WEBVTT - Surveillance: Earnings Contraction with Han 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best an economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.400 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.840 Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app. 0:00:29.920 --> 0:00:31.440 Should we get to our guests with sure? 0:00:31.520 --> 0:00:34.040 Choose around the table with this usually on the other 0:00:34.120 --> 0:00:36.040 end of a camera, Anahan, it's been a fit to 0:00:36.040 --> 0:00:38.760 see in person. Thanks for bamdas from whilst fago as 0:00:38.800 --> 0:00:41.880 Tom just moves his autosport magazines. 0:00:41.400 --> 0:00:43.680 Away from a movement. You want to read a card table? 0:00:43.720 --> 0:00:46.280 You have Aston Martin coming up? Do you watch your one? 0:00:46.400 --> 0:00:48.400 I do we spoke of Ballou's Hamilton List. 0:00:48.440 --> 0:00:50.800 You're a Mersiti son, an't you? We'll catch up with 0:00:50.800 --> 0:00:53.320 Aston Martin later this how we'll talk about Fernando, who's 0:00:53.400 --> 0:00:54.800 rumored to be dating Taylor Swift. 0:00:54.840 --> 0:00:58.880 But Fernando is, oh my word, so far behind in 0:00:58.920 --> 0:00:59.400 the gossip. 0:00:59.480 --> 0:01:03.400 On the gossip, the rumor that Fernando is dating Taylor Swift, 0:01:03.680 --> 0:01:05.839 that's a story for another time. The wels Fanco Equity 0:01:05.880 --> 0:01:08.720 strategist joins us now to talk about stocks and a hand. 0:01:08.720 --> 0:01:11.120 You're and a team Chris Harvey leading the way for 0:01:11.160 --> 0:01:14.280 equities at WEWES looking for a ten percent correction at 0:01:14.280 --> 0:01:16.840 the headline sm P five hundred. What is it that 0:01:16.880 --> 0:01:18.280 you see that's going to lead to that correction? 0:01:18.920 --> 0:01:22.120 We're seeing really margin compression. We think that earnings are slowing, 0:01:22.400 --> 0:01:24.840 and right now where earning's projections are as we go 0:01:24.920 --> 0:01:28.039 through Q one reporting, they continue to believe pretty much 0:01:28.040 --> 0:01:30.160 a flat growth year over year for the S and 0:01:30.200 --> 0:01:33.200 P five hundred, we think that's too optimistic. So we're 0:01:33.240 --> 0:01:37.040 bringing our EPs number down about ten percent contraction and 0:01:37.080 --> 0:01:40.520 EPs growth. We think that's very reasonable in an environment 0:01:40.560 --> 0:01:45.800 that you expect GDP growth, slowing consumer and still inflationary pressure. 0:01:45.920 --> 0:01:47.920 So you put that in, you tack on still a 0:01:47.960 --> 0:01:51.520 pretty reasonable multiple of eighteen half That brings us lower. 0:01:51.640 --> 0:01:54.720 How does tech absolutely crushing it over the last week 0:01:55.000 --> 0:01:55.919 factor into your. 0:01:55.800 --> 0:01:58.840 Cod Absolutely something we're watching, but we think that it's 0:01:58.880 --> 0:02:01.280 getting a little ahead of itself. Right now you are 0:02:01.320 --> 0:02:04.520 seeing as well, why is that running ahead of itself? 0:02:04.560 --> 0:02:07.120 The yield markets you're down with the ten year round 0:02:07.160 --> 0:02:10.440 three a half. That is a move already expecting FED cuts. 0:02:10.480 --> 0:02:14.200 The market is expecting cuts after this meeting, and again 0:02:14.360 --> 0:02:16.880 that's just too soon for us. I think that realization 0:02:17.280 --> 0:02:21.760 and people having to move forward or out their expectation 0:02:21.840 --> 0:02:24.519 for monetary easing is going to make things a little 0:02:24.560 --> 0:02:25.800 tougher in this summer. 0:02:26.040 --> 0:02:28.760 To challenge your mathiveness at Yale, and I'm thinking now 0:02:28.800 --> 0:02:32.280 seeing Tela, the great quant finance guru, on the tail 0:02:32.360 --> 0:02:34.280 risks out there. If I look at the tails of 0:02:34.320 --> 0:02:37.160 the distribution, the risks of the distribution good and bad 0:02:37.680 --> 0:02:40.360 out to next year, can you see them or is 0:02:40.360 --> 0:02:41.839 it as opaque as you've ever seen? 0:02:42.360 --> 0:02:44.880 I certainly think there are things top of mind, actually, 0:02:44.919 --> 0:02:47.840 and that's what's got things so interesting. We know what 0:02:47.960 --> 0:02:50.000 to look at, which is not sure how to weigh 0:02:50.080 --> 0:02:52.880 each one. For example, we're looking at the commercial real 0:02:53.000 --> 0:02:55.519 estate space that's been a hot topic. What's going to 0:02:55.560 --> 0:02:58.040 happen if those loans can't get renewed? Another one is 0:02:58.160 --> 0:03:01.480 student loans. How does that impact consumer spending if student 0:03:01.520 --> 0:03:04.760 loans don't get dismissed. We're looking at these kind of 0:03:04.800 --> 0:03:08.000 factors and as well, what if the FED really doesn't 0:03:08.000 --> 0:03:10.959 start cutting. What if they just pause and hold Because. 0:03:10.760 --> 0:03:13.799 Of the litany of worries that all of our listeners 0:03:13.800 --> 0:03:15.920 and viewers have, there's got to be a good side 0:03:15.919 --> 0:03:18.040 of this, and that the SPX is recovered from a 0:03:18.080 --> 0:03:20.600 great bear market. We're back to negative three percent whatever 0:03:20.600 --> 0:03:25.080 it is, twelve months trailing. You're basically saying, take the 0:03:25.120 --> 0:03:27.280 summer off and take the rest of the year off. 0:03:27.360 --> 0:03:28.280 Right when you. 0:03:28.280 --> 0:03:32.560 Take the summer off under Anahan Wells Fargo economics, do 0:03:32.600 --> 0:03:36.360 you go to cash? How do you take the summer off? 0:03:36.400 --> 0:03:37.080 Based on your. 0:03:37.000 --> 0:03:39.880 Forty two hundred call, I think actually, rather than go 0:03:40.000 --> 0:03:42.640 full cash, we're not that bearish yet. We do think 0:03:42.680 --> 0:03:45.920 you can weather through this by looking at those secular growers. 0:03:45.960 --> 0:03:48.560 I still think there's opportunity. And you look in the 0:03:48.560 --> 0:03:51.400 cab good space as well, for example, and you're seeing 0:03:51.440 --> 0:03:54.640 that volumes are actually holding up, and all other sectors, 0:03:54.760 --> 0:03:58.000 especially even in something like staples like food area, you're 0:03:58.000 --> 0:04:01.600 seeing volumes shrink. So there'll are opportunities to keep that 0:04:01.720 --> 0:04:04.320 growth to plow through what could be that rough summer 0:04:04.320 --> 0:04:04.840 we talked about. 0:04:04.880 --> 0:04:08.000 And know it's difficult to identify specific names with you 0:04:08.080 --> 0:04:09.880 so I'm going to be delicate about asking this question. 0:04:10.520 --> 0:04:13.880 Are the cloud name secular grower is still oh? 0:04:13.920 --> 0:04:17.040 Well, you know, as someone who believes in that technology 0:04:17.080 --> 0:04:19.400 and certainly uses it and believes in the computing power 0:04:19.440 --> 0:04:22.160 of it, I do still think that there's growth opportunities. 0:04:22.360 --> 0:04:25.120 But like we said, especially with the software spin tech 0:04:25.160 --> 0:04:28.440 itself overall has had such a hot run, It's not 0:04:28.520 --> 0:04:32.239 somewhere where I'm ready to really pour in the investments now. 0:04:32.320 --> 0:04:34.200 So what is a secular growth story that you do 0:04:34.279 --> 0:04:35.440 want to get behind at the moment. 0:04:36.000 --> 0:04:38.160 So besides the cop good space where we do like 0:04:38.240 --> 0:04:40.920 as well, media and entertainment, and now again that too 0:04:40.960 --> 0:04:43.360 has had a great start to the year. We still 0:04:43.400 --> 0:04:46.200 think that it's attractive. We still think there's opportunities, and 0:04:46.480 --> 0:04:48.720 a lot of it is thinking about where consumers will 0:04:48.760 --> 0:04:51.400 continue to spend even as they have to tighten the belt, 0:04:51.560 --> 0:04:54.120 and part of that is really in the experiences in 0:04:54.160 --> 0:04:56.080 the services that they can enjoy. 0:04:56.360 --> 0:04:58.240 Can we get an extra level of detail here, is 0:04:58.240 --> 0:05:01.400 this Tom spending more money on streat gaps? What exactly 0:05:01.480 --> 0:05:02.279 you're talking about? 0:05:02.720 --> 0:05:04.719 It could be him watching a more f one and 0:05:04.760 --> 0:05:08.200 spending there. That certainly is true. There is that push. 0:05:08.400 --> 0:05:10.760 But again it's more of what is going to relatively 0:05:10.800 --> 0:05:14.320 outperform when people start pulling back on their spending, pulling 0:05:14.360 --> 0:05:17.240 back on the revenge travel spending year, talking about how 0:05:17.240 --> 0:05:19.279 those prices in airlines are still expensive. 0:05:19.360 --> 0:05:21.800 So you think the airline story is done? Is can 0:05:21.880 --> 0:05:23.800 I go that far? Do you think it's done? 0:05:24.040 --> 0:05:26.360 I wouldn't say it's done, but it's not somewhere where 0:05:26.360 --> 0:05:28.320 if I had cash to put to work, where I 0:05:28.320 --> 0:05:29.680 would rotate into right. 0:05:29.560 --> 0:05:31.960 Now, Okay, that sounds like it's done. 0:05:32.279 --> 0:05:34.360 You know, I look at the Wells Fargo economic call, 0:05:34.720 --> 0:05:40.479 and you know your economics team looking at where GDP is. 0:05:40.480 --> 0:05:43.360 Is there enough nominal GDP to keep this game going? 0:05:43.400 --> 0:05:45.000 To me, that's the heart of the matter. How do 0:05:45.040 --> 0:05:48.600 you fold in Wells Fargo economics into your equity analysis. 0:05:48.800 --> 0:05:52.440 So our expectation for actually GDP growth is just above 0:05:52.480 --> 0:05:54.919 one percent for this year, but pretty much a flat 0:05:54.920 --> 0:05:57.640 twenty twenty four, and that is concerning. But I think 0:05:57.720 --> 0:06:00.000 the sharpest pain points where we see the most GDP 0:06:00.200 --> 0:06:03.440 contraction is four Q and one Q. Four Q this 0:06:03.560 --> 0:06:05.919 year and the beginning of next year is going to 0:06:05.920 --> 0:06:09.400 be the toughest drop in GDP. But that doesn't necessarily 0:06:09.440 --> 0:06:13.240 align with when we expect to see the toughest earnings contraction. 0:06:13.600 --> 0:06:16.200 Okay, just to be specific about that, just final question, 0:06:16.279 --> 0:06:18.800 when is that Ernie's contraction. What's the window that you 0:06:18.839 --> 0:06:19.800 and a team you're looking for. 0:06:20.120 --> 0:06:22.280 We think, really it's this year, and we think it's 0:06:22.279 --> 0:06:25.320 already occurring. You already have been seeing those margins come 0:06:25.400 --> 0:06:28.240 under pressure and you've seen that four Q last year 0:06:28.279 --> 0:06:30.680 earnings came in a little lower than projected. I think 0:06:30.720 --> 0:06:33.520 that continues and these are the quarters now where it's 0:06:33.520 --> 0:06:36.400 going to be toughest. That realization is what's going to 0:06:36.440 --> 0:06:39.880 push equity multiples and equity levels lower. 0:06:40.000 --> 0:06:41.719 And a hand of Wes Faga and a great to 0:06:41.720 --> 0:06:43.919 do this in person. Wonderful, really good to see you. 0:06:44.000 --> 0:06:46.120 Thank you. The team at West Fago looking for a 0:06:46.120 --> 0:06:49.000 ten percent correction in the next three to six months 0:06:49.400 --> 0:06:50.680 off the back of earnings. 0:06:54.240 --> 0:06:55.839 Where the snow and he's helped us so much. 0:06:55.839 --> 0:06:58.760 I think of Ken Leon over at CEFII, Michael Mayo 0:06:59.160 --> 0:07:02.240 when we can dress him in Gerard Cassidy up early 0:07:02.279 --> 0:07:05.240 in London, had a US bank equity strategy at the 0:07:05.279 --> 0:07:09.080 Royal Bank of Canada, and we welcome him this morning, Gerard, 0:07:09.120 --> 0:07:11.000 I'm gonna go to the PowerPoint. I thought it was 0:07:11.040 --> 0:07:14.880 really quite nicely done by JP Morgan. I'm service massage 0:07:14.920 --> 0:07:17.760 by his staff of forty two. And buried at the 0:07:17.760 --> 0:07:22.200 bottom was an internal rate to return guestament of twenty percent. 0:07:22.400 --> 0:07:24.200 You and I aren't going to go to an iterative 0:07:25.640 --> 0:07:28.920 discussion of the equation, but I fell off my chair. 0:07:29.400 --> 0:07:32.320 Is this really an IRR twenty percent? Is it that 0:07:32.440 --> 0:07:36.320 lucrative for Fortress Diamond, Tom? 0:07:36.360 --> 0:07:36.720 It is? 0:07:36.880 --> 0:07:39.280 And thank you for having me on the program from 0:07:39.280 --> 0:07:42.160 London here, And I would point out that one of 0:07:42.200 --> 0:07:45.520 the reasons the internal rate of return is so strong 0:07:46.040 --> 0:07:49.440 is that in an agreement with the FDIC, which is 0:07:49.560 --> 0:07:53.400 very common the FDIC, when they sell these banks out 0:07:53.400 --> 0:07:57.160 of receivership, we'll take a law sharing agreement with the buyer. 0:07:57.800 --> 0:08:00.000 As a result, when you have one of those laws 0:08:00.000 --> 0:08:03.240 sharing agreements, the amount of capital that the bank is 0:08:03.280 --> 0:08:06.960 required to hold against those assets goes down. And that's 0:08:07.040 --> 0:08:09.840 one of the reasons the IRR is as strong as 0:08:09.840 --> 0:08:10.160 it is. 0:08:10.760 --> 0:08:14.080 What kind of pop do you calculate, JP Morgan will 0:08:14.120 --> 0:08:17.880 get if interest rates actually come in, if we disinvert, 0:08:18.360 --> 0:08:20.880 if we get ourselves back to some form of normal 0:08:21.000 --> 0:08:24.720 interst rate structure. To me, it's an incalculable delta. It's 0:08:24.800 --> 0:08:29.520 just a huge number if they get the markets to cooperate, you. 0:08:29.480 --> 0:08:31.320 Know, and Tom, you really put your thumb on it, 0:08:31.400 --> 0:08:34.360 because if you go back to ninety four ninety five, 0:08:34.400 --> 0:08:36.959 and I'm not suggesting we're going to have that Goldilocks 0:08:37.240 --> 0:08:40.600 economy we had in ninety five, but Greensman took rates 0:08:40.679 --> 0:08:43.440 up from three to six percent and we didn't have 0:08:43.480 --> 0:08:47.400 a recession, and then he started cutting rates in ninety five. 0:08:47.720 --> 0:08:50.360 The bank stocks were up fifty five percent that year. 0:08:50.640 --> 0:08:53.360 So if we don't have a big recession as many 0:08:53.400 --> 0:08:56.400 people think we are going to have, the credit problems 0:08:56.400 --> 0:08:58.840 for the banks will not be that severe and rates 0:08:58.880 --> 0:09:01.200 will start coming down probably next year. 0:09:01.559 --> 0:09:03.840 You and I studied at the altar of Henry Kaufman. 0:09:03.920 --> 0:09:06.400 He was so kind to me when I first joined Bloomberg. 0:09:06.480 --> 0:09:10.360 Mister Cassidy. Henry Kaufman is quoted by John Authurs, Folks, 0:09:10.440 --> 0:09:13.920 Matt Levine, John Authors. Read them today if you're part 0:09:13.960 --> 0:09:17.720 of Global at Wall Street. Mister Authors talks about Kaufman 0:09:18.240 --> 0:09:21.839 is a quasi public utility. Is that what we've gotten 0:09:21.880 --> 0:09:24.960 now with a combination of JP Morgan and Bank of America. 0:09:25.080 --> 0:09:26.440 Are they a public utility? 0:09:28.120 --> 0:09:31.800 Tommy, You know, I wouldn't refrain too much from saying that, 0:09:31.840 --> 0:09:35.080 but other than to say the financial utilities, and that's 0:09:35.080 --> 0:09:37.960 not a negative that it's a positive. If we could 0:09:38.000 --> 0:09:42.200 have banks that consistently pay their dividends through the cycle 0:09:42.559 --> 0:09:46.520 and also deliver you know, mid to lower teens ro 0:09:47.600 --> 0:09:51.360 return on tangible common equity, those are very attractive returns, 0:09:51.520 --> 0:09:55.439 So you could call them financial utilities, in my opinion. 0:09:55.200 --> 0:09:57.800 Great for Shahoudis. I want to it's great for customers. 0:09:57.880 --> 0:09:58.120 Jared. 0:09:58.200 --> 0:10:01.720 Let's talk about that the deposit that they're assuming JP 0:10:01.840 --> 0:10:04.720 Morgan from First Republic. You asked about this on the 0:10:04.760 --> 0:10:07.640 call yesterday, Jared, how do those deposits repriced? Did you 0:10:07.640 --> 0:10:08.960 get some clarity on that. 0:10:10.600 --> 0:10:14.880 John, What happens normally in bank failures. Quite often the 0:10:15.000 --> 0:10:19.439 acquirers are able to renegotiate down those rates of interest 0:10:19.520 --> 0:10:23.160 on those deposits, not the term CDs. Those are contractual. 0:10:23.440 --> 0:10:26.120 But that was the reason for the question, because that 0:10:26.280 --> 0:10:30.680 makes the deal even more attractive. To know, JP Morgan 0:10:30.760 --> 0:10:32.640 and quite often, and I'm not saying this happened with 0:10:32.760 --> 0:10:35.880 First Republic. But quite often what happens when these banks 0:10:36.120 --> 0:10:39.480 head into receivership they have to pay up for deposits 0:10:39.600 --> 0:10:42.320 to bring money in. That's why the buyers get to 0:10:42.400 --> 0:10:46.080 reprice them downwards. What makes it more profitable for the buyer. 0:10:46.240 --> 0:10:48.440 I left the way that Jeremy Bonnham, the CFO of 0:10:48.520 --> 0:10:52.000 JP Morgan, addressed this. Listen to this language. I think 0:10:52.040 --> 0:10:54.760 the reprice experience will blend over time into the rest 0:10:54.760 --> 0:10:56.600 of our deposit franchise. Do you know what that means? 0:10:56.640 --> 0:10:56.840 Tom? 0:10:57.520 --> 0:10:59.600 Their deposits and their rate of return will come down 0:10:59.600 --> 0:11:02.560 to zero over time because I've got JP Morgan, John, 0:11:02.600 --> 0:11:05.720 They're not paying much for deposits and they don't need to. Jod, 0:11:05.800 --> 0:11:09.160 I was wondering yesterday whether you thought they were downplaying 0:11:09.200 --> 0:11:12.440 to some extent for pr reasons, just how profitable this 0:11:12.520 --> 0:11:16.040 deal might be for JP Morgan, John. 0:11:16.160 --> 0:11:17.400 I think you said it well. 0:11:17.480 --> 0:11:21.199 I think it's an extremely profitable deal for JP Morgan. 0:11:21.800 --> 0:11:25.360 Their size and their strength gave them the advantage. We 0:11:25.400 --> 0:11:28.720 wrote last night in our research note on this transaction 0:11:29.160 --> 0:11:33.360 that the prior to transactions, the loans were marked to 0:11:33.520 --> 0:11:37.120 market to about seventy seven cents on the dollar and 0:11:37.200 --> 0:11:39.800 in the case of JP Morgan yesterday they marked them 0:11:39.800 --> 0:11:42.199 to eighty three cents on the dollar, so they didn't 0:11:42.200 --> 0:11:44.800 have to be as aggressive as maybe some of the 0:11:44.840 --> 0:11:47.199 other bidders who were bidding on this, and that was 0:11:47.240 --> 0:11:48.360 an advantage they had. 0:11:48.559 --> 0:11:51.200 There's the math, folks, you get it from Joad Cassidy, 0:11:51.280 --> 0:11:53.319 not from us. We go to the pros and John, 0:11:53.679 --> 0:11:56.240 you got a bond at par or a loan at 0:11:56.280 --> 0:11:59.280 par down to seventy seven cents and JP Morgan paid 0:11:59.320 --> 0:12:00.280 up where the others. 0:12:00.360 --> 0:12:03.359 So, Jared, I've got experience of dealing with distressed institutions 0:12:03.520 --> 0:12:07.400 Washington Mutual bad Jamie, time has been that done that, Judge, 0:12:07.440 --> 0:12:10.040 you addressed that question as well. Why is this so 0:12:10.160 --> 0:12:12.680 different and why in five years want me to be 0:12:12.679 --> 0:12:15.680 sitting care rethinking everything we've just said in the last 0:12:15.679 --> 0:12:16.559 twenty four hours. 0:12:18.160 --> 0:12:22.400 John, the major difference in Jamie Diamond addressed this yesterday 0:12:22.400 --> 0:12:25.679 to my question as well, which is this was a 0:12:25.720 --> 0:12:31.120 deposit flight deposit run problem. It was a classic duration 0:12:31.280 --> 0:12:35.840 issue of long assets on duration short umfunding. This was 0:12:35.920 --> 0:12:39.080 not a credit problem, and that and First Republic had 0:12:39.200 --> 0:12:42.480 pristine credit and I would suggest that this is a 0:12:42.800 --> 0:12:46.080 very different situation As a result, it's not as risky 0:12:46.360 --> 0:12:49.320 for JP Morgan and the others because this is a 0:12:49.400 --> 0:12:52.920 mismatch of assets versus liabilities, and they're now going to 0:12:52.960 --> 0:12:56.480 benefit from the marketing of market of those assets and 0:12:56.480 --> 0:12:57.800 the yields that that creates. 0:12:58.080 --> 0:13:00.439 George wonderful coutage. As a wise, I'm going to see 0:13:00.480 --> 0:13:03.080 you in London as well, Jared Cassidy that of obviously 0:13:03.120 --> 0:13:04.760 Capital Marcus. Thank you Jered. 0:13:15.160 --> 0:13:16.200 Right now and this is a joy. 0:13:16.240 --> 0:13:19.840 As John and I continue our coverage of this banking crisis, 0:13:20.280 --> 0:13:22.920 it pays to have somebody with real worlds experience. He 0:13:23.080 --> 0:13:27.800 is global Currency's an interest rate strategy at Australia's Macquarie, 0:13:27.800 --> 0:13:30.600 but far more Terry Weisman is something that has lived 0:13:30.800 --> 0:13:33.400 what so many other people are doing. I want to 0:13:33.440 --> 0:13:37.360 go back to Alan Schwartz, David Malpass, John writing you 0:13:37.760 --> 0:13:40.960 emishioh and it blew up in March of two thousand 0:13:41.000 --> 0:13:44.679 and eight at bear Stearns. From your distance, but your 0:13:44.800 --> 0:13:49.680 tangible experience of collapse. How is JP Morgan different in 0:13:49.840 --> 0:13:53.400 two thousand and eight than JP Morgan is in twenty 0:13:53.520 --> 0:13:54.240 twenty three. 0:13:54.840 --> 0:13:57.080 Let me instead speaking about JP Morgan, Tom, let me 0:13:57.080 --> 0:14:00.559 just talk about the banking pastor generally, thousand and eight 0:14:00.679 --> 0:14:03.440 was I think qualitatively different than the situation we're seeing 0:14:03.440 --> 0:14:05.600 now for the banks in the United States. In two 0:14:05.640 --> 0:14:08.240 thousand and eight, you had a situation where the primary 0:14:08.280 --> 0:14:11.280 problem at the banks was the asset side of the 0:14:11.280 --> 0:14:14.800 balance sheet. It was generally a situation where there were 0:14:14.880 --> 0:14:17.920 too many mortgages that went bad too quickly. That's an 0:14:17.920 --> 0:14:22.120 asset side problem, it's a collateral side problem. What we're 0:14:22.120 --> 0:14:25.240 seeing now is different. What we're seeing now primarily is 0:14:25.320 --> 0:14:28.280 deposit flight. In other words, it's a liability side problem. 0:14:28.440 --> 0:14:30.640 It's lack of confidence in the banks. Yes, it may 0:14:30.640 --> 0:14:32.720 be lack of confidence in the banks because people are 0:14:32.720 --> 0:14:36.840 worried about their ability to continue to honor their obligations, 0:14:36.840 --> 0:14:40.000 their liabilities, their deposits. But nonetheless, this is a crisis 0:14:40.000 --> 0:14:42.520 that has started from the liability side, and I think 0:14:42.560 --> 0:14:45.120 that makes it qualitatively different. It actually makes it easier 0:14:45.160 --> 0:14:48.760 for entities like the Federal Reserve to solve because the 0:14:48.760 --> 0:14:52.080 Federal Reserve has backstops. It could come in and replace 0:14:52.360 --> 0:14:55.760 the liability side that the banks are losing. Right if 0:14:55.760 --> 0:14:57.920 at the one dollars deposits leaves, the bank can simply 0:14:57.960 --> 0:14:59.920 go to the FED and borrow from on the Prime 0:15:00.480 --> 0:15:03.720 Credit Facility or from the new BTFP and get that 0:15:03.760 --> 0:15:06.360 dollar back, rebuild its base of liabilities, and continue to 0:15:06.400 --> 0:15:09.000 do what it's doing. So I think this is qualitatively 0:15:09.000 --> 0:15:10.480 different than two thousand. 0:15:10.120 --> 0:15:14.720 And eight, And can interest rates assist government institutions? And 0:15:14.760 --> 0:15:18.920 can interest rates assist JP Morgan here by getting the 0:15:18.960 --> 0:15:21.520 win behind him over the next one two and five 0:15:21.640 --> 0:15:23.120 years to make this easier. 0:15:23.160 --> 0:15:27.080 There's nothing better in promoting confidence than economic growth, nominal 0:15:27.120 --> 0:15:30.760 income growth, certainly, because obligations are typically in nominal terms. 0:15:30.920 --> 0:15:32.560 But if you can't get nominal growth, you might as 0:15:32.560 --> 0:15:35.040 well just get real growth. I guess the question comes 0:15:35.040 --> 0:15:37.240 down to do lower interest rates help growth? I think 0:15:37.280 --> 0:15:40.920 they do right. If the Fed were to lower interest 0:15:41.000 --> 0:15:43.760 rates these days, certainly you would get some inflation, presumably, 0:15:44.040 --> 0:15:46.000 but that would be coincident with nominal growth. It would 0:15:46.000 --> 0:15:50.200 help corporations, bank and every obligator in the economy honor 0:15:50.240 --> 0:15:53.720 those obligations, honor their debts. I think that would reduce 0:15:53.760 --> 0:15:55.280 the amount of financial stress in the economy. 0:15:55.360 --> 0:15:58.600 Let's talk about something that's not promoting confidence. The debts 0:15:58.640 --> 0:16:02.120 samely divide down in Washington, people are already exhausted about it, 0:16:02.120 --> 0:16:05.360 and negotiations haven't really even started to get going. Now, Terry, 0:16:05.360 --> 0:16:07.160 you've got a different view on this. Can you just 0:16:07.160 --> 0:16:08.720 walk us through piece by piece? And we have time 0:16:08.760 --> 0:16:10.800 to do this, so just go through peace by piece. 0:16:10.840 --> 0:16:13.400 Why you think this can get addressed. 0:16:13.040 --> 0:16:16.200 Well, first of all, we've had examples of a debt 0:16:16.240 --> 0:16:19.160 sealing crisis in the past before and they have found resolution. Now, 0:16:19.160 --> 0:16:20.440 I'm not going to say that this is the same, 0:16:20.920 --> 0:16:23.120 but I think the differences today are political, they're not 0:16:23.160 --> 0:16:25.960 really economic. Why do I say that, Because Kevin McCarthy 0:16:26.480 --> 0:16:29.280 wanted the acclamation of his party to become speaker, and 0:16:29.280 --> 0:16:31.640 he had to make certain promises. And among the promises 0:16:31.680 --> 0:16:34.560 he made, given that this was January and we were 0:16:34.600 --> 0:16:37.200 already coming up against the dead ceiling, Janet Yellen had 0:16:37.200 --> 0:16:39.240 said so in January, one of the promises he made 0:16:39.280 --> 0:16:41.200 was that he wasn't going to back down with respect 0:16:41.240 --> 0:16:43.600 to getting out of the administration what he wants in 0:16:43.680 --> 0:16:47.320 terms of spending cuts if he's going to go with 0:16:47.440 --> 0:16:51.960 a debt sealing increase. Unfortunately, he got the speakership, and 0:16:52.000 --> 0:16:54.440 now he painted himself in a quarter because he made 0:16:54.480 --> 0:16:57.480 that promise to his caucus, and he can't really back 0:16:57.520 --> 0:17:01.880 out that easily. So now you have a a stone 0:17:01.960 --> 0:17:04.520 heartstone coming up against a hard wall, etc. You've got 0:17:04.560 --> 0:17:08.680 two intransigent sides. I actually think that we might come 0:17:08.720 --> 0:17:10.679 down to the wire, and I actually think that the 0:17:10.720 --> 0:17:13.320 way we may resolve this is not to the traditional 0:17:13.359 --> 0:17:17.760 means of a debate and negotiation that results in a compromise. 0:17:18.359 --> 0:17:21.200 I think we may approach a crisis. But I think 0:17:21.240 --> 0:17:24.760 the cleaner solution here I get to if we don't 0:17:24.800 --> 0:17:27.520 get to a political resolution, is simply for the US 0:17:27.600 --> 0:17:29.600 Treasury to continue to do what it's doing, i e. 0:17:29.720 --> 0:17:33.879 Issue debt and get challenged in the courts by the opposition. 0:17:33.920 --> 0:17:36.239 Now remember they've already passed the spending, so there's some 0:17:36.359 --> 0:17:38.359 legal basis for the view that they have to issue 0:17:38.359 --> 0:17:40.359 the debt to support that spending, because that was a 0:17:40.359 --> 0:17:43.160 bill that was passed. But what happened to that that point, well, 0:17:43.480 --> 0:17:45.360 I think it will go immediately to the Supreme Court. 0:17:45.400 --> 0:17:47.480 I think the Supreme Court could issue an injunction. I 0:17:47.480 --> 0:17:49.520 think the Supreme Court has legal basis for doing that. 0:17:49.600 --> 0:17:52.920 They have amended fourteen Section four says the debt of 0:17:52.920 --> 0:17:55.439 the United States will not be questioned, and that's a 0:17:55.480 --> 0:17:58.320 legal basis for telling the administration you can do what 0:17:58.359 --> 0:18:00.560 you want. And if that happens, by the way, it'll 0:18:00.560 --> 0:18:04.040 put the debt ceiling situation on ice forever because now 0:18:04.080 --> 0:18:07.240 you have a clean, clear judicial ruling. 0:18:07.400 --> 0:18:09.359 So that's a clean that's a clean way to do it. 0:18:09.560 --> 0:18:11.320 There are other there are there's no sound to clean. 0:18:11.400 --> 0:18:12.520 Let's just say, well, well, look, I. 0:18:12.520 --> 0:18:14.400 Mean, I mean, I mean to come in here and 0:18:14.400 --> 0:18:16.840 and and have the Supreme Court, which is coequal to 0:18:16.880 --> 0:18:19.760 the other two branches of government, and effectively say no, 0:18:19.920 --> 0:18:20.679 this is our perview. 0:18:20.760 --> 0:18:23.240 No outcome would be clean. Show the process not so well. 0:18:23.320 --> 0:18:25.240 It can happen the course of forty eight hours. You 0:18:25.280 --> 0:18:27.960 don't really need, you know, a lengthy hearings on the 0:18:27.960 --> 0:18:30.120 part of the Supreme Court. They have the Constitution right there. 0:18:30.160 --> 0:18:33.240 They can read what's Amendment fourteen. Section four says. It's 0:18:33.320 --> 0:18:35.640 very clear to me. You should read it yourself. I mean, 0:18:35.840 --> 0:18:39.360 it's it's it's undeniable that this is not something that's 0:18:39.400 --> 0:18:42.560 constitutional to let the to let to let intentionally let 0:18:42.840 --> 0:18:47.040 certainly intentionally let the payments go unpaid. There's another way 0:18:47.080 --> 0:18:48.960 to do this. Of course, the Treasury has you know, 0:18:49.119 --> 0:18:53.159 hundreds of billions of gold in storage right at Fort Knox. 0:18:53.720 --> 0:18:55.200 One way to do this is simply to issue gold 0:18:55.240 --> 0:18:57.479 certificates to the Federal Reserve and have the Federal Reserve 0:18:57.560 --> 0:19:04.160 continue to fund uh the the the government's operations through 0:19:04.160 --> 0:19:04.639 this period. 0:19:04.960 --> 0:19:05.679 That's a solution. 0:19:06.119 --> 0:19:08.920 Look, there are a few workarounds. People have proposed these. 0:19:08.960 --> 0:19:10.439 You can go on the web and you can read them, 0:19:10.440 --> 0:19:12.119 and they tap it to be cleaner than the messy 0:19:12.160 --> 0:19:14.320 situation we might get ourselves into the next few weeks. 0:19:14.400 --> 0:19:17.120 This is a dissertation, folks, and the history of debt 0:19:17.160 --> 0:19:19.719 coming out of World War two. Terry, how much of 0:19:19.720 --> 0:19:23.560 this is almost religious in nature. We have a culture 0:19:23.600 --> 0:19:26.800 in this America. I'm going to generalize it's Calvinists, but 0:19:26.840 --> 0:19:28.880 that's unfair to the gentleman from Switzerland. 0:19:29.560 --> 0:19:31.440 Debt is bad and. 0:19:31.480 --> 0:19:34.440 Heil Broner and Bernstein wrote a classic monograph on his 0:19:34.520 --> 0:19:35.360 thirty years. 0:19:35.119 --> 0:19:38.600