1 00:00:05,080 --> 00:00:08,440 Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 2 00:00:08,480 --> 00:00:12,240 Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day 3 00:00:12,320 --> 00:00:16,800 Speaker 1: for insight from the best and economics, geopolitics, finance and investment. 4 00:00:17,239 --> 00:00:22,000 Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 5 00:00:22,239 --> 00:00:26,560 Speaker 1: anywhere you get your podcasts, and always I'm Bloomberg dot Com, 6 00:00:26,600 --> 00:00:30,360 Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Right now, 7 00:00:30,800 --> 00:00:33,640 Speaker 1: it's going to be very interesting to see the ballet here. 8 00:00:33,720 --> 00:00:36,080 Speaker 1: This has been an annual. I say it's to say, 9 00:00:36,080 --> 00:00:41,000 Speaker 1: a monthly ritual of John Farrell talking with the gentleman 10 00:00:41,040 --> 00:00:42,880 Speaker 1: from Boston. I think it's because the way the British 11 00:00:43,000 --> 00:00:45,320 Speaker 1: were treated in the Revolutionary War. I think that's I 12 00:00:45,400 --> 00:00:49,160 Speaker 1: think that as a conversation, and the answer is now 13 00:00:49,240 --> 00:00:52,680 Speaker 1: made even more interesting as Secretary of Labor will exit 14 00:00:53,159 --> 00:00:57,160 Speaker 1: and he will represent the players of his national hockey 15 00:00:57,320 --> 00:00:59,680 Speaker 1: league with a good jobs report. Today, the Dow down 16 00:00:59,720 --> 00:01:03,680 Speaker 1: one one hundred and eighty points. John Farrow was Secretary Walsh. 17 00:01:03,880 --> 00:01:05,360 Speaker 1: I'm pleased to say that joining us now is the 18 00:01:05,400 --> 00:01:07,920 Speaker 1: US Labor Secretary Morty walshon he joins us from Washington. 19 00:01:08,360 --> 00:01:10,720 Speaker 1: Secondy Walsh, what a morning for it Just amazing moves 20 00:01:10,720 --> 00:01:13,319 Speaker 1: in this market that we can discuss, amazing moves on 21 00:01:13,319 --> 00:01:16,200 Speaker 1: the West coast with a financial institution. Secondly, Walsh, you 22 00:01:16,200 --> 00:01:18,360 Speaker 1: get to represent the administration this morning. I just wonder 23 00:01:18,440 --> 00:01:20,760 Speaker 1: what your thoughts on what have been what's been developing 24 00:01:20,760 --> 00:01:23,959 Speaker 1: in the last twenty four hours or side. Well, certainly 25 00:01:24,160 --> 00:01:26,039 Speaker 1: on the jobs front, we had a good day, but 26 00:01:26,319 --> 00:01:28,560 Speaker 1: as you have been reporting for the last I've heard 27 00:01:28,600 --> 00:01:31,320 Speaker 1: you for the last fifteen minutes, a lot of concern 28 00:01:31,680 --> 00:01:34,600 Speaker 1: in different areas, and hopefully we can continue to move 29 00:01:34,600 --> 00:01:37,000 Speaker 1: forward here. I know the Secretary Ellen is up at 30 00:01:37,040 --> 00:01:42,120 Speaker 1: Capitol Hill today testifying. There's lots of concerns about about 31 00:01:42,480 --> 00:01:44,520 Speaker 1: what the future of the stock market is. I know that. 32 00:01:44,560 --> 00:01:46,840 Speaker 1: But when it comes to jobs, we have a real 33 00:01:46,920 --> 00:01:49,040 Speaker 1: good We have a good jobs report and good signs 34 00:01:49,120 --> 00:01:51,200 Speaker 1: all along. Are you worried that we're starting to see 35 00:01:51,240 --> 00:01:55,760 Speaker 1: things break as the Federal Reserve tries to address inflation. No, 36 00:01:55,960 --> 00:01:58,080 Speaker 1: because we've been talking about now and people have been 37 00:01:58,080 --> 00:02:00,320 Speaker 1: concerned about it for the last year. Really, and when 38 00:02:00,360 --> 00:02:02,800 Speaker 1: you think about what we're doing here, we're seeing we're 39 00:02:02,800 --> 00:02:05,920 Speaker 1: seeing jobs being added, we're seeing participation rate going up. 40 00:02:06,320 --> 00:02:09,680 Speaker 1: We're seeing opportunities for even further participation rate by making 41 00:02:09,680 --> 00:02:15,520 Speaker 1: some investments, and certainly we're seeing incremental steps in the 42 00:02:16,480 --> 00:02:18,639 Speaker 1: inflation coming down, so we need to continue to stay 43 00:02:18,680 --> 00:02:21,480 Speaker 1: focused on that. Secondly, well, sorry, I froze there for 44 00:02:21,480 --> 00:02:23,919 Speaker 1: a second because somebody behind is talking, so I kind 45 00:02:23,919 --> 00:02:25,960 Speaker 1: of cut in my head. Don't worry, it's fine. It's 46 00:02:25,960 --> 00:02:27,519 Speaker 1: the last interview we get to do together because I 47 00:02:27,520 --> 00:02:28,920 Speaker 1: know you head into the exit too, so I'll give 48 00:02:28,919 --> 00:02:30,639 Speaker 1: you the time. I'm gonna miss you. I'm gonna miss you, 49 00:02:30,720 --> 00:02:33,680 Speaker 1: Gonna miss you too. Secondly, for a couple more questions, 50 00:02:33,680 --> 00:02:35,880 Speaker 1: didn't there? If I can, we heard a little bit 51 00:02:35,919 --> 00:02:37,639 Speaker 1: earlier this week for the Chairman of the Federal Reserve. 52 00:02:38,080 --> 00:02:39,680 Speaker 1: He took a lot of flat, a lot of heat 53 00:02:39,760 --> 00:02:42,519 Speaker 1: from some Democratic senators, including Senator Warren, who said that 54 00:02:42,560 --> 00:02:44,720 Speaker 1: maybe he was pushing this too far it could lead 55 00:02:44,720 --> 00:02:46,560 Speaker 1: to people losing their jobs, and he said, would working 56 00:02:46,600 --> 00:02:48,520 Speaker 1: people be better off if we just walk away from 57 00:02:48,520 --> 00:02:52,560 Speaker 1: our jobs with inflation of five six percent? Secondly, Welsh, 58 00:02:52,600 --> 00:02:54,400 Speaker 1: how did you feel when you hurt that interaction earlier 59 00:02:54,400 --> 00:02:57,840 Speaker 1: this week? What were you thinking? Listen, as I said 60 00:02:57,840 --> 00:02:59,840 Speaker 1: from from BA one, my focus here is to get 61 00:02:59,919 --> 00:03:02,240 Speaker 1: us many people back to work as possible and continue 62 00:03:02,240 --> 00:03:04,919 Speaker 1: to see wages go up working with business so business 63 00:03:05,000 --> 00:03:07,040 Speaker 1: is successful. That's what my focus has been for the 64 00:03:07,120 --> 00:03:09,240 Speaker 1: last two years here at the Department of Labor. That's 65 00:03:09,240 --> 00:03:11,480 Speaker 1: been the President's focus, and we're going to continue to 66 00:03:11,480 --> 00:03:13,799 Speaker 1: continue on that path. I know you're heading to the exit, 67 00:03:13,840 --> 00:03:16,720 Speaker 1: your replacement facing a little bit of scrutiny right now. 68 00:03:16,840 --> 00:03:20,000 Speaker 1: You work closely with her secondary Welsh. Is it a 69 00:03:20,080 --> 00:03:22,639 Speaker 1: ringed endorsement from your side? Can you give her some 70 00:03:22,680 --> 00:03:26,440 Speaker 1: words to support Absolutely. We've spent the last couple weeks 71 00:03:26,480 --> 00:03:31,440 Speaker 1: Secretary Secretary depinutey Secretary Sue myself meeting with business, meeting 72 00:03:31,440 --> 00:03:33,680 Speaker 1: with the US Chamber, and meeting with the Business Roundtable, 73 00:03:33,960 --> 00:03:37,320 Speaker 1: meeting with the independent associations. So we're meeting with all 74 00:03:37,320 --> 00:03:40,200 Speaker 1: those organizations just to talk about what the plan is 75 00:03:40,200 --> 00:03:42,000 Speaker 1: here at the Department label we've been we've been connected 76 00:03:42,000 --> 00:03:43,560 Speaker 1: at the hip for the last two years. We work 77 00:03:43,720 --> 00:03:46,320 Speaker 1: very closely together. Business I think has a very good 78 00:03:46,320 --> 00:03:48,400 Speaker 1: feel for me as Secretary of Labor, and they show 79 00:03:48,640 --> 00:03:50,400 Speaker 1: they'll have the same field for Julie Sue and Julie 80 00:03:50,400 --> 00:03:53,320 Speaker 1: Sue gets nominated secret prove we've got to leave it there. 81 00:03:53,320 --> 00:03:55,120 Speaker 1: Thank you for your service, sir, and thank you for 82 00:03:55,160 --> 00:03:57,720 Speaker 1: these monthly interactions. They've been fun. I've enjoyed them, and 83 00:03:57,760 --> 00:03:59,960 Speaker 1: hopefully we get to catch up soon in your new role. 84 00:04:04,160 --> 00:04:07,560 Speaker 1: The former governor of the Federal Reserve System Randall Krosner, 85 00:04:07,680 --> 00:04:11,040 Speaker 1: before we spoke about the financial side. Now Krasner on 86 00:04:11,120 --> 00:04:15,960 Speaker 1: our monetary system. Randy, in this milieu, can you use theory? 87 00:04:16,240 --> 00:04:19,760 Speaker 1: Can you use anything that was invented at Yale years 88 00:04:19,760 --> 00:04:23,080 Speaker 1: ago or at London School of Economics? The theories that matter? 89 00:04:23,440 --> 00:04:27,800 Speaker 1: Are they valid and beneficial at this time? Even some 90 00:04:27,839 --> 00:04:30,360 Speaker 1: of them from University Chicago too. You know, I think 91 00:04:30,360 --> 00:04:34,640 Speaker 1: it gives us a broad a broad framework for thinking 92 00:04:34,640 --> 00:04:37,520 Speaker 1: through these issues. But exactly as you were discussing, these 93 00:04:37,600 --> 00:04:39,880 Speaker 1: data are not clear, and as we were talking about 94 00:04:39,880 --> 00:04:42,240 Speaker 1: with Lisa before, the data have been quite volatile and 95 00:04:42,440 --> 00:04:46,800 Speaker 1: sometimes difficult to interpret before, and this report is not 96 00:04:46,960 --> 00:04:50,279 Speaker 1: completely consistent. Although I think Mike may have hit on 97 00:04:50,640 --> 00:04:53,680 Speaker 1: exactly one of the issues in the so called composition effect. 98 00:04:53,920 --> 00:04:57,159 Speaker 1: If you're growing a lot of jobs in the lower 99 00:04:57,160 --> 00:05:00,640 Speaker 1: wage part like hospitality, but losing them in a higher 100 00:05:00,640 --> 00:05:05,000 Speaker 1: wage part like manufacturing, that could lead to that number 101 00:05:05,120 --> 00:05:09,440 Speaker 1: coming down that average hourly wage, but wages may still 102 00:05:09,480 --> 00:05:11,800 Speaker 1: be going up because in each of those individual categories, 103 00:05:11,800 --> 00:05:14,000 Speaker 1: wages make up. So we've got to get more more 104 00:05:14,080 --> 00:05:18,400 Speaker 1: data on that. So to speak to the Chicago theory, 105 00:05:18,640 --> 00:05:20,839 Speaker 1: Lisa has been beating me to death with long and 106 00:05:21,000 --> 00:05:27,640 Speaker 1: variable lags. Does that math work now? Is it useful? Oh? Well, 107 00:05:28,279 --> 00:05:30,960 Speaker 1: you know, Milton Friedman articulated that like seventy years ago, 108 00:05:31,000 --> 00:05:34,039 Speaker 1: and I think we're still seeing that. We certainly have 109 00:05:34,080 --> 00:05:37,680 Speaker 1: seen some lags. We've certainly seen some hit in housing 110 00:05:37,720 --> 00:05:40,480 Speaker 1: market and in certain sectors, but not in all the sectors. 111 00:05:40,760 --> 00:05:45,480 Speaker 1: And obviously there are lags, and we'll see when the 112 00:05:45,520 --> 00:05:48,039 Speaker 1: tightening of monetary policy really hits. May not come for 113 00:05:48,040 --> 00:05:50,719 Speaker 1: a few more months. Randy, we're seeing in markets people 114 00:05:50,760 --> 00:05:53,200 Speaker 1: back away from the likelihood of a fifty basis point 115 00:05:53,279 --> 00:05:56,039 Speaker 1: rate hike at the meeting of the Federal Reserve later 116 00:05:56,080 --> 00:05:59,040 Speaker 1: this month. Do you think that that's valid given the guidance, 117 00:05:59,240 --> 00:06:01,680 Speaker 1: given the strength the labor market, given the lack of 118 00:06:01,760 --> 00:06:05,880 Speaker 1: significant downside revisions to what we saw in January. So 119 00:06:06,000 --> 00:06:08,080 Speaker 1: we still have a very strong labor market. There's no 120 00:06:08,160 --> 00:06:11,640 Speaker 1: way around that, And especially at this point, and you know, 121 00:06:12,040 --> 00:06:14,720 Speaker 1: after the fan has been hiking for for a full year, 122 00:06:15,040 --> 00:06:16,880 Speaker 1: those lags may have been long and variable. But this 123 00:06:16,960 --> 00:06:20,080 Speaker 1: is a bit surprising. See so little, so little impact, 124 00:06:20,800 --> 00:06:23,040 Speaker 1: and so I think I don't think the Fed has 125 00:06:23,080 --> 00:06:26,560 Speaker 1: made their decision. I think exactly as John said as 126 00:06:26,640 --> 00:06:30,919 Speaker 1: well as as well as Tom, the the inflation report 127 00:06:31,000 --> 00:06:33,640 Speaker 1: is going to be very important because it's really you know, 128 00:06:33,720 --> 00:06:36,400 Speaker 1: this is one input, a key input into what inflation 129 00:06:36,480 --> 00:06:38,080 Speaker 1: is going to be. And that's ultimately what the FED 130 00:06:38,120 --> 00:06:40,440 Speaker 1: cares about is bringing inflation down. If we do see 131 00:06:40,440 --> 00:06:43,400 Speaker 1: inflation started to come down, they may some around the 132 00:06:43,400 --> 00:06:45,839 Speaker 1: table may feel more comfortable to just say let's stick 133 00:06:45,880 --> 00:06:47,960 Speaker 1: with twenty five. But if they don't see signs of 134 00:06:48,040 --> 00:06:49,520 Speaker 1: it coming down, and you just look at this labor 135 00:06:49,560 --> 00:06:53,360 Speaker 1: market being pretty hot, I think a number of people 136 00:06:53,400 --> 00:06:55,840 Speaker 1: will want to push for fifty. It's early days. Yet 137 00:06:55,920 --> 00:06:57,880 Speaker 1: in terms of the market reaction and put the knee 138 00:06:57,920 --> 00:07:00,760 Speaker 1: jerk reaction seems to emphasize that it client and average 139 00:07:00,800 --> 00:07:04,160 Speaker 1: hourly earnings and the tick up and the unemployment rate 140 00:07:04,480 --> 00:07:07,400 Speaker 1: as why perhaps the Fed wouldn't have to go quite 141 00:07:07,440 --> 00:07:10,440 Speaker 1: as far as previously believed. Do you think that these 142 00:07:10,440 --> 00:07:14,440 Speaker 1: are significant things that these are developments that highlight softening 143 00:07:14,440 --> 00:07:17,880 Speaker 1: around the edges that will show up later on. Well, 144 00:07:17,920 --> 00:07:21,360 Speaker 1: as I was saying that the reduction in the average 145 00:07:21,400 --> 00:07:24,520 Speaker 1: early earnings may just have be a composition effect, and 146 00:07:24,800 --> 00:07:28,120 Speaker 1: so I think it's it's hard to interpret any any 147 00:07:28,160 --> 00:07:34,000 Speaker 1: one report at two and too much detail and really say, ah, well, 148 00:07:34,000 --> 00:07:36,120 Speaker 1: the Fed's going to change because of it. I think 149 00:07:36,160 --> 00:07:38,000 Speaker 1: looking over the last three months, we still see a 150 00:07:38,120 --> 00:07:40,679 Speaker 1: very strong labor market. I think that's what the context 151 00:07:40,760 --> 00:07:43,640 Speaker 1: in which j. Powell gave his testimony. I think the 152 00:07:43,680 --> 00:07:45,800 Speaker 1: labor market is still pretty strong. It doesn't seem to 153 00:07:45,840 --> 00:07:49,360 Speaker 1: be strengthening, but you know, if it were, then I 154 00:07:49,360 --> 00:07:52,520 Speaker 1: think it would be very clear. Have to be fifty now, 155 00:07:52,560 --> 00:07:55,000 Speaker 1: I think it's I think it's reasonable at the market 156 00:07:55,040 --> 00:07:57,120 Speaker 1: states and even BET but I think a lot will 157 00:07:57,160 --> 00:08:00,480 Speaker 1: be determined inflation number on Tuesday, Professor Cross, thank you 158 00:08:00,520 --> 00:08:03,600 Speaker 1: so much for joining US today from Madrid. Obviously, Randy 159 00:08:03,640 --> 00:08:07,200 Speaker 1: Krosner with the FED and also with the University of 160 00:08:07,280 --> 00:08:20,560 Speaker 1: Chicago Booth School as well, now turned to bond market reaction. 161 00:08:20,640 --> 00:08:24,400 Speaker 1: He's aged overnight. Jeffrey Rosenberg joins US now portfolio manager 162 00:08:24,840 --> 00:08:29,200 Speaker 1: of Systematic Multi strategy fund at Blackrock. Jeff open question, 163 00:08:29,320 --> 00:08:34,000 Speaker 1: what's the multi strategy right now? The multi strategy is 164 00:08:34,520 --> 00:08:37,600 Speaker 1: defensive here, Tom. I mean, you know, there's a lot 165 00:08:37,640 --> 00:08:40,839 Speaker 1: of focus on twenty five versus fifty, But I think 166 00:08:40,840 --> 00:08:43,679 Speaker 1: the real message of the week was that Powell re 167 00:08:43,840 --> 00:08:49,840 Speaker 1: emphasized financial conditions need to stay tight for transmission of 168 00:08:49,880 --> 00:08:53,400 Speaker 1: monetary policy to work. And the thing that we lost 169 00:08:53,440 --> 00:08:57,360 Speaker 1: sight of here is how is monetary supposed. Monetary policy 170 00:08:57,360 --> 00:09:02,199 Speaker 1: is supposed to actually bring down into it functions mainly 171 00:09:02,240 --> 00:09:05,160 Speaker 1: through financial conditions tightening. And when you look at where 172 00:09:05,160 --> 00:09:07,800 Speaker 1: we were at the end of January, financial conditions we're 173 00:09:07,880 --> 00:09:12,800 Speaker 1: basically back to where they were before the tightening even began, 174 00:09:13,000 --> 00:09:17,560 Speaker 1: effectively unwinding all of the tightening in policy. So the 175 00:09:17,679 --> 00:09:22,600 Speaker 1: pushback here is coming from the data play, and you know, 176 00:09:22,679 --> 00:09:25,760 Speaker 1: we can parse today's payroll report. I would emphasize the 177 00:09:25,800 --> 00:09:29,160 Speaker 1: earlier conversation, AH is the worst measure of real time 178 00:09:30,040 --> 00:09:33,480 Speaker 1: or near term measures of wage growth because of the 179 00:09:33,520 --> 00:09:37,640 Speaker 1: compositional effects. But beyond the noise of the data, the 180 00:09:37,720 --> 00:09:41,200 Speaker 1: issue is that financial conditions aren't tightening enough. And Powell 181 00:09:41,240 --> 00:09:43,959 Speaker 1: pushed back this week, and that means that it raises 182 00:09:44,000 --> 00:09:46,040 Speaker 1: the prospects that they have to do more. That's the 183 00:09:46,080 --> 00:09:49,200 Speaker 1: fifty twenty five debate, but it's really the terminal debate 184 00:09:49,600 --> 00:09:53,199 Speaker 1: that is important here, and that they're much more willing 185 00:09:53,200 --> 00:09:56,440 Speaker 1: to push the risk up of a recession. Jeff Rosenberg, 186 00:09:56,480 --> 00:09:58,480 Speaker 1: You're going to take in the various narratives and you're 187 00:09:58,480 --> 00:10:02,240 Speaker 1: going to filter them through a Carnegie Mellon education, which 188 00:10:02,320 --> 00:10:08,320 Speaker 1: is hugely probabilistically determined. Fine, can you state that we 189 00:10:08,400 --> 00:10:13,400 Speaker 1: are in a disinflationary trend? Now? What is the probability 190 00:10:13,840 --> 00:10:16,960 Speaker 1: at the vector coming off of this report and coming 191 00:10:17,040 --> 00:10:22,200 Speaker 1: off Tuesday will signal disinflation? Well, you know, I think 192 00:10:22,200 --> 00:10:26,640 Speaker 1: what we had is finally the realization of peak inflation. 193 00:10:26,880 --> 00:10:29,760 Speaker 1: And remember that was the big debate for a while, was, 194 00:10:29,880 --> 00:10:32,760 Speaker 1: you know, the expectation that we'd hit peak inflation, inflation 195 00:10:32,800 --> 00:10:36,120 Speaker 1: would come down, and it just kept getting disappointed. Last 196 00:10:36,200 --> 00:10:39,040 Speaker 1: November we hit the peak inflation, and everybody got very 197 00:10:39,080 --> 00:10:42,560 Speaker 1: excited by three in a row, three months in a 198 00:10:42,640 --> 00:10:46,800 Speaker 1: row of very good inflation numbers that showed a decline, 199 00:10:46,840 --> 00:10:50,040 Speaker 1: but decline to what level? Right? The FETE is talking 200 00:10:50,080 --> 00:10:53,360 Speaker 1: about getting back to the pre COVID two percent, and 201 00:10:53,520 --> 00:10:55,840 Speaker 1: nothing in the data that we're seeing in terms of 202 00:10:55,880 --> 00:11:00,440 Speaker 1: the persistent measures of inflation, which is really that core 203 00:11:00,559 --> 00:11:03,760 Speaker 1: services x housing services, which is really about labor and 204 00:11:04,160 --> 00:11:08,120 Speaker 1: markets and wage inflation. Nothing is really said that the 205 00:11:08,160 --> 00:11:11,840 Speaker 1: Fed's tightening to date has done the work that's necessary 206 00:11:11,880 --> 00:11:16,080 Speaker 1: to bring that back to two percent target to have 207 00:11:16,200 --> 00:11:19,520 Speaker 1: that be accomplished. Jeff, you're talking about the financial market 208 00:11:19,520 --> 00:11:22,439 Speaker 1: conditions and how that's really important for the transmission of 209 00:11:23,280 --> 00:11:26,320 Speaker 1: FED policy. I'm looking now at the terminal rate being 210 00:11:26,360 --> 00:11:29,360 Speaker 1: priced in a five point three percent, down from five 211 00:11:29,360 --> 00:11:32,200 Speaker 1: point six percent earlier this week. Do you think that 212 00:11:32,240 --> 00:11:34,959 Speaker 1: this is an accurate response to the report that we 213 00:11:35,080 --> 00:11:38,600 Speaker 1: just got. Well, I think the I think the market 214 00:11:38,679 --> 00:11:42,880 Speaker 1: is being whip sought a lot around positioning and technicals 215 00:11:42,920 --> 00:11:45,240 Speaker 1: around twenty five verses fifty. So you have to be 216 00:11:45,320 --> 00:11:50,199 Speaker 1: careful about overinterpreting kind of the longer run fundamental interpretation 217 00:11:50,280 --> 00:11:53,000 Speaker 1: from today's news. And as John was saying earlier, you know, 218 00:11:53,120 --> 00:11:56,240 Speaker 1: come Tuesday with a hot CPI report, all this is 219 00:11:56,280 --> 00:12:00,160 Speaker 1: going to get sort of thrown out and reinterpreted. I 220 00:12:00,200 --> 00:12:03,559 Speaker 1: think the broader message of the raising of the terminal 221 00:12:03,640 --> 00:12:07,640 Speaker 1: rate is the right response to what Powell said earlier 222 00:12:07,679 --> 00:12:11,200 Speaker 1: this week. That we need to do more, and that's 223 00:12:11,280 --> 00:12:15,360 Speaker 1: really the broader message of the failure of the core measures, 224 00:12:15,760 --> 00:12:19,880 Speaker 1: the labor market measures, the core ex housing X services 225 00:12:19,920 --> 00:12:23,600 Speaker 1: measures of inflation to really respond to what is a 226 00:12:23,720 --> 00:12:26,640 Speaker 1: very significant amount of tightening to date. So it's higher 227 00:12:26,679 --> 00:12:30,080 Speaker 1: for longer, and you've got to price out that expectation 228 00:12:30,200 --> 00:12:32,200 Speaker 1: that the Fed's going to turn around very quickly and 229 00:12:32,240 --> 00:12:35,120 Speaker 1: be able to cut interest rates as well ahead spinning, Jeff, 230 00:12:35,120 --> 00:12:37,280 Speaker 1: I've got to be honest, everyone said something slightly different. 231 00:12:37,320 --> 00:12:39,679 Speaker 1: Everybody has a different base expectation of what the FEDS 232 00:12:39,679 --> 00:12:42,960 Speaker 1: parameters are to high rates. People have ring. I mean, yes, 233 00:12:43,000 --> 00:12:45,960 Speaker 1: actually that's a completely accurate I'm looking at this. Is 234 00:12:45,960 --> 00:12:48,920 Speaker 1: there any certainty in your investment thesis that you have 235 00:12:49,000 --> 00:12:51,880 Speaker 1: continued to drive home that you continue to have conviction 236 00:12:51,920 --> 00:12:55,600 Speaker 1: in Jeff, Well, you're going to hate this answer. The 237 00:12:55,679 --> 00:13:02,959 Speaker 1: only certainty, the only certainty is is the uncertaintyer that's 238 00:13:03,000 --> 00:13:07,120 Speaker 1: Ellen Melzer continue. I know you aren't gonna like that one, 239 00:13:07,160 --> 00:13:10,280 Speaker 1: but but it's you know, it's really it's about recognizing 240 00:13:10,320 --> 00:13:15,120 Speaker 1: that that there is a lack of ability of forecasting 241 00:13:15,120 --> 00:13:17,320 Speaker 1: and inflation. That's really the issue here is that the 242 00:13:17,400 --> 00:13:21,719 Speaker 1: market consensus is pretty confident or was pretty confident, uh 243 00:13:22,000 --> 00:13:25,959 Speaker 1: in a in a steady return to two percent, and 244 00:13:26,520 --> 00:13:29,880 Speaker 1: the history of the accuracy of forecasting inflation here just 245 00:13:29,920 --> 00:13:32,600 Speaker 1: doesn't bear out that degree of confidence. And so it's 246 00:13:32,600 --> 00:13:35,200 Speaker 1: really about recognizing what we know and what we don't 247 00:13:35,200 --> 00:13:38,360 Speaker 1: know relative to the what's priced into the market. In there, 248 00:13:38,600 --> 00:13:42,439 Speaker 1: you certainly saw a lot of skew to the downside, 249 00:13:42,440 --> 00:13:44,600 Speaker 1: and that that downside has been playing out, you know, 250 00:13:44,800 --> 00:13:46,880 Speaker 1: of course of February, the first part of March. Here 251 00:13:47,040 --> 00:13:50,200 Speaker 1: Jeff Rozenberg always thank you. He is with a black 252 00:13:54,800 --> 00:13:56,720 Speaker 1: Let's not waste any time you're joining us right now, 253 00:13:56,800 --> 00:13:59,640 Speaker 1: is mister Mayo, senior equity analyst at Wills Fargo, A 254 00:13:59,720 --> 00:14:02,160 Speaker 1: kind on the street back to days long ago with 255 00:14:02,240 --> 00:14:04,760 Speaker 1: Credit Suite. So, Mike, I've got eight ways to go here. 256 00:14:05,320 --> 00:14:07,840 Speaker 1: But I want to just simply say, is this morning 257 00:14:07,920 --> 00:14:12,079 Speaker 1: the opportunity for the major banks to get competitive ground. 258 00:14:12,280 --> 00:14:16,000 Speaker 1: Do the major banks benefit by all this turmoil because 259 00:14:16,200 --> 00:14:21,000 Speaker 1: financial America will find comfort with big banks. Well, the 260 00:14:21,080 --> 00:14:25,600 Speaker 1: unintended consequences of everything that's taken place since the global 261 00:14:25,640 --> 00:14:30,560 Speaker 1: financial crisis is it's increased the moat around the largest banks. 262 00:14:31,000 --> 00:14:35,160 Speaker 1: So the regulation, the reduction of mergers, the too big 263 00:14:35,200 --> 00:14:41,040 Speaker 1: to fail all that simply has reinforced the resiliency of 264 00:14:41,080 --> 00:14:45,800 Speaker 1: the largest banks and resiliency of the balance sheets. Credit 265 00:14:45,880 --> 00:14:49,320 Speaker 1: risk is much less the resiliency of the business models, 266 00:14:49,760 --> 00:14:53,200 Speaker 1: the scalability that you've gotten from technology, and yes, the 267 00:14:53,280 --> 00:14:57,560 Speaker 1: resiliency of the funding. Even though deposits are declining some 268 00:14:58,520 --> 00:15:02,320 Speaker 1: we think the deposits are quite sticky at the largest 269 00:15:02,320 --> 00:15:06,160 Speaker 1: banks and they have all sorts of ways to fund themselves. 270 00:15:06,240 --> 00:15:09,120 Speaker 1: So you know, the issues out there that you see 271 00:15:09,160 --> 00:15:11,600 Speaker 1: it in the stock price to clients for the largest 272 00:15:11,600 --> 00:15:16,600 Speaker 1: banks are are way overdone. The FED stress test is 273 00:15:16,600 --> 00:15:20,000 Speaker 1: conducted each year, and this year it's I see it 274 00:15:20,080 --> 00:15:24,040 Speaker 1: at the combination of the last three recessions combined. And 275 00:15:24,120 --> 00:15:26,880 Speaker 1: until banks can pass that test, they're not allowed to 276 00:15:26,920 --> 00:15:30,680 Speaker 1: return capital. The issue of the moment is banks do 277 00:15:30,800 --> 00:15:36,160 Speaker 1: have some unrealized securities losses that's already reflected in their financials. 278 00:15:36,400 --> 00:15:39,240 Speaker 1: And even if you assume they never sell these securities, 279 00:15:40,040 --> 00:15:43,920 Speaker 1: deposits are still about twenty percent higher relative to loans 280 00:15:43,960 --> 00:15:47,720 Speaker 1: than they've been historically. So since the global financial crisis, 281 00:15:48,000 --> 00:15:51,000 Speaker 1: you know, capital is up fifty to one hundred percent 282 00:15:51,560 --> 00:15:56,560 Speaker 1: liquidity is up about fifty percent. The credit profiles are 283 00:15:56,640 --> 00:16:00,840 Speaker 1: vastly improved. Subprime loans or eighty percent less than where 284 00:16:00,840 --> 00:16:03,440 Speaker 1: they were before and time. As you know, I was 285 00:16:03,800 --> 00:16:07,040 Speaker 1: fortunate to be the first analyst to testify on the 286 00:16:07,080 --> 00:16:10,680 Speaker 1: causes of the global financial crisis to the Congressional Committee. 287 00:16:10,960 --> 00:16:14,000 Speaker 1: And you know, as you know, I got fired part 288 00:16:14,040 --> 00:16:18,560 Speaker 1: of that time when I was negative. Well it worked 289 00:16:18,600 --> 00:16:21,360 Speaker 1: out in the end, not in the moment. But this 290 00:16:21,440 --> 00:16:24,560 Speaker 1: is almost like the opposite of the global financial crisis, 291 00:16:24,600 --> 00:16:28,600 Speaker 1: when there were not fears and then things were about 292 00:16:28,600 --> 00:16:31,920 Speaker 1: to crumble, and now the fears are really you know, 293 00:16:32,240 --> 00:16:35,040 Speaker 1: way out there, when the banks were more resilient than 294 00:16:35,040 --> 00:16:38,040 Speaker 1: they've been, you know, in a generation. So, Mike, we 295 00:16:38,040 --> 00:16:40,000 Speaker 1: can talk about a resiliency. I think we also need 296 00:16:40,040 --> 00:16:43,120 Speaker 1: to discuss the profit headwinds as well, and that interest margins, 297 00:16:43,120 --> 00:16:45,000 Speaker 1: how much they'll have to pay for that deposit base 298 00:16:45,080 --> 00:16:47,480 Speaker 1: at the largest lenders. In just a moment, right before 299 00:16:47,480 --> 00:16:48,800 Speaker 1: we get there, I want to pick up on something 300 00:16:48,800 --> 00:16:51,640 Speaker 1: you said. You said the moats around the biggest banks 301 00:16:51,640 --> 00:16:55,440 Speaker 1: are huge. What about the smallest banks, Mike, How vulnerable 302 00:16:55,480 --> 00:16:58,040 Speaker 1: are they? Have we seen and can you comment on 303 00:16:58,320 --> 00:17:01,160 Speaker 1: the lack of regulatory scrutiny that they received. Over the 304 00:17:01,200 --> 00:17:07,119 Speaker 1: last ten years, well, the entire industry has had additional 305 00:17:07,359 --> 00:17:11,520 Speaker 1: regulation and oversight, and so those industry statistics that I 306 00:17:11,600 --> 00:17:15,520 Speaker 1: quote include both the small and the large banks. Now, 307 00:17:15,560 --> 00:17:20,040 Speaker 1: you can always have idiosyncratic events, and that's going to happen, 308 00:17:20,160 --> 00:17:23,000 Speaker 1: I mean, and I think one warning here is the 309 00:17:23,119 --> 00:17:26,119 Speaker 1: risk outside the banking industry. So you have issues with 310 00:17:26,200 --> 00:17:29,040 Speaker 1: crypto and that can have a ricochet effect. You have 311 00:17:29,080 --> 00:17:32,960 Speaker 1: an issue with VC firms not fundraising as much, needing 312 00:17:33,000 --> 00:17:35,880 Speaker 1: to draw down their funds. That can have a ricochet effect. 313 00:17:36,240 --> 00:17:39,000 Speaker 1: But really, I think what's not been seen yet, and 314 00:17:39,000 --> 00:17:42,359 Speaker 1: I think you could see more are bigger problems outside 315 00:17:42,359 --> 00:17:45,679 Speaker 1: the banking industry, as so much risk has been pushed 316 00:17:45,720 --> 00:17:49,840 Speaker 1: outside of banks into non banks. Which banks, Which of 317 00:17:49,880 --> 00:17:53,280 Speaker 1: the biggest banks are most exposed to a devaluation in 318 00:17:53,320 --> 00:17:56,320 Speaker 1: some of the assets most exposed to those areas, And 319 00:17:56,359 --> 00:17:59,080 Speaker 1: I'm thinking of private credit, I'm thinking of less liquid loans, 320 00:17:59,119 --> 00:18:02,000 Speaker 1: I'm thinking of some of these industries that are seeing 321 00:18:02,000 --> 00:18:06,880 Speaker 1: some serious distress. Well, the truth is, and this goes 322 00:18:06,880 --> 00:18:09,359 Speaker 1: back to the FED stress test. Every year, the FED 323 00:18:09,480 --> 00:18:13,560 Speaker 1: is recalibrating the most risky areas. So the penalty for 324 00:18:13,760 --> 00:18:18,359 Speaker 1: Goldman Sacks having private equity investments has gone up and 325 00:18:18,440 --> 00:18:20,800 Speaker 1: up and up the last few years, so you're you 326 00:18:21,160 --> 00:18:25,960 Speaker 1: have big capital behind a lot of those types of investments. 327 00:18:26,000 --> 00:18:30,480 Speaker 1: So the entire industry has become much more resilient. So 328 00:18:30,560 --> 00:18:36,680 Speaker 1: you have four categories of loans. One is consumer secured 329 00:18:36,840 --> 00:18:41,359 Speaker 1: that residential mortgages. You had that crisis in seven o 330 00:18:41,480 --> 00:18:46,560 Speaker 1: eight and that's not happening now. Loan two values are great. 331 00:18:46,800 --> 00:18:50,760 Speaker 1: You have unsecured consumer and credit cards, and credit cards 332 00:18:50,800 --> 00:18:53,640 Speaker 1: are an area to watch. You're seeing issues on the 333 00:18:53,680 --> 00:18:57,439 Speaker 1: low end auto loans, low end consumer. And then you 334 00:18:57,560 --> 00:19:00,800 Speaker 1: have on the wholesale side secured that would be commercial 335 00:19:00,840 --> 00:19:03,960 Speaker 1: real estate. That is an area to watch, especially offices, 336 00:19:04,760 --> 00:19:07,600 Speaker 1: so we're watching that. And then you have the unsecured 337 00:19:07,720 --> 00:19:11,199 Speaker 1: wholesale work commercial loans, and you have leverage loans and 338 00:19:11,240 --> 00:19:14,040 Speaker 1: that's also an area to watch. Having said all that, 339 00:19:15,320 --> 00:19:18,959 Speaker 1: you know this is really more of an earnings issue, 340 00:19:19,119 --> 00:19:22,240 Speaker 1: not a liquidity issue, not a soleignty issue. We've taken 341 00:19:22,280 --> 00:19:24,240 Speaker 1: our estimates down on some of the banks due to 342 00:19:24,320 --> 00:19:28,439 Speaker 1: higher funding costs, and if anything, so far, credit quality 343 00:19:28,440 --> 00:19:32,400 Speaker 1: has performed stronger for longer than I or many have expected, 344 00:19:32,480 --> 00:19:35,000 Speaker 1: and that's still likely to be to be good in 345 00:19:35,320 --> 00:19:38,000 Speaker 1: a good economy. We started out by talking about how, 346 00:19:38,040 --> 00:19:41,480 Speaker 1: in some ways episodes like this consolidate control, consolidate market 347 00:19:41,520 --> 00:19:45,080 Speaker 1: share among the biggest banks, Which among the big banks 348 00:19:45,240 --> 00:19:47,640 Speaker 1: will emerge as the winner from all of this, especially 349 00:19:47,680 --> 00:19:50,520 Speaker 1: because that really determined the winners and the losers as 350 00:19:50,560 --> 00:19:54,720 Speaker 1: a last crisis. Well, you have seen a theme of 351 00:19:54,800 --> 00:19:58,400 Speaker 1: Goliath is winning when it comes to capital markets, and 352 00:19:58,480 --> 00:20:02,119 Speaker 1: it's really amazing the impact of regulation. I mean, the 353 00:20:02,400 --> 00:20:08,240 Speaker 1: likes of Goldman Sachs and JP Morgan consolidating wholesale market share. 354 00:20:08,520 --> 00:20:11,560 Speaker 1: And on the retail side, you've seen the likes of 355 00:20:11,640 --> 00:20:16,200 Speaker 1: Bank of America really uh, you know, lead the way 356 00:20:16,280 --> 00:20:21,920 Speaker 1: with retail banking gathering share. JP Morgan is also gathered share. 357 00:20:22,080 --> 00:20:25,880 Speaker 1: So when these rules come out saying okay, banks don't 358 00:20:25,920 --> 00:20:29,960 Speaker 1: merge anymore, I mean, it's like the Jamie Diamond Protection Act. 359 00:20:30,600 --> 00:20:34,320 Speaker 1: It just increases the moats around that business. And I 360 00:20:34,359 --> 00:20:37,720 Speaker 1: think that's one of the unintended consequences of regulation and 361 00:20:38,400 --> 00:20:41,119 Speaker 1: you know, probably should be reconsidered. Michael got to squeeze 362 00:20:41,200 --> 00:20:44,080 Speaker 1: us in just quickly. It's just on the challenges that 363 00:20:44,280 --> 00:20:47,399 Speaker 1: Keikope mentioned earlier this week. It's not not a profit 364 00:20:47,400 --> 00:20:49,600 Speaker 1: headwind for some of the big names you just went through. 365 00:20:51,000 --> 00:20:53,960 Speaker 1: I'm certain. Look, funding is going up, and last time 366 00:20:54,000 --> 00:20:55,480 Speaker 1: I was on the show, I know Lisa asked me, 367 00:20:55,520 --> 00:20:57,640 Speaker 1: when are we getting paid more for our deposits? Where 368 00:20:57,640 --> 00:20:59,800 Speaker 1: you're getting paid more for your deposits now? And so 369 00:21:00,320 --> 00:21:05,399 Speaker 1: look the additional funding costs for the banks. Look, this 370 00:21:05,440 --> 00:21:08,000 Speaker 1: could wind up taking five to ten percent out of 371 00:21:08,000 --> 00:21:11,240 Speaker 1: our earnings estmates. On the other hand, the recession discount 372 00:21:11,320 --> 00:21:14,719 Speaker 1: is about a thirty percent, you know factor. So if 373 00:21:14,760 --> 00:21:16,600 Speaker 1: you give up ten percent of earnings but get that 374 00:21:16,920 --> 00:21:19,520 Speaker 1: thirty percent valuation back, then that would you know, I 375 00:21:19,600 --> 00:21:21,199 Speaker 1: come back a year from now you say, wow, the 376 00:21:21,200 --> 00:21:25,000 Speaker 1: banks actually performed well after all. Mike, appreciate the Howay 377 00:21:25,040 --> 00:21:26,840 Speaker 1: has always and thanks for getting got badly for us. 378 00:21:26,880 --> 00:21:39,280 Speaker 1: This morning may have that of last Tago. Our team 379 00:21:39,280 --> 00:21:41,520 Speaker 1: has worked overnight to bring you the best of global 380 00:21:41,560 --> 00:21:44,359 Speaker 1: Wall Street on banking, and we begin strong this morning 381 00:21:44,359 --> 00:21:47,639 Speaker 1: with Gerard Cassidy, head of US bank Equity Strategy at 382 00:21:47,760 --> 00:21:51,800 Speaker 1: RBC Capital Markets. He counted banks on Thursday in the 383 00:21:51,880 --> 00:21:54,000 Speaker 1: savings and loan crisis of who would go out of 384 00:21:54,040 --> 00:21:57,040 Speaker 1: business over the weekend. You Gerard, I mentioned the SNL 385 00:21:57,119 --> 00:22:00,240 Speaker 1: crisis of the nineteen eighties earlier. This is not this. 386 00:22:00,960 --> 00:22:04,199 Speaker 1: What is this? If it's ideo syncretic, how do you 387 00:22:04,280 --> 00:22:07,800 Speaker 1: describe it? Tom? Thank you for having me on, and 388 00:22:07,800 --> 00:22:10,560 Speaker 1: you're so right. This is not what we saw in 389 00:22:10,600 --> 00:22:13,880 Speaker 1: the SMIL crisis at all. As you remember, Tom, back 390 00:22:13,920 --> 00:22:16,520 Speaker 1: in those days, it was a credit crisis. This is 391 00:22:16,560 --> 00:22:18,920 Speaker 1: not an issue with credit at all for a Silicon 392 00:22:19,000 --> 00:22:21,240 Speaker 1: Valley or for any of the banks. But you're bringing 393 00:22:21,320 --> 00:22:23,800 Speaker 1: up a very good point. What has happened here is 394 00:22:23,840 --> 00:22:28,240 Speaker 1: the deposits. Everybody is very concerned about deposit outflows. As 395 00:22:28,280 --> 00:22:32,920 Speaker 1: you guys know, during the pandemic, because of quantitative easing, 396 00:22:33,280 --> 00:22:36,960 Speaker 1: the FED pumped in over three trillion dollars of deposits 397 00:22:37,040 --> 00:22:39,720 Speaker 1: into the banking system, and now they're starting to leave. 398 00:22:40,040 --> 00:22:44,240 Speaker 1: These wholesale deposits are surge deposits, as they're often referred to, 399 00:22:44,440 --> 00:22:47,280 Speaker 1: are the deposits that are likely to leave. But again, 400 00:22:47,359 --> 00:22:50,439 Speaker 1: this system has too many deposits, if you can believe that. 401 00:22:50,800 --> 00:22:53,600 Speaker 1: But the core issue here is we need to focus 402 00:22:53,640 --> 00:22:57,879 Speaker 1: on core deposits. These are the small denominated deposits. I 403 00:22:57,960 --> 00:23:01,720 Speaker 1: like to call them grandmon grandpon deposits. Those are very sticky, 404 00:23:01,920 --> 00:23:05,280 Speaker 1: and those are very difficult to grow because it takes 405 00:23:05,400 --> 00:23:08,879 Speaker 1: years together those deposits. The banks with high concentrations of 406 00:23:08,960 --> 00:23:12,399 Speaker 1: those deposits, Bank America is a good example, fifth Third 407 00:23:12,520 --> 00:23:15,359 Speaker 1: Regions Bank. Those deposits are sticky and there's not going 408 00:23:15,359 --> 00:23:18,600 Speaker 1: to be any real concerns about those deposits. Girard, Is 409 00:23:18,600 --> 00:23:22,680 Speaker 1: this a moment to acquire shares and quality banking? Can 410 00:23:22,680 --> 00:23:25,240 Speaker 1: you use the opportunity of the last couple days in 411 00:23:25,280 --> 00:23:29,520 Speaker 1: crypto and in Silicon Valley to go strong with small 412 00:23:29,560 --> 00:23:32,399 Speaker 1: banks that you're noted for, or dare I say even 413 00:23:32,440 --> 00:23:37,800 Speaker 1: the money center banks? Absolutely, and the reason being is 414 00:23:37,840 --> 00:23:41,520 Speaker 1: that we understand how fearful it is and the uncertainty 415 00:23:41,560 --> 00:23:43,800 Speaker 1: out there, no doubt about it. But when you come 416 00:23:43,840 --> 00:23:47,439 Speaker 1: to core banking business that the regional banks do, the 417 00:23:47,480 --> 00:23:51,160 Speaker 1: community banks do, and the money centers, it's a very strong, 418 00:23:51,480 --> 00:23:55,600 Speaker 1: stable business. There's no real systemic risk here. And when 419 00:23:55,640 --> 00:23:58,320 Speaker 1: the stocks sell off like they did yesterday, it is 420 00:23:58,359 --> 00:24:01,920 Speaker 1: a buying opportunity for the law German investor. Also the traders, 421 00:24:01,920 --> 00:24:04,280 Speaker 1: of course can get involved, the hedge onuns and so forth. 422 00:24:04,480 --> 00:24:07,480 Speaker 1: But we don't see this as a systemic crasis, nothing 423 00:24:07,520 --> 00:24:09,879 Speaker 1: compared to O eight or nine or ninety nine. You 424 00:24:09,960 --> 00:24:12,320 Speaker 1: are the SNL crasis time, Jared. Just because it's not 425 00:24:12,320 --> 00:24:14,639 Speaker 1: a systemic issue for some of these big names, and 426 00:24:14,680 --> 00:24:16,680 Speaker 1: a lot of people listening would agree with you, does 427 00:24:16,720 --> 00:24:19,280 Speaker 1: not necessarily mean it's a buying opportunity. And Jared, you 428 00:24:19,320 --> 00:24:20,439 Speaker 1: know where I'm going to go with this because you 429 00:24:20,480 --> 00:24:22,400 Speaker 1: and I've already gone back and forth on it. There 430 00:24:22,440 --> 00:24:25,200 Speaker 1: is clearly a profit headwind emerging for these big banks. 431 00:24:25,480 --> 00:24:28,679 Speaker 1: I understand that they don't have the diversification issues a 432 00:24:28,800 --> 00:24:31,520 Speaker 1: very concentrated deposit base at a bank like SVP. I 433 00:24:31,520 --> 00:24:33,680 Speaker 1: think we all understand the unique nature of what's developing 434 00:24:33,680 --> 00:24:35,840 Speaker 1: in the last twenty four hours. But Jared, there is 435 00:24:35,840 --> 00:24:38,200 Speaker 1: going to be a competition for deposits. And I think 436 00:24:38,200 --> 00:24:39,919 Speaker 1: what we're all trying to understand and what are the 437 00:24:39,920 --> 00:24:42,639 Speaker 1: profit headwinds there emerging? Care What are we seeing signs 438 00:24:42,640 --> 00:24:45,000 Speaker 1: off particularly with was a key CORP early this week 439 00:24:45,160 --> 00:24:47,440 Speaker 1: talking about deposit basis and the risk around that. Jared, 440 00:24:47,560 --> 00:24:49,040 Speaker 1: can you frame that for us and what it means 441 00:24:49,040 --> 00:24:52,280 Speaker 1: for the profits the bottom line of these banks? John Very, 442 00:24:52,520 --> 00:24:54,840 Speaker 1: you put your thumb right on it. We held our 443 00:24:55,119 --> 00:24:58,800 Speaker 1: twenty seventh annual Financial Conferences week in which, key to 444 00:24:58,960 --> 00:25:02,240 Speaker 1: your point, lower the guidance on their net interest revenue 445 00:25:02,240 --> 00:25:06,199 Speaker 1: growth because of higher deposit beatas so, what's happening is 446 00:25:06,240 --> 00:25:10,359 Speaker 1: consumers are moving into more higher rate deposits, which is 447 00:25:10,400 --> 00:25:13,720 Speaker 1: squeezing the margins as we go forward. We expect net 448 00:25:13,760 --> 00:25:16,919 Speaker 1: interest margin for the industry to probably peak in the 449 00:25:16,960 --> 00:25:19,520 Speaker 1: first quarter or second quarter of this year, so there 450 00:25:19,520 --> 00:25:22,600 Speaker 1: will be that pressure or headwind on the margin. But 451 00:25:22,880 --> 00:25:26,000 Speaker 1: we have to remember banks can still expand their balance 452 00:25:26,000 --> 00:25:29,439 Speaker 1: sheets through loan growth depending on how the economic outlook is. 453 00:25:29,560 --> 00:25:32,760 Speaker 1: So net interesting growth net interest income growth, which last 454 00:25:32,840 --> 00:25:36,320 Speaker 1: year was spectacular, we still see for most banks anywhere 455 00:25:36,400 --> 00:25:39,320 Speaker 1: from eight to ten percent top line growth in net 456 00:25:39,320 --> 00:25:42,240 Speaker 1: interest income, even with a margin coming down because of 457 00:25:42,320 --> 00:25:45,399 Speaker 1: earning asset growth, and that will help them. We still 458 00:25:45,440 --> 00:25:47,879 Speaker 1: think this year the banks as a group will be 459 00:25:47,920 --> 00:25:50,880 Speaker 1: one of the few groups that put up EPs year 460 00:25:51,160 --> 00:25:55,040 Speaker 1: year growth as we see twenty three today. Or I'd 461 00:25:55,040 --> 00:25:57,400 Speaker 1: want to build on that, this idea of growing their 462 00:25:57,480 --> 00:25:59,720 Speaker 1: loan books at a time where we potentially could be 463 00:25:59,720 --> 00:26:02,560 Speaker 1: faced seeing some serious headwinds and also a lot of 464 00:26:02,600 --> 00:26:04,600 Speaker 1: companies aren't going to want to borrow at the rates 465 00:26:04,600 --> 00:26:06,119 Speaker 1: that a lot of these banks are going to offer. 466 00:26:06,160 --> 00:26:08,800 Speaker 1: I mean, how fruitful are they going to find the 467 00:26:08,920 --> 00:26:11,760 Speaker 1: lending market. How risky are the assets they're going to 468 00:26:11,840 --> 00:26:16,159 Speaker 1: have to lock themselves into in order to capture that 469 00:26:16,359 --> 00:26:20,480 Speaker 1: higher rate. It's a really good question. Now. In our 470 00:26:20,560 --> 00:26:23,919 Speaker 1: forecast for twenty twenty three, we do expect loan growth 471 00:26:23,920 --> 00:26:27,480 Speaker 1: to slow. History has shown the industry's loan growth will 472 00:26:27,520 --> 00:26:30,919 Speaker 1: grow with nominal GDP. So if you expect inflation this 473 00:26:31,000 --> 00:26:33,159 Speaker 1: year to average let's call it three to four percent, 474 00:26:33,480 --> 00:26:37,680 Speaker 1: we have zero percent real GDP growth or maybe slightly negative, 475 00:26:38,119 --> 00:26:40,720 Speaker 1: you're looking at about three to four percent loan growth 476 00:26:40,760 --> 00:26:42,800 Speaker 1: this year. So we would say three to five percent 477 00:26:42,920 --> 00:26:45,800 Speaker 1: is not an unreasonable estimate at this time, and we've 478 00:26:45,800 --> 00:26:49,040 Speaker 1: seen that in other slowdowns where loan growth continues. But 479 00:26:49,119 --> 00:26:51,800 Speaker 1: you're right, the loans have to be underwritten very carefully 480 00:26:51,840 --> 00:26:55,359 Speaker 1: because the real risk to bank profitability. Even though I 481 00:26:55,400 --> 00:26:58,360 Speaker 1: know this margin pressure is something that discuss, the real 482 00:26:58,480 --> 00:27:01,760 Speaker 1: risk has always been credit. While curdit quality today is 483 00:27:01,800 --> 00:27:04,560 Speaker 1: quite good. So right now, if we don't have some 484 00:27:04,600 --> 00:27:08,160 Speaker 1: sort of severe economic downturn, credits should hang in there. 485 00:27:08,200 --> 00:27:11,240 Speaker 1: This year. It will be higher costs for credit, but 486 00:27:11,400 --> 00:27:13,760 Speaker 1: nothing like what we saw in past downturns. We're talking 487 00:27:13,760 --> 00:27:16,359 Speaker 1: about the biggest, best capitalized banks, and then really the 488 00:27:16,400 --> 00:27:18,679 Speaker 1: issue right now is in the smaller regional banks with 489 00:27:18,760 --> 00:27:23,760 Speaker 1: more concentrated portfolios of depositors of creditors. Bill Ackman overnight 490 00:27:23,760 --> 00:27:25,920 Speaker 1: a Pershing Square came out and said that the failure 491 00:27:26,160 --> 00:27:29,399 Speaker 1: of SVB could destroy an important longer term driver of 492 00:27:29,400 --> 00:27:32,640 Speaker 1: the economy because of the VC component of the economy, 493 00:27:32,640 --> 00:27:35,200 Speaker 1: and recommends that if private capital can provide a solution, 494 00:27:35,240 --> 00:27:39,960 Speaker 1: a highly dilutive government preferred bailout should be considered. Thoughts Jarred, 495 00:27:41,160 --> 00:27:44,200 Speaker 1: I think that's premature when you look at Silicon Valley. 496 00:27:44,440 --> 00:27:48,800 Speaker 1: Though it's important to the Silicon Valley area obviously the 497 00:27:48,800 --> 00:27:51,920 Speaker 1: country and private equity, they're not the only players there, 498 00:27:51,960 --> 00:27:54,320 Speaker 1: of course, and as you know, our biggest banks are 499 00:27:54,359 --> 00:27:58,399 Speaker 1: involved in lending into the private equity business, so single 500 00:27:58,440 --> 00:28:02,080 Speaker 1: handedly Silicon Valley, it's important to that part of the business, 501 00:28:02,280 --> 00:28:05,080 Speaker 1: but it's not the only bank that has act that 502 00:28:05,200 --> 00:28:08,720 Speaker 1: have PE customers, private equity customers, or a venture capital. 503 00:28:08,880 --> 00:28:11,160 Speaker 1: So I think it's a little premature to be saying 504 00:28:11,200 --> 00:28:14,200 Speaker 1: that at this time, Joe, when Bramo says thoughts, Gerardi 505 00:28:14,280 --> 00:28:16,600 Speaker 1: Hanks that she has thoughts, but she's really trying hard 506 00:28:16,640 --> 00:28:21,280 Speaker 1: to bite her tongue what she really thinks. I was 507 00:28:21,400 --> 00:28:24,600 Speaker 1: wondering what he wants special. Can you give us a 508 00:28:24,640 --> 00:28:28,399 Speaker 1: brief answer, Police, I'm going to butcher something Jeremy Irons 509 00:28:28,440 --> 00:28:31,159 Speaker 1: said in marchin Caller those years ago. Speak to me 510 00:28:31,200 --> 00:28:33,080 Speaker 1: like I'm a golden retriever. So, Jared, if you can, 511 00:28:33,760 --> 00:28:35,600 Speaker 1: this is a bit of a bit of a blank 512 00:28:35,640 --> 00:28:38,400 Speaker 1: spot for me. It's just regulation, and I'd love your 513 00:28:38,440 --> 00:28:40,360 Speaker 1: thoughts on it, because I know you follow this stuff 514 00:28:40,400 --> 00:28:42,960 Speaker 1: really closely. Can you talk to me about the degree 515 00:28:42,960 --> 00:28:45,720 Speaker 1: of regulatory scrutiny some of these smaller banks have received 516 00:28:45,800 --> 00:28:47,760 Speaker 1: over the last decade compared to say, some of the 517 00:28:47,840 --> 00:28:50,880 Speaker 1: large banks and the problems that might emerge for the 518 00:28:50,920 --> 00:28:56,000 Speaker 1: smaller cant banks. John, The regulators have done a very 519 00:28:56,000 --> 00:28:59,000 Speaker 1: good job in changing the system compared to where we 520 00:28:59,000 --> 00:29:01,560 Speaker 1: were a pre financial crisis. As you know, and you 521 00:29:01,680 --> 00:29:04,400 Speaker 1: just touched on, the largest banks go through a stress 522 00:29:04,440 --> 00:29:08,880 Speaker 1: test every year, and the banking system has been fortified 523 00:29:09,400 --> 00:29:13,200 Speaker 1: very strongly since the financial crisis. Now, even the smaller banks, 524 00:29:13,600 --> 00:29:17,080 Speaker 1: They too go through a very rigorous regulatory process, and 525 00:29:17,120 --> 00:29:19,880 Speaker 1: so I would say that the regulatory picture and the 526 00:29:20,000 --> 00:29:22,960 Speaker 1: capital levels are quite strong for these banks. And that's 527 00:29:22,960 --> 00:29:25,040 Speaker 1: the critical part. When you look back to the pre 528 00:29:25,120 --> 00:29:28,800 Speaker 1: financial crisis days, the level of capital in the banking 529 00:29:28,880 --> 00:29:32,120 Speaker 1: system back then was materially lower than it is today. 530 00:29:32,400 --> 00:29:35,320 Speaker 1: Same thing with liquidity. All the banks have to measure 531 00:29:35,320 --> 00:29:38,760 Speaker 1: their liquidity. There's a liquidity coverage ratio that it's called, 532 00:29:39,000 --> 00:29:41,560 Speaker 1: or you have to measure the amount of deposit outflow 533 00:29:41,880 --> 00:29:44,760 Speaker 1: over the next thirty days. And in that ratio you've 534 00:29:44,800 --> 00:29:47,720 Speaker 1: got to carry liquid assets to handle that. So the 535 00:29:47,760 --> 00:29:51,080 Speaker 1: liquidity and capital is quite strong now. Granted we all 536 00:29:51,120 --> 00:29:54,640 Speaker 1: know uncertainty creates fear. That's what we saw yesterday. As 537 00:29:54,640 --> 00:29:56,720 Speaker 1: you guys said in the pre market opening, we're seeing 538 00:29:56,760 --> 00:29:59,920 Speaker 1: it again. But as cooler minds prevail, I think things 539 00:30:00,040 --> 00:30:03,320 Speaker 1: will stabilize and people will realize that this is not 540 00:30:03,440 --> 00:30:06,320 Speaker 1: an O eight oh nine or even in nineteen ninety moment. 541 00:30:06,560 --> 00:30:08,440 Speaker 1: If you're listening to this on radio, it makes you 542 00:30:08,480 --> 00:30:10,920 Speaker 1: can't say the few that John Cassidy has out of 543 00:30:10,960 --> 00:30:13,880 Speaker 1: his living bricks right now, which is just sick, absolutely depressing. 544 00:30:13,960 --> 00:30:16,720 Speaker 1: So it's shooting on TV. He lives, he lives, what 545 00:30:17,160 --> 00:30:20,680 Speaker 1: is that? He'll live? So large? In nine the Lobster 546 00:30:20,840 --> 00:30:24,120 Speaker 1: check down the road is eighty dollars for a lobsteroy 547 00:30:24,240 --> 00:30:27,040 Speaker 1: doing it oh wrong. That's a large It's wrong this 548 00:30:27,080 --> 00:30:28,640 Speaker 1: all the time. It just feel like we're just doing 549 00:30:28,680 --> 00:30:32,640 Speaker 1: it oh wrong, Cassidy. If I'MBC Capital Markets, thank you, sir. 550 00:30:33,080 --> 00:30:36,920 Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and 551 00:30:37,080 --> 00:30:41,400 Speaker 1: anywhere else you get your podcasts. Listen live every weekday 552 00:30:41,520 --> 00:30:45,040 Speaker 1: starting at seven am Eastern. I'm Bloomberg dot Com, the 553 00:30:45,120 --> 00:30:49,640 Speaker 1: iHeartRadio app, tune In, and the Bloomberg Business app. You 554 00:30:49,720 --> 00:30:53,760 Speaker 1: can watch us live. I'm Bloomberg Television and always I'm 555 00:30:53,800 --> 00:30:57,720 Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and 556 00:30:57,880 --> 00:31:01,520 Speaker 1: this is Bloomberg tw