --> 0:05:06.560 borrow money, they have tremendous cash reserves, and they're very 0:05:06.600 --> 0:05:11.440 powerful companies, so they're being used as safe haven there 0:05:11.520 --> 0:05:14.000 dominate the market. So if you look, there's there's an 0:05:14.200 --> 0:05:20.160 enormous rotation into large cap tech safety and out of 0:05:20.279 --> 0:05:23.320 things that are related to financials, including rates, which is 0:05:23.360 --> 0:05:25.680 irrational because rates are dropping. That's good for them. They're 0:05:25.720 --> 0:05:29.640 well capitalized, so that's why the market's not crashing, But 0:05:29.760 --> 0:05:32.000 underneath it, it really is crashing. Like if you look 0:05:32.040 --> 0:05:36.600 at the regional banks for obviously, from your perspective, what 0:05:36.640 --> 0:05:40.039 are we seeing with these regional banks, the svbs, the 0:05:40.200 --> 0:05:43.880 maybe even the FRC today the signature bank are these 0:05:43.920 --> 0:05:48.160 one offs or they have a systemic background to them. 0:05:48.200 --> 0:05:50.680 Do you think, well, I think it's it's not fully 0:05:50.760 --> 0:05:54.760 systemic because as I mentioned, money center banks and superregionals 0:05:54.800 --> 0:05:57.920 are going to benefit, and that's the dominant portion of 0:05:57.960 --> 0:06:00.880 the banking system. But and this is going to be 0:06:00.960 --> 0:06:04.440 an issue for politicians hopefully, is that their banks are 0:06:04.480 --> 0:06:08.040 getting crushed, so the community banks and the regular regional banks. 0:06:08.520 --> 0:06:12.240 Because if you think about a CFO, so there's sort 0:06:12.279 --> 0:06:14.400 of an implicit guarantee, but it's kind of like the 0:06:14.880 --> 0:06:17.400 commercial sort of is not good enough. So if you're 0:06:17.480 --> 0:06:22.400 CFO and a bank, I'll mention any names certain bank closes, 0:06:23.160 --> 0:06:25.120 like my CFO call and say hey, should we move 0:06:25.160 --> 0:06:27.159 all of our reserves? Because you have to make that 0:06:27.240 --> 0:06:30.400 call because you're going to be fired if you said, oh, yeah, 0:06:30.400 --> 0:06:33.359 I know, Silicon Valley Bank happened, but we thought that 0:06:33.600 --> 0:06:35.719 the FTI C would step in and they decided not 0:06:35.800 --> 0:06:38.560 to for political reasons. You're fired. So you have to 0:06:38.600 --> 0:06:43.320 move your reserves, your checking spread it out, and you're 0:06:43.360 --> 0:06:45.200 going to move it to super You probably don't want 0:06:45.240 --> 0:06:47.440 fifty or five hundred accounts, so you're going to move 0:06:47.480 --> 0:06:49.800 it to money center bank, where then you're not going 0:06:49.880 --> 0:06:52.160 to get fired, Like if city groups goes bankrupt, you're 0:06:52.160 --> 0:06:54.680 not gonna get fired. So there's going to be an 0:06:54.720 --> 0:06:58.479 ongoing run on small banks. It's a huge problem because 0:06:58.520 --> 0:07:01.760 they're going to become unprofit. They're going to get downgraded 0:07:01.880 --> 0:07:07.200 by the rating age whis which that precipitated Silicon Valley's demise, 0:07:07.440 --> 0:07:11.720 along with the worst equity offering ever executed in human history. 0:07:12.120 --> 0:07:15.040 I don't I'm certain there's never been an equity offering 0:07:15.080 --> 0:07:17.640 that resulted in bankruptcy, right, Like, you don't need to 0:07:17.680 --> 0:07:19.160 do a post meeting to see if that was a 0:07:19.160 --> 0:07:21.920 good That sounds like a Morgan Stanley bank are pitching 0:07:21.960 --> 0:07:27.320 against think any on any particular firms. But that is 0:07:27.360 --> 0:07:30.280 the worst equity offering in the history of human quick 0:07:30.360 --> 0:07:33.920 question here, and forgive my ignorance on this. That doesn't 0:07:33.960 --> 0:07:36.640 necessarily seem like a new concept here naturally that if 0:07:36.640 --> 0:07:38.280 you want, the bigger banks are going to be safer 0:07:38.320 --> 0:07:41.160 because essentially they're too big to fail, especially since oh wait, 0:07:41.800 --> 0:07:44.800 why did a lot of folks invest in these smaller banks? Anyway? 0:07:44.840 --> 0:07:47.600 Was the incentive there? Well? I think that there's also 0:07:47.720 --> 0:07:49.880 too much heat being put on the san Francisco fed 0:07:50.440 --> 0:07:53.320 because no stress test ever said you're going to lose 0:07:53.360 --> 0:07:56.360 all of your deposits in twenty four hours. Yeah, there's 0:07:56.400 --> 0:07:58.440 never been a situation like that. Even like during the 0:07:58.480 --> 0:08:02.000 financial crisis, we did guarantee the deposits, so we created 0:08:02.040 --> 0:08:05.120 a system. By accident, we're having this two hundred and 0:08:05.200 --> 0:08:07.720 fifty limit, which is never hasn't been increased, and there 0:08:07.720 --> 0:08:11.800 have been bills to increase. It really created a tinderbox 0:08:11.880 --> 0:08:15.800 that exploded. It's just like mortgage the mortgage market. There's 0:08:15.840 --> 0:08:20.080 always something that hasn't been addressed that a two rapid 0:08:20.200 --> 0:08:24.840 fed tightening cycle will expose. And there's been like ten 0:08:24.880 --> 0:08:26.800 of them, even in my career. You know, if you 0:08:26.800 --> 0:08:31.680 think about junk bond crisis, SNL crisis, commercial real estate 0:08:31.680 --> 0:08:35.280 crisis in the early eighties, there's always oh tech tech 0:08:35.360 --> 0:08:38.640 crash after that tightening cycle. So this is just the 0:08:38.640 --> 0:08:41.720 flaw that should have been fixed. Should have guaranteed all deposits. 0:08:41.720 --> 0:08:43.760 It won't even cost so much because you get a 0:08:43.840 --> 0:08:45.959 low you can have a lower rate on more deposits. 0:08:46.640 --> 0:08:49.160 So you know, would it would hurt the money center 0:08:49.240 --> 0:08:52.200 banks and it would benefit the regional banks. All right, 0:08:52.240 --> 0:08:55.800 So what do you what what what? What do you 0:08:55.840 --> 0:08:57.680 think folks should be doing in the market today. There's 0:08:57.720 --> 0:09:00.600 a lot of cross currents here with the FED, um 0:09:00.800 --> 0:09:04.240 with this banking crisis, if you will, is this just 0:09:04.280 --> 0:09:06.040 stay on the sidelines here, because I'm looking at the 0:09:06.040 --> 0:09:08.240 market here and it's kind of hanging in there. Yeah, 0:09:08.320 --> 0:09:11.280 so that's the rotation going on. So I'm sure we'll 0:09:11.320 --> 0:09:13.960 have the SNPF, but I'm sure the tech stocks are 0:09:14.000 --> 0:09:17.360 starting to rip an offset the bit here. Yeah, right, 0:09:17.400 --> 0:09:21.280 So I do think that ultimately this is bullish because 0:09:21.320 --> 0:09:23.520 assuming the FED, but I would wait to have the 0:09:23.600 --> 0:09:28.240 FED pause, not raise rate, and hopefully good commentary about 0:09:28.280 --> 0:09:31.560 even being willing to cut, and then that will take 0:09:31.600 --> 0:09:33.640 the key the key overhang on the market, which I've 0:09:33.640 --> 0:09:38.080 said before on your shows, is that as the FED 0:09:38.160 --> 0:09:40.160 because they were just completely out to lunch and thought 0:09:40.200 --> 0:09:43.120 it was fine to raise rates at this unprecedented level. 0:09:43.160 --> 0:09:46.400 So now because the FED regulates banks, they can't ignore it. 0:09:47.040 --> 0:09:49.240 You know, they're getting the calls from the FDC, they're 0:09:49.240 --> 0:09:52.200 getting the calls from Congress, and so it's not like 0:09:52.280 --> 0:09:55.640 CSFB that none of our you know, our politicians, so 0:09:56.000 --> 0:09:59.640 they have to focus on this and presumably they will 0:10:00.160 --> 0:10:04.000 consider rate increases there won't be at their normal level 0:10:04.040 --> 0:10:06.280 of being behind by about twelve months. They can't afford 0:10:06.280 --> 0:10:07.920 to be behind twelve months here, they have to cut 0:10:08.000 --> 0:10:11.880 rates more quicker than that. Well, doesn't that factor in 0:10:12.320 --> 0:10:15.000 things like any of the retail data, any of the 0:10:15.080 --> 0:10:17.800 Chinese story, any of the eco stuff that we I 0:10:17.840 --> 0:10:20.520 feel like have been paying attention to as these tailwinds 0:10:20.559 --> 0:10:25.000 for inflation in the face of this banking fallout. Does 0:10:25.000 --> 0:10:29.800 the rest matter? Not really? No, That's why it's important 0:10:29.840 --> 0:10:32.640 to focus on those two elements that drove inflation. I'm 0:10:32.679 --> 0:10:36.679 talking high inflation by way, not one versus two versus three. Yeah, 0:10:36.920 --> 0:10:41.760 is housing core and energy is only six and keeping 0:10:41.800 --> 0:10:45.040 my natural gas presents during an eighty percent in the 0:10:45.120 --> 0:10:48.920 last four months, highly deflationary. But every business the United 0:10:48.920 --> 0:10:53.960 States uses energy, and so that's the key supply shock. 0:10:54.200 --> 0:10:57.920 It's not necessarily the ports or chips. I mean, chips 0:10:58.000 --> 0:11:01.480 was a problem because you can't build cars. But those 0:11:01.520 --> 0:11:03.760 are the key drivers. And you should look at oil. 0:11:04.080 --> 0:11:06.679 It's both an indicator of inflation and it's also an 0:11:06.720 --> 0:11:10.800 indicator of the potential for a global recession. Jay, we 0:11:10.840 --> 0:11:13.120 can't let you go without getting kind of your thoughts 0:11:13.160 --> 0:11:16.600 on energy right here, I see WTI crude oil down again. Today, 0:11:16.600 --> 0:11:19.839 we're sixty six dollars at barrel. What's kind of next 0:11:19.880 --> 0:11:22.760 twelve eighteen months? What are you looking for an energy space? Well, 0:11:23.120 --> 0:11:26.440 before the financial crisis, we were at seventy five to 0:11:26.600 --> 0:11:30.200 ninety five on WTI. Because you do have a recovery 0:11:30.240 --> 0:11:34.960 in China, you do have a pretty robust US economy, 0:11:35.000 --> 0:11:37.959 which is shocking, but it's because of the pandemic, and 0:11:38.080 --> 0:11:40.680 you still do have an energy crisis or at least 0:11:40.679 --> 0:11:43.600 an energy deficit in Europe. So those are all supportive factors. 0:11:43.640 --> 0:11:48.040 But investors treat oil as a risk asset, and this 0:11:48.120 --> 0:11:50.160 is a risk off environment. So you're going to crash 0:11:50.200 --> 0:11:54.880 bullet well below our level, and so it's all bets 0:11:54.880 --> 0:11:57.200 are off until we get clarity on the FED and 0:11:57.520 --> 0:12:00.560 possibly maybe a guarantee of all deposits. I mean, that's 0:12:00.559 --> 0:12:02.200 going to be hard to get through Congress, but that's 0:12:02.200 --> 0:12:04.959 what's needed, all right, Jake, great stuff, Really appreciate it 0:12:05.000 --> 0:12:09.359 as always. Jay Haffield, CEO, founder and portfolio mentor Infrastructure 0:12:09.400 --> 0:12:12.520 Capital Visors, joining us live here in our Bloomberg Interactive 0:12:12.840 --> 0:12:20.000 Brokers studio. All right, Let's get back over to Europe 0:12:20.000 --> 0:12:21.680 a little bit, get a sense of kind of what 0:12:21.800 --> 0:12:24.520 the feeling is here with the ECB with Credit Swiss. 0:12:24.520 --> 0:12:28.280 We could do that with doctor Vanya Straviakva, Professor of 0:12:28.320 --> 0:12:32.719 economics at the London Business School. Doctor, thanks so much 0:12:32.720 --> 0:12:36.160 for joining us here. Let's start with the European Central Bank. 0:12:36.679 --> 0:12:39.720 They came out with a fifty basis point increase given 0:12:39.720 --> 0:12:42.720 all that's going on over there with the banking situation 0:12:42.960 --> 0:12:46.439 and namely Credit Swiss. Do you think that was a mistake. 0:12:46.480 --> 0:12:49.240 Should they have paused or maybe just raised the rate 0:12:49.320 --> 0:12:52.880 twenty five basis points? What do you think? So? Thank 0:12:52.920 --> 0:12:54.320 you so much for having me. It's a pleasure to 0:12:54.360 --> 0:12:56.400 be here. I think actually they did the right thing. 0:12:56.760 --> 0:12:59.520 Given the numbers for inflation. They have to establish credibility 0:12:59.520 --> 0:13:01.960 at this point, and I think the main concern in 0:13:02.000 --> 0:13:04.880 Europe right now is to get inflation under control. I'm 0:13:04.960 --> 0:13:08.360 less worried about solvency issues with the banks in Europe 0:13:08.400 --> 0:13:11.400 at this point, and I think they're probably thinking the 0:13:11.480 --> 0:13:14.440 same way. Of course, they will be liquidity issues on 0:13:14.480 --> 0:13:16.400 the horizon, which is what we're seeing with Credit Swist 0:13:16.440 --> 0:13:19.720 potentially at a banks, but they're ready to provide a backstop. 0:13:19.760 --> 0:13:23.080 For example, the Swiss National bandit the same for creditswis is. 0:13:23.120 --> 0:13:25.960 Of course we can do that for the Eurozone banks. 0:13:26.040 --> 0:13:27.920 So I think treating it at the moment as a 0:13:27.960 --> 0:13:30.880 liquidity rud and a solvency crisis is the right approach. 0:13:31.360 --> 0:13:35.120 Regulation is quite strict, especially for the large banks in Europe, 0:13:35.120 --> 0:13:38.880 so credit Swiss is very well regulated. For example, you 0:13:38.920 --> 0:13:42.360 know the one correcting that was done by Switzerland, and 0:13:42.360 --> 0:13:44.960 also the UK was ring fencing the retail banking of 0:13:45.000 --> 0:13:47.400 the large banks. So both the UK and Switzer one 0:13:47.480 --> 0:13:50.160 realize after the global financial crisis that these countries do 0:13:50.200 --> 0:13:53.480 not have the physical capacity to bail out their massive banks, 0:13:53.559 --> 0:13:56.480 so ring fencing the retail bank, which is essential for 0:13:56.480 --> 0:13:59.199 the functioning of the economy, essentially is giving them the 0:13:59.360 --> 0:14:02.360 freedom to not worry too much about having to put 0:14:02.400 --> 0:14:05.760 in massive bailouts. And then liquidity can be dealt with 0:14:05.880 --> 0:14:09.400 in many ways, such as providing loans against the phase 0:14:09.480 --> 0:14:11.840 value of the collateral, which is what the FEDS started doing, 0:14:12.480 --> 0:14:14.880 so that they don't have to worry about the decrease 0:14:14.960 --> 0:14:20.520 in the evaluations of long term government that Professor, I'm 0:14:20.520 --> 0:14:23.920 curious about the timeline here, it feels like the banking 0:14:23.960 --> 0:14:27.280 fallout to your point two pause point as well, has 0:14:27.360 --> 0:14:30.920 kind of thrown the idea of the energy crisis, this 0:14:31.080 --> 0:14:33.400 kind of multi year recession we were expecting in the 0:14:33.520 --> 0:14:37.840 UK out the window. To what extent are those still 0:14:37.840 --> 0:14:40.600 the factors that the BOE and the ECB have be 0:14:40.720 --> 0:14:44.240 watching well. So the problems in the UK area are 0:14:44.320 --> 0:14:46.760 separate because they have to deal with the consequences of 0:14:46.800 --> 0:14:50.000 Brexit as well mismanagement of the economy for many, many years, sadly, 0:14:50.960 --> 0:14:53.880 so we are seeing that in the news. The public 0:14:53.920 --> 0:14:57.360 sector is collapsing in the UK. We are seeing strikes 0:14:57.440 --> 0:15:01.240 daily in the news. So those issues are not going away, 0:15:01.280 --> 0:15:03.960 those structural issues that governments will have to deal with. 0:15:04.480 --> 0:15:07.600 But getting inflation under control is absolutely crucial because if 0:15:07.600 --> 0:15:09.520 we think that high interest rates are a problem for 0:15:09.560 --> 0:15:12.400 the banking sector, imagine having high interest rates for a 0:15:12.440 --> 0:15:15.160 very long period of time because we cannot get inflation 0:15:15.240 --> 0:15:18.520 under control, Potentially the problems will be even more severe, 0:15:18.600 --> 0:15:21.920 particularly for the mortgages of course, so Europe and the 0:15:22.040 --> 0:15:24.800 UK the majority of the mortgages of floating rate mortgages, 0:15:24.840 --> 0:15:27.960 and that's where the real problem will be because a 0:15:28.000 --> 0:15:30.280 lot of the borrowers might not be able to soon 0:15:30.440 --> 0:15:33.880 start repay their mortgages and that will generate a recession 0:15:33.920 --> 0:15:36.960 down the road. So the longer the high interest rates remain, 0:15:37.080 --> 0:15:39.560 which they will if we don't get inflation under control, 0:15:39.960 --> 0:15:43.400 the bigger the cost on anyone that has a mortgage 0:15:43.400 --> 0:15:45.200 in Europe and the UK, and that's where the real 0:15:45.200 --> 0:15:49.000 recession is going to come. We're getting a little bit 0:15:49.080 --> 0:15:52.440 of news. I just want to announce to our international 0:15:52.440 --> 0:15:55.280 audience here JP Morgan and Morgan Stanley in tax to 0:15:55.440 --> 0:15:58.200 bolster First Republic. This of course was the next bank 0:15:58.240 --> 0:16:00.920 that was expected to kind of get down with signature 0:16:00.920 --> 0:16:03.120 with Silicon Valley Bank. This is according to reports from 0:16:03.120 --> 0:16:05.560 the Wall Street Journal. You are seeing farc those shares 0:16:05.920 --> 0:16:08.400 up hair some of those losses still down twenty six percent, 0:16:08.440 --> 0:16:11.160 but certainly off the lows of down about thirty percent. 0:16:11.560 --> 0:16:13.640 Professor Vannia, I want to bring you back in here, 0:16:13.760 --> 0:16:16.040 not to talk about First Republic, but perhaps a similar 0:16:16.040 --> 0:16:20.400 situation with Credit Suis as well. Do the woes and 0:16:20.480 --> 0:16:23.920 the European baking sector go away if someone takes over 0:16:24.160 --> 0:16:29.200 parts of Credit Suis well? So the problem with Great 0:16:29.240 --> 0:16:32.520 Swiss is effectively, they could never gain their footing after 0:16:32.520 --> 0:16:34.920 the global financial crisis. They couldn't figure out what type 0:16:34.920 --> 0:16:36.960 of bank they will be in the sense that they 0:16:36.960 --> 0:16:40.000 were a massive bank. The asset management division and the 0:16:40.000 --> 0:16:42.360 wealth management divisions who are a big part of the bank, however, 0:16:42.440 --> 0:16:45.360 they're not competitive. The fees that they were charging couldn't 0:16:45.360 --> 0:16:47.680 compete with the black Rocks and the vanguards of the world, 0:16:47.720 --> 0:16:51.560 and essentially the decreasing fees due to the advancement of ETFs. 0:16:52.160 --> 0:16:55.040 So I think that's a structural problem. So more generally, 0:16:55.160 --> 0:16:58.640 people compare this stampede of depositors from banks now to 0:16:58.720 --> 0:17:01.360 a classic bank run. I think that's not correct. So 0:17:01.360 --> 0:17:04.639 the fundamental problem here is not about having deposit insurance 0:17:04.640 --> 0:17:08.400 that's not credible or insufficient deposits insurance, as governments are 0:17:08.400 --> 0:17:10.840 clearly willing to bank depositors in full, as the FAT 0:17:10.920 --> 0:17:14.360 has shown. It's about final investors waking up and realizing 0:17:14.400 --> 0:17:17.320 their alternatives to bank deposits that can give them both 0:17:17.320 --> 0:17:20.399 liquidity and much high return. The banking sector will have 0:17:20.440 --> 0:17:23.880 to shrink, so Credit Suite has been experiencing that true 0:17:23.920 --> 0:17:25.840 the ass management division, but this will be true for 0:17:26.200 --> 0:17:29.480 your standard depositors as well, because many banks will not 0:17:29.520 --> 0:17:31.359 be able to afford to off a high interest rates 0:17:31.359 --> 0:17:34.719 on depositors, right, So this is because on their assets 0:17:34.760 --> 0:17:36.840 then they will not be able to make the interest 0:17:36.920 --> 0:17:40.120 rates that depositors can make just by purchasing the government data. 0:17:40.160 --> 0:17:42.520 This point, I think that's the big problem, and the 0:17:42.560 --> 0:17:47.600 trend of bank disintermediation had already started, and the rate hikes, 0:17:47.640 --> 0:17:51.160 together with the SVB collapse and the negative news around 0:17:51.160 --> 0:17:54.240 credit suites, are just precipitating the adjustment. Yes, there'll be 0:17:54.320 --> 0:17:56.879 some casualties along the way, but the old bank business 0:17:56.880 --> 0:17:59.840 model is simply not sustainable in the new environment where 0:18:00.000 --> 0:18:02.919 even small retail investors can open a bangered account overnight 0:18:02.960 --> 0:18:06.080 and investing government data bays post to phrase. So now 0:18:06.080 --> 0:18:09.640 to be honest, yeah, no, go ahead, professor. What I'm 0:18:09.680 --> 0:18:13.160 particularly concerned about, and I don't hear being spoken about 0:18:13.359 --> 0:18:16.240 enough in the news, is essentially there is someone on 0:18:16.320 --> 0:18:19.000 the other end of these interest rate hedges. So the 0:18:19.040 --> 0:18:21.679 interest rate indurvatives market is the most liquid market in 0:18:21.720 --> 0:18:25.240 the world essentially, So presumably a lot of financial institutions 0:18:25.240 --> 0:18:28.240 and banks are hedge induration risk, But who is providing 0:18:28.280 --> 0:18:30.680 this hedge. So we know that this ended a very 0:18:30.680 --> 0:18:33.439 badly for AG in two thousand and eight because there 0:18:33.440 --> 0:18:37.119 were the sealers of insurance for the mortgage back securities. 0:18:37.640 --> 0:18:39.680 If the risk is concentrated and there are a few 0:18:39.760 --> 0:18:44.840 entities actually providing the interest rate essentially hedge, then I 0:18:44.880 --> 0:18:47.000 think this will be the casualties this time. We don't 0:18:47.000 --> 0:18:48.960 know yet where the risk is concentrated, which is a 0:18:48.960 --> 0:18:52.320 big problem I think regulators. Okay, so professor, just kind 0:18:52.359 --> 0:18:56.160 of getting back to the ECB here, I mean the risk. 0:18:56.359 --> 0:18:57.920 You know, we've heard a lot of folks say, hey, 0:18:57.960 --> 0:19:01.280 the ECB is making a stake here. They need the 0:19:01.400 --> 0:19:06.080 pause if they're not necessarily just for the credit Swiss reason, 0:19:06.119 --> 0:19:08.760 but for some of the reasons you outlined about you know, 0:19:08.760 --> 0:19:11.199 there's some real stresses out there in the economy, and 0:19:11.240 --> 0:19:14.720 then the ECB really risk breaking the European economy and 0:19:14.880 --> 0:19:19.400 pushing into a deep recession. How viable are those risks 0:19:19.400 --> 0:19:23.320 do you think? Well, it is true that people arguing 0:19:23.359 --> 0:19:25.040 that they might be going at a pace that is 0:19:25.080 --> 0:19:27.959 too fast, I think they are doing the right thing 0:19:28.000 --> 0:19:30.760 to defend their credibility and whatever the issues there might 0:19:30.800 --> 0:19:33.000 be with the financial sector which I don't. I do 0:19:33.040 --> 0:19:35.400 believe they will be issues. As we discussed, they can 0:19:35.440 --> 0:19:37.919 handle them in different ways, so they have a lot 0:19:37.960 --> 0:19:40.320 of macropotential tools. It's not just the interest rates that 0:19:40.359 --> 0:19:43.240 they can employ in order to handle any staguties in 0:19:43.240 --> 0:19:45.680 the financial sector. And it's almost like time to give 0:19:45.720 --> 0:19:50.280 the patient the essentially the medicine it needs, because the 0:19:50.359 --> 0:19:54.639 longer we postpone normalization going back to normal interest rates, 0:19:54.800 --> 0:19:57.280 these adjustments has to take place at some point. Okay, 0:19:58.080 --> 0:20:00.280 all right, you just have to leave it there, doctor 0:20:00.520 --> 0:20:04.080 doctor Vannier strev Stravia Kava, Professor of Economics of the 0:20:04.119 --> 0:20:06.320 London School of Business. We really appreciate getting her time. 0:20:06.359 --> 0:20:10.520 She's got some cutting edge research on the banking sector 0:20:10.560 --> 0:20:13.840 and it's just absolutely at the forefront here as the 0:20:13.880 --> 0:20:17.159 European regulators and the Swiss regulators look at you know, 0:20:17.200 --> 0:20:21.919 look at credit Swiss and what to do there. All right, 0:20:22.000 --> 0:20:23.840 let's get back to the story that just broke over 0:20:23.960 --> 0:20:26.399 the last few minutes of Wall Street Journal reporting JP Morgan, 0:20:26.440 --> 0:20:30.119 Morgan Stanley and others in talks to aid First Republic. 0:20:31.080 --> 0:20:33.520 I mean, this is so obvious. I can't imagine these 0:20:33.520 --> 0:20:35.720 bankers are actually gonna get paid this investment backers. You're 0:20:35.760 --> 0:20:38.440 putting this deal to together. I could do this, but 0:20:38.520 --> 0:20:41.199 let's bring in some of our banking experts, Herman Chang 0:20:41.240 --> 0:20:44.399 and Arnod cale Kuda. Arnold covers the credit side and 0:20:44.640 --> 0:20:46.840 Herman kind of more on the equity side. For so 0:20:46.880 --> 0:20:49.040 we got you covered when it comes to these banks. 0:20:50.040 --> 0:20:53.240 Herman to me, what do you make of this news? 0:20:53.280 --> 0:20:55.359 It kind of makes complete sense to me. This isn't 0:20:55.640 --> 0:20:58.920 I would think. And either if they're gonna put capital 0:20:58.960 --> 0:21:02.480 in or outright buy parts are all of that seems 0:21:02.520 --> 0:21:04.600 like an easy deal to do. Yeah, I think so. 0:21:06.000 --> 0:21:08.960 We still think our First Republic is a really strong 0:21:09.040 --> 0:21:12.720 franchise with a lot of wealth and managements assets that 0:21:12.760 --> 0:21:16.639 are attractive to a potential buyer. And really it's been 0:21:16.640 --> 0:21:19.840 sucking into the vortex with some of the uncertainty that 0:21:19.840 --> 0:21:24.920 that proliferated with SVB and Signature. But the capitol infusion 0:21:25.280 --> 0:21:28.440 news is definitely great news for the bank and management. 0:21:28.480 --> 0:21:31.800 So we're looking to hear more on that front. All right, Arnold, 0:21:31.920 --> 0:21:33.800 come on in here. We just had Alison Williams on 0:21:34.480 --> 0:21:37.000