WEBVTT - Apple's $90 Billion Buyback and Borrowing 0:00:01.360 --> 0:00:05.680 This is Bloomberg Business. Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:19.000 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:21.480 --> 0:00:24.200 All right, everybody, you're listening and watching Bloomberg Business Week 0:00:24.239 --> 0:00:26.520 Carol Masser along with Matt Miller, Tim you know on leave. 0:00:26.600 --> 0:00:29.800 We're live in our Bloomberg Interactor Broker studio on YouTube 0:00:29.800 --> 0:00:31.920 on Bloomberg Originals. Now, Matt was kind of hot and 0:00:32.000 --> 0:00:34.440 heavy about doing the Apple debt offering. 0:00:34.800 --> 0:00:38.400 I mean, to me, it's huge because this company A 0:00:38.400 --> 0:00:41.280 already has one hundred and seventy billion dollars in cash. 0:00:41.400 --> 0:00:42.239 What does it need money for? 0:00:42.479 --> 0:00:42.680 Right? 0:00:42.960 --> 0:00:45.760 They don't seem to need money. Although if I if 0:00:45.760 --> 0:00:48.520 I type in DDIS on the terminal, I can see 0:00:48.520 --> 0:00:50.960 that they have forty four billion dollars in debt coming 0:00:51.040 --> 0:00:52.120 due over the next four years. 0:00:52.159 --> 0:00:54.319 So it's all about maybe just managing that debt right. 0:00:54.360 --> 0:00:56.920 The next round, let's see what Robert Schiffman has to say. 0:00:56.920 --> 0:00:59.600 He's senior credit analyst at Bloomberg Intelligence. He's here in 0:00:59.600 --> 0:01:02.480 our interact a broker studio. That's right. I mean we've 0:01:02.480 --> 0:01:05.319 all been reading your work that says they've got a 0:01:05.360 --> 0:01:07.920 fortress balance sheet, right, So why do they have to 0:01:08.000 --> 0:01:10.360 do this? Or is this just business as usual for Apple? 0:01:10.520 --> 0:01:13.319 Yeah, I sort of don't want to burst everybody's bubble, 0:01:13.319 --> 0:01:15.480 but this is a little bit of ho home. You know, 0:01:15.560 --> 0:01:18.920 Apple raising five and a quarter billion, it's almost a 0:01:19.000 --> 0:01:21.600 rounding error. And you know, if you look, you talked 0:01:21.600 --> 0:01:24.560 about how much debt Apple for Apple for of course, yes, 0:01:24.640 --> 0:01:26.920 now I live in a different world of megacap you know, 0:01:27.160 --> 0:01:28.920 in a lot over the last three years, Apple's raised 0:01:28.959 --> 0:01:31.240 forty billion dollars a debt. This is sort of just 0:01:31.360 --> 0:01:34.240 regular course of business for them, Like I, like I 0:01:34.280 --> 0:01:36.400 said to you earlier, Matt, Like, I'm just I'm wondering 0:01:36.400 --> 0:01:39.200 why they're just not raising a little bit more. You know. 0:01:39.240 --> 0:01:41.480 Maybe it's a play on rates. Maybe they think that 0:01:42.040 --> 0:01:43.920 three minutes from now, three months from now, three years 0:01:43.920 --> 0:01:45.160 from now, rates are going to be a little bit 0:01:45.200 --> 0:01:47.080 lower and the cost of capital be a little bit lower. 0:01:47.160 --> 0:01:49.200 That's what I'm wondering, right, why not wait even a 0:01:49.240 --> 0:01:50.800 little bit more, or just they have to do this? 0:01:50.880 --> 0:01:53.440 It's honestly it's it's reasonably it's it's five tranches, but 0:01:53.440 --> 0:01:56.720 it's reasonably short duration. You know, the first four tranches 0:01:56.720 --> 0:01:59.760 are three, five, sevens, and tens. So it's really not 0:02:00.120 --> 0:02:02.000 so much I think a play on rates. You know, Apple, 0:02:02.040 --> 0:02:05.279 if you think about it over time, with one hundred 0:02:05.280 --> 0:02:08.000 and ten odd billion dollars a debt, they're going to 0:02:08.160 --> 0:02:11.400 constantly need to refinance unless they want to take their 0:02:11.440 --> 0:02:13.880 debt levels down. And they've had one hundred and ten 0:02:13.880 --> 0:02:16.200 odd billion dollars a debt for the last decade, So 0:02:16.280 --> 0:02:19.720 what they're really well, we still have one notch to 0:02:19.760 --> 0:02:22.880 go at SMP doub plus, but Moodies did raise them 0:02:22.919 --> 0:02:27.800 to triple A in December of twenty twenty one. So listen, 0:02:27.880 --> 0:02:30.640 we've always talked about the mount rushmore credit. They're on it. 0:02:30.840 --> 0:02:32.000 Yeah there with Microsoft. 0:02:32.080 --> 0:02:34.400 Well, this is why I wanted to do this story. 0:02:34.400 --> 0:02:35.840 This is why I'm so hot and heavy on it, 0:02:35.880 --> 0:02:39.639 because Apple is putting another product out into the market 0:02:39.680 --> 0:02:43.399 that everybody has to have, right, everybody wants these bonds. 0:02:43.600 --> 0:02:47.000 If you can get five percent on thirty year debt 0:02:47.120 --> 0:02:49.960 in a completely risk free company, which this is as 0:02:49.960 --> 0:02:52.680 close as damn it to a completely risk free company. 0:02:52.800 --> 0:02:55.600 You want that, which is why they got oversubscribed. That's 0:02:55.639 --> 0:02:57.440 why they did five and a quarter instead of five 0:02:57.480 --> 0:02:59.560 and that's why they're got a spread of one hundred 0:02:59.600 --> 0:03:00.840 eight rather than one hundred and thirty five. 0:03:00.919 --> 0:03:03.320 Right, Yeah, listen, Apple. 0:03:03.360 --> 0:03:07.160 When you comp them versus their peers, they look pretty cheap. 0:03:07.280 --> 0:03:08.600 Yeah. I mean they trade. 0:03:08.320 --> 0:03:12.000 Wide to both Alphabet and Microsoft. The reason is not 0:03:12.080 --> 0:03:18.440 so much about credit quality, like you're really like mincing words. 0:03:18.560 --> 0:03:20.720 If you're thinking about what's the difference between a double 0:03:20.760 --> 0:03:23.760 A and a triple A. The real difference is technicals. 0:03:23.840 --> 0:03:26.400 Apple's got a lot more bonds out there than their peers, 0:03:26.960 --> 0:03:30.200 so people have a little bit of larger holding. It 0:03:30.240 --> 0:03:32.440 costs a little bit more to put another five or 0:03:32.440 --> 0:03:35.800 ten billion in people's pocket. But listen, if Apple wanted 0:03:35.800 --> 0:03:38.200 to raise fifty billion dollars today, the market would be 0:03:38.240 --> 0:03:39.800 there for them. It's just a matter of what that 0:03:39.920 --> 0:03:40.440 cost is. 0:03:40.720 --> 0:03:43.520 How much of this too is though having enough on 0:03:43.560 --> 0:03:45.160 the balance you. I mean, they've got we said a 0:03:45.160 --> 0:03:47.640 lot on the balance you. But they like to do buybacks, 0:03:47.840 --> 0:03:50.600 they like to do dividends, and if it's a questionable 0:03:50.640 --> 0:03:53.840 economic environment, potentially if anything slows down. 0:03:53.680 --> 0:03:55.040 They wish they did dividends. 0:03:55.120 --> 0:03:58.880 They could still do this and make shareholders happy. 0:03:59.000 --> 0:04:02.320 Yeah, listen, they pay a already fair dividend. The dividend 0:04:02.360 --> 0:04:05.240 yield is low, but on an absolute basis, you know, 0:04:05.280 --> 0:04:07.720 it's fifteen odd billion dollars, it's not like it's nothing. 0:04:07.840 --> 0:04:10.720 I will tell you though, I'm a was a bit surprised. 0:04:11.040 --> 0:04:15.160 It's pretty much every year during their their fiscal two 0:04:15.240 --> 0:04:18.720 Q is when they reauthorize a bigger buyback. 0:04:18.800 --> 0:04:19.880 So surprise they did it already. 0:04:20.040 --> 0:04:23.080 No, it's surprised that it wasn't bigger. It was ninety billion, 0:04:23.080 --> 0:04:24.960 which was similar to last year. I think if they 0:04:25.000 --> 0:04:27.880 really want to make hay on this cash neutral target, 0:04:28.000 --> 0:04:31.279 you know, they've got fifty seven billion dollars to get through, 0:04:31.520 --> 0:04:33.600 you know, why not announce one hundred and twenty five 0:04:33.640 --> 0:04:36.320 billion dollar authorization. Listen. I don't know if it's a 0:04:36.320 --> 0:04:38.440 call on their stock. I don't know if they need 0:04:38.480 --> 0:04:40.719 money for they don't need They don't need money. That's 0:04:40.839 --> 0:04:42.440 you know, they have one hundred billion dollars of annual 0:04:42.440 --> 0:04:45.120 free cashrob I just think it's managing a long term 0:04:45.160 --> 0:04:47.920 balance sheet. It looks like what they really want to 0:04:47.960 --> 0:04:50.719 shake out with is having enough cash on this balance 0:04:50.720 --> 0:04:53.599 sheet over time that they can do whatever they want. 0:04:53.839 --> 0:04:56.080 Right now, they can't do whatever they want. For instance, 0:04:56.240 --> 0:05:00.720 Microsoft is trying to buy Activision sixty nine billion cash. 0:05:00.560 --> 0:05:00.680 Uh. 0:05:00.760 --> 0:05:03.279 Pretty much governments around the world said no, you can't 0:05:03.279 --> 0:05:06.599 do it. At some point, maybe there's a different administration, 0:05:06.960 --> 0:05:10.000 maybe the M and A environment is different, and Apple 0:05:10.040 --> 0:05:13.120 can go out there and I don't know bya Netflix. 0:05:13.200 --> 0:05:17.000 I mean, it seems crazy nowadays. Well, Peloton though, doesn't 0:05:17.000 --> 0:05:20.359 move the needle. I actually I have my Peloton and 0:05:20.400 --> 0:05:23.279 I spend somewhat regularly. It's not moving my weight needle. 0:05:23.480 --> 0:05:25.640 It's just not big enough for for like these large 0:05:25.680 --> 0:05:28.520 cat names to do a transaction that actually makes a difference. 0:05:28.800 --> 0:05:29.679 It's got to be signed. 0:05:29.720 --> 0:05:31.520 I'm just thinking the whole health and wellness thing that 0:05:31.520 --> 0:05:33.400 they are looking. They see that as a. 0:05:33.680 --> 0:05:36.960 Growth that you know, that's actually a great point that 0:05:37.000 --> 0:05:37.479 you're making. 0:05:37.720 --> 0:05:37.919 You know. 0:05:38.000 --> 0:05:40.159 One of the ways that Apples can get to a 0:05:40.160 --> 0:05:42.559 triple A is they need to diversify their revenue stream, 0:05:42.720 --> 0:05:45.159 and they're doing that. Services have their best quarter ever. 0:05:45.480 --> 0:05:47.520 But this is still a hardware company, so they need 0:05:47.560 --> 0:05:52.360 to continue to figure out new, different, better ways to 0:05:52.480 --> 0:05:54.479 make all of their products sticky, and that means that 0:05:54.520 --> 0:05:58.200 they're they're gonna have to find things that they're not 0:05:58.600 --> 0:06:01.960 used to doing. You can build. 0:06:01.760 --> 0:06:03.839 It, it's hard to get as sticky as the iPhone. 0:06:03.880 --> 0:06:04.040 I mean. 0:06:04.080 --> 0:06:07.880 Warren Buffett was pointing out he thinks people in America 0:06:08.000 --> 0:06:10.640 would rather have an iPhone than a second car. Yeah, 0:06:10.839 --> 0:06:13.719 And he said, if somebody comes to repoe your second 0:06:13.800 --> 0:06:15.719 car and it comes to giving up your iPhone, you say, 0:06:15.720 --> 0:06:16.320 take the car. 0:06:16.640 --> 0:06:19.200 Yeah, I listen. I don't think that he's wrong. 0:06:19.640 --> 0:06:22.000 One thing I don't get is why the dividend yield 0:06:22.040 --> 0:06:25.320 is so painfully low. I mean half a percent. I 0:06:25.360 --> 0:06:27.600 get that they spend a lot of money in dividends, 0:06:27.640 --> 0:06:29.800 but if I buy the shares, I would like a 0:06:29.800 --> 0:06:32.440 bigger dividend yield. It's something I can count on and 0:06:32.480 --> 0:06:36.120 something I can plan on, rather than hoping that they continue, 0:06:36.240 --> 0:06:39.400 you know, one hundred billion dollars of share buybacks every year. 0:06:39.480 --> 0:06:41.720 Yeah, Well, as a shareholder, you'd also hope that they 0:06:41.800 --> 0:06:44.400 bought back a trillion dollars worth of stock each year. 0:06:44.880 --> 0:06:48.680 You know, they're doing what's in the long run best 0:06:48.720 --> 0:06:51.560 financial case for the business. Quite frankly, the dividend also 0:06:51.640 --> 0:06:53.480 is a little bit ho hum, like, why does anyone 0:06:53.480 --> 0:06:56.080 have a one percent dividend yield? It's to check a 0:06:56.120 --> 0:06:58.760 box that you're in a variety of dividend funds, so 0:06:58.800 --> 0:07:03.440 people so so the name fits into various ETFs and industries. 0:07:03.440 --> 0:07:04.920 I don't think that's going to go up that much. 0:07:05.160 --> 0:07:09.040 You want to keep your flexibility really high. I think 0:07:09.080 --> 0:07:11.840 there's a benefit to be able to say next year, 0:07:11.840 --> 0:07:13.200 if we want to buy back one hundred and fifty 0:07:13.240 --> 0:07:15.320 billion of stock, we can do it. If you triple 0:07:15.360 --> 0:07:18.480 that dividend, it limits your flexibility over time? 0:07:18.600 --> 0:07:20.400 Am I an idiot? Always thinking that when you're doing 0:07:20.480 --> 0:07:23.440 buybacks it's just financial engineering? Right, You're reducing the amount 0:07:23.440 --> 0:07:27.240 of improve your EPs number? Like is it just? I 0:07:27.320 --> 0:07:31.000 know investors like it, I get it, But isn't it 0:07:31.040 --> 0:07:32.440 a form of financial engineering? 0:07:32.480 --> 0:07:32.600 Well? 0:07:32.640 --> 0:07:34.679 I wish I wish Tom was here because he would 0:07:34.680 --> 0:07:38.440 break out modic Leani and Miller. And that theory is 0:07:38.480 --> 0:07:41.239 that you know, it doesn't It doesn't make any difference. 0:07:41.240 --> 0:07:43.400 I will tell you though, because it doesn't. Weighted average 0:07:43.440 --> 0:07:46.640 cost of capital I think does matter. Apple's weighted average 0:07:46.640 --> 0:07:49.800 cost of capital it's reasonably high. It's because it's got 0:07:49.840 --> 0:07:54.720 such a large equity component, their debt component is effectively zero, 0:07:55.040 --> 0:07:57.000 and that to me argues they're supposed to be borrowing 0:07:57.120 --> 0:07:59.880 a lot more to buy back stock, which has a 0:08:00.000 --> 0:08:02.360 wait a cost of capital that's closer to ten percent. 0:08:03.120 --> 0:08:06.840 Are we seeing, though, a drop in the kind of 0:08:06.880 --> 0:08:10.400 demand that Apple would have previously seen? I mean, are 0:08:10.400 --> 0:08:14.840 investors out there more risk averse showing more patients when 0:08:14.880 --> 0:08:18.120 you look at the at the book building for this offering, 0:08:18.400 --> 0:08:20.360 wasn't it a little bit weaker than you may have expected? 0:08:20.400 --> 0:08:22.320 Now? I don't think it's being risk averse. I think 0:08:22.360 --> 0:08:26.400 it's part of being one of the largest non financial 0:08:26.440 --> 0:08:29.800 debt issuers in the market. At some point, it doesn't 0:08:29.840 --> 0:08:31.960 make a bit a difference how big you are. On 0:08:32.000 --> 0:08:34.680 the byside, you can only have so much exposure to 0:08:34.840 --> 0:08:40.040 individual names. And you know, this is Apple's probably most 0:08:40.240 --> 0:08:44.400 largest individual non financial exposure out there. So it just 0:08:44.440 --> 0:08:47.320 gets harder and harder to squeeze in that last dollar. 0:08:47.360 --> 0:08:49.360 But again, if they wanted to raise another ten or 0:08:49.400 --> 0:08:51.040 fifteen billion, they could do it. You just might have 0:08:51.040 --> 0:08:52.960 cost them another twenty five beeps across the curve. 0:08:53.000 --> 0:08:55.840 Hey, Robert, just broadening out right, We're obviously focusing on Apple, 0:08:55.880 --> 0:08:58.280 but there's a lot going on right the corporate issuance world. 0:08:58.360 --> 0:09:00.320 What are you keeping on your radar this and what 0:09:00.360 --> 0:09:02.760 does it tell you about kind of the economic outlook? 0:09:02.880 --> 0:09:05.320 Well, listen, I think corporate outlook. You know we've been 0:09:05.360 --> 0:09:07.040 saying this for the last couple of years, is I 0:09:07.040 --> 0:09:10.200 think that tech needs to be considered the corporate safe haven, 0:09:10.520 --> 0:09:14.080 and in fact, tech credit needs to be considered the 0:09:14.200 --> 0:09:17.920 market safe haven. We're seeing right now that banks certainly 0:09:17.960 --> 0:09:22.200 don't fit that. If you have a super highly rated 0:09:23.080 --> 0:09:27.800 financial institution with hundreds of billions of dollars of deposits 0:09:27.800 --> 0:09:30.439 that can go to zero, that's not a safe haven. 0:09:30.760 --> 0:09:34.520 We've also seen that with treasuries. The volatility that we're 0:09:34.520 --> 0:09:38.559 seeing your conversation about what the Fed has been doing 0:09:38.840 --> 0:09:42.240 and potentially, you know, breaking a debt limit is sort 0:09:42.240 --> 0:09:45.000 of mind boggling. So we've always talked about, you know, 0:09:45.559 --> 0:09:51.680 large tech companies that have massive cash positions that generate 0:09:51.800 --> 0:09:54.040 tens of billions dollars of cash a year, that have 0:09:54.480 --> 0:09:58.600 enormous competitive barriers to entry. Those are the safe havens. 0:09:58.760 --> 0:10:00.959 People tend to talk about tech is being violatile because 0:10:01.000 --> 0:10:04.720 stocks are violatile but tech bonds are not nearly as violatile. 0:10:04.840 --> 0:10:07.800 They trade tighter than just about every other sector for 0:10:07.840 --> 0:10:11.360 a good reason. It's because credit risk is really low. 0:10:11.440 --> 0:10:14.880 So what's happening is we're seeing more companies borrow to 0:10:15.000 --> 0:10:17.040 buy back shares. We just saw that with Meta. 0:10:17.120 --> 0:10:19.440 I was just gonna say Meta last week, right, just quickly, 0:10:19.480 --> 0:10:20.400 just got about twenty seconds. 0:10:20.480 --> 0:10:21.760 Yes, I think we're going to see more of this. 0:10:21.880 --> 0:10:26.520 And if Microsoft's deal with Activision ends up disappearing, I 0:10:26.559 --> 0:10:29.760 wouldn't be shocked to see seventy billion dollars of buybacks 0:10:29.840 --> 0:10:31.320 right off the bat. So you're going to see more 0:10:31.320 --> 0:10:33.840 of this. People. Tech credits are going to get on 0:10:33.880 --> 0:10:36.920 the back of their balance sheets, and they're gonna benefit shareholders. 0:10:37.040 --> 0:10:38.400 I love what you said about looking at the tech 0:10:39.360 --> 0:10:42.480 debt side of things. Robert Chiffin, Senior credit analyst at 0:10:42.480 --> 0:10:44.960 Bloomberg Intelligence, Making us smarter. On this Monday, you are 0:10:44.960 --> 0:10:47.840 listening and watching Bloomberg Business Week. This is Bloomberg. 0:10:49.320 --> 0:10:52.880 You're listening to the Bloomberg Business Week podcast. Catch us 0:10:52.920 --> 0:10:56.240 live weekday afternoons from three to six Eastern Listen on 0:10:56.320 --> 0:11:00.000 Bloomberg dot com, the iHeartRadio app, and the Bloomberg business 0:11:00.640 --> 0:11:02.960 or wants us live on YouTube. 0:11:03.480 --> 0:11:05.160 All right, let's get to it, because we just got 0:11:05.800 --> 0:11:10.199 the FED update on the financial stability of our system, 0:11:10.280 --> 0:11:13.880 specifically warning that banks concerns about slower growth could lead 0:11:13.880 --> 0:11:16.520 them to make fewer loans, accelerating an economic downturn. That's 0:11:16.600 --> 0:11:18.800 our headline on our story about Craig tour. So let's 0:11:18.800 --> 0:11:21.720 get to it with our team, Bloomberg Intelligence. Senior analyst 0:11:21.760 --> 0:11:23.760 for US regional banks, Herman Chan back with us in 0:11:23.800 --> 0:11:27.000 our interactive broker's studio on the phone in New York City, 0:11:27.080 --> 0:11:30.880 Chris Whale, and institutional risk analyst at Will and Global Advisors, 0:11:30.920 --> 0:11:34.360 someone who follows the financial sector, was with us during 0:11:34.360 --> 0:11:36.320 the crisis. Herman, I'm going to start with you. 0:11:36.520 --> 0:11:38.120 In a Great financial crisis during the. 0:11:38.080 --> 0:11:41.280 GFC exactly lean down him in a big way. Herman, 0:11:41.360 --> 0:11:44.240 Let's start with you. Among those two reports, the Senior 0:11:44.320 --> 0:11:47.400 Loan Officers as well as the Fed's report, what's important? 0:11:47.440 --> 0:11:48.360 What's a takeaway for you? 0:11:48.559 --> 0:11:48.800 Sure? 0:11:48.960 --> 0:11:51.559 So the Senior Loan Officer survey was interesting because it 0:11:51.640 --> 0:11:55.400 showed that commercial loan demand basically has cratered to the 0:11:55.480 --> 0:11:59.079 levels of the Great Financial Crisis, as you mentioned, So 0:11:59.160 --> 0:12:02.080 that's something that we weren't quite We were expecting a 0:12:02.120 --> 0:12:04.520 pullback in demand, but not quite to the same level 0:12:04.800 --> 0:12:08.960 as the survey indicated. And it also showed that credit 0:12:09.040 --> 0:12:12.040 is tightening across the board, across all loan types, so commercial, commercial, 0:12:12.080 --> 0:12:18.360 real estate, consumer. The banks are increasing spreads, being more 0:12:18.800 --> 0:12:20.920 cautious in terms of what loans they're putting on their 0:12:20.960 --> 0:12:24.760 balance sheet. And it just confirms the report, just confirms 0:12:24.800 --> 0:12:26.640 what we expected heading into the report. 0:12:26.800 --> 0:12:29.160 Chris Well, let me ask you, is this what the 0:12:29.200 --> 0:12:33.040 FED wants anyway? I mean, don't they want tighter financial conditions? 0:12:34.040 --> 0:12:36.640 You know, if they hadn't wanted banks to fail, wouldn't 0:12:36.640 --> 0:12:39.040 they have done something more serious about it ahead of time? 0:12:39.200 --> 0:12:40.560 Or is this all part of the plan. 0:12:41.520 --> 0:12:45.120 Well, I don't think the plan incorporates markets or banks 0:12:45.520 --> 0:12:49.720 in terms of the inputs. They're really focused on GDP 0:12:49.960 --> 0:12:53.600 modeling at the FED mat and I've confirmed with so 0:12:53.679 --> 0:12:55.599 of my former colleagues I worked at the FED in 0:12:55.640 --> 0:12:58.400 New York. They don't talk to the bank supervisory people 0:12:58.679 --> 0:13:00.480 at all. 0:13:01.240 --> 0:13:04.400 So one side is like firewalled off from the other. 0:13:04.640 --> 0:13:06.640 Monetary policy and financial stability. 0:13:07.120 --> 0:13:10.080 Yeah, and it's it's kind of concerning as far as 0:13:10.320 --> 0:13:13.040 I can see. But you know, I think the answer 0:13:13.080 --> 0:13:15.800 is no. They didn't model us at all, and they 0:13:15.920 --> 0:13:20.119 really didn't know what the equivalent of open market intervention 0:13:20.360 --> 0:13:22.520 is in interest rate terms, you know what I'm saying. 0:13:22.840 --> 0:13:26.040 So they had to guess and they went big thinking 0:13:26.120 --> 0:13:29.160 that was helpful, and in fact it's not helpful, as 0:13:29.200 --> 0:13:32.520 we can see. So, you know, there's this huge debate 0:13:32.640 --> 0:13:36.679 in the economics community right now about abundant reserves versus 0:13:37.120 --> 0:13:40.600 a more austere approach, and I think the austere approach 0:13:40.720 --> 0:13:43.160 is the right one, but we just have to fight 0:13:43.200 --> 0:13:43.920 our way through this. 0:13:44.040 --> 0:13:46.839 Matt, Yeah, well it looks like it looks like. 0:13:46.800 --> 0:13:49.079 Price in their balance sheets as fast as they can, 0:13:49.160 --> 0:13:51.000 but there's nothing they can do about assets. 0:13:51.320 --> 0:13:53.280 Well, you know, this brings up an interesting point that 0:13:53.360 --> 0:13:55.880 Tom Keane was talking about this morning, and that is 0:13:56.160 --> 0:14:00.560 scale and the lack thereof. Right, these banks are shrinking, 0:14:00.840 --> 0:14:05.280 and typically that's not great for investors in any company, 0:14:05.320 --> 0:14:09.040 in any industry. Right, is that just the reality of 0:14:09.080 --> 0:14:11.280 what's happening here on the KRI Do we have to 0:14:11.280 --> 0:14:14.600 look for all these regional banks to shrink, Well, you have. 0:14:14.559 --> 0:14:16.920 To look for the system to shrink, because as the 0:14:16.960 --> 0:14:19.880 FED shrink sits balance sheet. Every time a Treasury bond 0:14:19.960 --> 0:14:22.680 is redeemed on the books of the FED, a deposit 0:14:22.800 --> 0:14:26.520 disappears because the Treasury is in deficit, so they have 0:14:26.560 --> 0:14:30.400 to refinance that bond immediately your customer buys the bond, 0:14:30.400 --> 0:14:34.240 a deposit disappears, right. So the mechanics of this are 0:14:34.320 --> 0:14:38.080 very Darwinian, very you know, binary one to one. And 0:14:38.400 --> 0:14:41.119 at the same time, you see, the banks are very competitive. 0:14:41.360 --> 0:14:43.040 You've been the big guys that are out there for 0:14:43.080 --> 0:14:45.280 four and a half five percent now for one year, 0:14:45.880 --> 0:14:47.800 and it tells you they have to compete for money 0:14:47.800 --> 0:14:50.840 with the little guys. You know, it's the banks versus 0:14:50.840 --> 0:14:53.000 the treasury, and the Treasury is at what five point 0:14:53.000 --> 0:14:57.880 twenty this morning on one month, So you know that's 0:14:57.960 --> 0:15:00.800 the problem. People come to me, said Chris, if the 0:15:00.840 --> 0:15:03.440 FED doesn't do anymore, is it okay? And the answer 0:15:03.520 --> 0:15:06.560 is no, They've already done too much. You know, they 0:15:06.640 --> 0:15:08.840 could have maybe gotten FED funds a three and a 0:15:08.920 --> 0:15:12.280 half or four without breaking the China. But I think 0:15:12.320 --> 0:15:14.880 we're gonna break some china. I really do, Chris. 0:15:14.920 --> 0:15:19.119 You here, sorry, Herman Herman Chana Bloomberg Intelligence Regional Banks analysts. 0:15:19.280 --> 0:15:22.760 Are you hearing the same thing from the banks themselves? 0:15:22.800 --> 0:15:25.120 Are they at all pointing the finger at the FED? 0:15:25.600 --> 0:15:27.720 Well, they're not going to point the finger at the FED, because, 0:15:27.720 --> 0:15:31.680 as we talked about earlier here, the FED is also 0:15:31.760 --> 0:15:32.360 the regulator. 0:15:32.440 --> 0:15:35.800 So you're, yeah, but they don't do anything. They could 0:15:35.840 --> 0:15:37.840 be my regulator. I never heard from them. 0:15:37.840 --> 0:15:42.400 You know, right, Really, the FED creates the rules of 0:15:42.440 --> 0:15:46.360 the game, and the bank management team have to abide 0:15:46.400 --> 0:15:49.360 by those rules. So you have bie by credit rules, 0:15:49.360 --> 0:15:51.720 you buyed by interest rate rules, and if you don't, 0:15:51.760 --> 0:15:54.000 then you have a chance to break your bank. And 0:15:54.080 --> 0:15:56.080 that's really what's happened over the past couple of months. 0:15:56.120 --> 0:15:59.200 It's just a velocity of change. The time is so 0:15:59.400 --> 0:16:02.840 inadequate for these banks to actually adjust, you know what 0:16:02.840 --> 0:16:05.760 I mean, They roll off it maybe twenty percent a 0:16:05.840 --> 0:16:07.960 year if you think of it that way, so they 0:16:07.960 --> 0:16:11.520 can reply price twenty percent assets a year. Now. The 0:16:11.640 --> 0:16:15.280 deposits are headed for five right now this quarter, So 0:16:15.520 --> 0:16:17.640 that's going to be a remarkable shock I think for 0:16:17.680 --> 0:16:20.400 earnings and for net interest income for the whole industry. 0:16:20.800 --> 0:16:22.480 You know, if you look at our blog, we model 0:16:22.520 --> 0:16:26.680 it down thirty billion dollars and they'll still make money, 0:16:26.760 --> 0:16:29.360 don't get me wrong, but the you know, the search 0:16:29.520 --> 0:16:32.920 and cost for funding is going to be remarkable, I think. 0:16:33.200 --> 0:16:36.160 So, Chris, what's what's the regional bank industry look like 0:16:36.200 --> 0:16:40.960 on the other side of this? Well, well, but because 0:16:40.960 --> 0:16:43.000 it's interesting, you know, coming off in Milk and I 0:16:43.040 --> 0:16:45.240 was talking about this with Matt earlier, is that I'm 0:16:45.280 --> 0:16:47.720 just blown away by the role of the private market 0:16:47.800 --> 0:16:51.520 in so much, especially when it comes to smaller companies, 0:16:51.600 --> 0:16:54.760 mid sized companies. So I just wonder the big guys 0:16:54.760 --> 0:16:58.280 have been like pulling back for a long time. Regional 0:16:58.320 --> 0:17:02.240 banks maybe not so much to what happens to our 0:17:02.280 --> 0:17:05.919 financial system. More broadly, if we don't have those regional 0:17:05.920 --> 0:17:07.800 banks out there, well. 0:17:07.560 --> 0:17:11.440 You'll have more non bank involvement facing consumers because big 0:17:11.480 --> 0:17:14.240 banks don't want to face consumers. You know, think of 0:17:14.320 --> 0:17:18.120 the credit scale for FICO scores. Most big banks don't 0:17:18.119 --> 0:17:20.760 want to talk to anybody in the bottom half. It's 0:17:20.840 --> 0:17:24.280 just too much risk and too little reward. So particularly 0:17:24.320 --> 0:17:28.240 things like mortgages, Nah, they don't care. And that means 0:17:28.280 --> 0:17:30.480 that you know, the community banks, who were the ones 0:17:30.480 --> 0:17:34.119 who actually provide credit to communities right at the micro level, 0:17:34.359 --> 0:17:38.680 and particularly vulnerable communities that are not well served FAHA 0:17:38.840 --> 0:17:42.240 lending for example, that will go even more to non banks. 0:17:42.760 --> 0:17:45.200 And the irony, of course, is that the federal government, 0:17:45.320 --> 0:17:48.120 the home loan banks for example, don't deal with non banks, 0:17:48.320 --> 0:17:51.000 so three quarters of the industry is not supported. 0:17:51.320 --> 0:17:54.240 Right, This tighter credit is precisely what the Fed wants 0:17:54.240 --> 0:17:55.480 to do to slow downslation. 0:17:55.600 --> 0:17:57.800 They're going to get it because to your earlier points, 0:17:58.040 --> 0:18:00.960 they are stepping back. And it's not this loan office 0:18:01.000 --> 0:18:03.800 for survey, right, it's the treasurer walking into your office. 0:18:03.840 --> 0:18:06.080 You're the cfon. He says, I want to double cash 0:18:06.560 --> 0:18:07.480 by the end of the quarter. 0:18:08.800 --> 0:18:09.760 Well that makes sense. 0:18:09.920 --> 0:18:12.800 Look at everybody tapping the debt markets, right, yeah, but. 0:18:12.800 --> 0:18:16.480 The easiest way to raise cash is stop lending. Redemptions 0:18:16.480 --> 0:18:18.320 come in, you just don't redeploy them. 0:18:18.560 --> 0:18:22.520 I mean, for me, the ramifications seem like they could 0:18:22.520 --> 0:18:26.800 be amazing. Everyone's tightening credit as the price of money 0:18:26.840 --> 0:18:30.240 goes higher. Meanwhile, on the good side, we've been making 0:18:30.400 --> 0:18:32.400 trying to make as much stuff as we can. We're 0:18:32.400 --> 0:18:34.959 gonna end up with big fat inventories at the end 0:18:34.960 --> 0:18:37.520 of the year. I hope, in the form of much 0:18:37.600 --> 0:18:41.440 cheaper V eight engines from here because I've talked I 0:18:41.520 --> 0:18:43.720 talked to dealerships lately and they're like, they say the 0:18:43.720 --> 0:18:45.919 same thing that you do, Chris, about people with on 0:18:45.960 --> 0:18:47.719 the lower end of the ficos. They don't even want 0:18:47.760 --> 0:18:49.640 to hear about it. And right, they used to ask 0:18:49.680 --> 0:18:51.199 do you have a job? Now they want to know 0:18:51.240 --> 0:18:53.160 what job it is, and how much you get paid 0:18:53.359 --> 0:18:56.679 and how long you've worked there. They really care, well, they. 0:18:56.520 --> 0:18:58.760 Care, and also they know if they don't have more 0:18:58.800 --> 0:19:03.000 stringent standards, can't sell alone. Right, These loans are mostly 0:19:03.040 --> 0:19:06.680 originated for sale to investors, so you know, and a 0:19:06.800 --> 0:19:09.080 bank is even worse. The bank doesn't want to see 0:19:09.080 --> 0:19:11.960 a loan. It's not the middle of the fairway. So 0:19:12.080 --> 0:19:13.600 that's you know what I mean. The banks are even 0:19:13.640 --> 0:19:15.720 more picky than the cash investor. 0:19:15.400 --> 0:19:18.280