WEBVTT - Surveillance: US Payrolls Top Estimates 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.240 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.360 the Bloomberg Terminal, and the Bloomberg Business App. Right now, 0:00:30.800 --> 0:00:33.640 it's going to be very interesting to see the ballet here. 0:00:33.720 --> 0:00:36.080 This has been an annual. I say it's to say, 0:00:36.080 --> 0:00:41.000 a monthly ritual of John Farrell talking with the gentleman 0:00:41.040 --> 0:00:42.880 from Boston. I think it's because the way the British 0:00:43.000 --> 0:00:45.320 were treated in the Revolutionary War. I think that's I 0:00:45.400 --> 0:00:49.160 think that as a conversation, and the answer is now 0:00:49.240 --> 0:00:52.680 made even more interesting as Secretary of Labor will exit 0:00:53.159 --> 0:00:57.160 and he will represent the players of his national hockey 0:00:57.320 --> 0:00:59.680 league with a good jobs report. Today, the Dow down 0:00:59.720 --> 0:01:03.680 one one hundred and eighty points. John Farrow was Secretary Walsh. 0:01:03.880 --> 0:01:05.360 I'm pleased to say that joining us now is the 0:01:05.400 --> 0:01:07.920 US Labor Secretary Morty walshon he joins us from Washington. 0:01:08.360 --> 0:01:10.720 Secondy Walsh, what a morning for it Just amazing moves 0:01:10.720 --> 0:01:13.319 in this market that we can discuss, amazing moves on 0:01:13.319 --> 0:01:16.200 the West coast with a financial institution. Secondly, Walsh, you 0:01:16.200 --> 0:01:18.360 get to represent the administration this morning. I just wonder 0:01:18.440 --> 0:01:20.760 what your thoughts on what have been what's been developing 0:01:20.760 --> 0:01:23.959 in the last twenty four hours or side. Well, certainly 0:01:24.160 --> 0:01:26.039 on the jobs front, we had a good day, but 0:01:26.319 --> 0:01:28.560 as you have been reporting for the last I've heard 0:01:28.600 --> 0:01:31.320 you for the last fifteen minutes, a lot of concern 0:01:31.680 --> 0:01:34.600 in different areas, and hopefully we can continue to move 0:01:34.600 --> 0:01:37.000 forward here. I know the Secretary Ellen is up at 0:01:37.040 --> 0:01:42.120 Capitol Hill today testifying. There's lots of concerns about about 0:01:42.480 --> 0:01:44.520 what the future of the stock market is. I know that. 0:01:44.560 --> 0:01:46.840 But when it comes to jobs, we have a real 0:01:46.920 --> 0:01:49.040 good We have a good jobs report and good signs 0:01:49.120 --> 0:01:51.200 all along. Are you worried that we're starting to see 0:01:51.240 --> 0:01:55.760 things break as the Federal Reserve tries to address inflation. No, 0:01:55.960 --> 0:01:58.080 because we've been talking about now and people have been 0:01:58.080 --> 0:02:00.320 concerned about it for the last year. Really, and when 0:02:00.360 --> 0:02:02.800 you think about what we're doing here, we're seeing we're 0:02:02.800 --> 0:02:05.920 seeing jobs being added, we're seeing participation rate going up. 0:02:06.320 --> 0:02:09.680 We're seeing opportunities for even further participation rate by making 0:02:09.680 --> 0:02:15.520 some investments, and certainly we're seeing incremental steps in the 0:02:16.480 --> 0:02:18.639 inflation coming down, so we need to continue to stay 0:02:18.680 --> 0:02:21.480 focused on that. Secondly, well, sorry, I froze there for 0:02:21.480 --> 0:02:23.919 a second because somebody behind is talking, so I kind 0:02:23.919 --> 0:02:25.960 of cut in my head. Don't worry, it's fine. It's 0:02:25.960 --> 0:02:27.519 the last interview we get to do together because I 0:02:27.520 --> 0:02:28.920 know you head into the exit too, so I'll give 0:02:28.919 --> 0:02:30.639 you the time. I'm gonna miss you. I'm gonna miss you, 0:02:30.720 --> 0:02:33.680 Gonna miss you too. Secondly, for a couple more questions, 0:02:33.680 --> 0:02:35.880 didn't there? If I can, we heard a little bit 0:02:35.919 --> 0:02:37.639 earlier this week for the Chairman of the Federal Reserve. 0:02:38.080 --> 0:02:39.680 He took a lot of flat, a lot of heat 0:02:39.760 --> 0:02:42.519 from some Democratic senators, including Senator Warren, who said that 0:02:42.560 --> 0:02:44.720 maybe he was pushing this too far it could lead 0:02:44.720 --> 0:02:46.560 to people losing their jobs, and he said, would working 0:02:46.600 --> 0:02:48.520 people be better off if we just walk away from 0:02:48.520 --> 0:02:52.560 our jobs with inflation of five six percent? Secondly, Welsh, 0:02:52.600 --> 0:02:54.400 how did you feel when you hurt that interaction earlier 0:02:54.400 --> 0:02:57.840 this week? What were you thinking? Listen, as I said 0:02:57.840 --> 0:02:59.840 from from BA one, my focus here is to get 0:02:59.919 --> 0:03:02.240 us many people back to work as possible and continue 0:03:02.240 --> 0:03:04.919 to see wages go up working with business so business 0:03:05.000 --> 0:03:07.040 is successful. That's what my focus has been for the 0:03:07.120 --> 0:03:09.240 last two years here at the Department of Labor. That's 0:03:09.240 --> 0:03:11.480 been the President's focus, and we're going to continue to 0:03:11.480 --> 0:03:13.799 continue on that path. I know you're heading to the exit, 0:03:13.840 --> 0:03:16.720 your replacement facing a little bit of scrutiny right now. 0:03:16.840 --> 0:03:20.000 You work closely with her secondary Welsh. Is it a 0:03:20.080 --> 0:03:22.639 ringed endorsement from your side? Can you give her some 0:03:22.680 --> 0:03:26.440 words to support Absolutely. We've spent the last couple weeks 0:03:26.480 --> 0:03:31.440 Secretary Secretary depinutey Secretary Sue myself meeting with business, meeting 0:03:31.440 --> 0:03:33.680 with the US Chamber, and meeting with the Business Roundtable, 0:03:33.960 --> 0:03:37.320 meeting with the independent associations. So we're meeting with all 0:03:37.320 --> 0:03:40.200 those organizations just to talk about what the plan is 0:03:40.200 --> 0:03:42.000 here at the Department label we've been we've been connected 0:03:42.000 --> 0:03:43.560 at the hip for the last two years. We work 0:03:43.720 --> 0:03:46.320 very closely together. Business I think has a very good 0:03:46.320 --> 0:03:48.400 feel for me as Secretary of Labor, and they show 0:03:48.640 --> 0:03:50.400 they'll have the same field for Julie Sue and Julie 0:03:50.400 --> 0:03:53.320 Sue gets nominated secret prove we've got to leave it there. 0:03:53.320 --> 0:03:55.120 Thank you for your service, sir, and thank you for 0:03:55.160 --> 0:03:57.720 these monthly interactions. They've been fun. I've enjoyed them, and 0:03:57.760 --> 0:03:59.960 hopefully we get to catch up soon in your new role. 0:04:04.160 --> 0:04:07.560 The former governor of the Federal Reserve System Randall Krosner, 0:04:07.680 --> 0:04:11.040 before we spoke about the financial side. Now Krasner on 0:04:11.120 --> 0:04:15.960 our monetary system. Randy, in this milieu, can you use theory? 0:04:16.240 --> 0:04:19.760 Can you use anything that was invented at Yale years 0:04:19.760 --> 0:04:23.080 ago or at London School of Economics? The theories that matter? 0:04:23.440 --> 0:04:27.800 Are they valid and beneficial at this time? Even some 0:04:27.839 --> 0:04:30.360 of them from University Chicago too. You know, I think 0:04:30.360 --> 0:04:34.640 it gives us a broad a broad framework for thinking 0:04:34.640 --> 0:04:37.520 through these issues. But exactly as you were discussing, these 0:04:37.600 --> 0:04:39.880 data are not clear, and as we were talking about 0:04:39.880 --> 0:04:42.240 with Lisa before, the data have been quite volatile and 0:04:42.440 --> 0:04:46.800 sometimes difficult to interpret before, and this report is not 0:04:46.960 --> 0:04:50.279 completely consistent. Although I think Mike may have hit on 0:04:50.640 --> 0:04:53.680 exactly one of the issues in the so called composition effect. 0:04:53.920 --> 0:04:57.159 If you're growing a lot of jobs in the lower 0:04:57.160 --> 0:05:00.640 wage part like hospitality, but losing them in a higher 0:05:00.640 --> 0:05:05.000 wage part like manufacturing, that could lead to that number 0:05:05.120 --> 0:05:09.440 coming down that average hourly wage, but wages may still 0:05:09.480 --> 0:05:11.800 be going up because in each of those individual categories, 0:05:11.800 --> 0:05:14.000 wages make up. So we've got to get more more 0:05:14.080 --> 0:05:18.400 data on that. So to speak to the Chicago theory, 0:05:18.640 --> 0:05:20.839 Lisa has been beating me to death with long and 0:05:21.000 --> 0:05:27.640 variable lags. Does that math work now? Is it useful? Oh? Well, 0:05:28.279 --> 0:05:30.960 you know, Milton Friedman articulated that like seventy years ago, 0:05:31.000 --> 0:05:34.039 and I think we're still seeing that. We certainly have 0:05:34.080 --> 0:05:37.680 seen some lags. We've certainly seen some hit in housing 0:05:37.720 --> 0:05:40.480 market and in certain sectors, but not in all the sectors. 0:05:40.760 --> 0:05:45.480 And obviously there are lags, and we'll see when the 0:05:45.520 --> 0:05:48.039 tightening of monetary policy really hits. May not come for 0:05:48.040 --> 0:05:50.719 a few more months. Randy, we're seeing in markets people 0:05:50.760 --> 0:05:53.200 back away from the likelihood of a fifty basis point 0:05:53.279 --> 0:05:56.039 rate hike at the meeting of the Federal Reserve later 0:05:56.080 --> 0:05:59.040 this month. Do you think that that's valid given the guidance, 0:05:59.240 --> 0:06:01.680 given the strength the labor market, given the lack of 0:06:01.760 --> 0:06:05.880 significant downside revisions to what we saw in January. So 0:06:06.000 --> 0:06:08.080 we still have a very strong labor market. There's no 0:06:08.160 --> 0:06:11.640 way around that, And especially at this point, and you know, 0:06:12.040 --> 0:06:14.720 after the fan has been hiking for for a full year, 0:06:15.040 --> 0:06:16.880 those lags may have been long and variable. But this 0:06:16.960 --> 0:06:20.080 is a bit surprising. See so little, so little impact, 0:06:20.800 --> 0:06:23.040 and so I think I don't think the Fed has 0:06:23.080 --> 0:06:26.560 made their decision. I think exactly as John said as 0:06:26.640 --> 0:06:30.919 well as as well as Tom, the the inflation report 0:06:31.000 --> 0:06:33.640 is going to be very important because it's really you know, 0:06:33.720 --> 0:06:36.400 this is one input, a key input into what inflation 0:06:36.480 --> 0:06:38.080 is going to be. And that's ultimately what the FED 0:06:38.120 --> 0:06:40.440 cares about is bringing inflation down. If we do see 0:06:40.440 --> 0:06:43.400 inflation started to come down, they may some around the 0:06:43.400 --> 0:06:45.839 table may feel more comfortable to just say let's stick 0:06:45.880 --> 0:06:47.960 with twenty five. But if they don't see signs of 0:06:48.040 --> 0:06:49.520 it coming down, and you just look at this labor 0:06:49.560 --> 0:06:53.360 market being pretty hot, I think a number of people 0:06:53.400 --> 0:06:55.840 will want to push for fifty. It's early days. Yet 0:06:55.920 --> 0:06:57.880 in terms of the market reaction and put the knee 0:06:57.920 --> 0:07:00.760 jerk reaction seems to emphasize that it client and average 0:07:00.800 --> 0:07:04.160 hourly earnings and the tick up and the unemployment rate 0:07:04.480 --> 0:07:07.400 as why perhaps the Fed wouldn't have to go quite 0:07:07.440 --> 0:07:10.440 as far as previously believed. Do you think that these 0:07:10.440 --> 0:07:14.440 are significant things that these are developments that highlight softening 0:07:14.440 --> 0:07:17.880 around the edges that will show up later on. Well, 0:07:17.920 --> 0:07:21.360 as I was saying that the reduction in the average 0:07:21.400 --> 0:07:24.520 early earnings may just have be a composition effect, and 0:07:24.800 --> 0:07:28.120 so I think it's it's hard to interpret any any 0:07:28.160 --> 0:07:34.000 one report at two and too much detail and really say, ah, well, 0:07:34.000 --> 0:07:36.120 the Fed's going to change because of it. I think 0:07:36.160 --> 0:07:38.000 looking over the last three months, we still see a 0:07:38.120 --> 0:07:40.679 very strong labor market. I think that's what the context 0:07:40.760 --> 0:07:43.640 in which j. Powell gave his testimony. I think the 0:07:43.680 --> 0:07:45.800 labor market is still pretty strong. It doesn't seem to 0:07:45.840 --> 0:07:49.360 be strengthening, but you know, if it were, then I 0:07:49.360 --> 0:07:52.520 think it would be very clear. Have to be fifty now, 0:07:52.560 --> 0:07:55.000 I think it's I think it's reasonable at the market 0:07:55.040 --> 0:07:57.120 states and even BET but I think a lot will 0:07:57.160 --> 0:08:00.480 be determined inflation number on Tuesday, Professor Cross, thank you 0:08:00.520 --> 0:08:03.600 so much for joining US today from Madrid. Obviously, Randy 0:08:03.640 --> 0:08:07.200 Krosner with the FED and also with the University of 0:08:07.280 --> 0:08:20.560 Chicago Booth School as well, now turned to bond market reaction. 0:08:20.640 --> 0:08:24.400 He's aged overnight. Jeffrey Rosenberg joins US now portfolio manager 0:08:24.840 --> 0:08:29.200 of Systematic Multi strategy fund at Blackrock. Jeff open question, 0:08:29.320 --> 0:08:34.000 what's the multi strategy right now? The multi strategy is 0:08:34.520 --> 0:08:37.600 defensive here, Tom. I mean, you know, there's a lot 0:08:37.640 --> 0:08:40.839 of focus on twenty five versus fifty, But I think 0:08:40.840 --> 0:08:43.679 the real message of the week was that Powell re 0:08:43.840 --> 0:08:49.840 emphasized financial conditions need to stay tight for transmission of 0:08:49.880 --> 0:08:53.400 monetary policy to work. And the thing that we lost 0:08:53.440 --> 0:08:57.360 sight of here is how is monetary supposed. Monetary policy 0:08:57.360 --> 0:09:02.199 is supposed to actually bring down into it functions mainly 0:09:02.240 --> 0:09:05.160 through financial conditions tightening. And when you look at where 0:09:05.160 --> 0:09:07.800 we were at the end of January, financial conditions we're 0:09:07.880 --> 0:09:12.800 basically back to where they were before the tightening even began, 0:09:13.000 --> 0:09:17.560 effectively unwinding all of the tightening in policy. So the 0:09:17.679 --> 0:09:22.600 pushback here is coming from the data play, and you know, 0:09:22.679 --> 0:09:25.760 we can parse today's payroll report. I would emphasize the 0:09:25.800 --> 0:09:29.160 earlier conversation, AH is the worst measure of real time 0:09:30.040 --> 0:09:33.480 or near term measures of wage growth because of the 0:09:33.520 --> 0:09:37.640 compositional effects. But beyond the noise of the data, the 0:09:37.720 --> 0:09:41.200 issue is that financial conditions aren't tightening enough. And Powell 0:09:41.240 --> 0:09:43.959 pushed back this week, and that means that it raises 0:09:44.000 --> 0:09:46.040 the prospects that they have to do more. That's the 0:09:46.080 --> 0:09:49.200 fifty twenty five debate, but it's really the terminal debate 0:09:49.600 --> 0:09:53.199 that is important here, and that they're much more willing 0:09:53.200 --> 0:09:56.440 to push the risk up of a recession. Jeff Rosenberg, 0:09:56.480 --> 0:09:58.480 You're going to take in the various narratives and you're 0:09:58.480 --> 0:10:02.240 going to filter them through a Carnegie Mellon education, which 0:10:02.320 --> 0:10:08.320 is hugely probabilistically determined. Fine, can you state that we 0:10:08.400 --> 0:10:13.400 are in a disinflationary trend? Now? What is the probability 0:10:13.840 --> 0:10:16.960 at the vector coming off of this report and coming 0:10:17.040 --> 0:10:22.200 off Tuesday will signal disinflation? Well, you know, I think 0:10:22.200 --> 0:10:26.640 what we had is finally the realization of peak inflation. 0:10:26.880 --> 0:10:29.760 And remember that was the big debate for a while, was, 0:10:29.880 --> 0:10:32.760 you know, the expectation that we'd hit peak inflation, inflation 0:10:32.800 --> 0:10:36.120 would come down, and it just kept getting disappointed. Last 0:10:36.200 --> 0:10:39.040 November we hit the peak inflation, and everybody got very 0:10:39.080 --> 0:10:42.560 excited by three in a row, three months in a 0:10:42.640 --> 0:10:46.800 row of very good inflation numbers that showed a decline, 0:10:46.840 --> 0:10:50.040 but decline to what level? Right? The FETE is talking 0:10:50.080 --> 0:10:53.360 about getting back to the pre COVID two percent, and 0:10:53.520 --> 0:10:55.840 nothing in the data that we're seeing in terms of 0:10:55.880 --> 0:11:00.440 the persistent measures of inflation, which is really that core 0:11:00.559 --> 0:11:03.760 services x housing services, which is really about labor and 0:11:04.160 --> 0:11:08.120 markets and wage inflation. Nothing is really said that the 0:11:08.160 --> 0:11:11.840 Fed's tightening to date has done the work that's necessary 0:11:11.880 --> 0:11:16.080 to bring that back to two percent target to have 0:11:16.200 --> 0:11:19.520 that be accomplished. Jeff, you're talking about the financial market 0:11:19.520 --> 0:11:22.439 conditions and how that's really important for the transmission of 0:11:23.280 --> 0:11:26.320 FED policy. I'm looking now at the terminal rate being 0:11:26.360 --> 0:11:29.360 priced in a five point three percent, down from five 0:11:29.360 --> 0:11:32.200 point six percent earlier this week. Do you think that 0:11:32.240 --> 0:11:34.959 this is an accurate response to the report that we 0:11:35.080 --> 0:11:38.600 just got. Well, I think the I think the market 0:11:38.679 --> 0:11:42.880 is being whip sought a lot around positioning and technicals 0:11:42.920 --> 0:11:45.240 around twenty five verses fifty. So you have to be 0:11:45.320 --> 0:11:50.199 careful about overinterpreting kind of the longer run fundamental interpretation 0:11:50.280 --> 0:11:53.000 from today's news. And as John was saying earlier, you know, 0:11:53.120 --> 0:11:56.240 come Tuesday with a hot CPI report, all this is 0:11:56.280 --> 0:12:00.160 going to get sort of thrown out and reinterpreted. I 0:12:00.200 --> 0:12:03.559 think the broader message of the raising of the terminal 0:12:03.640 --> 0:12:07.640 rate is the right response to what Powell said earlier 0:12:07.679 --> 0:12:11.200 this week. That we need to do more, and that's 0:12:11.280 --> 0:12:15.360 really the broader message of the failure of the core measures, 0:12:15.760 --> 0:12:19.880 the labor market measures, the core ex housing X services 0:12:19.920 --> 0:12:23.600 measures of inflation to really respond to what is a 0:12:23.720 --> 0:12:26.640 very significant amount of tightening to date. So it's higher 0:12:26.679 --> 0:12:30.080 for longer, and you've got to price out that expectation 0:12:30.200 --> 0:12:32.200 that the Fed's going to turn around very quickly and 0:12:32.240 --> 0:12:35.120 be able to cut interest rates as well ahead spinning, Jeff, 0:12:35.120 --> 0:12:37.280 I've got to be honest, everyone said something slightly different. 0:12:37.320 --> 0:12:39.679 Everybody has a different base expectation of what the FEDS 0:12:39.679 --> 0:12:42.960 parameters are to high rates. People have ring. I mean, yes, 0:12:43.000 --> 0:12:45.960 actually that's a completely accurate I'm looking at this. Is 0:12:45.960 --> 0:12:48.920 there any certainty in your investment thesis that you have 0:12:49.000 --> 0:12:51.880 continued to drive home that you continue to have conviction 0:12:51.920 --> 0:12:55.600 in Jeff, Well, you're going to hate this answer. The 0:12:55.679 --> 0:13:02.959 only certainty, the only certainty is is the uncertaintyer that's 0:13:03.000 --> 0:13:07.120 Ellen Melzer continue. I know you aren't gonna like that one, 0:13:07.160 --> 0:13:10.280 but but it's you know, it's really it's about recognizing 0:13:10.320 --> 0:13:15.120 that that there is a lack of ability of forecasting 0:13:15.120 --> 0:13:17.320 and inflation. That's really the issue here is that the 0:13:17.400 --> 0:13:21.719 market consensus is pretty confident or was pretty confident, uh 0:13:22.000 --> 0:13:25.959 in a in a steady return to two percent, and 0:13:26.520 --> 0:13:29.880 the history of the accuracy of forecasting inflation here just 0:13:29.920 --> 0:13:32.600 doesn't bear out that degree of confidence. And so it's 0:13:32.600 --> 0:13:35.200 really about recognizing what we know and what we don't 0:13:35.200 --> 0:13:38.360 know relative to the what's priced into the market. In there, 0:13:38.600 --> 0:13:42.439 you certainly saw a lot of skew to the downside, 0:13:42.440 --> 0:13:44.600 and that that downside has been playing out, you know, 0:13:44.800 --> 0:13:46.880 of course of February, the first part of March. Here 0:13:47.040 --> 0:13:50.200 Jeff Rozenberg always thank you. He is with a black 0:13:54.800 --> 0:13:56.720 Let's not waste any time you're joining us right now, 0:13:56.800 --> 0:13:59.640 is mister Mayo, senior equity analyst at Wills Fargo, A 0:13:59.720 --> 0:14:02.160 kind on the street back to days long ago with 0:14:02.240 --> 0:14:04.760 Credit Suite. So, Mike, I've got eight ways to go here. 0:14:05.320 --> 0:14:07.840 But I want to just simply say, is this morning 0:14:07.920 --> 0:14:12.079 the opportunity for the major banks to get competitive ground. 0:14:12.280 --> 0:14:16.000 Do the major banks benefit by all this turmoil because 0:14:16.200 --> 0:14:21.000 financial America will find comfort with big banks. Well, the 0:14:21.080 --> 0:14:25.600 unintended consequences of everything that's taken place since the global 0:14:25.640 --> 0:14:30.560 financial crisis is it's increased the moat around the largest banks. 0:14:31.000 --> 0:14:35.160 So the regulation, the reduction of mergers, the too big 0:14:35.200 --> 0:14:41.040 to fail all that simply has reinforced the resiliency of 0:14:41.080 --> 0:14:45.800 the largest banks and resiliency of the balance sheets. Credit 0:14:45.880 --> 0:14:49.320 risk is much less the resiliency of the business models, 0:14:49.760 --> 0:14:53.200 the scalability that you've gotten from technology, and yes, the 0:14:53.280 --> 0:14:57.560 resiliency of the funding. Even though deposits are declining some 0:14:58.520 --> 0:15:02.320 we think the deposits are quite sticky at the largest 0:15:02.320 --> 0:15:06.160 banks and they have all sorts of ways to fund themselves. 0:15:06.240 --> 0:15:09.120 So you know, the issues out there that you see 0:15:09.160 --> 0:15:11.600 it in the stock price to clients for the largest 0:15:11.600 --> 0:15:16.600 banks are are way overdone. The FED stress test is 0:15:16.600 --> 0:15:20.000 conducted each year, and this year it's I see it 0:15:20.080 --> 0:15:24.040 at the combination of the last three recessions combined. And 0:15:24.120 --> 0:15:26.880 until banks can pass that test, they're not allowed to 0:15:26.920 --> 0:15:30.680 return capital. The issue of the moment is banks do 0:15:30.800 --> 0:15:36.160 have some unrealized securities losses that's already reflected in their financials. 0:15:36.400 --> 0:15:39.240 And even if you assume they never sell these securities, 0:15:40.040 --> 0:15:43.920 deposits are still about twenty percent higher relative to loans 0:15:43.960 --> 0:15:47.720 than they've been historically. So since the global financial crisis, 0:15:48.000 --> 0:15:51.000 you know, capital is up fifty to one hundred percent 0:15:51.560 --> 0:15:56.560 liquidity is up about fifty percent. The credit profiles are 0:15:56.640 --> 0:16:00.840 vastly improved. Subprime loans or eighty percent less than where 0:16:00.840 --> 0:16:03.440 they were before and time. As you know, I was 0:16:03.800 --> 0:16:07.040 fortunate to be the first analyst to testify on the 0:16:07.080 --> 0:16:10.680 causes of the global financial crisis to the Congressional Committee. 0:16:10.960 --> 0:16:14.000 And you know, as you know, I got fired part 0:16:14.040 --> 0:16:18.560 of that time when I was negative. Well it worked 0:16:18.600 --> 0:16:21.360 out in the end, not in the moment. But this 0:16:21.440 --> 0:16:24.560 is almost like the opposite of the global financial crisis, 0:16:24.600 --> 0:16:28.600 when there were not fears and then things were about 0:16:28.600 --> 0:16:31.920 to crumble, and now the fears are really you know, 0:16:32.240 --> 0:16:35.040 way out there, when the banks were more resilient than 0:16:35.040 --> 0:16:38.040 they've been, you know, in a generation. So, Mike, we 0:16:38.040 --> 0:16:40.000 can talk about a resiliency. I think we also need 0:16:40.040 --> 0:16:43.120 to discuss the profit headwinds as well, and that interest margins, 0:16:43.120 --> 0:16:45.000 how much they'll have to pay for that deposit base 0:16:45.080 --> 0:16:47.480 at the largest lenders. In just a moment, right before 0:16:47.480 --> 0:16:48.800 we get there, I want to pick up on something 0:16:48.800 --> 0:16:51.640 you said. You said the moats around the biggest banks 0:16:51.640 --> 0:16:55.440 are huge. What about the smallest banks, Mike, How vulnerable 0:16:55.480 --> 0:16:58.040 are they? Have we seen and can you comment on 0:16:58.320 --> 0:17:01.160 the lack of regulatory scrutiny that they received. Over the 0:17:01.200 --> 0:17:07.119 last ten years, well, the entire industry has had additional 0:17:07.359 --> 0:17:11.520 regulation and oversight, and so those industry statistics that I 0:17:11.600 --> 0:17:15.520 quote include both the small and the large banks. Now, 0:17:15.560 --> 0:17:20.040 you can always have idiosyncratic events, and that's going to happen, 0:17:20.160 --> 0:17:23.000 I mean, and I think one warning here is the 0:17:23.119 --> 0:17:26.119 risk outside the banking industry. So you have issues with 0:17:26.200 --> 0:17:29.040 crypto and that can have a ricochet effect. You have 0:17:29.080 --> 0:17:32.960 an issue with VC firms not fundraising as much, needing 0:17:33.000 --> 0:17:35.880 to draw down their funds. That can have a ricochet effect. 0:17:36.240 --> 0:17:39.000 But really, I think what's not been seen yet, and 0:17:39.000 --> 0:17:42.359 I think you could see more are bigger problems outside 0:17:42.359 --> 0:17:45.679 the banking industry, as so much risk has been pushed 0:17:45.720 --> 0:17:49.840 outside of banks into non banks. Which banks, Which of 0:17:49.880 --> 0:17:53.280 the biggest banks are most exposed to a devaluation in 0:17:53.320 --> 0:17:56.320 some of the assets most exposed to those areas, And 0:17:56.359 --> 0:17:59.080 I'm thinking of private credit, I'm thinking of less liquid loans, 0:17:59.119 --> 0:18:02.000 I'm thinking of some of these industries that are seeing 0:18:02.000 --> 0:18:06.880 some serious distress. Well, the truth is, and this goes 0:18:06.880 --> 0:18:09.359 back to the FED stress test. Every year, the FED 0:18:09.480 --> 0:18:13.560 is recalibrating the most risky areas. So the penalty for 0:18:13.760 --> 0:18:18.359 Goldman Sacks having private equity investments has gone up and 0:18:18.440 --> 0:18:20.800 up and up the last few years, so you're you 0:18:21.160 --> 0:18:25.960 have big capital behind a lot of those types of investments. 0:18:26.000 --> 0:18:30.480 So the entire industry has become much more resilient. So 0:18:30.560 --> 0:18:36.680 you have four categories of loans. One is consumer secured 0:18:36.840 --> 0:18:41.359 that residential mortgages. You had that crisis in seven o 0:18:41.480 --> 0:18:46.560 eight and that's not happening now. Loan two values are great. 0:18:46.800 --> 0:18:50.760 You have unsecured consumer and credit cards, and credit cards 0:18:50.800 --> 0:18:53.640 are an area to watch. You're seeing issues on the 0:18:53.680 --> 0:18:57.439 low end auto loans, low end consumer. And then you 0:18:57.560 --> 0:19:00.800 have on the wholesale side secured that would be commercial 0:19:00.840 --> 0:19:03.960 real estate. That is an area to watch, especially offices, 0:19:04.760 --> 0:19:07.600 so we're watching that. And then you have the unsecured 0:19:07.720 --> 0:19:11.199 wholesale work commercial loans, and you have leverage loans and 0:19:11.240 --> 0:19:14.040 that's also an area to watch. Having said all that, 0:19:15.320 --> 0:19:18.959 you know this is really more of an earnings issue, 0:19:19.119 --> 0:19:22.240 not a liquidity issue, not a soleignty issue. We've taken 0:19:22.280 --> 0:19:24.240 our estimates down on some of the banks due to 0:19:24.320 --> 0:19:28.439 higher funding costs, and if anything, so far, credit quality 0:19:28.440 --> 0:19:32.400 has performed stronger for longer than I or many have expected, 0:19:32.480 --> 0:19:35.000 and that's still likely to be to be good in 0:19:35.320 --> 0:19:38.000 a good economy. We started out by talking about how, 0:19:38.040 --> 0:19:41.480 in some ways episodes like this consolidate control, consolidate market 0:19:41.520 --> 0:19:45.080 share among the biggest banks, Which among the big banks 0:19:45.240 --> 0:19:47.640 will emerge as the winner from all of this, especially 0:19:47.680 --> 0:19:50.520 because that really determined the winners and the losers as 0:19:50.560 --> 0:19:54.720 a last crisis. Well, you have seen a theme of 0:19:54.800 --> 0:19:58.400 Goliath is winning when it comes to capital markets, and 0:19:58.480 --> 0:20:02.119 it's really amazing the impact of regulation. I mean, the 0:20:02.400 --> 0:20:08.240 likes of Goldman Sachs and JP Morgan consolidating wholesale market share. 0:20:08.520 --> 0:20:11.560 And on the retail side, you've seen the likes of 0:20:11.640 --> 0:20:16.200 Bank of America really uh, you know, lead the way 0:20:16.280 --> 0:20:21.920 with retail banking gathering share. JP Morgan is also gathered share. 0:20:22.080 --> 0:20:25.880 So when these rules come out saying okay, banks don't 0:20:25.920 --> 0:20:29.960 merge anymore, I mean, it's like the Jamie Diamond Protection Act. 0:20:30.600 --> 0:20:34.320 It just increases the moats around that business. And I 0:20:34.359 --> 0:20:37.720 think that's one of the unintended consequences of regulation and 0:20:38.400 --> 0:20:41.119 you know, probably should be reconsidered. Michael got to squeeze 0:20:41.200 --> 0:20:44.080 us in just quickly. It's just on the challenges that 0:20:44.280 --> 0:20:47.399 Keikope mentioned earlier this week. It's not not a profit 0:20:47.400 --> 0:20:49.600 headwind for some of the big names you just went through. 0:20:51.000 --> 0:20:53.960 I'm certain. Look, funding is going up, and last time 0:20:54.000 --> 0:20:55.480 I was on the show, I know Lisa asked me, 0:20:55.520 --> 0:20:57.640 when are we getting paid more for our deposits? Where 0:20:57.640 --> 0:20:59.800 you're getting paid more for your deposits now? And so 0:21:00.320 --> 0:21:05.399 look the additional funding costs for the banks. Look, this 0:21:05.440 --> 0:21:08.000 could wind up taking five to ten percent out of 0:21:08.000 --> 0:21:11.240 our earnings estmates. On the other hand, the recession discount 0:21:11.320 --> 0:21:14.719 is about a thirty percent, you know factor. So if 0:21:14.760 --> 0:21:16.600 you give up ten percent of earnings but get that 0:21:16.920 --> 0:21:19.520 thirty percent valuation back, then that would you know, I 0:21:19.600 --> 0:21:21.199 come back a year from now you say, wow, the 0:21:21.200 --> 0:21:25.000 banks actually performed well after all. Mike, appreciate the Howay 0:21:25.040 --> 0:21:26.840 has always and thanks for getting got badly for us. 0:21:26.880 --> 0:21:39.280 This morning may have that of last Tago. Our team 0:21:39.280 --> 0:21:41.520 has worked overnight to bring you the best of global 0:21:41.560 --> 0:21:44.359 Wall Street on banking, and we begin strong this morning 0:21:44.359 --> 0:21:47.639 with Gerard Cassidy, head of US bank Equity Strategy at 0:21:47.760 --> 0:21:51.800 RBC Capital Markets. He counted banks on Thursday in the 0:21:51.880 --> 0:21:54.000 savings and loan crisis of who would go out of 0:21:54.040 --> 0:21:57.040 business over the weekend. You Gerard, I mentioned the SNL 0:21:57.119 --> 0:22:00.240 crisis of the nineteen eighties earlier. This is not this. 0:22:00.960 --> 0:22:04.199 What is this? If it's ideo syncretic, how do you 0:22:04.280 --> 0:22:07.800 describe it? Tom? Thank you for having me on, and 0:22:07.800 --> 0:22:10.560 you're so right. This is not what we saw in 0:22:10.600 --> 0:22:13.880 the SMIL crisis at all. As you remember, Tom, back 0:22:13.920 --> 0:22:16.520 in those days, it was a credit crisis. This is 0:22:16.560 --> 0:22:18.920 not an issue with credit at all for a Silicon 0:22:19.000 --> 0:22:21.240 Valley or for any of the banks. But you're bringing 0:22:21.320 --> 0:22:23.800 up a very good point. What has happened here is 0:22:23.840 --> 0:22:28.240 the deposits. Everybody is very concerned about deposit outflows. As 0:22:28.280 --> 0:22:32.920 you guys know, during the pandemic, because of quantitative easing, 0:22:33.280 --> 0:22:36.960 the FED pumped in over three trillion dollars of deposits 0:22:37.040 --> 0:22:39.720 into the banking system, and now they're starting to leave. 0:22:40.040 --> 0:22:44.240 These wholesale deposits are surge deposits, as they're often referred to, 0:22:44.440 --> 0:22:47.280 are the deposits that are likely to leave. But again, 0:22:47.359 --> 0:22:50.439 this system has too many deposits, if you can believe that. 0:22:50.800 --> 0:22:53.600