Speaker 1: This is the Bloomberg Surveillance podcast. I'm Lisa A. Bromoids,
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Speaker 2: That conversation can commence Right now Bloomberg's Amrie Horton sitting
Speaker 2: down with the Treasury Secretary Janet Yell, and Amrie I
Speaker 2: would see you.
Speaker 3: Thanks so much, John Yea, We're very pleased to be
Speaker 3: joined by Jersury Secretary Janet Yellen. You join us now
Speaker 3: from India where you're meeting your counterparts. It's the G
Speaker 3: twenty finance ministers and Central Bank Governor's meeting. And really
Speaker 3: the cloud around this meeting is the fresh data we
Speaker 3: got out of China today. Beijing slowing momentum in their
Speaker 3: growth city is talking about the growth target being at risk.
Speaker 3: I'd like to start Treasury Secretary with the fact of
Speaker 3: whether you think this means there could be an increased
Speaker 3: chance of a US recession.
Speaker 4: Well, you're talking about the slow growth number from China,
Speaker 4: Is that right, Anne Marie?
Speaker 5: Yes, correct, So I think.
Speaker 4: China has seen slower growth than they expected upon opening
Speaker 4: up from COVID. Consumer spending has been relatively weak. It
Speaker 4: looks like consumers are more focused on building back their
Speaker 4: savings buffers, and so growth has been slow in As
Speaker 4: you know, youth unemployment is quite high there. So I
Speaker 4: think the Chinese are concerned about sluggish growth in their economy.
Speaker 3: But what does this mean for US growth and global
Speaker 3: growth overall? Is the soft landing in the United States
Speaker 3: sill your base case scenario?
Speaker 4: Well, many countries do to depend on strong Chinese growth
Speaker 4: to promote growth in their own economies, particularly countries in Asia,
Speaker 4: and slow growth in China can have some negative spillovers.
Speaker 4: For the United States, growth is slowed, but our labor
Speaker 4: market continues to be quite strong. I don't expect a recession.
Speaker 4: I think that we're on a good path to bringing
Speaker 4: inflation down. The most recent inflation data we're quite encouraging
Speaker 4: that we're making progress on getting inflation down. But as
Speaker 4: I'd hoped and expected that would occur in the context
Speaker 4: of a strong labor market, and we continue to see
Speaker 4: that the libor market's the fact the labor market's been
Speaker 4: so strong has encouraged more primate people to enter the
Speaker 4: labor force into work, and that's helped take a bit
Speaker 4: of the heat out of the labor market. The fact
Speaker 4: that growth overall has slowed after we enjoyed a rapid recovery,
Speaker 4: that's normal, but it's also led to some reduction in
Speaker 4: the desire of firms to hire. Still lots of job openings,
Speaker 4: but wage growth is moderating and inflation is subsiding. So
Speaker 4: I think we're in a good path on the United States.
Speaker 3: Okay, So it sounds like soft landing is your base case,
Speaker 3: and you don't think we're going to see a recession.
Speaker 3: Yesterday when you were speaking to reporters, you talked about
Speaker 3: this de escalation with China, and you rolled out lifting
Speaker 3: tariffs as part of this de escalation with Beijing.
Speaker 5: So what is on the table?
Speaker 4: You know, several years have gone by in which we've
Speaker 4: had COVID lockdowns, especially in China, and very limited contact
Speaker 4: between senior officials in the United States in China, and
Speaker 4: we now have a new economic team in China that
Speaker 4: we need to establish relationships with We need to get
Speaker 4: our relationship back in a more stable place, put a
Speaker 4: floor under it, and try to promote better understanding between
Speaker 4: our countries. So I recently made a trip met with
Speaker 4: a number of Chinese officials, including the new economic team. There,
Speaker 4: we had very candid discussions. Each side raised a series
Speaker 4: of concerns. Chinese certainly mentioned their concern with the tariffs
Speaker 4: that we have in place, but we had constructive conversations,
Speaker 4: deepened our understanding of the economic situation and of our concerns,
Speaker 4: were able to address them and agree that there are
Speaker 4: a broad range of global challenges, particularly debt and climate change,
Speaker 4: that affect the entire global economy that we need to
Speaker 4: work on jointly, and I'm hopeful we'll be able to
Speaker 4: do that more successfully. On tariffs, you know, we put
Speaker 4: tariffs in place on China because we had underlying concerns
Speaker 4: about unfair trade practices, particularly those affecting intellectual property and
Speaker 4: technology transfer, and those concerns really have not been addressed.
Speaker 4: We're undergoing a four year required review of tariff and
Speaker 4: of course China also retaliated putting tariffs in place on us.
Speaker 4: We have to see what comes out of the four
Speaker 4: year review. But I would emphasize that really the underlying
Speaker 4: concerns we have have not yet been addressed, and we
Speaker 4: need to work on that going forward.
Speaker 3: But when you're looking at de escalating, we're trying to
Speaker 3: figure out what we'll be left on the table, because
Speaker 3: what it feels right now is the administration is actually
Speaker 3: just amping up when it comes to potential tit for
Speaker 3: tat with Beijing. There is the outbound Executive Order that
Speaker 3: potentially we could see as soon as the end of
Speaker 3: July or this summer.
Speaker 5: Could that be a place pulling.
Speaker 3: A punch from the outbound Executive order, maybe making that
Speaker 3: a little bit more toned down.
Speaker 5: Could that be a place you could de escalate with Beijing.
Speaker 4: Well, first of all, I want to say that what
Speaker 4: we're doing is not TIT for tet. What we're doing
Speaker 4: is putting in place controls that are designed to protect
Speaker 4: US national security and in some cases to address fundamental
Speaker 4: human rights abuses. And we do intend to protect our
Speaker 4: national security. We have export controls that play an important
Speaker 4: role in accomplishing that, and what I try to explain
Speaker 4: to our Chinese counterparts is that our desire is to
Speaker 4: make these US policies clearly national security focused, transparent and narrow,
Speaker 4: that we're not attempting to stifle economic progress in China
Speaker 4: that we have and want to continue to have deep
Speaker 4: economic ties. After all, this year are trade aid has
Speaker 4: reached almost seven hundred billion dollars. The national security concern
Speaker 4: the economic.
Speaker 3: Madame Secretary of the National Security concerns are so important.
Speaker 3: Jake Sullivan called for this outbound of executive order two
Speaker 3: years ago.
Speaker 5: Why is it taking the administration so long?
Speaker 4: So we are looking carefully at outbound investment controls, and
Speaker 4: they would serve as a complement to the export controls
Speaker 4: that we have in place to make sure that we've
Speaker 4: covered all the channels by which technologies can be transferred
Speaker 4: to China that we think pose national security concerns. I
Speaker 4: explained to my Chinese counterparts that if we go forward
Speaker 4: with these, they would indeed be narrowly targeted. They would
Speaker 4: focus on a few sectors, in particular semiconductors, quantum and
Speaker 4: artificial intelligence. That they would contain a combination of notification
Speaker 4: requirements and in very narrowly scoped portions of these sectors prohibitions.
Speaker 4: But these would not be broad controls. That would affect
Speaker 4: US investment broadly in China, or in my opinion, have
Speaker 4: a fundamental impact on affecting the investment climate for China.
Speaker 4: So these would be national security focused.
Speaker 5: It sounds like it's already done.
Speaker 3: Is the administration have it finished and is just waiting
Speaker 3: for a good time to release it.
Speaker 4: We want to make sure if we do this, that
Speaker 4: we get it right, and we've been working on the details.
Speaker 5: If we do go ahead, and there.
Speaker 4: Is a good chance that we will, that we would
Speaker 4: put out along with the executive Order and notice of
Speaker 4: proposed rulemaking so that the public would have a chance
Speaker 4: to comment on these proposed controls, and we would receive
Speaker 4: a wide range of public input before finalizing anything that
Speaker 4: we do.
Speaker 3: Madame Secretary, you obviously have a lot on your plate
Speaker 3: when it comes to re engaging with China and your discussions.
Speaker 3: They're just off this trip from Beijing. I'm curious how
Speaker 3: difficult the dialogue is going to continue to be after
Speaker 3: the revelations about the Chinese hacking of your colleague, Secretary
Speaker 3: Gina Romundo.
Speaker 4: So I do have concerns about hacking of US government
Speaker 4: officials or private individuals or companies, and I know the
Speaker 4: United States has expressed those concerns, but we intend to
Speaker 4: continue to deepen our discussions with China to increase our engagement.
Speaker 4: It's especially important to explain what our motivation is to
Speaker 4: avoid misunderstandings that can lead to necessary, unnecessary and dangerous escalation.
Speaker 4: President Chi and President Biden agreed in Bali that senior officials,
Speaker 4: including those in economics, should interact more regularly, and I
Speaker 4: think an outcome of my trip there was that we
Speaker 4: will have deeper ongoing engagement at all levels.
Speaker 5: When did you learn about the China email hockey.
Speaker 3: I'm curious if you had a chance to maybe bring
Speaker 3: this up on your trip to Beijing.
Speaker 4: I believe I did not know about that in Beijing.
Speaker 4: Wasn't one of the things that we discussed.
Speaker 3: I also want to ask about what's happening on the ground,
Speaker 3: something that I know is very important to you, and
Speaker 3: this comes to debt relief of these developing countries. There
Speaker 3: has been this push from the US administration to use
Speaker 3: the Zambia principle for other countries like Ghana, but that's
Speaker 3: not getting.
Speaker 5: The broad support it needs in India. On the ground.
Speaker 3: Amongst other G twenty finance ministers is China the hold
Speaker 3: up here?
Speaker 4: Well, we designed the G twenty designed something called the
Speaker 4: Common Framework, which is a set of trough principles and
Speaker 4: processes to deal with unsustainable DIBt situations.
Speaker 5: And we would like.
Speaker 4: To see countries that apply to use the Common Framework
Speaker 4: get rapid relief from their dit that they need in
Speaker 4: order to grow and be able to attract investment and
Speaker 4: undertake IMF programs that can help to stabilize their economies.
Speaker 4: And the few cases that have applied to use the
Speaker 4: Common Framework, including Zambia, have taken far too long. The
Speaker 4: process has been onerous and it's taken a very long
Speaker 4: time to get debt relief. We are pleased that China
Speaker 4: has become China, after all, is a major creditor of
Speaker 4: these countries. We have been anxious to see China move
Speaker 4: more quickly and take a more constructive attitude. Participating in
Speaker 4: these debt relief talks and getting agreement on Zambia is
Speaker 4: an important step. China has also been helpful in Ghana,
Speaker 4: the case of Ghana and Sri Lanka, and I'm hopeful
Speaker 4: that we'll be able going forward to make more rapid progress.
Speaker 4: I should emphasize the dead issue is one that concerns
Speaker 4: the entire g twinning and we are united in wanting
Speaker 4: to see this framework work more effectively and it is
Speaker 4: a priority for India as well.
Speaker 3: Madam Secretary, thank you so much for your time today
Speaker 3: live from India at the G twenty Finance Ministers and
Speaker 3: Central Bank Governors meeting. And safe travels to you as
Speaker 3: I know you're heading off to Vietnam next.
Speaker 2: Let's push it out and talk about a federal reserve
Speaker 2: for July and beyond. The former FED Vice Chair Richard
Speaker 2: Clarda saying market bets for rat cut in March makes sense.
Speaker 2: JP Morgan's Calsi Barra writes in this raightcuts will need
Speaker 2: to be preceded by a more material way can get
Speaker 2: the labor market tom while we are seeing softening under
Speaker 2: the surface, we will need to see a further slow
Speaker 2: in job creation or a sharp pick up in layoffs
Speaker 2: the cause the FED to shift away from the concept
Speaker 2: of higher for longer.
Speaker 6: Joining us now, Kelsey Barrow fixed income portfolio manager that
Speaker 6: barely describes your duties with some Michael over JP Morgan
Speaker 6: Asset Management. Boy, Am I glad you're here. First of all,
Speaker 6: have you people changed tone, duration stability, the Fabosi curve
Speaker 6: out rather Fobosi out there. You'll give all the different
Speaker 6: metrics you use. Have you changed that view given the
Speaker 6: news flow of the last ten days.
Speaker 7: So I think the biggest data point that is impacting
Speaker 7: our view has been the recent inflation data. I think
Speaker 7: what we've seen there is increased confidence that inflation is
Speaker 7: coming down, and it's coming down faster than the FED projects.
Speaker 7: The FED has a forecast of three point nine percent
Speaker 7: for core PC by the end of the year. We
Speaker 7: think they're going to get there, and we're going and
Speaker 7: they're going to go even further. Inflation is going to
Speaker 7: move down even further. So for us, what we're seeing
Speaker 7: is the FED is going to be able to pause
Speaker 7: and it's going to be a function of this inflation
Speaker 7: data coming down faster than the FED projects.
Speaker 6: Look at this and I say, Okay, what's the tactical response,
Speaker 6: like do you barbell, do you ladder? Do you shift
Speaker 6: your ladder out picking up greater duration? What's the do
Speaker 6: right now?
Speaker 7: So we've been looking at the fixed income market this year.
Speaker 6: It was a great trying to frush at Bob's watching, So.
Speaker 5: A great question. I think all morning.
Speaker 7: I've been hearing you guys debate soft landing or hard landing, right,
Speaker 7: and what does that mean for fixed income? Well, the
Speaker 7: good news is is that regardless of a soft landing
Speaker 7: or a hard landing, if the FED is at the
Speaker 7: end of the cycle, bonds are going to outperform. So
Speaker 7: you look at the last seven rate hiking cycles, including
Speaker 7: the ones which were soft landings, that's nineteen eighty four
Speaker 7: and nineteen ninety five. In all of those scenarios, over
Speaker 7: the next two years, cumulatively, bonds outperformed cash or three
Speaker 7: month te bills by an average rate of thirteen percent.
Speaker 7: So we can disagree about if it's going to be
Speaker 7: a hard landing or a soft landing, but what we
Speaker 7: can agree upon is getting an allocation to core fixed
Speaker 7: income at this time is the appropriate positioning for an
Speaker 7: end of cycle time for the FED to pause.
Speaker 2: Matt hombachmore ca and Stanley agrees with you, says Bonnie,
Speaker 2: Dips and bonds. Can we talk about the potential limits
Speaker 2: of a rally. Some people think maybe yields won't fall
Speaker 2: that far that quick. I know that you and the
Speaker 2: team are looking potentially for three percent across the whole curve.
Speaker 2: Can you help people who are listening to this right
Speaker 2: now make sense of that? So right now the two
Speaker 2: years at four seventy two, and you think it's potential
Speaker 2: to get down to three point zero, the ten years
Speaker 2: at three seventy seven to thirty years at about three ninety,
Speaker 2: can you just walk us through how you're thinking about that.
Speaker 5: Yeah.
Speaker 7: To us, what we're seeing is not that there are
Speaker 7: limits to the rally. There's actually limits to the selloff.
Speaker 7: So if you look at the ten year yield so
Speaker 7: far ye're to date, it's not able to sustainably trade
Speaker 7: above four percent. So if you look back, we had
Speaker 7: a peek at four and a quarter in Q four
Speaker 7: of last year. We tried to retest that four percent
Speaker 7: level in Q one of this year. It failed. We
Speaker 7: then tried to retest four percent again in Q two
Speaker 7: that also failed. So what we're seeing is that there
Speaker 7: are limits to how high longer dated yields can trade,
Speaker 7: and to us, that's a signal that we are later
Speaker 7: in the cycle. The FED does have limits to how
Speaker 7: far they can go, and that is reflecting in this
Speaker 7: very historic yield curb in version that we currently see.
Speaker 2: So later cycle, considering end of cycle by core fixed income.
Speaker 2: Treasury's rarely got that. Why a high yield spreads near
Speaker 2: the ties.
Speaker 8: Of the year.
Speaker 7: Yeah, So it has been a grind tighter for credit
Speaker 7: in general. And so we've been looking with our high
Speaker 7: yield analyst about what is going on, and there are
Speaker 7: certainly a lot.
Speaker 5: Of cross currents.
Speaker 7: So if you look across the sectors, right, you're hearing
Speaker 7: different things across every sector. Every sector is kind of
Speaker 7: operating in its own little cycle. From the chemicals or
Speaker 7: technology in high yield not so great, right, then you
Speaker 7: hear from leisure and hospitality and people can't stop traveling.
Speaker 7: Everyone on my Instagram is in Europe this summer. I mean,
Speaker 7: it's incredible.
Speaker 6: That's funny, mind too.
Speaker 5: There you go.
Speaker 7: And so what we're seeing ultimately though, is that in
Speaker 7: the absence of a material weakening in the labor market,
Speaker 7: you're seeing that people just want to get that spread
Speaker 7: and they just want to get that yield.
Speaker 5: And on top of that.
Speaker 7: We've had very little issuance in the high old market,
Speaker 7: so the technicals are really there for that grind tighter.
Speaker 7: And what we found historically is that high old spreads
Speaker 7: really don't blow out until the recession is actually here,
Speaker 7: so this move is not really that unusual, but it
Speaker 7: really has been a grind.
Speaker 1: Do you still see a recession though? I mean, is
Speaker 1: it incompatible to see the strength that we're seeing that's
Speaker 1: underpinning this euphoria that we felt last week and the
Speaker 1: tighter spreads, as John was mentioning, is that compatible with
Speaker 1: a steadied grind lower in inflation?
Speaker 7: So we do see a recession still in the horizon.
Speaker 7: We have seen strong labor markets, but it's really important
Speaker 7: to understand that the labor market is a lagging indicator.
Speaker 7: So the unemployment rate bottoms right as the recession starts,
Speaker 7: and the unemployment rate doesn't peak.
Speaker 5: Until a recession is ending.
Speaker 7: So what we're looking at is the leading indicators, things
Speaker 7: like gross domestic income, which is softening below the surface,
Speaker 7: hours worked within the labor report which is also softening.
Speaker 7: And we're saying the five hundred basis points of rate
Speaker 7: hikes that have already occurred, they're not behind us, they're
Speaker 7: still impacting the economy.
Speaker 1: With John's point, we're seeing spreads right now in hiled
Speaker 1: bonds at the tightest levels going back to April of
Speaker 1: twenty twenty two. This has been an incredible grind. If
Speaker 1: credit is a leading indicator, is saying that we're not
Speaker 1: going to get a recession, We're not going to get
Speaker 1: a default cycle, and all systems ago when you look
Speaker 1: at sucks and where they are. So from your vantage point,
Speaker 1: do you reset and start to allocate a little bit
Speaker 1: more to risk your sectors than say a couple of
Speaker 1: months ago, when a lot of people Jet included saw
Speaker 1: a more imminent recession on the horizon.
Speaker 7: So where I would disagree is credit being a leading indicator.
Speaker 7: In fact, credit highield spreads don't actually tend to blow
Speaker 7: out until the recession is actually upon us. So just
Speaker 7: because risk assets are doing well now doesn't mean that
Speaker 7: a recession isn't on the horizon. So for us, what
Speaker 7: we're doing is we're for focusing on a high quality
Speaker 7: fixing come portfolio.
Speaker 5: So that's investment grade over high yield.
Speaker 7: Another sector we really like right now, agency mortgage backed securities.
Speaker 7: You can get very attractive valuations there. You get a
Speaker 7: lot of the spread without a lot of the risk.
Speaker 6: Kelsey. Most people in the equity space think the bomb
Speaker 6: markets three guys in a room with the slide rule
Speaker 6: and the fact that the opposite is true. It's much bigger,
Speaker 6: much deeper, etc.
Speaker 8: But at the.
Speaker 6: Margin, bonds can move off equity valuations. Are bonds competing
Speaker 6: now with equities? Are people buying particularly credit corporate quality
Speaker 6: bonds versus owning equities? Now do you observe that?
Speaker 7: Yeah, we absolutely do observe that. So what we're seeing
Speaker 7: is that people are taking this opportunity to pick up
Speaker 7: the yields that are historically attractive. So if you look back,
Speaker 7: real yields, for an example, are at their highest level
Speaker 7: in fifteen or twenty years, and this is not an
Speaker 7: opportunity that comes around very often, particularly in an era
Speaker 7: where the Fed has had to go to the zero
Speaker 7: lower bound multiple times in the last few decade.
Speaker 6: What are you guys going to say an issuance? I mean,
Speaker 6: I mean, I know you take the call that Bob Michael.
Speaker 6: What they do, folks, is when the issue bonds, here's
Speaker 6: some big fancy company. They call four people and one
Speaker 6: of them's Bob Michael. He's out at lunch watch in Liverpool.
Speaker 6: So you get the phone call. Are you getting phone
Speaker 6: calls about bond issuance right now?
Speaker 5: We are?
Speaker 7: So there is a little bit of a bifurcation between
Speaker 7: the markets. So, as I mentioned, high yield has been
Speaker 7: a market that has not had very much issuance. On
Speaker 7: the other hand, you have investment grade market. It's fully
Speaker 7: open and there is issuance taking place.
Speaker 2: Kessie Love it as always Cassie Power of the of
Speaker 2: JP Morkan Asset Management.
Speaker 6: Joining us. Now I've experienced David balin Cio at City
Speaker 6: Global Wealth. David is not that we've been here before.
Speaker 6: To me, it's absolutely original. But what is the character
Speaker 6: of this bullmarket?
Speaker 9: Well, it's a bull market I think born of a
Speaker 9: variety of things. Number one, a lot of exceeding expectations.
Speaker 9: You know, we had started the year expecting that there'd
Speaker 9: be an energy crisis in Europe that didn't happen. The
Speaker 9: banking crisis, you know that you've discussed this morning, didn't
Speaker 9: turn out to be a banking crisis. Growth turned out
Speaker 9: to be better than expected. And ultimately what we saw
Speaker 9: is really, you know, inflation coming down meaningfully. And I
Speaker 9: think it's very hard to make the argument the next
Speaker 9: year inflation goes up, Oh, will the source of that be?
Speaker 9: The last remnants of inflation really are in the area
Speaker 9: of housing and of rental costs and we see that,
Speaker 9: you know, it is possible for us to get to
Speaker 9: it a two to two and a half percent inflation
Speaker 9: rate in twenty two twenty four. Now you take all
Speaker 9: of that mix and you think about where we started
Speaker 9: the year from investor positioning, we had huge bear short positions,
Speaker 9: much worse than we saw in two thousand and eight.
Speaker 9: In two thousand and nine, and we had one point
Speaker 9: twenty five trillion dollars of money sitting in money market funds,
Speaker 9: of people waiting to invest or at least thinking they
Speaker 9: were waiting to invest. And then ultimately what happened, We
Speaker 9: had this innovative moment where you know, all of a sudden,
Speaker 9: the talk we came about artificial intelligence and the impact
Speaker 9: that we would have markets. That is the combination that's
Speaker 9: brought us here. And also, you know, the backdrop in
Speaker 9: twenty twenty two it is that this was an extremely
Speaker 9: rare year. Only in nineteen thirty one and in nineteen
Speaker 9: sixty nine do we see markets both equity and debt
Speaker 9: go down at the same time. So lots of facts,
Speaker 9: right it contributed to where we are right now and
Speaker 9: where we go forward. Of course, I think is a
Speaker 9: little bit more difficult because so much optimism has built
Speaker 9: into the market at these levels.
Speaker 6: Do you have enough combined information from your securities analysts
Speaker 6: to say yet that we have a better ANUE growth
Speaker 6: line because of a better nominal GDP?
Speaker 8: Not really, Tom.
Speaker 9: You know what our view is that next year we're
Speaker 9: going to be you know, one half of one percent
Speaker 9: highering GDP in the US. It's going to take time
Speaker 9: for momentum to build. We consider this to be like
Speaker 9: a rolling recession. So if you imagine that a sharp
Speaker 9: procession would have a be like this and last for
Speaker 9: six months, we think this recession is probably a fifteen
Speaker 9: month length and it's just like a solid, shallow trough.
Speaker 9: And if that's the case, it's going to take a
Speaker 9: while for us to have, you know, a building momentum.
Speaker 9: But what markets are looking to now is what's going
Speaker 9: to happen in twenty twenty four. And it's not going
Speaker 9: to be twenty twenty three where we see revenue growth.
Speaker 9: It's going to have to be next year because again,
Speaker 9: I think these next two quarters are going to be
Speaker 9: somewhat challenging.
Speaker 1: In the meantime, David, you said that you're raising your
Speaker 1: allocation to global equities. Where, in particular, when did you
Speaker 1: start to make a more meaningful shift on the heels
Speaker 1: of better than expected data.
Speaker 8: We've made two emerging markets moves.
Speaker 9: The first one was to Brazil specific allocation there, and
Speaker 9: then subsequently about a week half ago, we added emerging
Speaker 9: market debt to our portfolios. We really want everyone to
Speaker 9: think about their cash position a lot, and to think
Speaker 9: about moving from cash and taking some duration risk now
Speaker 9: you know, five or six year duration risk.
Speaker 8: Capture the yields that you're getting.
Speaker 9: In your money market fund today for the next five
Speaker 9: to six years, and in emerging markets, if you don't
Speaker 9: take a lot of credit risk, you can actually get
Speaker 9: you know, yields of seven to eight percent, and that
Speaker 9: to us is very attractive. If we expect inflation in
Speaker 9: fact two and two and a half percent next year,
Speaker 9: how much.
Speaker 1: Is that really predicated on the idea of a dollar
Speaker 1: continuing to weaken.
Speaker 9: Well, last week was a very important single and you've
Speaker 9: touched upon this in your conversation today. I mean, the
Speaker 9: dollar really took a move once inflation the inflation print
Speaker 9: came out last week, and I think that's indicative of
Speaker 9: what the world's expecting, right, the US is a much
Speaker 9: more active you know, our central bank than Europe does.
Speaker 9: They expected rates in the United States will come down
Speaker 9: when they need to, whereas if you think about the
Speaker 9: European central banks, they're going to keep their policies pretty constant.
Speaker 9: And if that's the truth, then you've already seen, you know,
Speaker 9: the beginning of the weekending dollar. And we think that
Speaker 9: that trend could last for several years from here, and
Speaker 9: that the dollar could be considerably weaker if we were
Speaker 9: to look out eighteen months.
Speaker 6: I'm told the public is pushing in against sixty forty.
Speaker 6: David Baal into sixty forty work in twenty twenty four,
Speaker 6: in twenty twenty five.
Speaker 9: I'm really back in love with sixty forty. Tom. I
Speaker 9: think that investors have to think about it this way.
Speaker 9: You're getting paid now for the first time in a
Speaker 9: very long time to hold a medium duration bond portfolio.
Speaker 9: If you can make as you know, five percent or
Speaker 9: five and a half percent doing that for five or
Speaker 9: six years, or you want to take more risk.
Speaker 8: You can really you know, earn some.
Speaker 9: Terrific yields and emerging markets and in private credit, you
Speaker 9: should be doing that right now. Because that is going
Speaker 9: to have diversification as compared to your equity portfolio.
Speaker 8: And the second thing.
Speaker 9: People have to be mindful of is that they need
Speaker 9: to think about the value that they're getting their portfolio.
Speaker 9: So I believe we're in a recovery in twenty four,
Speaker 9: a more meaningful recovery.
Speaker 8: You want to have small and medium sized stops.
Speaker 9: You want to diversify into areas even like China right
Speaker 9: which are countercyclical, which you A're treating it incredibly low values,
Speaker 9: and for the reason now, but ultimately you've got to
Speaker 9: be forward looking in your portfolio construction and diversification really
Speaker 9: is the only free lunch that you get on Wilson,
Speaker 9: and we think we need to see more of it
Speaker 9: less you are centrist, David.
Speaker 6: One final question and quickly unfortunately David Balin, are we
Speaker 6: clipping coupons or can we actually own that debt portion
Speaker 6: for total return?
Speaker 9: I really think it's the right now. Actually, I think
Speaker 9: you can get it for total return. You're being paid
Speaker 9: a lot of money to you know, if you can
Speaker 9: capture three or four percent real interest rates a year
Speaker 9: and a half from now, that is an exciting prospect
Speaker 9: relative to where we've been for the last eleven years.
Speaker 9: So I do think it contributes meaningfully both to risk
Speaker 9: reduction and to the total return tom and we're emphasizing
Speaker 9: that to our clients. We're actually seeing some real movement,
Speaker 9: you know, at the private bank into you know, into
Speaker 9: these areas where where clients are finally saying, Wow, I've
Speaker 9: just got too much cash, you know, I can actually
Speaker 9: put money to work and sustain my yields.
Speaker 2: David, i' just think for a lot of people that
Speaker 2: have been trapped in cash this year, and I say
Speaker 2: trapped in cash only relative to the gains we've seen
Speaker 2: elsewhere in the nastak and the S and P five hundred,
Speaker 2: if they're going to come back in they feel fall
Speaker 2: less chasing big tech. What do you say to those people.
Speaker 8: Well, we have to divide that up, right.
Speaker 9: So first of all, our clients have been sitting there
Speaker 9: for ten years waiting to come back into the market.
Speaker 9: So there's always this idea that you can outsmart the markets, right,
Speaker 9: you know, And so the difference between now and anytime
Speaker 9: in the last ten years is that you want to
Speaker 9: capture a real yield, right, and you need to do
Speaker 9: that now because when we're talking about it. In three
Speaker 9: or six months, this opportunity may go away with that
Speaker 9: much cash on the sidelines. In terms of the whole
Speaker 9: concept of the technology trade. Really, if you think about that,
Speaker 9: take a look at the valuation of the Nasdaq at
Speaker 9: twenty six plus times or the S and P at
Speaker 9: twenty one. There are parts of the market that you
Speaker 9: can actually invest in that are trading at fifteen or
Speaker 9: sixteen times, which is totally acceptable if we expect rates
Speaker 9: to go down. So you want to move away from
Speaker 9: the trendiest markets right into the MidCap, into the small caps,
Speaker 9: into some of the foreign markets. And if you do
Speaker 9: that meaningfully, you know, for five or ten percent of
Speaker 9: your portfolio, you'll get the benefit, you know, of this
Speaker 9: sort of total rerating of the market that we think
Speaker 9: will take place.
Speaker 8: But you don't want to time this the.
Speaker 9: Situation and say, oh my goodness, it's all over now,
Speaker 9: because we've had this movement in technology. The type of
Speaker 9: change we're talking about with artificial intelligence affects every industry
Speaker 9: and every company, and the adoption of it is something
Speaker 9: that we're going to be monitoring and looking for those
Speaker 9: companies that actually become more efficient maintain their margins, or
Speaker 9: drive revenues as a result of AI's you know, sort
Speaker 9: of rapid acceptance.
Speaker 2: Babe of City David, thank you.
Speaker 6: Tom Mischel joins us now. He's the chief executive officer
Speaker 6: of KBW, Keith, Buryett and Woods Stifle Company, and he
Speaker 6: understands this American banking system truly like no one we
Speaker 6: speak to. Off the market, off the March shock, the Keith,
Speaker 6: Friods and Wood index, I'm stunned by this. Off a
Speaker 6: dead cat bounces up all of four percent off of
Speaker 6: the middle of March shock. I thought it would have
Speaker 6: done much better. Why are the broader indexes of banks?
Speaker 6: Why is it lagging?
Speaker 10: It's lagging mainly because the market's unsettled about what the
Speaker 10: earnings is going to be for the regional banks and
Speaker 10: for the banks, and there's a reset underway. The first
Speaker 10: reset is around net interest income and what's happening with
Speaker 10: deposit costs. I thought it was very interesting that when
Speaker 10: you looked at the big bank earnings on Friday, which
Speaker 10: were actually pretty good relative expectations, the stock still went
Speaker 10: down across the sector. And it's because the view is
Speaker 10: that we're not there yet in terms of understanding how
Speaker 10: this remixing is happening in deposits. Some of the good
Speaker 10: news is that we're really not seeing big shoes drop
Speaker 10: on credit, but that also continues to be a concern.
Speaker 10: So I think you know KBW for our twenty twenty
Speaker 10: four estimates for banks, we've cut estimates twenty percent in
Speaker 10: the last six months, and I think investors want to
Speaker 10: know when is that going to stop? When and when
Speaker 10: is this reset to profitability going to stop?
Speaker 2: Could you have us understand just the size of those
Speaker 2: banks when you come out of a number like that
Speaker 2: twenty percent drop, it's.
Speaker 10: All the way through the industry, all the way through
Speaker 10: the down.
Speaker 2: It's large, just up and down.
Speaker 10: So just if I were to talk about dynamics, if
Speaker 10: you're just a spread income lender alone, you have more pressure.
Speaker 10: But don't forget we think this second quarter is going
Speaker 10: to be a very difficult quarter for investment banking. They
Speaker 10: did maybe a smidge in better than we thought, but still,
Speaker 10: let's just say down twenty percent at least a year
Speaker 10: over year. Now we're seeing green shoots and investment banking.
Speaker 10: That's only about half a dozen or so companies, but
Speaker 10: that really matters. The other banks are just feeling the
Speaker 10: full bread of the spread compression, which also impacts the
Speaker 10: bigger banks, even though the biggest banks are faring better.
Speaker 2: Have you been surprised by how quickly we've left behind
Speaker 2: the events of March April time.
Speaker 10: I am, which is good and bad. It's good because
Speaker 10: the American banking industry is really resilient and these were
Speaker 10: idiosyncratic risks, and I think we've proven that. But at
Speaker 10: the same time, we need the right reform. And actually
Speaker 10: in the last quarter I did testify in front of Congress,
Speaker 10: and I was urging deposit insurance reform. Instead we're getting
Speaker 10: capital increases, which I think are going to create unintended
Speaker 10: consequences and be a whole nother dynamic.
Speaker 1: How idiosyncratic, though, was it? And I asked this at
Speaker 1: a time when a lot of people are studying commercial
Speaker 1: real estate, including the Saint Louis Federal Reserve, which accounts
Speaker 1: for about half of all loans on smaller banks balance sheets,
Speaker 1: And we're looking at a potential record of maturities maturing
Speaker 1: commercial real estate loans this year? How do you dovetail
Speaker 1: that into future weakness that we could start to see
Speaker 1: in this earning cycle?
Speaker 10: So and I remember the last time we're on, we
Speaker 10: talked about this. So we have a commercial real estate
Speaker 10: research group, and higher rates are going to hurt commercial
Speaker 10: real estate values everywhere in the country, but the ones
Speaker 10: we're most worried about are the cities and the cities
Speaker 10: where they have the big properties. That's where you're seeing
Speaker 10: the biggest stress in terms of occupancy, in particular, where
Speaker 10: we think that the hits may be the biggest. Big
Speaker 10: news out of Friday Wells Fargo took their reserve for
Speaker 10: those type of properties to nine percent.
Speaker 5: Nine percent.
Speaker 10: That's a big number for a bank after you think
Speaker 10: about all the equity that's already in those projects, So
Speaker 10: that's pretty big. So we had a regional bank that
Speaker 10: we took around in New York recently to meet investors
Speaker 10: about a forty billion dollar bank. Their median commercial real
Speaker 10: estate loan was a million dollars and almost none of
Speaker 10: it in a city. So we feel better about that.
Speaker 10: And if that describes what a regional bank's what portfolio
Speaker 10: looks like, there'll be pressure, but nothing like these big
Speaker 10: cities where they're gonna be bigger hits.
Speaker 1: The last time you were on, we talked a lot
Speaker 1: about consolidation. You did expect a wave of consolidation among
Speaker 1: smaller banks. Do you feel differently now that evidently the
Speaker 1: crisis is over and everything has changed, or do you
Speaker 1: feel like we're going to see an ongoing turn of
Speaker 1: consolidation that hasn't yet transpired.
Speaker 10: I think we're going to see consolidation a because it's
Speaker 10: just been the trend for the last couple of decades.
Speaker 10: Then you ask yourself, why would that happen, Well, it
Speaker 10: would happen because the costs of regulation continue to go up,
Speaker 10: and one way to be able to afford it is
Speaker 10: either to have more scale or to merge with a
Speaker 10: bank that already has it so that way you don't
Speaker 10: have to build it yourself, and that makes the system
Speaker 10: more sound. Also, over time, healthy banks tend to acquire
Speaker 10: banks that are not performing as well, and that's a
Speaker 10: healthy step that also happens. Then, I think lastly is
Speaker 10: and this is a bigger story is over the last
Speaker 10: decade plus, especially since Dodd Frank, You've I've seen non
Speaker 10: bank lenders pick up market share. We did a report
Speaker 10: earlier this year where we think banks have about half
Speaker 10: of the market. Every time capital ratios go up, Vice
Speaker 10: Chairman Barr talked about a two percentage point change that's
Speaker 10: going to benefit non banks. Jamie Diamond talked about that
Speaker 10: in his call on Friday, and that's what's going to
Speaker 10: happen in that world is unregular, less regulated. I wouldn't
Speaker 10: say unregulated, less regulated.
Speaker 6: Tom Mischelle, all of us on the racket have a
Speaker 6: bank we just follow. I'm not going to mention the bank,
Speaker 6: but it's a pure mediocrity of a small bank and
Speaker 6: it's called bank X. Bank X in the last ten
Speaker 6: years has delivered two point two percent shareholder return and
Speaker 6: the least twenty years, bank X has returned one point
Speaker 6: four percent twenty years. Are these guys not put out
Speaker 6: of their misery because they're protected by an umbrella of
Speaker 6: government support? Back to Andrew Jackson, when do you Sandler,
Speaker 6: O'Neil and the rest of them, when do you roll
Speaker 6: these dogs up?
Speaker 10: Well, I'll tell you what's interesting is in some cases
Speaker 10: there may not be a buyer. There's a chance there
Speaker 10: may not be a buyer. And as technology continues to
Speaker 10: evolve and there's less branch traffic, for example, some of
Speaker 10: these companies may find there's just not the buyer.
Speaker 5: That's so what do they do?
Speaker 6: What what does Bank X do in their twenty year
Speaker 6: garbage mediocrity kept a float not by KBW, but kept
Speaker 6: a float by government regulation.
Speaker 10: Well, and I think the other thing is that should
Speaker 10: that company need capital, because that's say they have a
Speaker 10: bad loan or they need to make an investment, investors
Speaker 10: are going to look at that and an industry where
Speaker 10: where investors don't have strong incentive to invest. If the
Speaker 10: if that company, and I think this applies to any industry,
Speaker 10: but if there isn't a return, they're not going to
Speaker 10: have the access to the capital that the government and
Speaker 10: the regulators would like. You need a healthy industry up in.
Speaker 6: This is a uniquely American thing, John, Hey, this is
Speaker 6: just I'm sorry.
Speaker 10: And the big thing is so you know, and I
Speaker 10: get a lot of questions saying, hey, other countries have
Speaker 10: five or six big banks. You know, we have four
Speaker 10: really big ones. It would be great if we had
Speaker 10: fifteen to twenty five big ones, and then you'd have
Speaker 10: really good choice and really good competition, and then some
Speaker 10: of those local banks will still be critical to their
Speaker 10: local communities. I think it's that middle. I'll give you
Speaker 10: another number, the ninety seven percent of the banking industry
Speaker 10: in America's below ten billion in assets. That means there
Speaker 10: are one hundred and forty banks above ten billion. We're
Speaker 10: actually approaching the endgame where you can start to really
Speaker 10: pay attention as to how this might play out.
Speaker 2: I got thirty seconds when you went in front of Congress.
Speaker 2: Did you get the impression they wanted to make sensible
Speaker 2: policy or just punish this sector?
Speaker 10: I would say the majority, not the entirety, but the
Speaker 10: majority was they were thinking about steps that they could take.
Speaker 10: But I felt as if they were going to address
Speaker 10: issues that weren't solely Silicon Valley and other bank failures,
Speaker 10: and the chances for unintended consequences were high. And I
Speaker 10: think you really got to because if you push too hard,
Speaker 10: you're going to benefit the non bank industry, and I
Speaker 10: think we could be headed in that direction.
Speaker 2: Tom Mischa, thank you guys. I've KBW Maney response the
Speaker 2: question not so much very often on Tom Love it
Speaker 2: as always just want.
Speaker 8: To be with you.
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