1 00:00:05,120 --> 00:00:08,920 Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A. Bromoid's 2 00:00:08,920 --> 00:00:11,879 Speaker 1: along with Tom Keen and Jonathan Ferrell, join us each 3 00:00:11,960 --> 00:00:15,760 Speaker 1: day for insight from the best in economics, geopolitics, finance 4 00:00:15,800 --> 00:00:19,520 Speaker 1: and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 5 00:00:19,600 --> 00:00:22,840 Speaker 1: Spotify and anywhere you get your podcasts, and always on 6 00:00:22,880 --> 00:00:26,440 Speaker 1: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. 7 00:00:26,760 --> 00:00:30,400 Speaker 2: Chris Maronak joins us now director of Research at Jenny Montgomery. Scott, Chris, 8 00:00:30,440 --> 00:00:32,839 Speaker 2: We've been on this journey with you. We've appreciated it 9 00:00:32,840 --> 00:00:35,560 Speaker 2: every step of the way. We've got some kind of resolution. 10 00:00:35,760 --> 00:00:37,640 Speaker 2: I think what's interesting for us this morning is JP 11 00:00:37,760 --> 00:00:40,240 Speaker 2: Morgan is positive in the pre market when they say 12 00:00:40,240 --> 00:00:42,839 Speaker 2: things like our government invited us and others to step up, 13 00:00:42,840 --> 00:00:45,280 Speaker 2: and we did. Are they doing us a favor or 14 00:00:45,280 --> 00:00:46,400 Speaker 2: have they got something good here? 15 00:00:47,280 --> 00:00:48,600 Speaker 3: Well? I think they did both. 16 00:00:48,640 --> 00:00:50,320 Speaker 4: I think they did us a favor because they were 17 00:00:50,400 --> 00:00:52,879 Speaker 4: able to do this at a lower cost to the government. 18 00:00:53,200 --> 00:00:55,520 Speaker 4: If you look at the bid that they made and 19 00:00:55,560 --> 00:00:57,840 Speaker 4: the gain that they're booking, it's a lesser gain than 20 00:00:57,840 --> 00:01:01,320 Speaker 4: what we've seen at the other transactions, particularly comparing the SVB. 21 00:01:01,440 --> 00:01:03,600 Speaker 3: For Citizens deal for Citizens. 22 00:01:03,120 --> 00:01:06,200 Speaker 4: Had a real excellent transaction a month ago. This is 23 00:01:06,240 --> 00:01:08,200 Speaker 4: a less of a gain for JPM, But I also 24 00:01:08,200 --> 00:01:11,039 Speaker 4: think it represents the upside to the wealth management business 25 00:01:11,040 --> 00:01:15,039 Speaker 4: the FRC had. So that's really the honeyhole that JPM 26 00:01:15,080 --> 00:01:17,959 Speaker 4: Morgan sees, and that's where I think that there's opportunity 27 00:01:18,000 --> 00:01:20,040 Speaker 4: for them in the long term with the assets and 28 00:01:20,080 --> 00:01:21,399 Speaker 4: the asset management clients. 29 00:01:21,640 --> 00:01:23,759 Speaker 1: Chris, is this a bailout by the FDIC. 30 00:01:24,680 --> 00:01:28,560 Speaker 4: Not really, because the FDIC could have made much better terms. 31 00:01:28,840 --> 00:01:31,320 Speaker 4: I think that's ultimately why PNC or other bidders were 32 00:01:31,360 --> 00:01:34,040 Speaker 4: not successful. I think JPM was willing to come in 33 00:01:34,080 --> 00:01:36,640 Speaker 4: at at a less of a data, less of a discount. 34 00:01:37,080 --> 00:01:38,840 Speaker 3: So at the end of the day, the FDIC is 35 00:01:38,880 --> 00:01:39,399 Speaker 3: seizing the. 36 00:01:39,360 --> 00:01:42,160 Speaker 4: Assets, they are going to do a loss share, similar 37 00:01:42,200 --> 00:01:45,080 Speaker 4: to other smaller transactions we saw back in twenty eight, 38 00:01:45,160 --> 00:01:48,720 Speaker 4: nine and ten, and really the SVB and signature transactions too. 39 00:01:48,760 --> 00:01:50,000 Speaker 4: But I think at the end of the day, it's 40 00:01:50,040 --> 00:01:54,520 Speaker 4: a better transaction for the system and the DIF. 41 00:01:54,960 --> 00:01:57,680 Speaker 1: Did the FDC wait too long, Chris to allow this 42 00:01:57,840 --> 00:02:01,480 Speaker 1: crisis to continue to allow the drip drip of good assets, 43 00:02:01,560 --> 00:02:03,760 Speaker 1: of good workers at this bank to leave. 44 00:02:04,720 --> 00:02:06,840 Speaker 4: I think in a case of a week or two, yes, 45 00:02:06,920 --> 00:02:09,680 Speaker 4: I would have preferred to see this resolved earlier in April, 46 00:02:09,960 --> 00:02:11,120 Speaker 4: But at the end of the day, I think we 47 00:02:11,160 --> 00:02:12,200 Speaker 4: got where we needed to go. 48 00:02:12,840 --> 00:02:14,680 Speaker 3: I think they were trying to see if there was a. 49 00:02:14,639 --> 00:02:18,280 Speaker 4: Private market solution, perhaps private capital, perhaps the equity markets 50 00:02:18,320 --> 00:02:20,959 Speaker 4: would step up with the preferred or an equity raise, 51 00:02:21,000 --> 00:02:22,959 Speaker 4: but that was just not in the cards for a 52 00:02:23,040 --> 00:02:23,760 Speaker 4: first republic. 53 00:02:23,840 --> 00:02:25,360 Speaker 3: So this was the best alternative. 54 00:02:25,480 --> 00:02:27,400 Speaker 2: Chris, when you read lines like and you mentioned it 55 00:02:27,480 --> 00:02:30,400 Speaker 2: a moment ago that jp Morgan and the FDIC have 56 00:02:30,480 --> 00:02:33,320 Speaker 2: agreed to share the burden of losses, what does that 57 00:02:33,320 --> 00:02:34,360 Speaker 2: actually mean in practice? 58 00:02:34,360 --> 00:02:36,160 Speaker 5: Can you explain that for our audience? 59 00:02:36,760 --> 00:02:40,480 Speaker 4: Sure, so, as JPM now has the assets and deposits, 60 00:02:40,960 --> 00:02:43,480 Speaker 4: they will work through those and particularly loans. As they 61 00:02:43,520 --> 00:02:45,760 Speaker 4: collect those loans, there'll be a laws share agreement for 62 00:02:45,760 --> 00:02:48,240 Speaker 4: any losses that come out, and then that will be 63 00:02:48,240 --> 00:02:50,880 Speaker 4: shared with the FDIC. It's very similar to what we 64 00:02:50,960 --> 00:02:54,160 Speaker 4: had in twenty eight, nine and ten. Typically the assets 65 00:02:54,240 --> 00:02:57,360 Speaker 4: back then were much worse. These are assets that are 66 00:02:57,400 --> 00:02:59,959 Speaker 4: simply marked for interest rate risk, not for credit n 67 00:03:00,480 --> 00:03:02,680 Speaker 4: so Ultimately, I think you'll see JP Morgan sit with 68 00:03:02,720 --> 00:03:06,240 Speaker 4: these assets and sell them and move forward. It's possible 69 00:03:06,280 --> 00:03:09,320 Speaker 4: that much of what they are holding here comes back 70 00:03:09,320 --> 00:03:11,040 Speaker 4: to them in the next twelve day, ten months of 71 00:03:11,160 --> 00:03:14,359 Speaker 4: interest rates change and the FED change is policy perhaps 72 00:03:14,639 --> 00:03:16,520 Speaker 4: a quarter or two from now, that's going to have 73 00:03:16,520 --> 00:03:18,800 Speaker 4: a ce change to how these assets are valued. 74 00:03:18,840 --> 00:03:20,720 Speaker 3: So timing is everything, and I think. 75 00:03:20,560 --> 00:03:23,360 Speaker 4: That's ultimately why the bid end up being less of 76 00:03:23,400 --> 00:03:25,560 Speaker 4: a discount for JP Morgan than the other banks. 77 00:03:25,639 --> 00:03:27,880 Speaker 5: Did they share the upside as well than Chris? 78 00:03:29,200 --> 00:03:31,560 Speaker 4: They capture most of the upside, so I think the 79 00:03:31,639 --> 00:03:33,120 Speaker 4: upside all goes to JP Morgan. 80 00:03:33,480 --> 00:03:36,800 Speaker 5: That's fascinates in Premo well, especially fasciniting. 81 00:03:36,560 --> 00:03:39,080 Speaker 1: Especially because in the stories it actually said they shared 82 00:03:39,120 --> 00:03:41,520 Speaker 1: the upside as well as a downside. So it's confusing 83 00:03:41,560 --> 00:03:45,200 Speaker 1: that basically JP Morgan ends up with the entirety of 84 00:03:45,720 --> 00:03:48,120 Speaker 1: the upside at a time where the FBIIC wants to 85 00:03:48,200 --> 00:03:51,320 Speaker 1: mitigate socializing the losses and privatizing the games. 86 00:03:51,400 --> 00:03:53,040 Speaker 5: Chris, can you give us a little bit more clarity 87 00:03:53,320 --> 00:03:53,680 Speaker 5: on that. 88 00:03:53,720 --> 00:03:55,240 Speaker 2: What are you reading at the moment that gives you 89 00:03:55,800 --> 00:03:57,440 Speaker 2: a better idea of what's going to happen there. 90 00:03:58,200 --> 00:03:59,840 Speaker 3: Well, I think the laws share agreement's going to be 91 00:03:59,920 --> 00:04:00,480 Speaker 3: very typical. 92 00:04:00,480 --> 00:04:03,600 Speaker 4: And what we saw back in the transactions in twentyd 93 00:04:03,600 --> 00:04:05,760 Speaker 4: and eight, nine and ten it was a very typical 94 00:04:05,840 --> 00:04:09,520 Speaker 4: law share arrangement where the FDIC sees the bank, they 95 00:04:09,560 --> 00:04:11,760 Speaker 4: cut the law share arrangement, and then the bank collected 96 00:04:11,800 --> 00:04:15,120 Speaker 4: the assets. The bank becomes the conduit for the FBIC 97 00:04:15,360 --> 00:04:18,080 Speaker 4: to collect the money to collect the loans. It's less 98 00:04:18,120 --> 00:04:20,360 Speaker 4: of an issue with deposits. It's much more with the 99 00:04:20,400 --> 00:04:22,560 Speaker 4: loans that were made. To remember, the loans the First 100 00:04:22,560 --> 00:04:24,800 Speaker 4: Republic had were largely. 101 00:04:24,839 --> 00:04:28,239 Speaker 3: Low rate mortgages with low loan to value. 102 00:04:28,320 --> 00:04:31,320 Speaker 4: So these are not risky loans that in many cases 103 00:04:31,320 --> 00:04:34,159 Speaker 4: these are very low risk loans. They simply had interest 104 00:04:34,200 --> 00:04:36,400 Speaker 4: rate risks because they were done at three and a 105 00:04:36,480 --> 00:04:38,679 Speaker 4: quarter three and a half, and the mortgage market today 106 00:04:38,760 --> 00:04:39,479 Speaker 4: is closer. 107 00:04:39,200 --> 00:04:40,159 Speaker 5: To six chris. 108 00:04:40,360 --> 00:04:42,280 Speaker 2: As you know, and as we know because we've talked 109 00:04:42,279 --> 00:04:44,240 Speaker 2: about this over the last couple of weeks in a 110 00:04:44,320 --> 00:04:47,040 Speaker 2: much bigger way. JP Morgan already had more than ten 111 00:04:47,080 --> 00:04:50,520 Speaker 2: percent of US deposits. Now that's been seen as problematic 112 00:04:50,880 --> 00:04:53,520 Speaker 2: for the regulator. We assume in this morning that that 113 00:04:53,600 --> 00:04:56,000 Speaker 2: exception has been granted already just by the very nature 114 00:04:56,000 --> 00:04:57,640 Speaker 2: of this being authorized. 115 00:04:57,120 --> 00:04:57,680 Speaker 5: At the moment. 116 00:04:58,600 --> 00:05:01,800 Speaker 2: Correct, absolutely, So can I ask the question, then, does 117 00:05:01,800 --> 00:05:04,160 Speaker 2: this become a problem if they hold more than ten 118 00:05:04,200 --> 00:05:06,880 Speaker 2: percent of US deposits. I assume that was a line 119 00:05:06,920 --> 00:05:08,960 Speaker 2: in the send for a reason. Why are we willing 120 00:05:09,000 --> 00:05:09,640 Speaker 2: to go beyond it? 121 00:05:10,880 --> 00:05:12,240 Speaker 4: Well, I think at the end of the day, if 122 00:05:12,279 --> 00:05:15,400 Speaker 4: you had to take a lower bid and therefore a 123 00:05:15,440 --> 00:05:19,119 Speaker 4: bigger loss for the FDIC and for the Deposit Insurance Fund, 124 00:05:19,360 --> 00:05:21,200 Speaker 4: it would have been problematic for the other banks. The 125 00:05:21,240 --> 00:05:23,360 Speaker 4: other banks would have had to pay more than they 126 00:05:23,400 --> 00:05:27,560 Speaker 4: already are paying. The cost of FDS insurance will go 127 00:05:27,720 --> 00:05:30,760 Speaker 4: higher in the coming quarters the next year. So if 128 00:05:30,800 --> 00:05:33,000 Speaker 4: you could limit the hit to the DIIF to the 129 00:05:33,040 --> 00:05:36,400 Speaker 4: Deposit Insurance Fund, that really is the best outcome for 130 00:05:36,560 --> 00:05:39,360 Speaker 4: both the banks and for the system. So ultimately, this 131 00:05:39,400 --> 00:05:42,080 Speaker 4: is about building confidence, and I think you build confidence 132 00:05:42,120 --> 00:05:45,360 Speaker 4: a by having first Republic result and b by seeing 133 00:05:45,400 --> 00:05:49,200 Speaker 4: that a very good operator who has strong capital, remember 134 00:05:49,240 --> 00:05:52,080 Speaker 4: the Fortress balance sheet that JP Morgan has always advocated 135 00:05:52,279 --> 00:05:54,000 Speaker 4: that allows them to do the transaction. 136 00:05:54,360 --> 00:05:55,760 Speaker 3: I think it's going to be rare. I don't think 137 00:05:55,760 --> 00:05:56,919 Speaker 3: we're going to see others like this. 138 00:05:57,080 --> 00:05:59,440 Speaker 4: It really was the bank that was caught by the 139 00:05:59,480 --> 00:06:02,720 Speaker 4: Friendly five A BESTVB six weeks ago. 140 00:06:02,960 --> 00:06:04,520 Speaker 5: Chris, is too big to fail a good thing? 141 00:06:04,560 --> 00:06:07,320 Speaker 3: Now? Well, not necessarily. 142 00:06:07,760 --> 00:06:10,760 Speaker 4: I feel that the regional banks and mid sized community 143 00:06:10,800 --> 00:06:12,839 Speaker 4: banks are in a great position to step up and 144 00:06:12,920 --> 00:06:15,839 Speaker 4: serve the businesses and the households of the country, So 145 00:06:16,000 --> 00:06:18,599 Speaker 4: too big to fail is not necessarily the outcome that 146 00:06:18,640 --> 00:06:20,960 Speaker 4: I'm looking for. I think there's a many banks who 147 00:06:20,960 --> 00:06:23,360 Speaker 4: are well capitalized that can step up, So the su 148 00:06:23,520 --> 00:06:26,560 Speaker 4: regards having this episode resolved is a good thing. I 149 00:06:26,600 --> 00:06:28,159 Speaker 4: do think you're going to see that part of the 150 00:06:28,160 --> 00:06:31,159 Speaker 4: credit solution in the country is seeing these mid. 151 00:06:31,000 --> 00:06:32,840 Speaker 3: Sized banks perform and perform well. 152 00:06:33,440 --> 00:06:35,880 Speaker 4: I think you're correct that the credit is tightening, but 153 00:06:35,920 --> 00:06:37,480 Speaker 4: I don't think it is being shut off. 154 00:06:37,560 --> 00:06:39,279 Speaker 5: Hey, Chris Wonderfu to get your view on things. 155 00:06:39,279 --> 00:06:41,719 Speaker 2: No down will catch up again soon, Chris marinak there 156 00:06:41,800 --> 00:06:48,040 Speaker 2: of Jenny Montgomery's scuff. Kathy James with this around the 157 00:06:48,080 --> 00:06:50,279 Speaker 2: table from Schwab Kathy Wander for to catch up with you. 158 00:06:50,600 --> 00:06:52,520 Speaker 2: I can't believe it's the first time we're talking in person. 159 00:06:52,560 --> 00:06:54,200 Speaker 2: It's under like three years because I get to talk 160 00:06:54,240 --> 00:06:55,840 Speaker 2: to you so often. It feels so bizarre. 161 00:06:56,000 --> 00:06:58,599 Speaker 6: I know, just great to be back in the studio. 162 00:06:58,400 --> 00:06:59,279 Speaker 5: Wonderful to be with you. 163 00:06:59,560 --> 00:07:02,200 Speaker 2: This is another bank that's gone under in the United 164 00:07:02,240 --> 00:07:05,520 Speaker 2: States for America, another last minute deal, spending the whole 165 00:07:05,560 --> 00:07:09,440 Speaker 2: weekend negotiating this mess, and here we are. The Federal 166 00:07:09,440 --> 00:07:12,440 Speaker 2: Reserve gets to decide to high interest rates on Wednesday, 167 00:07:12,640 --> 00:07:14,200 Speaker 2: and seemingly it is going to go another twenty five 168 00:07:14,240 --> 00:07:16,360 Speaker 2: basis points. And I'm sure you've heard the same commentry 169 00:07:16,360 --> 00:07:19,480 Speaker 2: we have that every single bank that goes under is idiosyncratic, 170 00:07:19,520 --> 00:07:21,880 Speaker 2: and this isn't about what the Federal Reserve's done. In fact, 171 00:07:21,960 --> 00:07:24,880 Speaker 2: we heard from John Williams, the New York Fed President, 172 00:07:24,920 --> 00:07:26,600 Speaker 2: just say a couple of weeks ago that he doesn't 173 00:07:26,600 --> 00:07:29,160 Speaker 2: think it's because they went from zero to five so quickly. 174 00:07:29,600 --> 00:07:30,600 Speaker 5: How do you respond to. 175 00:07:30,560 --> 00:07:32,920 Speaker 6: That, Oh, I think it has a lot to do 176 00:07:33,160 --> 00:07:35,560 Speaker 6: with how much the Fed has tightened and how rapidly 177 00:07:35,600 --> 00:07:38,600 Speaker 6: they've tightened. You know the old saying that the Fed 178 00:07:38,600 --> 00:07:42,640 Speaker 6: titans until something breaks. I think that clearly they've moved 179 00:07:42,680 --> 00:07:46,240 Speaker 6: at such a rapid pace that there's an impact on 180 00:07:46,320 --> 00:07:48,680 Speaker 6: financial stability, and we're seeing it in some of the 181 00:07:48,680 --> 00:07:52,960 Speaker 6: bankings areas now. It doesn't mean that credit risk, which 182 00:07:53,040 --> 00:07:57,720 Speaker 6: is what they normally get concerned about, is a big issue. 183 00:07:58,000 --> 00:08:00,800 Speaker 6: But I think it's hard to divorce the Fed's actions 184 00:08:00,800 --> 00:08:02,560 Speaker 6: from what's happening in the banking sector. 185 00:08:02,920 --> 00:08:04,840 Speaker 2: Do you think it gets worse then, given that they're 186 00:08:04,840 --> 00:08:06,360 Speaker 2: going to keep on hiking, or at least we'll hid 187 00:08:06,400 --> 00:08:07,440 Speaker 2: one more time this week. 188 00:08:08,000 --> 00:08:10,520 Speaker 6: Yeah, we're kind of hoping this is the last rate hike. 189 00:08:11,000 --> 00:08:12,760 Speaker 6: But it tells you a lot about this FED that 190 00:08:12,800 --> 00:08:16,679 Speaker 6: they hiked in March when we had banking sector problems, 191 00:08:16,720 --> 00:08:18,280 Speaker 6: and they look like they're going to go ahead in 192 00:08:18,320 --> 00:08:21,520 Speaker 6: May when they have banking sector problems. One would think 193 00:08:21,560 --> 00:08:24,320 Speaker 6: that this is probably the end of the rate hike 194 00:08:24,440 --> 00:08:25,760 Speaker 6: cycle at this stage of the game. 195 00:08:25,880 --> 00:08:27,720 Speaker 1: I wonder what kind of key man risk there is 196 00:08:27,800 --> 00:08:30,080 Speaker 1: for the Federal Reserve at this point, given the fact 197 00:08:30,120 --> 00:08:32,360 Speaker 1: that on Friday they did put out a report talking 198 00:08:32,400 --> 00:08:35,440 Speaker 1: about what went wrong with SVB, seem to have passed 199 00:08:36,040 --> 00:08:38,959 Speaker 1: in the back few mirror, but there are ongoing questions 200 00:08:38,960 --> 00:08:42,040 Speaker 1: about how accurately they are regulating some of these banks. 201 00:08:42,080 --> 00:08:45,320 Speaker 1: I mean, is this potentially going to, I don't know, 202 00:08:45,400 --> 00:08:48,040 Speaker 1: up end the leadership at the fed at a certain point. 203 00:08:48,640 --> 00:08:50,480 Speaker 6: Well, I would think at least we're going to get 204 00:08:50,520 --> 00:08:53,880 Speaker 6: some dissenting boats this week, or at least one or two, 205 00:08:54,040 --> 00:08:56,440 Speaker 6: and I think that, yeah, they have to reconsider the 206 00:08:56,480 --> 00:09:00,520 Speaker 6: regulatory environment that they're in as a banking regulator and 207 00:09:00,600 --> 00:09:05,000 Speaker 6: supervisory capacity. So I would think, you know, I don't know. 208 00:09:05,040 --> 00:09:08,000 Speaker 6: I don't have any particular predictions in that, but I 209 00:09:08,080 --> 00:09:10,920 Speaker 6: do think that there may be certainly some rewritten rules 210 00:09:11,480 --> 00:09:14,040 Speaker 6: and certainly a re examination of what's been going on. 211 00:09:14,160 --> 00:09:16,160 Speaker 1: We were just talking with Michael Showell and he was 212 00:09:16,160 --> 00:09:19,360 Speaker 1: talking about how for now it's interest rate risk, but 213 00:09:19,400 --> 00:09:23,040 Speaker 1: that eventually it could very easily become credit risk, especially 214 00:09:23,080 --> 00:09:25,240 Speaker 1: as a lot of companies and individuals have a trouble 215 00:09:25,280 --> 00:09:28,800 Speaker 1: paying back such high rates. What's your sense of just 216 00:09:29,120 --> 00:09:31,679 Speaker 1: how significant that credit risk is and whether it's accurately 217 00:09:31,720 --> 00:09:33,960 Speaker 1: reflected and where the market is right now. 218 00:09:34,360 --> 00:09:36,760 Speaker 6: Yeah, one thing that we've seen is the credit spreads 219 00:09:36,800 --> 00:09:39,360 Speaker 6: really haven't blown out in the way that you would 220 00:09:39,400 --> 00:09:42,760 Speaker 6: anticipate given what's going on in the market. So we 221 00:09:42,840 --> 00:09:45,480 Speaker 6: do think that there's some risk of widening where I 222 00:09:45,520 --> 00:09:50,200 Speaker 6: think the bank loan sector certainly is vulnerable. Private credit. 223 00:09:50,280 --> 00:09:52,320 Speaker 6: We don't know what's happening there because they don't mark 224 00:09:52,360 --> 00:09:54,040 Speaker 6: the market, but I have to think that there's some 225 00:09:54,520 --> 00:09:57,880 Speaker 6: bad loans there that are having to be restructured, and 226 00:09:57,920 --> 00:10:00,480 Speaker 6: the high yield spreads have been much to than I 227 00:10:00,520 --> 00:10:02,480 Speaker 6: would have anticipated at this stage of the game. 228 00:10:02,600 --> 00:10:06,840 Speaker 1: Just very specifically, after SVB happened and now First Republic, 229 00:10:06,880 --> 00:10:08,320 Speaker 1: some people were saying they were going to come in 230 00:10:08,760 --> 00:10:11,800 Speaker 1: and buy bank bonds that had gotten beaten up because 231 00:10:11,840 --> 00:10:14,199 Speaker 1: particularly for regional banks, that there was still value there. 232 00:10:15,120 --> 00:10:18,480 Speaker 1: Gerard Cassidy of RBC put this out, where JP Morgan 233 00:10:18,600 --> 00:10:21,640 Speaker 1: is not assuming First Republic's corporate debt or preferred stock, 234 00:10:21,960 --> 00:10:25,120 Speaker 1: does this raise another risk, another layer of risk that 235 00:10:25,240 --> 00:10:28,240 Speaker 1: makes that proposition perhaps less valuable than some people were 236 00:10:28,320 --> 00:10:29,080 Speaker 1: arguing initially. 237 00:10:29,320 --> 00:10:33,080 Speaker 6: Yeah, you've seen bond holders and equity holders and preferred 238 00:10:33,080 --> 00:10:36,080 Speaker 6: holders get washed out in these deals. So I think 239 00:10:36,120 --> 00:10:38,640 Speaker 6: you have to be pretty selective when you're looking at 240 00:10:38,640 --> 00:10:42,640 Speaker 6: the banking sector now in terms of the bonds. You know, again, 241 00:10:42,800 --> 00:10:45,280 Speaker 6: I think they're good bonds and they're not so good bonds, 242 00:10:45,280 --> 00:10:47,600 Speaker 6: and maybe there's some opportunities there, but I do think 243 00:10:47,640 --> 00:10:48,720 Speaker 6: you have to be really selective. 244 00:10:48,920 --> 00:10:51,000 Speaker 2: Kathy, I've asked this question a few times, so I'm 245 00:10:51,040 --> 00:10:53,240 Speaker 2: going to ask it again. It's a little bit unfair 246 00:10:53,280 --> 00:10:54,680 Speaker 2: of me. So you can take as much time to 247 00:10:54,679 --> 00:10:57,240 Speaker 2: think about it if you want. The risk that sham 248 00:10:57,240 --> 00:10:59,800 Speaker 2: and pound runs now for months, In fact, for the 249 00:10:59,840 --> 00:11:01,760 Speaker 2: linelast twelve months, we've been talking about the risk of 250 00:11:01,840 --> 00:11:04,679 Speaker 2: him becoming Burns. Is the bigger risk now that he 251 00:11:04,720 --> 00:11:07,120 Speaker 2: becomes treche and hikes at the most inappropriate time? 252 00:11:07,760 --> 00:11:09,640 Speaker 5: Just think that's thrue. Why do you come down on 253 00:11:09,679 --> 00:11:11,520 Speaker 5: that one right now? Is it Burns or Treesche? What's 254 00:11:11,559 --> 00:11:12,320 Speaker 5: the big risk for him? 255 00:11:13,000 --> 00:11:15,600 Speaker 6: I think it's Treche And have all along I thought 256 00:11:15,600 --> 00:11:20,360 Speaker 6: that this FED was moving too fast and ignoring some 257 00:11:20,400 --> 00:11:25,000 Speaker 6: of the lags between tightening monetary policy and what impact 258 00:11:25,080 --> 00:11:27,640 Speaker 6: it has on the economy and on the financial system. 259 00:11:27,679 --> 00:11:29,720 Speaker 6: And we've seen a lot of stress in the financial 260 00:11:29,720 --> 00:11:33,800 Speaker 6: system in various ways even before this, and so I 261 00:11:33,840 --> 00:11:37,040 Speaker 6: think the risk is greater that they moved too far 262 00:11:37,240 --> 00:11:41,720 Speaker 6: too fast, as they have then having the Arthur Burns 263 00:11:41,760 --> 00:11:43,760 Speaker 6: problem of having to tighten down the road. I don't 264 00:11:43,760 --> 00:11:46,040 Speaker 6: think this is a repeat of the sixties and seventies. 265 00:11:46,280 --> 00:11:48,040 Speaker 6: It's a very different economic environment. 266 00:11:48,280 --> 00:11:49,679 Speaker 2: Would you go as far as saying you don't think 267 00:11:49,679 --> 00:11:51,760 Speaker 2: the inflation story is as sticky as some people might 268 00:11:52,200 --> 00:11:52,679 Speaker 2: say it is. 269 00:11:53,280 --> 00:11:56,480 Speaker 6: Yeah, I do. I think we've seen the good prices 270 00:11:56,480 --> 00:11:58,360 Speaker 6: come all the way back down. I mean, oil prices 271 00:11:58,360 --> 00:12:00,439 Speaker 6: are lower than they were pre pandemics, so we've seen 272 00:12:00,480 --> 00:12:03,920 Speaker 6: the supply side come back. And when you look at 273 00:12:04,000 --> 00:12:07,040 Speaker 6: your balance sheets on consumer side, are good people spend 274 00:12:07,040 --> 00:12:10,560 Speaker 6: money because they have jobs. But it doesn't look to 275 00:12:10,600 --> 00:12:13,320 Speaker 6: me like that it's necessarily a big push and inflation. 276 00:12:13,400 --> 00:12:17,960 Speaker 6: We still have aging population, we still have demographic drag, 277 00:12:18,120 --> 00:12:21,800 Speaker 6: we still have a lot of savings globally, so I'm 278 00:12:21,800 --> 00:12:24,319 Speaker 6: not sure that we need to move as fast as. 279 00:12:24,160 --> 00:12:24,800 Speaker 5: They have moved. 280 00:12:24,920 --> 00:12:26,920 Speaker 2: Kathy, good to see you. I can't believe it's been 281 00:12:27,000 --> 00:12:28,760 Speaker 2: like three years plus, but it has been. I don't 282 00:12:28,800 --> 00:12:31,160 Speaker 2: know where that time's gone. Kathy Jones a chance swap. 283 00:12:31,160 --> 00:12:44,080 Speaker 2: Thank you very much joining us on Somebody's headlines. Mara 284 00:12:44,200 --> 00:12:48,720 Speaker 2: Rodriguez Va Darrez, managing principal at mr V Associates. Maara, 285 00:12:48,800 --> 00:12:51,040 Speaker 2: wonderful to catch up with you again. Just working through 286 00:12:51,040 --> 00:12:52,680 Speaker 2: this together over the last few weeks. It's been a 287 00:12:52,679 --> 00:12:54,600 Speaker 2: pleasure for all of us here on the show. Can 288 00:12:54,640 --> 00:12:56,520 Speaker 2: I just get to that headline from Jamie Diamond that 289 00:12:56,559 --> 00:12:59,400 Speaker 2: on banking faiblures this is getting near the end of it. 290 00:12:59,520 --> 00:13:01,439 Speaker 2: Do you get this sense that this is anywhe near 291 00:13:01,480 --> 00:13:01,959 Speaker 2: the end of it? 292 00:13:03,000 --> 00:13:05,559 Speaker 7: Respectfully, I'm not sure that I agree. 293 00:13:05,800 --> 00:13:09,960 Speaker 8: What is not idiosyncratic here is we're discovering that, unfortunately, 294 00:13:10,040 --> 00:13:13,360 Speaker 8: a lot of these banks are not very good at 295 00:13:13,480 --> 00:13:18,920 Speaker 8: interest rate risks and liquidity measurements, which really is what 296 00:13:19,080 --> 00:13:22,719 Speaker 8: should be astonishing. This is the basics of banking, and 297 00:13:23,120 --> 00:13:25,760 Speaker 8: as long as the European Central Bank, the Bank of England, 298 00:13:25,800 --> 00:13:28,640 Speaker 8: and of course the Federal Reserve continued to raise rates, 299 00:13:28,960 --> 00:13:31,679 Speaker 8: I'm afraid that this turnoil may not. 300 00:13:31,679 --> 00:13:34,560 Speaker 1: Be over yet. Marie, do you think that the regulators 301 00:13:34,679 --> 00:13:38,800 Speaker 1: models effectively account for interest rate risk given that they 302 00:13:38,840 --> 00:13:41,319 Speaker 1: were not able to get ahead of some of these cases, 303 00:13:42,440 --> 00:13:42,719 Speaker 1: You know. 304 00:13:42,840 --> 00:13:44,160 Speaker 7: They actually do. 305 00:13:44,440 --> 00:13:47,160 Speaker 8: And one of the things that has really come out 306 00:13:48,040 --> 00:13:51,280 Speaker 8: since Friday with the Federal Reserve reports as well as 307 00:13:51,280 --> 00:13:54,120 Speaker 8: the FDIC reports, is that a lot of problems, for 308 00:13:54,160 --> 00:13:58,840 Speaker 8: example with Silicon Valley Bank and Signature, we're actually identified 309 00:13:58,960 --> 00:14:04,680 Speaker 8: by the regular The problem was the enforcement and there 310 00:14:04,720 --> 00:14:09,240 Speaker 8: have long been many, many requirements for banks to measure 311 00:14:09,800 --> 00:14:13,160 Speaker 8: interest rate risks. The problem is Unfortunately, with every new 312 00:14:13,320 --> 00:14:17,880 Speaker 8: crop of risk managers and lenders, they always think that 313 00:14:18,040 --> 00:14:21,240 Speaker 8: this time is going to be different. They don't pay 314 00:14:21,240 --> 00:14:24,520 Speaker 8: attention to the history that interest rates go down and 315 00:14:24,880 --> 00:14:29,000 Speaker 8: they also go up, and you need to constantly be 316 00:14:29,080 --> 00:14:33,400 Speaker 8: testing your asset liability measurements, all your different kinds of 317 00:14:33,480 --> 00:14:37,040 Speaker 8: models for interest rates going up and down. So this 318 00:14:37,200 --> 00:14:40,960 Speaker 8: idea that people have been caught by surprise they didn't 319 00:14:40,960 --> 00:14:42,520 Speaker 8: realize that interest. 320 00:14:42,320 --> 00:14:44,960 Speaker 7: Rates could go up, is really truly astounding. 321 00:14:45,560 --> 00:14:48,440 Speaker 1: One thing that Jamie Diamond did say was that there 322 00:14:48,480 --> 00:14:51,640 Speaker 1: would probably be some reduction in lending on the heels 323 00:14:51,760 --> 00:14:56,600 Speaker 1: of their acquisition of this bank A First Republic. What's 324 00:14:56,640 --> 00:14:59,640 Speaker 1: your sense of how many smaller banks are going to 325 00:14:59,640 --> 00:15:01,800 Speaker 1: get a wired, how much lending is going to get 326 00:15:01,800 --> 00:15:05,040 Speaker 1: taken out of the system if there are more potential 327 00:15:05,040 --> 00:15:06,160 Speaker 1: incidents just like this. 328 00:15:07,160 --> 00:15:09,680 Speaker 8: Yeah, I am worried about some of the smaller banks, 329 00:15:09,680 --> 00:15:12,200 Speaker 8: even some of the community banks, some of the smaller 330 00:15:12,280 --> 00:15:17,240 Speaker 8: regional banks. It's hard to compete with the incredible advantages 331 00:15:17,280 --> 00:15:20,560 Speaker 8: that a JP Morgan, Bank of America City Bank have. 332 00:15:20,720 --> 00:15:24,840 Speaker 8: These are globally systemically important banks. It's not just their size, 333 00:15:24,880 --> 00:15:27,800 Speaker 8: it's just the diversity of the different businesses that we have, 334 00:15:28,320 --> 00:15:32,920 Speaker 8: and here we are twenty twenty three, and it almost feels, 335 00:15:33,400 --> 00:15:35,840 Speaker 8: at least from the history books, that we're kind of 336 00:15:35,880 --> 00:15:39,680 Speaker 8: back to eighteen ninety five with JP Morgan rescuing the 337 00:15:39,720 --> 00:15:43,440 Speaker 8: American government in nineteen thirteen when JP Morgan was rescuing banks, 338 00:15:43,880 --> 00:15:47,360 Speaker 8: that kind of bank has become incredibly powerful, so it 339 00:15:47,440 --> 00:15:51,920 Speaker 8: now has incredible exposure to operational risk. What kinds of 340 00:15:51,920 --> 00:15:55,560 Speaker 8: skeletons are going to come out with this acquisition of 341 00:15:55,760 --> 00:15:56,520 Speaker 8: First Republic. 342 00:15:56,560 --> 00:15:59,080 Speaker 7: We really need to keep an eye on those. 343 00:15:58,960 --> 00:16:01,960 Speaker 2: Kinds of things. Joked about thirty minutes ago that Washington, 344 00:16:02,040 --> 00:16:05,760 Speaker 2: DC was still asleep, wasn't awake yet and hadn't seen 345 00:16:05,800 --> 00:16:08,160 Speaker 2: this deal. Then she messaged me a moment ago and said, 346 00:16:08,160 --> 00:16:11,000 Speaker 2: it looks like people are waking up. Senator Warren on 347 00:16:11,040 --> 00:16:14,000 Speaker 2: Twitter in the last I think twenty minutes said this, 348 00:16:14,440 --> 00:16:17,360 Speaker 2: The failure of First Republic Bank shows how deregulation has 349 00:16:17,400 --> 00:16:20,160 Speaker 2: made the two big to fail problem even worse. A 350 00:16:20,200 --> 00:16:22,960 Speaker 2: poorly supervised bank has been snapped up by an even 351 00:16:22,960 --> 00:16:26,040 Speaker 2: bigger bank. Congress needs to make major reforms to fix 352 00:16:26,040 --> 00:16:31,040 Speaker 2: a broken banking system. Mara, what's broken about it and 353 00:16:31,080 --> 00:16:33,440 Speaker 2: what kind of follow through follow up are you expecting 354 00:16:33,960 --> 00:16:36,200 Speaker 2: after this stress of the last couple of months or so. 355 00:16:37,240 --> 00:16:40,280 Speaker 8: Well, one thing that has definitely broken is that after 356 00:16:40,360 --> 00:16:43,720 Speaker 8: all the time that legislators and various lobbyists spent with 357 00:16:43,840 --> 00:16:47,160 Speaker 8: Dodd Frank, there's a good portion of Title one that 358 00:16:47,280 --> 00:16:50,520 Speaker 8: was actually got it where banks the size of Silicon 359 00:16:50,640 --> 00:16:55,200 Speaker 8: Valley or First Republic were no longer considered systomachly important. 360 00:16:55,240 --> 00:16:59,160 Speaker 8: That's incredibly incorrect, as we've seen this, and it has 361 00:16:59,360 --> 00:17:03,160 Speaker 8: very signific and repercussions to the entire financial industry as 362 00:17:03,160 --> 00:17:04,160 Speaker 8: well as to main street. 363 00:17:04,160 --> 00:17:06,440 Speaker 7: Think of all those people who are now getting hurt and. 364 00:17:06,400 --> 00:17:09,040 Speaker 8: Are going to be losing their jobs every time that 365 00:17:09,080 --> 00:17:11,920 Speaker 8: one of these banks fails. So you need to declare 366 00:17:12,040 --> 00:17:15,680 Speaker 8: these banks systemically important. That then means that they would 367 00:17:15,720 --> 00:17:18,480 Speaker 8: get enhanced supervision. They would have to do a better 368 00:17:18,600 --> 00:17:24,360 Speaker 8: job of measuring liquidity risks, especially doing simulations of periods 369 00:17:24,359 --> 00:17:26,399 Speaker 8: of stress, which is what they should have been doing 370 00:17:26,960 --> 00:17:29,760 Speaker 8: all along. And so there is an element of truth 371 00:17:30,080 --> 00:17:33,320 Speaker 8: that there is deregulation. However, you also need to provide 372 00:17:33,840 --> 00:17:36,159 Speaker 8: the examiners and all the different. 373 00:17:35,920 --> 00:17:38,160 Speaker 7: Kinds of supervisors with resources. 374 00:17:38,800 --> 00:17:42,200 Speaker 8: They don't have enough in terms of manpower in terms 375 00:17:42,280 --> 00:17:45,679 Speaker 8: of human resources, and they also need more resources in 376 00:17:45,800 --> 00:17:49,720 Speaker 8: terms of technology to be able to better detect when 377 00:17:49,800 --> 00:17:52,359 Speaker 8: some of these risks are percolating with the banks, and 378 00:17:52,400 --> 00:17:56,520 Speaker 8: you need to fire executives and high level risk managers 379 00:17:56,560 --> 00:17:59,440 Speaker 8: when they don't do their jobs, and they there definitely 380 00:17:59,440 --> 00:18:02,400 Speaker 8: need to be clawbacks. All these executives are walking away 381 00:18:02,400 --> 00:18:05,240 Speaker 8: with millions, and what about everybody else at the bank 382 00:18:05,320 --> 00:18:07,920 Speaker 8: and in the surrounding community that is going to lose 383 00:18:07,960 --> 00:18:08,359 Speaker 8: their job? 384 00:18:08,600 --> 00:18:10,240 Speaker 5: What about firing regulates us. 385 00:18:11,520 --> 00:18:14,760 Speaker 8: That's right if indeed there's a good post mortem and 386 00:18:14,800 --> 00:18:19,439 Speaker 8: we discover that there are any kind of professional in 387 00:18:19,480 --> 00:18:23,159 Speaker 8: the various state as well as the national regulatory entities 388 00:18:23,200 --> 00:18:25,280 Speaker 8: that aren't doing their job, they need to be fired. 389 00:18:25,320 --> 00:18:27,440 Speaker 8: And part of the problem is the tone at the. 390 00:18:27,359 --> 00:18:29,880 Speaker 7: Top, the way that things were. 391 00:18:30,160 --> 00:18:34,840 Speaker 8: You know, let's face it, President former President Trump made 392 00:18:34,960 --> 00:18:38,240 Speaker 8: terrible appointments. The tone of the top then filters down 393 00:18:38,359 --> 00:18:41,359 Speaker 8: and it very much became both to offsite and on 394 00:18:41,480 --> 00:18:45,919 Speaker 8: site examiners to have hands off and to almost be 395 00:18:46,119 --> 00:18:49,440 Speaker 8: friendly with the banks. That's not what we want. We 396 00:18:49,560 --> 00:18:53,919 Speaker 8: want examiners, both on site and the offside supervisors to 397 00:18:53,920 --> 00:18:57,840 Speaker 8: be empowered to not only talk about what the problems 398 00:18:57,840 --> 00:19:00,440 Speaker 8: are at the banks, but then you need enforcement. All 399 00:19:00,480 --> 00:19:03,560 Speaker 8: of the treasure trove of documents that was released on 400 00:19:03,640 --> 00:19:06,159 Speaker 8: Friday shows that those examiners were on top of things. 401 00:19:06,560 --> 00:19:08,800 Speaker 7: It was the enforcement that completely lacks. 402 00:19:08,840 --> 00:19:12,760 Speaker 5: Sadly, was Chairman Powell a terrible appointment. 403 00:19:14,240 --> 00:19:16,359 Speaker 7: I had? That's a very interesting question. 404 00:19:16,480 --> 00:19:18,680 Speaker 8: I think one thing that I think that he has 405 00:19:18,720 --> 00:19:22,600 Speaker 8: done a very very good job in very difficult circumstances 406 00:19:22,600 --> 00:19:26,440 Speaker 8: with monetary policy. That is where his background is, where 407 00:19:26,480 --> 00:19:31,240 Speaker 8: his expertise is. His background is not in bank regulation, 408 00:19:31,480 --> 00:19:35,760 Speaker 8: bank supervision, bank examination. These are interrelated, but they are 409 00:19:36,280 --> 00:19:40,600 Speaker 8: different things. I think that somebody like lyel Brainard should 410 00:19:40,600 --> 00:19:43,159 Speaker 8: have been appointed to head the banks earlier during the 411 00:19:43,160 --> 00:19:45,720 Speaker 8: Trump administration. When I say head the banks, I mean 412 00:19:45,760 --> 00:19:50,040 Speaker 8: the bank supervisory part. Obviously, I think that mister Barr 413 00:19:50,040 --> 00:19:51,360 Speaker 8: has been a good appointment, but he. 414 00:19:51,320 --> 00:19:52,160 Speaker 7: Barely got there. 415 00:19:52,400 --> 00:19:56,080 Speaker 8: So there's a lot of different parts to the Federal Reserve, 416 00:19:56,280 --> 00:20:01,320 Speaker 8: and Miss Chair Powell's background is not in supervision and examination. 417 00:20:02,600 --> 00:20:06,119 Speaker 8: Former Chair Tarula was fantastic, Unfortunately he never got the 418 00:20:06,160 --> 00:20:09,639 Speaker 8: official designation. So there are some talented people there, but 419 00:20:09,680 --> 00:20:13,560 Speaker 8: they were not put to head bank supervision when they 420 00:20:13,560 --> 00:20:17,520 Speaker 8: should have under the previous administration. And those things take 421 00:20:17,560 --> 00:20:20,399 Speaker 8: time and they're all surfacing now, so there definitely has 422 00:20:20,480 --> 00:20:23,320 Speaker 8: to be a serious post bortem about what needs to 423 00:20:23,359 --> 00:20:27,560 Speaker 8: be done about both state as well as the national agencies. 424 00:20:27,640 --> 00:20:31,720 Speaker 2: Mar thank you, Mara Rodriguez Viadarus. There of MRV associates 425 00:20:35,800 --> 00:20:39,080 Speaker 2: going into key week, the Fed on Wednesday, payrolls Friday, 426 00:20:39,359 --> 00:20:41,760 Speaker 2: Apple earnings on Thursday. We've got to start with the 427 00:20:41,760 --> 00:20:45,080 Speaker 2: banking sector in America. Lori Cavacina joins US now head 428 00:20:45,080 --> 00:20:48,959 Speaker 2: of Usacuity Strategy at RBC Capital Markets. Lorii does that 429 00:20:49,080 --> 00:20:54,760 Speaker 2: deal over the weekend put this issue to bed, Well, let's. 430 00:20:54,560 --> 00:20:55,080 Speaker 7: Hope, John. 431 00:20:55,200 --> 00:20:58,280 Speaker 9: I mean, we've been watching the KBW Bank index performance 432 00:20:58,359 --> 00:21:00,840 Speaker 9: very closely. We think it's become as important of a 433 00:21:00,880 --> 00:21:02,680 Speaker 9: sentiment barometer as anything else. 434 00:21:02,520 --> 00:21:03,879 Speaker 10: That you can look at these days. 435 00:21:04,160 --> 00:21:06,160 Speaker 9: And I think when we go back to the financial crisis, 436 00:21:06,160 --> 00:21:07,880 Speaker 9: when we go back to the tech bubble, we look 437 00:21:07,920 --> 00:21:10,879 Speaker 9: at things like world Com, Bear, Lihman, and Ron. What 438 00:21:10,960 --> 00:21:13,960 Speaker 9: we know is that the problem children in any crisis 439 00:21:14,000 --> 00:21:17,000 Speaker 9: have to settle down before the market can can settle 440 00:21:17,040 --> 00:21:19,520 Speaker 9: down itself. And I think that if you look at 441 00:21:19,520 --> 00:21:22,480 Speaker 9: that index, that bank's index, it's been trying to stabilize. 442 00:21:22,720 --> 00:21:25,520 Speaker 9: It's remarkable the resilience that we've seen. We know that 443 00:21:25,600 --> 00:21:28,280 Speaker 9: earnings revision trends and small cap financials, which is a 444 00:21:28,280 --> 00:21:31,919 Speaker 9: good proxy for regional banks, have been absolutely smoked. And 445 00:21:31,960 --> 00:21:34,159 Speaker 9: that's something else that you know, we really need to 446 00:21:34,160 --> 00:21:36,320 Speaker 9: see happen in here before I think the market can 447 00:21:36,359 --> 00:21:38,560 Speaker 9: be content with the idea that the pain is out 448 00:21:38,600 --> 00:21:40,439 Speaker 9: of the way. So time will tell, John, But I 449 00:21:40,480 --> 00:21:41,480 Speaker 9: do like what I'm seeing. 450 00:21:41,320 --> 00:21:41,760 Speaker 10: In the data. 451 00:21:42,040 --> 00:21:42,879 Speaker 5: SVB failed. 452 00:21:42,880 --> 00:21:46,960 Speaker 2: In March, the equity market rallied First Republic was essentially 453 00:21:47,000 --> 00:21:51,000 Speaker 2: going under. In April, the equity market rallied Laurie. Can 454 00:21:51,040 --> 00:21:52,680 Speaker 2: you make sense of that? The fact that we seem 455 00:21:52,720 --> 00:21:55,199 Speaker 2: to have left behind the KBW bank index and the 456 00:21:55,240 --> 00:21:58,439 Speaker 2: broader s and P five hundred has carried on grinding higher. 457 00:22:00,000 --> 00:22:01,200 Speaker 10: Well, there's another child. 458 00:22:00,920 --> 00:22:03,359 Speaker 9: That the market's paying attention to, not just its problem 459 00:22:03,440 --> 00:22:05,760 Speaker 9: child of the regional banks, but it's you know, sort 460 00:22:05,800 --> 00:22:09,000 Speaker 9: of oldest, you know, stellar child, the text sector, and 461 00:22:09,040 --> 00:22:11,720 Speaker 9: the earnings there I think are in a recovery process. 462 00:22:12,080 --> 00:22:14,000 Speaker 9: If you look at the rate of upward divisions, another 463 00:22:14,040 --> 00:22:16,840 Speaker 9: good proxy for earning sentiment It got absolutely smoked last 464 00:22:16,880 --> 00:22:19,520 Speaker 9: year for the T I MT space broadly, and it's 465 00:22:19,520 --> 00:22:22,440 Speaker 9: actually in recovery mode this year. We're seeing things get 466 00:22:22,480 --> 00:22:25,280 Speaker 9: less bad. We've even seen the tech sector briefly in 467 00:22:25,280 --> 00:22:28,359 Speaker 9: our upward revision territory, and frankly, John, that is just 468 00:22:28,400 --> 00:22:28,920 Speaker 9: the child that. 469 00:22:28,880 --> 00:22:30,360 Speaker 10: Matters more to the market right now. 470 00:22:30,440 --> 00:22:34,240 Speaker 9: It's it's just bigger in terms of its market cap representation. 471 00:22:34,440 --> 00:22:36,879 Speaker 9: So the structure of the S and P five hundred 472 00:22:36,960 --> 00:22:38,520 Speaker 9: is in such a way today and this is very 473 00:22:38,520 --> 00:22:41,000 Speaker 9: different from what we've seen in the past. But if 474 00:22:41,040 --> 00:22:44,159 Speaker 9: tech is behaving well, it also pre traded the pause 475 00:22:44,280 --> 00:22:47,680 Speaker 9: essentially and is looking ahead to rate cuts. We can debate, 476 00:22:47,720 --> 00:22:49,320 Speaker 9: you know, whether or not that's going to actually happen, 477 00:22:49,880 --> 00:22:53,360 Speaker 9: but basically, the recovery, the improving trends, and the positive 478 00:22:53,359 --> 00:22:56,359 Speaker 9: interest rate dynamics for the tech sector have been enough. 479 00:22:56,800 --> 00:22:58,920 Speaker 1: Well it's not just the tech side sector though, Laurie, 480 00:22:58,920 --> 00:23:01,240 Speaker 1: as you know, you've been tracking the earnings and even 481 00:23:01,240 --> 00:23:04,000 Speaker 1: in some of the consumer discretionary areas, you've seen consumers 482 00:23:04,119 --> 00:23:07,680 Speaker 1: absorb higher prices. They have absorbed going around the world 483 00:23:07,760 --> 00:23:10,639 Speaker 1: traveling as much as they possibly can. At what point 484 00:23:10,880 --> 00:23:12,960 Speaker 1: does the fact that even these bank failures that we're 485 00:23:12,960 --> 00:23:15,840 Speaker 1: talking about not tighten credit enough to really do the 486 00:23:15,880 --> 00:23:18,000 Speaker 1: work for the FED, and that comes in as a 487 00:23:18,040 --> 00:23:20,399 Speaker 1: potential surprise for markets this week. 488 00:23:21,760 --> 00:23:24,240 Speaker 9: Well, look, I do think that the FED is likely 489 00:23:24,280 --> 00:23:26,520 Speaker 9: to go ahead and hike later this week. That's basically 490 00:23:26,520 --> 00:23:28,520 Speaker 9: priced into market. I think for the FED to not 491 00:23:28,560 --> 00:23:30,199 Speaker 9: do it at this point in time would spook the 492 00:23:30,200 --> 00:23:32,960 Speaker 9: markets more than helping it. But I think that you 493 00:23:33,040 --> 00:23:35,320 Speaker 9: have to always go back to the reasons why the 494 00:23:35,359 --> 00:23:37,240 Speaker 9: FED is doing what it's doing. And if the FED 495 00:23:37,320 --> 00:23:39,200 Speaker 9: is saying, Okay, we can go ahead and hike one 496 00:23:39,240 --> 00:23:41,840 Speaker 9: more time, we think this is a relatively contained implosion. 497 00:23:42,240 --> 00:23:44,320 Speaker 10: We think that the economy is strong enough to go 498 00:23:44,320 --> 00:23:46,639 Speaker 10: ahead and do that. That is a vote of confidence 499 00:23:46,680 --> 00:23:47,639 Speaker 10: for the here and now. Now. 500 00:23:47,680 --> 00:23:49,280 Speaker 9: I do agree with you that we're seeing a tighter 501 00:23:49,359 --> 00:23:50,640 Speaker 9: lending environment coming up. 502 00:23:51,119 --> 00:23:51,679 Speaker 10: I was listening to. 503 00:23:51,640 --> 00:23:53,879 Speaker 9: Bloomberg earlier this morning and liked what I heard one 504 00:23:53,880 --> 00:23:55,920 Speaker 9: of the analysts saying about, you know, this doesn't really 505 00:23:56,000 --> 00:23:58,040 Speaker 9: seem like it's a cliff. It seems like it's something 506 00:23:58,280 --> 00:23:59,720 Speaker 9: that's going to come in, you know, in terms of 507 00:23:59,800 --> 00:24:03,000 Speaker 9: drill and drabs over the longer term. I think we 508 00:24:03,080 --> 00:24:05,320 Speaker 9: have to go back and ask what is sort of 509 00:24:05,320 --> 00:24:08,080 Speaker 9: the state of the consumer balance sheets coming into all this, 510 00:24:08,160 --> 00:24:10,240 Speaker 9: And I think the resiliency that you're seeing in terms 511 00:24:10,280 --> 00:24:13,040 Speaker 9: of that consumer spending speaks to the fact that so 512 00:24:13,320 --> 00:24:15,920 Speaker 9: much of a mess was cleaned up during COVID from 513 00:24:15,960 --> 00:24:18,160 Speaker 9: all the stimulus programs and all the time that people 514 00:24:18,160 --> 00:24:20,879 Speaker 9: were forced to spend at home, and that strength is 515 00:24:20,960 --> 00:24:22,959 Speaker 9: now coming in and it's an asset and a buffer 516 00:24:23,000 --> 00:24:24,959 Speaker 9: for this economy, and it's showing up in those consumer 517 00:24:25,000 --> 00:24:25,719 Speaker 9: earnings results. 518 00:24:25,800 --> 00:24:27,480 Speaker 1: Is the best way to play this in large cap 519 00:24:27,520 --> 00:24:29,920 Speaker 1: companies and not necessarily the Russell two thousand. It's more 520 00:24:29,920 --> 00:24:32,760 Speaker 1: exposed to other banks that, as Charlie Munger said over 521 00:24:32,800 --> 00:24:35,360 Speaker 1: the weekend, could be laden with some of these other 522 00:24:35,480 --> 00:24:39,159 Speaker 1: bad loans, or at least to underpriced loans based on 523 00:24:39,359 --> 00:24:40,680 Speaker 1: where interstrates currently are. 524 00:24:41,920 --> 00:24:43,760 Speaker 9: I think, you know, we go back to these crises 525 00:24:43,800 --> 00:24:45,320 Speaker 9: that we saw in the past. If you go back 526 00:24:45,320 --> 00:24:46,840 Speaker 9: and look at, you know, sort of the big growth 527 00:24:46,840 --> 00:24:48,760 Speaker 9: stocks back in the tech bubble, it took a very 528 00:24:48,880 --> 00:24:51,480 Speaker 9: very long time for this to become a leadership berry again. 529 00:24:51,640 --> 00:24:53,399 Speaker 9: And you can say the same things about the banks 530 00:24:53,440 --> 00:24:54,760 Speaker 9: coming out of the financial crisis. 531 00:24:54,760 --> 00:24:57,040 Speaker 10: So I think it's right to have some caution there. 532 00:24:57,119 --> 00:25:00,200 Speaker 9: We've moved to a neutral on the financials and say 533 00:25:00,200 --> 00:25:01,960 Speaker 9: that in small cap as well, they're cheap at who 534 00:25:01,960 --> 00:25:04,520 Speaker 9: the heck knows how cheap they actually are. I do 535 00:25:04,600 --> 00:25:07,399 Speaker 9: think outside of the financials in small cap you can 536 00:25:07,440 --> 00:25:09,120 Speaker 9: find interesting things to play. 537 00:25:08,880 --> 00:25:09,960 Speaker 10: On a recovery thesis. 538 00:25:10,200 --> 00:25:14,000 Speaker 9: Small cap consumer discretionary the sector looks extraordinarily cheap right 539 00:25:14,080 --> 00:25:16,880 Speaker 9: now and should benefit from kind of a recovery going 540 00:25:16,920 --> 00:25:17,920 Speaker 9: into twenty twenty four. 541 00:25:18,160 --> 00:25:19,440 Speaker 10: The same fundamental. 542 00:25:19,040 --> 00:25:20,960 Speaker 9: Tailwinds that we would see in the big CAF names, 543 00:25:21,119 --> 00:25:24,080 Speaker 9: but the large cap consumer discretionary stocks are actually extraordinarily 544 00:25:24,119 --> 00:25:26,000 Speaker 9: expensive right now, so we think there's a better risk 545 00:25:26,040 --> 00:25:27,960 Speaker 9: reward in those small cap consumer names. 546 00:25:28,200 --> 00:25:29,879 Speaker 10: I do, though, think Lisa, as long. 547 00:25:29,720 --> 00:25:32,680 Speaker 9: As markets are kind of jitterate, and as long as 548 00:25:32,680 --> 00:25:34,720 Speaker 9: markets are focused on, you know, kind of getting ready 549 00:25:34,720 --> 00:25:36,960 Speaker 9: for FED cuts down the road, I do think that 550 00:25:37,040 --> 00:25:39,080 Speaker 9: tech is going to have some tailwinds now. We are 551 00:25:39,119 --> 00:25:42,200 Speaker 9: watching the positioning there very very closely. The nastaf futures 552 00:25:42,240 --> 00:25:45,119 Speaker 9: are starting to get elevated. When that breaks, when that peaks, 553 00:25:45,160 --> 00:25:46,720 Speaker 9: it's going to take down the tech stocks for a 554 00:25:46,760 --> 00:25:49,360 Speaker 9: little bit. It's going to impact the broader SMP five 555 00:25:49,440 --> 00:25:51,520 Speaker 9: hundred as well. But for now, I think the earnings 556 00:25:51,560 --> 00:25:54,080 Speaker 9: trends are good. I think the FED trajectory in terms 557 00:25:54,080 --> 00:25:56,320 Speaker 9: of where the market expects to go is good. So 558 00:25:56,359 --> 00:25:58,119 Speaker 9: I think you can be selective in small cap, but 559 00:25:58,160 --> 00:25:59,960 Speaker 9: I do think that the tech space and big cap 560 00:26:00,040 --> 00:26:00,840 Speaker 9: should do pretty well. 561 00:26:01,080 --> 00:26:03,640 Speaker 2: Laurie, you're not verish. I just want to be upfront 562 00:26:03,800 --> 00:26:06,280 Speaker 2: about that. You're really not. You've been constructive in some 563 00:26:06,440 --> 00:26:09,520 Speaker 2: ways in many ways over the last few months, Laurie. 564 00:26:09,560 --> 00:26:12,000 Speaker 2: How hard is it to convince someone to take money 565 00:26:12,000 --> 00:26:13,520 Speaker 2: out of money market funds and put it in the 566 00:26:13,520 --> 00:26:14,280 Speaker 2: equity market. 567 00:26:16,600 --> 00:26:18,879 Speaker 9: I think that it depends on what part of the 568 00:26:18,880 --> 00:26:22,120 Speaker 9: market you're talking about, the time horizon you're giving investors, 569 00:26:22,480 --> 00:26:22,880 Speaker 9: and the. 570 00:26:22,840 --> 00:26:24,719 Speaker 10: Purposes that it's supposed to achieve. 571 00:26:24,800 --> 00:26:26,280 Speaker 9: So one of the things we've been talking a lot 572 00:26:26,320 --> 00:26:28,960 Speaker 9: about lately is the energy sector, which has really really 573 00:26:29,040 --> 00:26:31,399 Speaker 9: nice divid in yields, balance sheets that have been cleaned up. 574 00:26:31,440 --> 00:26:33,400 Speaker 9: It's been kind of an orphan sector for the last 575 00:26:33,480 --> 00:26:35,600 Speaker 9: few years. It's come back over the last year or so, 576 00:26:35,720 --> 00:26:37,520 Speaker 9: especially with rush of Ukraine in the spotlight. 577 00:26:37,800 --> 00:26:38,919 Speaker 10: That's a pretty easy. 578 00:26:38,680 --> 00:26:41,320 Speaker 9: Conversation to have with investors right now, even though there 579 00:26:41,320 --> 00:26:43,000 Speaker 9: are some shorter term concerns. 580 00:26:42,600 --> 00:26:43,640 Speaker 10: About oil prices. 581 00:26:44,200 --> 00:26:45,840 Speaker 9: I do think at the end of the day, one 582 00:26:45,840 --> 00:26:47,840 Speaker 9: of the things we see retail investors do is come 583 00:26:47,880 --> 00:26:50,240 Speaker 9: into the S and P five hundred for yield opportunities. 584 00:26:50,440 --> 00:26:52,280 Speaker 10: And even though the growth sector. 585 00:26:51,920 --> 00:26:53,720 Speaker 9: The growth part of the market is zigging and zagging 586 00:26:53,800 --> 00:26:56,040 Speaker 9: right now in terms of all the strength we're seeing 587 00:26:56,080 --> 00:26:58,840 Speaker 9: on earnings, there's some really interesting yield opportunities if you 588 00:26:58,880 --> 00:26:59,800 Speaker 9: look in other sectors. 589 00:27:00,040 --> 00:27:01,479 Speaker 10: Those aren't tough conversations to have. 590 00:27:01,560 --> 00:27:05,080 Speaker 2: Frankly, Lurie, thanks for paminas LERI cavistd that of MBC 591 00:27:05,240 --> 00:27:17,200 Speaker 2: Capital Markets. 592 00:27:16,600 --> 00:27:19,200 Speaker 1: Joining us now to really give a sense of what 593 00:27:19,359 --> 00:27:22,800 Speaker 1: the risk reward is for a federal reserve, the balance 594 00:27:22,840 --> 00:27:24,920 Speaker 1: of risks at a time of inflation that is coming 595 00:27:24,960 --> 00:27:27,760 Speaker 1: down but still incredibly high. Joseph Lavornia, a chief US 596 00:27:27,800 --> 00:27:31,480 Speaker 1: economist at SMBC Nico Securities, Joe, wonderful that you're joining 597 00:27:31,560 --> 00:27:34,560 Speaker 1: us here on set. I'm wondering, from just a high 598 00:27:34,640 --> 00:27:39,720 Speaker 1: level perspective, what is the impact on the economy from 599 00:27:40,119 --> 00:27:43,520 Speaker 1: failures of banks that have left the biggest banks in 600 00:27:43,560 --> 00:27:47,960 Speaker 1: America assuming the smaller ones even bigger and not going 601 00:27:47,960 --> 00:27:49,080 Speaker 1: to fill in some of the lending. 602 00:27:49,200 --> 00:27:52,400 Speaker 11: There are two key things, Lisa. Number one, this problem 603 00:27:52,440 --> 00:27:56,600 Speaker 11: resides with the Federal Reserve. Management issues exist in banks, 604 00:27:56,600 --> 00:27:59,800 Speaker 11: no question, But this FED raised rates much more than 605 00:27:59,800 --> 00:28:01,600 Speaker 11: the guidance suggested. 606 00:28:03,080 --> 00:28:04,960 Speaker 5: They put those rates way above. 607 00:28:04,680 --> 00:28:07,920 Speaker 11: Where the markets suggested last summer. They were supposed to 608 00:28:07,960 --> 00:28:10,199 Speaker 11: be based on the version of the yield curve and 609 00:28:10,280 --> 00:28:12,960 Speaker 11: the banking system. The lending system doesn't work when you 610 00:28:13,000 --> 00:28:15,960 Speaker 11: have a higher short rate versus the longer rate. Yield 611 00:28:15,960 --> 00:28:19,080 Speaker 11: curve not just as a predictor of recession, but causes recessions. 612 00:28:19,560 --> 00:28:21,159 Speaker 11: And the sad thing is the FED is going to 613 00:28:21,160 --> 00:28:24,560 Speaker 11: now regulate these smaller medium sized banks when it was 614 00:28:24,560 --> 00:28:27,480 Speaker 11: FED policy itself that caused this crisis. That's number one. 615 00:28:27,560 --> 00:28:30,680 Speaker 11: Number two, given the tightening and lending standards we saw 616 00:28:30,800 --> 00:28:35,160 Speaker 11: in January before this SVB Signature Bank First Republic situation, 617 00:28:35,680 --> 00:28:39,880 Speaker 11: Rose banks were already tightening lending standards small medium in 618 00:28:40,000 --> 00:28:43,760 Speaker 11: large banks at the fastest pace since previous recessions. So 619 00:28:43,800 --> 00:28:46,280 Speaker 11: I can imagine that when we get the data a 620 00:28:46,320 --> 00:28:50,000 Speaker 11: week from today, on Monday May eighth, at two, it's 621 00:28:50,000 --> 00:28:52,480 Speaker 11: going to show further tightening and lending standards and that 622 00:28:52,600 --> 00:28:55,280 Speaker 11: is unambiguously bad for the economy. 623 00:28:55,480 --> 00:28:57,120 Speaker 1: So you just said a number of things that I 624 00:28:57,120 --> 00:28:59,080 Speaker 1: want to dig into, and I'll get to the FEDS 625 00:28:59,320 --> 00:29:01,240 Speaker 1: and sort of how quickly they raised rates in just 626 00:29:01,280 --> 00:29:04,240 Speaker 1: a minute. But if you're saying that they raised rates 627 00:29:04,360 --> 00:29:08,040 Speaker 1: so quickly that the banking model did not work, then 628 00:29:08,080 --> 00:29:11,080 Speaker 1: what kind of follow on effect do you expect in 629 00:29:11,160 --> 00:29:14,280 Speaker 1: other regional banks Even though a lot of people say 630 00:29:14,280 --> 00:29:16,760 Speaker 1: they have been fortified, they have raised capital, they have 631 00:29:16,800 --> 00:29:17,959 Speaker 1: addressed some of the issues. 632 00:29:18,000 --> 00:29:20,920 Speaker 5: Well, that may be true. So there's two issues early. 633 00:29:20,960 --> 00:29:23,680 Speaker 11: So one is systemic, like how many other banks perhaps 634 00:29:23,760 --> 00:29:25,960 Speaker 11: are behind the banks that have had troubles, and we 635 00:29:26,000 --> 00:29:27,800 Speaker 11: don't know the answer to that. The FED is backstop 636 00:29:28,280 --> 00:29:31,640 Speaker 11: these banks through these various lending programs. The issue, though, 637 00:29:31,720 --> 00:29:35,720 Speaker 11: is will these banks make loans and extend credit that 638 00:29:35,800 --> 00:29:38,120 Speaker 11: to me is unlikely to happen. In other words, they're 639 00:29:38,120 --> 00:29:40,720 Speaker 11: going to call in deposits or call in loans, try 640 00:29:40,760 --> 00:29:44,320 Speaker 11: to raise deposits, revolving lines of credit won't be extended. 641 00:29:44,360 --> 00:29:47,320 Speaker 11: That's bad for growth. So whether there is another systemic 642 00:29:47,400 --> 00:29:49,800 Speaker 11: issue because of let's say bank mismanagement, we'll call it 643 00:29:49,800 --> 00:29:52,680 Speaker 11: with quotes, is a sort of irrelevant in the sense 644 00:29:52,680 --> 00:29:54,680 Speaker 11: that what the FED has already done from a monetary 645 00:29:54,720 --> 00:29:58,720 Speaker 11: policy transmission mechanism is they've they've basically killed credit and 646 00:29:58,760 --> 00:29:59,920 Speaker 11: money and lending create. 647 00:30:00,520 --> 00:30:01,880 Speaker 1: So you don't think that it was the issue of 648 00:30:01,960 --> 00:30:06,200 Speaker 1: Randy Quarrels for not necessarily enforcing some of the regulatory 649 00:30:06,200 --> 00:30:08,600 Speaker 1: oversights that the FED flagged at specific banks that have 650 00:30:08,640 --> 00:30:09,280 Speaker 1: run into trouble. 651 00:30:09,320 --> 00:30:11,880 Speaker 11: No, I mean, that's just political cover. I mean, if 652 00:30:11,880 --> 00:30:15,320 Speaker 11: you looked at the bond market through April of last year, 653 00:30:15,440 --> 00:30:18,280 Speaker 11: was the middle part, the longer part of the curve. 654 00:30:18,320 --> 00:30:20,760 Speaker 11: Those were bond market returns at that point were the 655 00:30:20,760 --> 00:30:24,760 Speaker 11: worst returns you had in measured history. So the market 656 00:30:24,840 --> 00:30:26,800 Speaker 11: was not People did not expect the FED to keep 657 00:30:26,880 --> 00:30:28,920 Speaker 11: going in seventy fives, and it was after that first 658 00:30:28,920 --> 00:30:31,280 Speaker 11: seventy five when the yeal curve inverted and the FED 659 00:30:31,360 --> 00:30:33,239 Speaker 11: stupidly ignored it. 660 00:30:33,680 --> 00:30:35,480 Speaker 1: Okay, but then what would you say to people who 661 00:30:35,520 --> 00:30:38,400 Speaker 1: point to the actual economic data that's coming in. It's 662 00:30:38,440 --> 00:30:41,320 Speaker 1: been stronger than expected. Consumers keep spending. There has been 663 00:30:41,400 --> 00:30:44,520 Speaker 1: ongoing credit creation. This morning, we have ten different issuers 664 00:30:44,720 --> 00:30:47,640 Speaker 1: ready to sell corporate debt even though rates have risen 665 00:30:47,760 --> 00:30:49,640 Speaker 1: so much. What would you say to people, say, the 666 00:30:49,680 --> 00:30:51,520 Speaker 1: economy has proven it is resilient and it has been 667 00:30:51,520 --> 00:30:53,960 Speaker 1: able to withstand this, and then someone actually, it hasn't 668 00:30:54,040 --> 00:30:55,240 Speaker 1: driven inflation down enough. 669 00:30:55,520 --> 00:30:59,560 Speaker 11: Inflation's lagging, inflation's coming down. If you look at the 670 00:31:00,120 --> 00:31:03,120 Speaker 11: tree of the CPI, the upswing in the downswing has 671 00:31:03,160 --> 00:31:06,200 Speaker 11: been identical in this cycle. Their pockets of the economy 672 00:31:06,240 --> 00:31:08,280 Speaker 11: that are strong. We had the same debate Lisa back 673 00:31:08,320 --> 00:31:10,440 Speaker 11: in eight. I remember vivil I wrote a piece on this. 674 00:31:10,600 --> 00:31:13,240 Speaker 11: You look on eight we had people debating if we'd 675 00:31:13,320 --> 00:31:15,640 Speaker 11: entered recession. The economy grew over two percent in the 676 00:31:15,680 --> 00:31:17,760 Speaker 11: second quarter of two thousand and eight and what turned 677 00:31:17,760 --> 00:31:19,920 Speaker 11: out to be the deepest recession since the thirty So 678 00:31:20,440 --> 00:31:24,040 Speaker 11: the fact that the data are all in alignment is normal. 679 00:31:24,080 --> 00:31:29,040 Speaker 11: We had where housings in recession, manufacturings in recession, inflation's 680 00:31:29,080 --> 00:31:31,480 Speaker 11: coming down. Core CPI will be sticky. Rents are a 681 00:31:31,480 --> 00:31:34,600 Speaker 11: big piece, but we know the housings weakening. What is 682 00:31:34,640 --> 00:31:37,440 Speaker 11: so wrong and just waiting and seeing what happens for 683 00:31:37,480 --> 00:31:39,560 Speaker 11: this spillover, if any in the rest of the economy. 684 00:31:39,560 --> 00:31:42,160 Speaker 11: If that could have done that numerous times over the 685 00:31:42,160 --> 00:31:42,920 Speaker 11: past year. 686 00:31:42,920 --> 00:31:44,920 Speaker 1: Well, they've gotten it wrong. Though they've got gotten it 687 00:31:44,920 --> 00:31:47,800 Speaker 1: totally right, and they got the transitory concept wrong as well, 688 00:31:48,120 --> 00:31:51,000 Speaker 1: and that some people would argue, including muhammadl Aaria, that 689 00:31:51,000 --> 00:31:53,360 Speaker 1: that was the reason for how rapidly they rose real 690 00:31:53,360 --> 00:31:55,440 Speaker 1: they raised rates. So yes, perhaps they did raise them 691 00:31:55,440 --> 00:31:57,920 Speaker 1: too quickly, but that was the least worst option after 692 00:31:57,960 --> 00:31:59,719 Speaker 1: not raising them for as long as they did. So 693 00:32:00,040 --> 00:32:01,280 Speaker 1: what would you say to that? I mean, was the 694 00:32:01,320 --> 00:32:04,000 Speaker 1: first misstep in the real misstep not raising them back 695 00:32:04,000 --> 00:32:05,960 Speaker 1: in the summer yea twenty twenty. 696 00:32:06,400 --> 00:32:10,200 Speaker 11: Absolutely J. Powell channeled his inner poll voker when he 697 00:32:10,240 --> 00:32:12,680 Speaker 11: wanted to be reappointed. So you're absolutely right, and Muhammed's 698 00:32:12,720 --> 00:32:15,480 Speaker 11: right about that. However, you don't correct one mistake by 699 00:32:15,480 --> 00:32:18,560 Speaker 11: making another mistake. And I could imagine the people who 700 00:32:19,600 --> 00:32:21,280 Speaker 11: have been arguing the Fed to raise rates, who have 701 00:32:21,480 --> 00:32:23,960 Speaker 11: got to get inflation down. What happens, least hypothetically, we 702 00:32:24,040 --> 00:32:25,840 Speaker 11: go into recession this year, as I believe will happen, 703 00:32:25,840 --> 00:32:28,640 Speaker 11: and we're in next year presidential election year. What kind 704 00:32:28,680 --> 00:32:30,640 Speaker 11: of political pressure is the FED going to take? Because 705 00:32:30,640 --> 00:32:33,080 Speaker 11: it doesn't matter who's arguing, is one side is going 706 00:32:33,120 --> 00:32:35,840 Speaker 11: to be happy they're cutting or not cutting or whatever 707 00:32:35,840 --> 00:32:37,920 Speaker 11: it might be. So the FED has really put a 708 00:32:38,000 --> 00:32:39,640 Speaker 11: huge bull's eye on its back, and it could have 709 00:32:39,680 --> 00:32:42,560 Speaker 11: been prevented. And part of the problem is that to 710 00:32:42,600 --> 00:32:44,959 Speaker 11: Fed all these meetings, it's all this unanimity. 711 00:32:45,400 --> 00:32:46,200 Speaker 5: There should be debate. 712 00:32:46,200 --> 00:32:48,360 Speaker 11: Economists don't agree in anything, except for those at the FED. 713 00:32:49,080 --> 00:32:51,240 Speaker 1: This is something that people are expecting. Well here perhaps 714 00:32:51,240 --> 00:32:54,400 Speaker 1: more of going forward. But right now, given where we are, 715 00:32:54,560 --> 00:32:57,520 Speaker 1: given how quickly they've raised rates, what is the bigger 716 00:32:57,640 --> 00:33:00,880 Speaker 1: risk if they pause at this point? Is that the 717 00:33:00,960 --> 00:33:01,760 Speaker 1: right course of action? 718 00:33:02,000 --> 00:33:04,520 Speaker 11: Is it justation at a point where people are concerned that. 719 00:33:04,520 --> 00:33:06,400 Speaker 1: They're going to reignite some of the credit creation. 720 00:33:06,600 --> 00:33:09,080 Speaker 11: Inflation is easy to handle your raise rates. The FED 721 00:33:09,160 --> 00:33:11,200 Speaker 11: should have paused a while ago. The FED will be 722 00:33:11,240 --> 00:33:15,440 Speaker 11: cutting and should be cutting break even inflation, the yield curve, 723 00:33:15,560 --> 00:33:18,479 Speaker 11: the dollar, commodity prices, none of these things have been 724 00:33:18,520 --> 00:33:20,760 Speaker 11: suggesting for the last six or seven months. There's really 725 00:33:20,800 --> 00:33:24,640 Speaker 11: any sort of inflation problem. Not that inflation's not needs 726 00:33:24,640 --> 00:33:27,160 Speaker 11: to come down, it will, but the FED should stop 727 00:33:27,240 --> 00:33:30,280 Speaker 11: this crazy policy of tightening, and they should continue with 728 00:33:30,280 --> 00:33:31,880 Speaker 11: the balance sheet, but they should cut on the rates. 729 00:33:32,080 --> 00:33:34,720 Speaker 1: That should people are expecting. The market is pricing in 730 00:33:34,760 --> 00:33:37,440 Speaker 1: a twenty five basis point rate hike at Wednesday's meeting. 731 00:33:37,920 --> 00:33:40,720 Speaker 1: Based on that rate hiking cycle, based on what you're 732 00:33:40,720 --> 00:33:43,480 Speaker 1: seeing in the fundamental economy, what do you think will 733 00:33:43,520 --> 00:33:46,320 Speaker 1: be the outcome for the US economy. 734 00:33:46,080 --> 00:33:48,440 Speaker 11: Recession by third quarter of this year. I mean, the 735 00:33:48,480 --> 00:33:50,880 Speaker 11: thing is, you look at the index leny indicators in 736 00:33:50,960 --> 00:33:53,720 Speaker 11: the six period of peak twenty one months before the 737 00:33:53,760 --> 00:33:56,760 Speaker 11: economy peaked, that would put an economy peak this year 738 00:33:56,800 --> 00:33:59,840 Speaker 11: in September. We're down almost eight percent over the past 739 00:34:00,200 --> 00:34:04,160 Speaker 11: twelve months. Virtue, All the indicators are declining. The EIL 740 00:34:04,240 --> 00:34:06,880 Speaker 11: curvistil inverted. You mentioned the bank lending. That tightening is 741 00:34:06,920 --> 00:34:09,480 Speaker 11: still working itself through the economy. Why in the role 742 00:34:09,480 --> 00:34:11,560 Speaker 11: of your raising rates, you're actually making the problem worse 743 00:34:11,560 --> 00:34:14,239 Speaker 11: because you're lifting money market rates, which is encouraging to 744 00:34:14,320 --> 00:34:18,239 Speaker 11: record deposit flight. It's like, I don't understand what these 745 00:34:18,239 --> 00:34:20,200 Speaker 11: people don't see it. It's kind of like remember in 746 00:34:20,239 --> 00:34:22,480 Speaker 11: Zulander with Will Ferrell that you know we got to 747 00:34:22,480 --> 00:34:25,239 Speaker 11: a piano key necktie, like the Fed you those short rates, 748 00:34:25,239 --> 00:34:27,160 Speaker 11: So those bill rates are up at five percent plus 749 00:34:27,480 --> 00:34:28,399 Speaker 11: you've put them there? 750 00:34:28,440 --> 00:34:29,160 Speaker 5: What are you doing? 751 00:34:29,880 --> 00:34:33,040 Speaker 1: Never thought that i'd hear Zulander cited as a model 752 00:34:33,040 --> 00:34:37,000 Speaker 1: for FED policy. Joseph Lavornia of SMBC Group, thank you 753 00:34:37,040 --> 00:34:39,080 Speaker 1: so much for being with us. Subscribe to the Bloomberg 754 00:34:39,080 --> 00:34:42,319 Speaker 1: Surveillance podcast on Apple, Spotify, and anywhere else you get 755 00:34:42,320 --> 00:34:45,839 Speaker 1: your podcasts. Listen live every weekday starting at seven am 756 00:34:45,880 --> 00:34:49,279 Speaker 1: Eastern on Bloomberg dot com, the iHeartRadio app tune In, 757 00:34:49,440 --> 00:34:52,359 Speaker 1: and the Bloomberg Business app. You can watch us live 758 00:34:52,400 --> 00:34:56,160 Speaker 1: on Bloomberg Television and always on the Bloomberg Terminal. Thanks 759 00:34:56,160 --> 00:34:59,080 Speaker 1: for listening. I'm Lisa Abramowitz, and this is bloomberg 760 00:35:00,960 --> 00:35:01,000 Speaker 10: S