Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Right now,
Speaker 1: it's going to be very interesting to see the ballet here.
Speaker 1: This has been an annual. I say it's to say,
Speaker 1: a monthly ritual of John Farrell talking with the gentleman
Speaker 1: from Boston. I think it's because the way the British
Speaker 1: were treated in the Revolutionary War. I think that's I
Speaker 1: think that as a conversation, and the answer is now
Speaker 1: made even more interesting as Secretary of Labor will exit
Speaker 1: and he will represent the players of his national hockey
Speaker 1: league with a good jobs report. Today, the Dow down
Speaker 1: one one hundred and eighty points. John Farrow was Secretary Walsh.
Speaker 1: I'm pleased to say that joining us now is the
Speaker 1: US Labor Secretary Morty walshon he joins us from Washington.
Speaker 1: Secondy Walsh, what a morning for it Just amazing moves
Speaker 1: in this market that we can discuss, amazing moves on
Speaker 1: the West coast with a financial institution. Secondly, Walsh, you
Speaker 1: get to represent the administration this morning. I just wonder
Speaker 1: what your thoughts on what have been what's been developing
Speaker 1: in the last twenty four hours or side. Well, certainly
Speaker 1: on the jobs front, we had a good day, but
Speaker 1: as you have been reporting for the last I've heard
Speaker 1: you for the last fifteen minutes, a lot of concern
Speaker 1: in different areas, and hopefully we can continue to move
Speaker 1: forward here. I know the Secretary Ellen is up at
Speaker 1: Capitol Hill today testifying. There's lots of concerns about about
Speaker 1: what the future of the stock market is. I know that.
Speaker 1: But when it comes to jobs, we have a real
Speaker 1: good We have a good jobs report and good signs
Speaker 1: all along. Are you worried that we're starting to see
Speaker 1: things break as the Federal Reserve tries to address inflation. No,
Speaker 1: because we've been talking about now and people have been
Speaker 1: concerned about it for the last year. Really, and when
Speaker 1: you think about what we're doing here, we're seeing we're
Speaker 1: seeing jobs being added, we're seeing participation rate going up.
Speaker 1: We're seeing opportunities for even further participation rate by making
Speaker 1: some investments, and certainly we're seeing incremental steps in the
Speaker 1: inflation coming down, so we need to continue to stay
Speaker 1: focused on that. Secondly, well, sorry, I froze there for
Speaker 1: a second because somebody behind is talking, so I kind
Speaker 1: of cut in my head. Don't worry, it's fine. It's
Speaker 1: the last interview we get to do together because I
Speaker 1: know you head into the exit too, so I'll give
Speaker 1: you the time. I'm gonna miss you. I'm gonna miss you,
Speaker 1: Gonna miss you too. Secondly, for a couple more questions,
Speaker 1: didn't there? If I can, we heard a little bit
Speaker 1: earlier this week for the Chairman of the Federal Reserve.
Speaker 1: He took a lot of flat, a lot of heat
Speaker 1: from some Democratic senators, including Senator Warren, who said that
Speaker 1: maybe he was pushing this too far it could lead
Speaker 1: to people losing their jobs, and he said, would working
Speaker 1: people be better off if we just walk away from
Speaker 1: our jobs with inflation of five six percent? Secondly, Welsh,
Speaker 1: how did you feel when you hurt that interaction earlier
Speaker 1: this week? What were you thinking? Listen, as I said
Speaker 1: from from BA one, my focus here is to get
Speaker 1: us many people back to work as possible and continue
Speaker 1: to see wages go up working with business so business
Speaker 1: is successful. That's what my focus has been for the
Speaker 1: last two years here at the Department of Labor. That's
Speaker 1: been the President's focus, and we're going to continue to
Speaker 1: continue on that path. I know you're heading to the exit,
Speaker 1: your replacement facing a little bit of scrutiny right now.
Speaker 1: You work closely with her secondary Welsh. Is it a
Speaker 1: ringed endorsement from your side? Can you give her some
Speaker 1: words to support Absolutely. We've spent the last couple weeks
Speaker 1: Secretary Secretary depinutey Secretary Sue myself meeting with business, meeting
Speaker 1: with the US Chamber, and meeting with the Business Roundtable,
Speaker 1: meeting with the independent associations. So we're meeting with all
Speaker 1: those organizations just to talk about what the plan is
Speaker 1: here at the Department label we've been we've been connected
Speaker 1: at the hip for the last two years. We work
Speaker 1: very closely together. Business I think has a very good
Speaker 1: feel for me as Secretary of Labor, and they show
Speaker 1: they'll have the same field for Julie Sue and Julie
Speaker 1: Sue gets nominated secret prove we've got to leave it there.
Speaker 1: Thank you for your service, sir, and thank you for
Speaker 1: these monthly interactions. They've been fun. I've enjoyed them, and
Speaker 1: hopefully we get to catch up soon in your new role.
Speaker 1: The former governor of the Federal Reserve System Randall Krosner,
Speaker 1: before we spoke about the financial side. Now Krasner on
Speaker 1: our monetary system. Randy, in this milieu, can you use theory?
Speaker 1: Can you use anything that was invented at Yale years
Speaker 1: ago or at London School of Economics? The theories that matter?
Speaker 1: Are they valid and beneficial at this time? Even some
Speaker 1: of them from University Chicago too. You know, I think
Speaker 1: it gives us a broad a broad framework for thinking
Speaker 1: through these issues. But exactly as you were discussing, these
Speaker 1: data are not clear, and as we were talking about
Speaker 1: with Lisa before, the data have been quite volatile and
Speaker 1: sometimes difficult to interpret before, and this report is not
Speaker 1: completely consistent. Although I think Mike may have hit on
Speaker 1: exactly one of the issues in the so called composition effect.
Speaker 1: If you're growing a lot of jobs in the lower
Speaker 1: wage part like hospitality, but losing them in a higher
Speaker 1: wage part like manufacturing, that could lead to that number
Speaker 1: coming down that average hourly wage, but wages may still
Speaker 1: be going up because in each of those individual categories,
Speaker 1: wages make up. So we've got to get more more
Speaker 1: data on that. So to speak to the Chicago theory,
Speaker 1: Lisa has been beating me to death with long and
Speaker 1: variable lags. Does that math work now? Is it useful? Oh? Well,
Speaker 1: you know, Milton Friedman articulated that like seventy years ago,
Speaker 1: and I think we're still seeing that. We certainly have
Speaker 1: seen some lags. We've certainly seen some hit in housing
Speaker 1: market and in certain sectors, but not in all the sectors.
Speaker 1: And obviously there are lags, and we'll see when the
Speaker 1: tightening of monetary policy really hits. May not come for
Speaker 1: a few more months. Randy, we're seeing in markets people
Speaker 1: back away from the likelihood of a fifty basis point
Speaker 1: rate hike at the meeting of the Federal Reserve later
Speaker 1: this month. Do you think that that's valid given the guidance,
Speaker 1: given the strength the labor market, given the lack of
Speaker 1: significant downside revisions to what we saw in January. So
Speaker 1: we still have a very strong labor market. There's no
Speaker 1: way around that, And especially at this point, and you know,
Speaker 1: after the fan has been hiking for for a full year,
Speaker 1: those lags may have been long and variable. But this
Speaker 1: is a bit surprising. See so little, so little impact,
Speaker 1: and so I think I don't think the Fed has
Speaker 1: made their decision. I think exactly as John said as
Speaker 1: well as as well as Tom, the the inflation report
Speaker 1: is going to be very important because it's really you know,
Speaker 1: this is one input, a key input into what inflation
Speaker 1: is going to be. And that's ultimately what the FED
Speaker 1: cares about is bringing inflation down. If we do see
Speaker 1: inflation started to come down, they may some around the
Speaker 1: table may feel more comfortable to just say let's stick
Speaker 1: with twenty five. But if they don't see signs of
Speaker 1: it coming down, and you just look at this labor
Speaker 1: market being pretty hot, I think a number of people
Speaker 1: will want to push for fifty. It's early days. Yet
Speaker 1: in terms of the market reaction and put the knee
Speaker 1: jerk reaction seems to emphasize that it client and average
Speaker 1: hourly earnings and the tick up and the unemployment rate
Speaker 1: as why perhaps the Fed wouldn't have to go quite
Speaker 1: as far as previously believed. Do you think that these
Speaker 1: are significant things that these are developments that highlight softening
Speaker 1: around the edges that will show up later on. Well,
Speaker 1: as I was saying that the reduction in the average
Speaker 1: early earnings may just have be a composition effect, and
Speaker 1: so I think it's it's hard to interpret any any
Speaker 1: one report at two and too much detail and really say, ah, well,
Speaker 1: the Fed's going to change because of it. I think
Speaker 1: looking over the last three months, we still see a
Speaker 1: very strong labor market. I think that's what the context
Speaker 1: in which j. Powell gave his testimony. I think the
Speaker 1: labor market is still pretty strong. It doesn't seem to
Speaker 1: be strengthening, but you know, if it were, then I
Speaker 1: think it would be very clear. Have to be fifty now,
Speaker 1: I think it's I think it's reasonable at the market
Speaker 1: states and even BET but I think a lot will
Speaker 1: be determined inflation number on Tuesday, Professor Cross, thank you
Speaker 1: so much for joining US today from Madrid. Obviously, Randy
Speaker 1: Krosner with the FED and also with the University of
Speaker 1: Chicago Booth School as well, now turned to bond market reaction.
Speaker 1: He's aged overnight. Jeffrey Rosenberg joins US now portfolio manager
Speaker 1: of Systematic Multi strategy fund at Blackrock. Jeff open question,
Speaker 1: what's the multi strategy right now? The multi strategy is
Speaker 1: defensive here, Tom. I mean, you know, there's a lot
Speaker 1: of focus on twenty five versus fifty, But I think
Speaker 1: the real message of the week was that Powell re
Speaker 1: emphasized financial conditions need to stay tight for transmission of
Speaker 1: monetary policy to work. And the thing that we lost
Speaker 1: sight of here is how is monetary supposed. Monetary policy
Speaker 1: is supposed to actually bring down into it functions mainly
Speaker 1: through financial conditions tightening. And when you look at where
Speaker 1: we were at the end of January, financial conditions we're
Speaker 1: basically back to where they were before the tightening even began,
Speaker 1: effectively unwinding all of the tightening in policy. So the
Speaker 1: pushback here is coming from the data play, and you know,
Speaker 1: we can parse today's payroll report. I would emphasize the
Speaker 1: earlier conversation, AH is the worst measure of real time
Speaker 1: or near term measures of wage growth because of the
Speaker 1: compositional effects. But beyond the noise of the data, the
Speaker 1: issue is that financial conditions aren't tightening enough. And Powell
Speaker 1: pushed back this week, and that means that it raises
Speaker 1: the prospects that they have to do more. That's the
Speaker 1: fifty twenty five debate, but it's really the terminal debate
Speaker 1: that is important here, and that they're much more willing
Speaker 1: to push the risk up of a recession. Jeff Rosenberg,
Speaker 1: You're going to take in the various narratives and you're
Speaker 1: going to filter them through a Carnegie Mellon education, which
Speaker 1: is hugely probabilistically determined. Fine, can you state that we
Speaker 1: are in a disinflationary trend? Now? What is the probability
Speaker 1: at the vector coming off of this report and coming
Speaker 1: off Tuesday will signal disinflation? Well, you know, I think
Speaker 1: what we had is finally the realization of peak inflation.
Speaker 1: And remember that was the big debate for a while, was,
Speaker 1: you know, the expectation that we'd hit peak inflation, inflation
Speaker 1: would come down, and it just kept getting disappointed. Last
Speaker 1: November we hit the peak inflation, and everybody got very
Speaker 1: excited by three in a row, three months in a
Speaker 1: row of very good inflation numbers that showed a decline,
Speaker 1: but decline to what level? Right? The FETE is talking
Speaker 1: about getting back to the pre COVID two percent, and
Speaker 1: nothing in the data that we're seeing in terms of
Speaker 1: the persistent measures of inflation, which is really that core
Speaker 1: services x housing services, which is really about labor and
Speaker 1: markets and wage inflation. Nothing is really said that the
Speaker 1: Fed's tightening to date has done the work that's necessary
Speaker 1: to bring that back to two percent target to have
Speaker 1: that be accomplished. Jeff, you're talking about the financial market
Speaker 1: conditions and how that's really important for the transmission of
Speaker 1: FED policy. I'm looking now at the terminal rate being
Speaker 1: priced in a five point three percent, down from five
Speaker 1: point six percent earlier this week. Do you think that
Speaker 1: this is an accurate response to the report that we
Speaker 1: just got. Well, I think the I think the market
Speaker 1: is being whip sought a lot around positioning and technicals
Speaker 1: around twenty five verses fifty. So you have to be
Speaker 1: careful about overinterpreting kind of the longer run fundamental interpretation
Speaker 1: from today's news. And as John was saying earlier, you know,
Speaker 1: come Tuesday with a hot CPI report, all this is
Speaker 1: going to get sort of thrown out and reinterpreted. I
Speaker 1: think the broader message of the raising of the terminal
Speaker 1: rate is the right response to what Powell said earlier
Speaker 1: this week. That we need to do more, and that's
Speaker 1: really the broader message of the failure of the core measures,
Speaker 1: the labor market measures, the core ex housing X services
Speaker 1: measures of inflation to really respond to what is a
Speaker 1: very significant amount of tightening to date. So it's higher
Speaker 1: for longer, and you've got to price out that expectation
Speaker 1: that the Fed's going to turn around very quickly and
Speaker 1: be able to cut interest rates as well ahead spinning, Jeff,
Speaker 1: I've got to be honest, everyone said something slightly different.
Speaker 1: Everybody has a different base expectation of what the FEDS
Speaker 1: parameters are to high rates. People have ring. I mean, yes,
Speaker 1: actually that's a completely accurate I'm looking at this. Is
Speaker 1: there any certainty in your investment thesis that you have
Speaker 1: continued to drive home that you continue to have conviction
Speaker 1: in Jeff, Well, you're going to hate this answer. The
Speaker 1: only certainty, the only certainty is is the uncertaintyer that's
Speaker 1: Ellen Melzer continue. I know you aren't gonna like that one,
Speaker 1: but but it's you know, it's really it's about recognizing
Speaker 1: that that there is a lack of ability of forecasting
Speaker 1: and inflation. That's really the issue here is that the
Speaker 1: market consensus is pretty confident or was pretty confident, uh
Speaker 1: in a in a steady return to two percent, and
Speaker 1: the history of the accuracy of forecasting inflation here just
Speaker 1: doesn't bear out that degree of confidence. And so it's
Speaker 1: really about recognizing what we know and what we don't
Speaker 1: know relative to the what's priced into the market. In there,
Speaker 1: you certainly saw a lot of skew to the downside,
Speaker 1: and that that downside has been playing out, you know,
Speaker 1: of course of February, the first part of March. Here
Speaker 1: Jeff Rozenberg always thank you. He is with a black
Speaker 1: Let's not waste any time you're joining us right now,
Speaker 1: is mister Mayo, senior equity analyst at Wills Fargo, A
Speaker 1: kind on the street back to days long ago with
Speaker 1: Credit Suite. So, Mike, I've got eight ways to go here.
Speaker 1: But I want to just simply say, is this morning
Speaker 1: the opportunity for the major banks to get competitive ground.
Speaker 1: Do the major banks benefit by all this turmoil because
Speaker 1: financial America will find comfort with big banks. Well, the
Speaker 1: unintended consequences of everything that's taken place since the global
Speaker 1: financial crisis is it's increased the moat around the largest banks.
Speaker 1: So the regulation, the reduction of mergers, the too big
Speaker 1: to fail all that simply has reinforced the resiliency of
Speaker 1: the largest banks and resiliency of the balance sheets. Credit
Speaker 1: risk is much less the resiliency of the business models,
Speaker 1: the scalability that you've gotten from technology, and yes, the
Speaker 1: resiliency of the funding. Even though deposits are declining some
Speaker 1: we think the deposits are quite sticky at the largest
Speaker 1: banks and they have all sorts of ways to fund themselves.
Speaker 1: So you know, the issues out there that you see
Speaker 1: it in the stock price to clients for the largest
Speaker 1: banks are are way overdone. The FED stress test is
Speaker 1: conducted each year, and this year it's I see it
Speaker 1: at the combination of the last three recessions combined. And
Speaker 1: until banks can pass that test, they're not allowed to
Speaker 1: return capital. The issue of the moment is banks do
Speaker 1: have some unrealized securities losses that's already reflected in their financials.
Speaker 1: And even if you assume they never sell these securities,
Speaker 1: deposits are still about twenty percent higher relative to loans
Speaker 1: than they've been historically. So since the global financial crisis,
Speaker 1: you know, capital is up fifty to one hundred percent
Speaker 1: liquidity is up about fifty percent. The credit profiles are
Speaker 1: vastly improved. Subprime loans or eighty percent less than where
Speaker 1: they were before and time. As you know, I was
Speaker 1: fortunate to be the first analyst to testify on the
Speaker 1: causes of the global financial crisis to the Congressional Committee.
Speaker 1: And you know, as you know, I got fired part
Speaker 1: of that time when I was negative. Well it worked
Speaker 1: out in the end, not in the moment. But this
Speaker 1: is almost like the opposite of the global financial crisis,
Speaker 1: when there were not fears and then things were about
Speaker 1: to crumble, and now the fears are really you know,
Speaker 1: way out there, when the banks were more resilient than
Speaker 1: they've been, you know, in a generation. So, Mike, we
Speaker 1: can talk about a resiliency. I think we also need
Speaker 1: to discuss the profit headwinds as well, and that interest margins,
Speaker 1: how much they'll have to pay for that deposit base
Speaker 1: at the largest lenders. In just a moment, right before
Speaker 1: we get there, I want to pick up on something
Speaker 1: you said. You said the moats around the biggest banks
Speaker 1: are huge. What about the smallest banks, Mike, How vulnerable
Speaker 1: are they? Have we seen and can you comment on
Speaker 1: the lack of regulatory scrutiny that they received. Over the
Speaker 1: last ten years, well, the entire industry has had additional
Speaker 1: regulation and oversight, and so those industry statistics that I
Speaker 1: quote include both the small and the large banks. Now,
Speaker 1: you can always have idiosyncratic events, and that's going to happen,
Speaker 1: I mean, and I think one warning here is the
Speaker 1: risk outside the banking industry. So you have issues with
Speaker 1: crypto and that can have a ricochet effect. You have
Speaker 1: an issue with VC firms not fundraising as much, needing
Speaker 1: to draw down their funds. That can have a ricochet effect.
Speaker 1: But really, I think what's not been seen yet, and
Speaker 1: I think you could see more are bigger problems outside
Speaker 1: the banking industry, as so much risk has been pushed
Speaker 1: outside of banks into non banks. Which banks, Which of
Speaker 1: the biggest banks are most exposed to a devaluation in
Speaker 1: some of the assets most exposed to those areas, And
Speaker 1: I'm thinking of private credit, I'm thinking of less liquid loans,
Speaker 1: I'm thinking of some of these industries that are seeing
Speaker 1: some serious distress. Well, the truth is, and this goes
Speaker 1: back to the FED stress test. Every year, the FED
Speaker 1: is recalibrating the most risky areas. So the penalty for
Speaker 1: Goldman Sacks having private equity investments has gone up and
Speaker 1: up and up the last few years, so you're you
Speaker 1: have big capital behind a lot of those types of investments.
Speaker 1: So the entire industry has become much more resilient. So
Speaker 1: you have four categories of loans. One is consumer secured
Speaker 1: that residential mortgages. You had that crisis in seven o
Speaker 1: eight and that's not happening now. Loan two values are great.
Speaker 1: You have unsecured consumer and credit cards, and credit cards
Speaker 1: are an area to watch. You're seeing issues on the
Speaker 1: low end auto loans, low end consumer. And then you
Speaker 1: have on the wholesale side secured that would be commercial
Speaker 1: real estate. That is an area to watch, especially offices,
Speaker 1: so we're watching that. And then you have the unsecured
Speaker 1: wholesale work commercial loans, and you have leverage loans and
Speaker 1: that's also an area to watch. Having said all that,
Speaker 1: you know this is really more of an earnings issue,
Speaker 1: not a liquidity issue, not a soleignty issue. We've taken
Speaker 1: our estimates down on some of the banks due to
Speaker 1: higher funding costs, and if anything, so far, credit quality
Speaker 1: has performed stronger for longer than I or many have expected,
Speaker 1: and that's still likely to be to be good in
Speaker 1: a good economy. We started out by talking about how,
Speaker 1: in some ways episodes like this consolidate control, consolidate market
Speaker 1: share among the biggest banks, Which among the big banks
Speaker 1: will emerge as the winner from all of this, especially
Speaker 1: because that really determined the winners and the losers as
Speaker 1: a last crisis. Well, you have seen a theme of
Speaker 1: Goliath is winning when it comes to capital markets, and
Speaker 1: it's really amazing the impact of regulation. I mean, the
Speaker 1: likes of Goldman Sachs and JP Morgan consolidating wholesale market share.
Speaker 1: And on the retail side, you've seen the likes of
Speaker 1: Bank of America really uh, you know, lead the way
Speaker 1: with retail banking gathering share. JP Morgan is also gathered share.
Speaker 1: So when these rules come out saying okay, banks don't
Speaker 1: merge anymore, I mean, it's like the Jamie Diamond Protection Act.
Speaker 1: It just increases the moats around that business. And I
Speaker 1: think that's one of the unintended consequences of regulation and
Speaker 1: you know, probably should be reconsidered. Michael got to squeeze
Speaker 1: us in just quickly. It's just on the challenges that
Speaker 1: Keikope mentioned earlier this week. It's not not a profit
Speaker 1: headwind for some of the big names you just went through.
Speaker 1: I'm certain. Look, funding is going up, and last time
Speaker 1: I was on the show, I know Lisa asked me,
Speaker 1: when are we getting paid more for our deposits? Where
Speaker 1: you're getting paid more for your deposits now? And so
Speaker 1: look the additional funding costs for the banks. Look, this
Speaker 1: could wind up taking five to ten percent out of
Speaker 1: our earnings estmates. On the other hand, the recession discount
Speaker 1: is about a thirty percent, you know factor. So if
Speaker 1: you give up ten percent of earnings but get that
Speaker 1: thirty percent valuation back, then that would you know, I
Speaker 1: come back a year from now you say, wow, the
Speaker 1: banks actually performed well after all. Mike, appreciate the Howay
Speaker 1: has always and thanks for getting got badly for us.
Speaker 1: This morning may have that of last Tago. Our team
Speaker 1: has worked overnight to bring you the best of global
Speaker 1: Wall Street on banking, and we begin strong this morning
Speaker 1: with Gerard Cassidy, head of US bank Equity Strategy at
Speaker 1: RBC Capital Markets. He counted banks on Thursday in the
Speaker 1: savings and loan crisis of who would go out of
Speaker 1: business over the weekend. You Gerard, I mentioned the SNL
Speaker 1: crisis of the nineteen eighties earlier. This is not this.
Speaker 1: What is this? If it's ideo syncretic, how do you
Speaker 1: describe it? Tom? Thank you for having me on, and
Speaker 1: you're so right. This is not what we saw in
Speaker 1: the SMIL crisis at all. As you remember, Tom, back
Speaker 1: in those days, it was a credit crisis. This is
Speaker 1: not an issue with credit at all for a Silicon
Speaker 1: Valley or for any of the banks. But you're bringing
Speaker 1: up a very good point. What has happened here is
Speaker 1: the deposits. Everybody is very concerned about deposit outflows. As
Speaker 1: you guys know, during the pandemic, because of quantitative easing,
Speaker 1: the FED pumped in over three trillion dollars of deposits
Speaker 1: into the banking system, and now they're starting to leave.
Speaker 1: These wholesale deposits are surge deposits, as they're often referred to,
Speaker 1: are the deposits that are likely to leave. But again,
Speaker 1: this system has too many deposits, if you can believe that.
Speaker 1: But the core issue here is we need to focus
Speaker 1: on core deposits. These are the small denominated deposits. I
Speaker 1: like to call them grandmon grandpon deposits. Those are very sticky,
Speaker 1: and those are very difficult to grow because it takes
Speaker 1: years together those deposits. The banks with high concentrations of
Speaker 1: those deposits, Bank America is a good example, fifth Third
Speaker 1: Regions Bank. Those deposits are sticky and there's not going
Speaker 1: to be any real concerns about those deposits. Girard, Is
Speaker 1: this a moment to acquire shares and quality banking? Can
Speaker 1: you use the opportunity of the last couple days in
Speaker 1: crypto and in Silicon Valley to go strong with small
Speaker 1: banks that you're noted for, or dare I say even
Speaker 1: the money center banks? Absolutely, and the reason being is
Speaker 1: that we understand how fearful it is and the uncertainty
Speaker 1: out there, no doubt about it. But when you come
Speaker 1: to core banking business that the regional banks do, the
Speaker 1: community banks do, and the money centers, it's a very strong,
Speaker 1: stable business. There's no real systemic risk here. And when
Speaker 1: the stocks sell off like they did yesterday, it is
Speaker 1: a buying opportunity for the law German investor. Also the traders,
Speaker 1: of course can get involved, the hedge onuns and so forth.
Speaker 1: But we don't see this as a systemic crasis, nothing
Speaker 1: compared to O eight or nine or ninety nine. You
Speaker 1: are the SNL crasis time, Jared. Just because it's not
Speaker 1: a systemic issue for some of these big names, and
Speaker 1: a lot of people listening would agree with you, does
Speaker 1: not necessarily mean it's a buying opportunity. And Jared, you
Speaker 1: know where I'm going to go with this because you
Speaker 1: and I've already gone back and forth on it. There
Speaker 1: is clearly a profit headwind emerging for these big banks.
Speaker 1: I understand that they don't have the diversification issues a
Speaker 1: very concentrated deposit base at a bank like SVP. I
Speaker 1: think we all understand the unique nature of what's developing
Speaker 1: in the last twenty four hours. But Jared, there is
Speaker 1: going to be a competition for deposits. And I think
Speaker 1: what we're all trying to understand and what are the
Speaker 1: profit headwinds there emerging? Care What are we seeing signs
Speaker 1: off particularly with was a key CORP early this week
Speaker 1: talking about deposit basis and the risk around that. Jared,
Speaker 1: can you frame that for us and what it means
Speaker 1: for the profits the bottom line of these banks? John Very,
Speaker 1: you put your thumb right on it. We held our
Speaker 1: twenty seventh annual Financial Conferences week in which, key to
Speaker 1: your point, lower the guidance on their net interest revenue
Speaker 1: growth because of higher deposit beatas so, what's happening is
Speaker 1: consumers are moving into more higher rate deposits, which is
Speaker 1: squeezing the margins as we go forward. We expect net
Speaker 1: interest margin for the industry to probably peak in the
Speaker 1: first quarter or second quarter of this year, so there
Speaker 1: will be that pressure or headwind on the margin. But
Speaker 1: we have to remember banks can still expand their balance
Speaker 1: sheets through loan growth depending on how the economic outlook is.
Speaker 1: So net interesting growth net interest income growth, which last
Speaker 1: year was spectacular, we still see for most banks anywhere
Speaker 1: from eight to ten percent top line growth in net
Speaker 1: interest income, even with a margin coming down because of
Speaker 1: earning asset growth, and that will help them. We still
Speaker 1: think this year the banks as a group will be
Speaker 1: one of the few groups that put up EPs year
Speaker 1: year growth as we see twenty three today. Or I'd
Speaker 1: want to build on that, this idea of growing their
Speaker 1: loan books at a time where we potentially could be
Speaker 1: faced seeing some serious headwinds and also a lot of
Speaker 1: companies aren't going to want to borrow at the rates
Speaker 1: that a lot of these banks are going to offer.
Speaker 1: I mean, how fruitful are they going to find the
Speaker 1: lending market. How risky are the assets they're going to
Speaker 1: have to lock themselves into in order to capture that
Speaker 1: higher rate. It's a really good question. Now. In our
Speaker 1: forecast for twenty twenty three, we do expect loan growth
Speaker 1: to slow. History has shown the industry's loan growth will
Speaker 1: grow with nominal GDP. So if you expect inflation this
Speaker 1: year to average let's call it three to four percent,
Speaker 1: we have zero percent real GDP growth or maybe slightly negative,
Speaker 1: you're looking at about three to four percent loan growth
Speaker 1: this year. So we would say three to five percent
Speaker 1: is not an unreasonable estimate at this time, and we've
Speaker 1: seen that in other slowdowns where loan growth continues. But
Speaker 1: you're right, the loans have to be underwritten very carefully
Speaker 1: because the real risk to bank profitability. Even though I
Speaker 1: know this margin pressure is something that discuss, the real
Speaker 1: risk has always been credit. While curdit quality today is
Speaker 1: quite good. So right now, if we don't have some
Speaker 1: sort of severe economic downturn, credits should hang in there.
Speaker 1: This year. It will be higher costs for credit, but
Speaker 1: nothing like what we saw in past downturns. We're talking
Speaker 1: about the biggest, best capitalized banks, and then really the
Speaker 1: issue right now is in the smaller regional banks with
Speaker 1: more concentrated portfolios of depositors of creditors. Bill Ackman overnight
Speaker 1: a Pershing Square came out and said that the failure
Speaker 1: of SVB could destroy an important longer term driver of
Speaker 1: the economy because of the VC component of the economy,
Speaker 1: and recommends that if private capital can provide a solution,
Speaker 1: a highly dilutive government preferred bailout should be considered. Thoughts Jarred,
Speaker 1: I think that's premature when you look at Silicon Valley.
Speaker 1: Though it's important to the Silicon Valley area obviously the
Speaker 1: country and private equity, they're not the only players there,
Speaker 1: of course, and as you know, our biggest banks are
Speaker 1: involved in lending into the private equity business, so single
Speaker 1: handedly Silicon Valley, it's important to that part of the business,
Speaker 1: but it's not the only bank that has act that
Speaker 1: have PE customers, private equity customers, or a venture capital.
Speaker 1: So I think it's a little premature to be saying
Speaker 1: that at this time, Joe, when Bramo says thoughts, Gerardi
Speaker 1: Hanks that she has thoughts, but she's really trying hard
Speaker 1: to bite her tongue what she really thinks. I was
Speaker 1: wondering what he wants special. Can you give us a
Speaker 1: brief answer, Police, I'm going to butcher something Jeremy Irons
Speaker 1: said in marchin Caller those years ago. Speak to me
Speaker 1: like I'm a golden retriever. So, Jared, if you can,
Speaker 1: this is a bit of a bit of a blank
Speaker 1: spot for me. It's just regulation, and I'd love your
Speaker 1: thoughts on it, because I know you follow this stuff
Speaker 1: really closely. Can you talk to me about the degree
Speaker 1: of regulatory scrutiny some of these smaller banks have received
Speaker 1: over the last decade compared to say, some of the
Speaker 1: large banks and the problems that might emerge for the
Speaker 1: smaller cant banks. John, The regulators have done a very
Speaker 1: good job in changing the system compared to where we
Speaker 1: were a pre financial crisis. As you know, and you
Speaker 1: just touched on, the largest banks go through a stress
Speaker 1: test every year, and the banking system has been fortified
Speaker 1: very strongly since the financial crisis. Now, even the smaller banks,
Speaker 1: They too go through a very rigorous regulatory process, and
Speaker 1: so I would say that the regulatory picture and the
Speaker 1: capital levels are quite strong for these banks. And that's
Speaker 1: the critical part. When you look back to the pre
Speaker 1: financial crisis days, the level of capital in the banking
Speaker 1: system back then was materially lower than it is today.
Speaker 1: Same thing with liquidity. All the banks have to measure
Speaker 1: their liquidity. There's a liquidity coverage ratio that it's called,
Speaker 1: or you have to measure the amount of deposit outflow
Speaker 1: over the next thirty days. And in that ratio you've
Speaker 1: got to carry liquid assets to handle that. So the
Speaker 1: liquidity and capital is quite strong now. Granted we all
Speaker 1: know uncertainty creates fear. That's what we saw yesterday. As
Speaker 1: you guys said in the pre market opening, we're seeing
Speaker 1: it again. But as cooler minds prevail, I think things
Speaker 1: will stabilize and people will realize that this is not
Speaker 1: an O eight oh nine or even in nineteen ninety moment.
Speaker 1: If you're listening to this on radio, it makes you
Speaker 1: can't say the few that John Cassidy has out of
Speaker 1: his living bricks right now, which is just sick, absolutely depressing.
Speaker 1: So it's shooting on TV. He lives, he lives, what
Speaker 1: is that? He'll live? So large? In nine the Lobster
Speaker 1: check down the road is eighty dollars for a lobsteroy
Speaker 1: doing it oh wrong. That's a large It's wrong this
Speaker 1: all the time. It just feel like we're just doing
Speaker 1: it oh wrong, Cassidy. If I'MBC Capital Markets, thank you, sir.
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