WEBVTT - BWPodcast062923 0:00:01.360 --> 0:00:05.680 This is Bloomberg Business. Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:19.000 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:20.000 --> 0:00:22.400 We're justking a great little conversation with Jenny Sorain here 0:00:22.480 --> 0:00:24.520 in our studio ahead of her story because it is 0:00:24.920 --> 0:00:27.040 among the most right on the Bloomberg. It's also the 0:00:27.080 --> 0:00:30.160 Bloomberg Big Take. It's about the hot money that is 0:00:30.400 --> 0:00:34.680 scorching regional bank profits after they were losing lots of deposits. 0:00:34.680 --> 0:00:36.320 So let's get into it. The who, what, where and 0:00:36.360 --> 0:00:39.760 why with us is Bloomberg News Finance reporter Jenny Sorain 0:00:39.880 --> 0:00:44.440 in our Bloomberg Interactive Brokers studio. So great story, Thank you, 0:00:44.560 --> 0:00:47.839 amazing story. So tell us what's going on and what 0:00:48.000 --> 0:00:48.840 is hot money? 0:00:49.440 --> 0:00:52.800 So hot money is the word that regulators like to 0:00:52.840 --> 0:00:56.880 call broker deposits. And these are basically deposits that banks 0:00:56.960 --> 0:00:59.560 get whenever they use a third party to go out 0:00:59.560 --> 0:01:02.640 and a deposits for them. The reason that regulators don't 0:01:02.680 --> 0:01:06.039 like them is, you know, these brokers are typically connecting 0:01:06.080 --> 0:01:08.880 these banks with wealthy individuals, big corporations that are just 0:01:08.920 --> 0:01:10.840 looking for a better rate on their cash, and so 0:01:11.280 --> 0:01:13.320 that means as soon as a better rate comes along, 0:01:13.360 --> 0:01:16.600 this money is quick to depart. So regulators really do 0:01:16.720 --> 0:01:18.600 view it as kind of a more risky way to 0:01:18.600 --> 0:01:21.160 fund yourself. And on top of that, it's a lot 0:01:21.160 --> 0:01:24.120 more expensive than the kind of core deposits banks you 0:01:24.160 --> 0:01:25.360 know have relied on for so long. 0:01:25.520 --> 0:01:28.640 Why do I mean, I've been thinking about this since 0:01:28.680 --> 0:01:30.640 last night, so I read your story and it's been 0:01:30.760 --> 0:01:34.880 on top of my mind. For one thing, because I'm 0:01:34.920 --> 0:01:39.080 already angry about the FHLB story, right, But then I 0:01:39.160 --> 0:01:41.920 was thinking about broker deposits and how exactly do they work. 0:01:42.200 --> 0:01:44.760 On the one hand, it seems they could be very 0:01:44.800 --> 0:01:50.360 simple and benign, right like my bank offers certificates of 0:01:50.440 --> 0:01:53.760 deposit where I get very high interest rates if I 0:01:53.800 --> 0:01:55.520 promise to keep the money locked up there for a 0:01:55.520 --> 0:01:56.040 long time. 0:01:56.160 --> 0:01:58.200 But that's different from a broker deposit, isn't it. 0:01:58.520 --> 0:02:01.320 So in some cases, a broker deposit can be a 0:02:01.680 --> 0:02:04.000 certificate of deposit. It all depends on if there's like 0:02:04.040 --> 0:02:06.320 a third party kind of sitting in between you and 0:02:06.360 --> 0:02:09.480 the bank and so there's these networks that will connect, 0:02:09.680 --> 0:02:13.000 like I said, like wealthy individuals or big corporations to 0:02:13.160 --> 0:02:16.360 all these regional banks that are in need of more liquidity. 0:02:16.400 --> 0:02:19.240 And so that's that's really I think the kind that 0:02:19.240 --> 0:02:21.560 that regulators don't like because there's not that like direct 0:02:21.600 --> 0:02:24.440 relationship that a consumer would have with the bank, and 0:02:24.560 --> 0:02:28.000 so they don't feel anything about moving their money. And 0:02:28.040 --> 0:02:30.079 you're right that it is really good for consumers. I mean, 0:02:30.080 --> 0:02:32.400 this is a way for folks to get the rate 0:02:32.440 --> 0:02:35.200 that they should be getting probably on their cash. But 0:02:35.240 --> 0:02:37.920 for the banks, it's it's really expensive. It's really you know, 0:02:37.960 --> 0:02:41.079 pinging their profits, putting pressure on them. And so it's 0:02:41.120 --> 0:02:43.359 sort of a yeah, a tale of two cities, as 0:02:43.360 --> 0:02:43.600 it were. 0:02:43.760 --> 0:02:44.920 How much more expensive is it? 0:02:45.560 --> 0:02:48.400 I mean, over the last year, interest expenses have risen 0:02:48.600 --> 0:02:50.799 twelvefold and. 0:02:50.720 --> 0:02:52.760 As a result, and that's putting it lightly by the way, 0:02:52.800 --> 0:02:55.280 because a lot of banks that like me and Carroll 0:02:55.280 --> 0:02:58.760 probably use banks that we're paying less well less than 0:02:58.800 --> 0:03:01.640 one percent inflation, right, it's right interest, and these broker 0:03:01.720 --> 0:03:04.359 deposits are probably paying five percent plus the banks need 0:03:04.360 --> 0:03:05.480 to give the broker a cut. 0:03:05.639 --> 0:03:08.680 Yeah, yeah, so these yeah, exactly, So this is you know, 0:03:08.840 --> 0:03:12.120 around five percent is kind of the going rate these days. 0:03:12.639 --> 0:03:14.400 And yeah, I mean a year ago, most banks weren't 0:03:14.400 --> 0:03:18.280 paying anything like, well well below one percent on core deposits. 0:03:18.320 --> 0:03:21.960 So these are much more expensive. Interest expenses are going up. 0:03:22.000 --> 0:03:24.880 You've already heard from a number of regional bank executives 0:03:24.919 --> 0:03:26.680 warning that, you know, the profits that we thought we 0:03:26.680 --> 0:03:29.040 were going to have this year, that's not looking likely anymore. 0:03:29.080 --> 0:03:32.760 Can I ask you something, our is private credit loaning money? 0:03:32.800 --> 0:03:35.720 Do we know if private lenders are actually loaning money? 0:03:35.840 --> 0:03:38.160 I think so for the most part, this is really 0:03:38.520 --> 0:03:41.000 you know, the cash that a company has on its 0:03:41.040 --> 0:03:44.720 balance sheet. They and for the past year have probably 0:03:44.720 --> 0:03:47.400 been hearing, you know, us talking about interest rates going 0:03:47.480 --> 0:03:49.640 up a lot, and they were earning less than one 0:03:49.640 --> 0:03:51.400 percent on that cash. And so now they've kind of 0:03:51.440 --> 0:03:53.960 woken up. They've realized, hey, I'm getting charged more for 0:03:54.040 --> 0:03:55.960 my loans. I need to be making more of my deposits. 0:03:55.960 --> 0:03:58.480 And so you're just seeing a lot of these customers 0:03:58.480 --> 0:04:00.080 finally kind of wake up and say I need to 0:04:00.120 --> 0:04:02.480 make more. On top of that, we had three regional 0:04:02.520 --> 0:04:04.480 banks fail, you know, at the start of the year, 0:04:04.600 --> 0:04:07.400 and so anybody who was sitting on large piles of 0:04:07.480 --> 0:04:09.560 uninsured cash. We're also like, I need to find a 0:04:09.600 --> 0:04:12.800 network that allows me to get more insurance on this cash. 0:04:12.840 --> 0:04:15.200 So you know what I'm saying, right, those private credit funds, 0:04:15.200 --> 0:04:16.680 Like I'm just curious if they're taking some of their 0:04:16.720 --> 0:04:18.360 funds and throwing it in a bank for a little 0:04:18.360 --> 0:04:20.080 bit and then just pulling it when they want. 0:04:19.920 --> 0:04:22.200 It, that's a great Actually, that's a really good question. 0:04:22.440 --> 0:04:24.560 I don't know, it's because it's like. 0:04:24.520 --> 0:04:26.960 I guarantee like five percent. Yeah, it's for like a 0:04:26.960 --> 0:04:29.480 month or two, right, Yeah, truly, if they haven't put 0:04:29.520 --> 0:04:32.279 it to work, that's very good. So next story exactly. 0:04:32.480 --> 0:04:35.440 So I wonder if regulators are going to crack down, 0:04:35.520 --> 0:04:38.200 and maybe not on broker deposits, because, as you point out, 0:04:38.200 --> 0:04:40.640 they've been around for a while, regulators don't love them, 0:04:40.720 --> 0:04:42.440 but they haven't done anything about them yet. On the 0:04:42.480 --> 0:04:48.200 other hand, we're just now seeing the light shone on 0:04:48.240 --> 0:04:52.560 the FHLB issue, and we're right ahead of an election year, 0:04:52.720 --> 0:04:55.040 so it seems like the perfect time to crack down 0:04:55.040 --> 0:04:57.040 on this like one hundred year old institution. 0:04:57.600 --> 0:05:00.680 Yeah. I think the bigger way that we'll see crackdown 0:05:00.800 --> 0:05:03.440 is like I think First Republic is actually a really 0:05:03.440 --> 0:05:06.200 good example where they didn't get seized and you know, 0:05:06.279 --> 0:05:09.560 ultimately fail because of some big rush on deposits. It 0:05:09.600 --> 0:05:11.760 was more of a slow bleed and they were replacing 0:05:11.760 --> 0:05:14.760 that slow bleed with these more expensive forms of funding. 0:05:14.800 --> 0:05:17.200 And so ultimately, when regulators sees them, they were like, 0:05:17.600 --> 0:05:19.039 you know, this has everything to do with the fact 0:05:19.040 --> 0:05:20.719 that your borrowing costs have gone up in such a 0:05:20.720 --> 0:05:23.680 manner that you were no longer you're structurally unprofitable, and 0:05:23.680 --> 0:05:25.360 you're no longer able to operate in a safe and 0:05:25.400 --> 0:05:27.560 sound manner. And so I think you'll start to see regulators, 0:05:28.480 --> 0:05:30.440 you know, really taking that seriously and saying, you know, 0:05:30.480 --> 0:05:33.120 if you've had to backfill this you know, you know, 0:05:33.240 --> 0:05:36.160 slow and steady decline and deposits with these more expensive 0:05:36.200 --> 0:05:38.840 forms of funding, we're going to take notice and we're 0:05:38.880 --> 0:05:40.359 gonna you know, show So you. 0:05:40.360 --> 0:05:41.400 Think they're gonna shut down. 0:05:41.240 --> 0:05:44.760 More banks, I hesitant to say that. I think more 0:05:44.800 --> 0:05:48.600 banks are aware that that is that's the risk here, Yeah, exactly, 0:05:48.640 --> 0:05:50.839 that's what That's what I think is this next phase 0:05:50.880 --> 0:05:53.200 of the regional bank turmoil is you know, we're not 0:05:53.240 --> 0:05:55.880 seeing these big sudden rush on deposits anymore. It's really 0:05:55.960 --> 0:05:59.120 this slow bleed that is more worrisome in a way 0:05:59.160 --> 0:06:01.479 and could honestly affect a lot more lenders. 0:06:01.800 --> 0:06:03.359 Well, one of the things I loved in your story 0:06:03.440 --> 0:06:05.679 is you talked I guess it was specifically somebody quoted 0:06:06.760 --> 0:06:09.200 the chief financial officer at Western Alliance, I guess about 0:06:09.320 --> 0:06:11.800 current liquidity. I mean, are we not getting a clear 0:06:12.160 --> 0:06:15.159 picture of the bank's liquidity picture as a result because 0:06:15.160 --> 0:06:17.080 of this, money can be yanked very quickly. 0:06:17.400 --> 0:06:20.120 I think that's what regulators fear, and that's they actually 0:06:20.120 --> 0:06:23.240 do have really stringent rules around broker deposits that they're 0:06:23.279 --> 0:06:26.839 not viewed as favorably as like the typical core deposit 0:06:26.880 --> 0:06:29.400 that a bank will have, and so that's why regulators 0:06:29.440 --> 0:06:32.360 have long hated them. You don't get broker deposit numbers 0:06:32.360 --> 0:06:34.599 and earnings. You get them in call reports weeks later. 0:06:35.360 --> 0:06:37.320 Even the data that we based our story off of 0:06:37.360 --> 0:06:39.560 this is all first quarter data, and really this was 0:06:39.600 --> 0:06:41.200 an issue only in the last two weeks of the 0:06:41.240 --> 0:06:43.520 first quarter. So even now it's just the tip of 0:06:43.560 --> 0:06:45.640 the iceberg really coming out, and I think the second 0:06:45.720 --> 0:06:48.200 quarter data that we get in the coming weeks and months, 0:06:48.760 --> 0:06:50.120 that's going to be a lot more worrisome. 0:06:50.400 --> 0:06:53.760 So, I mean it makes sense. I'm from Ohio, my 0:06:53.839 --> 0:06:57.559 whole family is from there. You always have views. 0:06:57.000 --> 0:06:59.560 Huntington Bank or Park National or one of these you know, 0:06:59.600 --> 0:07:03.160 local regional banks, and we're unlikely to move our money 0:07:03.200 --> 0:07:05.400 out of there because it's part of who we are, 0:07:05.760 --> 0:07:08.359 right But these broker deposits, how likely are they to 0:07:08.360 --> 0:07:10.360 shift from one bank to another. 0:07:10.160 --> 0:07:10.720 Or be polled? 0:07:10.840 --> 0:07:14.160 So some of the hope is that because more folks 0:07:14.160 --> 0:07:16.760 are doing this because they want more FDIC insurance on 0:07:16.800 --> 0:07:19.440 their deposits, the hope is actually that they wouldn't need 0:07:19.480 --> 0:07:21.760 to move as much because as long as you know, 0:07:21.800 --> 0:07:24.760 whatever regional bank is still offering five percent, even if 0:07:24.760 --> 0:07:27.200 that person can get five point two percent by you 0:07:27.200 --> 0:07:30.600 know moving, really they're there for the FDIC insurance and 0:07:30.640 --> 0:07:33.720 so it should be fine. But we really don't know. 0:07:33.760 --> 0:07:35.520 I mean, this is kind of a new era where 0:07:35.560 --> 0:07:37.040 it's a lot easier to move your money than it 0:07:37.080 --> 0:07:38.640 ever has been before. I mean, that was one of 0:07:38.680 --> 0:07:41.960 the big issues we saw with Silicon Valley Bank. So 0:07:42.120 --> 0:07:45.200 a lot of exactly on your phone and it's you know, 0:07:45.320 --> 0:07:47.960 hundreds of thousands of dollars move. So it's just it's 0:07:48.000 --> 0:07:50.360 hard to know. And I think that's also why regulators 0:07:50.360 --> 0:07:53.000 have so much anxiety around this issue, is you really 0:07:53.040 --> 0:07:54.920 don't know what consumer behavior will be like, given how 0:07:54.960 --> 0:07:56.760 much tech has evolved since the last crisis. 0:07:56.840 --> 0:07:58.720 Jenny, about forty five seconds left here. So with more 0:07:59.080 --> 0:08:01.600 earnings just around the corner, we've already gotten warnings as 0:08:01.640 --> 0:08:03.200 you guys, as you write in your story about from 0:08:03.280 --> 0:08:06.240 M and TV, from Columbia Financial, from Fifth Third Bank Corps, 0:08:06.280 --> 0:08:09.680 should we expect that there could be some not so 0:08:09.880 --> 0:08:13.840 great earnings releases in that in the next round of 0:08:14.000 --> 0:08:15.960 quarterly earnings. I'm just thinking about for our audience who's 0:08:15.960 --> 0:08:18.840 thinking about investing and maybe have been looking at this space. 0:08:19.120 --> 0:08:20.960 I think yes, I mean, I think a lot of 0:08:20.960 --> 0:08:23.600 these regional banks have already started to kind of prepare 0:08:23.640 --> 0:08:26.080 investors for this new reality. But I think we'll hear 0:08:26.120 --> 0:08:28.200 a lot more comments like that in the coming weeks 0:08:28.240 --> 0:08:30.360 as banks kind of come to terms of the fact 0:08:30.360 --> 0:08:33.080 that they might have set guidance in January that you know, 0:08:33.240 --> 0:08:35.920 wasn't anticipating a bank crisis in March, and you know, 0:08:36.000 --> 0:08:38.480 further rate hikes, and so I think You're going to 0:08:38.520 --> 0:08:41.199 see a lot more kind of you know, honesty and 0:08:41.640 --> 0:08:44.520 transparency from these bank executives as they realized the extent 0:08:44.559 --> 0:08:45.120 of the problem. 0:08:45.320 --> 0:08:47.000 Hot money. What's the matter is. 0:08:47.040 --> 0:08:49.600 Fifth Third Bank Corps Latin for? 0:08:49.679 --> 0:08:49.880 What? 0:08:50.040 --> 0:08:51.160 Is it like the Marine Corps? 0:08:52.360 --> 0:08:53.160 Did I say it again? 0:08:54.080 --> 0:08:57.120 I always say in a core corp? All Right, I 0:08:57.160 --> 0:08:59.640 can't help it. It's like this hang in my head, 0:09:00.080 --> 0:09:01.440 fifth Third Big Court. 0:09:01.600 --> 0:09:03.280 This has been going on for twenty years. Jack, Yeah, 0:09:03.280 --> 0:09:03.680 I do don't. 0:09:03.880 --> 0:09:05.319 Yeah, I know. It's you know, just some things you 0:09:05.440 --> 0:09:08.920 just got to accept. Yeah, what I am Jenny Sarying, 0:09:09.040 --> 0:09:10.960 great story. It's a Bloomberg big take. It is among 0:09:11.000 --> 0:09:12.559 our most read on the Bloomberg. 0:09:13.240 --> 0:09:16.800 You're listening to the Bloomberg Business Week podcast. Catch us 0:09:16.840 --> 0:09:20.319 live weekday afternoons from three to six Eastern Listen. 0:09:20.080 --> 0:09:23.559 On Bloomberg dot com, the iHeartRadio app, and the Bloomberg 0:09:23.600 --> 0:09:37.559 Business App, or watch us live on YouTube. 0:09:37.480 --> 0:09:38.120 A little bit. 0:09:38.160 --> 0:09:42.000 You used to just that movie, No, not The Bodyguard. 0:09:42.040 --> 0:09:44.120 There's actually a movie like on her. 0:09:44.440 --> 0:09:45.719 No, it's actually well done. 0:09:45.720 --> 0:09:48.640 It's really well done. Anyway, I digree The Biggest Little Farm. 0:09:48.679 --> 0:09:49.680 I haven't seen that yet. 0:09:49.800 --> 0:09:50.800 You should see that. 0:09:51.120 --> 0:09:54.800 Have you seen air, Yes, have you seen the what's 0:09:54.800 --> 0:09:56.120 going on with treasury yields today? 0:09:56.160 --> 0:09:56.880 Yeah? Very cool? 0:09:56.920 --> 0:09:59.480 I mean fourteen basis point jump right in the ten 0:09:59.559 --> 0:10:01.720 year yield and Bill Dudley out with the column saying 0:10:01.760 --> 0:10:03.920 he thinks the ten year should be about four and 0:10:04.000 --> 0:10:05.800 a half percent rather than what are we looking at 0:10:05.880 --> 0:10:06.160 right now? 0:10:06.200 --> 0:10:06.880 Three eighty four? 0:10:07.400 --> 0:10:10.080 Uh yeah, I think so, I just head it up there, 0:10:10.120 --> 0:10:12.520 let me just pull it up. But bun got a 0:10:12.520 --> 0:10:14.880 ten yere at three eighty five? Is that what you're 0:10:14.920 --> 0:10:16.720 looking at the tenure? Yeah? Three hundy five? All right, 0:10:16.760 --> 0:10:19.480 So let's see because we, as we said, swap markets 0:10:19.520 --> 0:10:22.720 now indicating you know, we're looking at what two rate 0:10:22.800 --> 0:10:25.040 hikes by the Fed by year end. So let's try 0:10:25.040 --> 0:10:26.640 to make some sense out of it with us. Lucky 0:10:26.640 --> 0:10:29.840 for us in studios Ben Emmons, he's senior portfolio manager, 0:10:29.840 --> 0:10:32.000 head of fixed income over the wealth management firm New 0:10:32.080 --> 0:10:33.960 Edge Wealth, and he's here, as we said in our 0:10:33.960 --> 0:10:35.440 Blue Work Interactive Brokers Studio. 0:10:35.440 --> 0:10:37.920 Hello, Hello, Hi Carol, it's great to meet you. 0:10:38.040 --> 0:10:39.719 It's nice to meet you. I've heard a lot about you. 0:10:39.960 --> 0:10:40.439 Hi, thank you. 0:10:40.720 --> 0:10:43.400 So make sense of today's moves? Is this logical? Is 0:10:43.440 --> 0:10:45.280 this where we should be and in terms of what 0:10:45.280 --> 0:10:46.560 we're seeing along the Treasury curve. 0:10:46.840 --> 0:10:49.520 Yeah, I think it's logical, and there's actually two reasons why. 0:10:49.880 --> 0:10:53.120 So obviously the GDP data surprise. But you know, as 0:10:53.160 --> 0:10:57.840 Matth was starting the segment off the bally of the curve, underperformance. 0:10:57.320 --> 0:10:58.160 That tends to happen. 0:10:58.440 --> 0:11:01.120 The ball mar could recognized strong growth. The five year 0:11:01.160 --> 0:11:04.720 part sells off the most. That's I think if very 0:11:04.880 --> 0:11:09.080 logical reaction. The auto reaction is that Powell overnight puts 0:11:09.120 --> 0:11:11.360 in a speech that there could be two or more 0:11:11.480 --> 0:11:13.880 rate hikes. That really caught a lot of people's attention 0:11:14.600 --> 0:11:17.199 because he endorsed the dop lot the day before in 0:11:17.240 --> 0:11:19.959 the Penelt and Cintra saying it could be more rate 0:11:20.080 --> 0:11:23.920 hikes meaning I'm saying what the forecast is showing you. 0:11:24.440 --> 0:11:26.679 But if you say two or more, if you look 0:11:26.720 --> 0:11:29.720 at that dop lot, anything beyond where the median is, 0:11:29.720 --> 0:11:32.640 which is five point six two five percent, are those 0:11:32.720 --> 0:11:34.920 three little dots on the top that are. 0:11:34.840 --> 0:11:36.760 Six to six and quarter percent different? 0:11:37.040 --> 0:11:37.720 Huge difference. 0:11:38.160 --> 0:11:40.880 So the bomb marker is edging here a bit about Okay, 0:11:40.880 --> 0:11:43.360 we're getting core PC tomorrow, which, by the way, Powell 0:11:43.360 --> 0:11:46.760 also floated in the speech saying likely to be four 0:11:46.760 --> 0:11:49.040 point seven percent, which is the number that forecasts tomorrow. 0:11:49.720 --> 0:11:51.800 You know, that's too high inflation, and with the growth 0:11:51.840 --> 0:11:55.079 number today being this strong, means that inflation like that 0:11:55.160 --> 0:11:58.520 stays high, and that means yes that maybe not only 0:11:58.559 --> 0:12:00.680 two high rate hydred may have to be more. I 0:12:00.720 --> 0:12:02.040 think that's the reaction to it. 0:12:02.720 --> 0:12:05.520 So what do you think about the underlying economy though, Ben? 0:12:05.559 --> 0:12:08.839 I mean, we got some good numbers today on the economy, but. 0:12:08.760 --> 0:12:10.120 They're very backwards looking. 0:12:10.200 --> 0:12:15.040 Right, we're talking about first quarter GDP and personal consumption. 0:12:15.400 --> 0:12:19.960 First quarter core PCE in fact, was revised down. Does 0:12:20.000 --> 0:12:22.080 the economy look good to you here or do we 0:12:22.120 --> 0:12:24.040 need to see earnings to really judge that. 0:12:25.040 --> 0:12:26.800 You do need to see earnings to judge it. And 0:12:26.840 --> 0:12:29.040 there it's corporate profits, right, we were at least too and 0:12:29.040 --> 0:12:31.640 they were down for the first quarter. So there's one 0:12:31.760 --> 0:12:34.959 one I guess, softness in the economy. But what stood 0:12:34.960 --> 0:12:37.720 out to me that number was that the housing market 0:12:37.800 --> 0:12:39.960 is coming through the data. You know, the fixed structures 0:12:40.080 --> 0:12:43.640 is one component was actually much higher. So it does 0:12:43.800 --> 0:12:48.200 tell you that rates are not finding everywhere. You know, 0:12:48.320 --> 0:12:51.760 it's footprints in order to slow the economy truly down. 0:12:52.040 --> 0:12:53.960 We would have otherwise had a number that would have 0:12:54.160 --> 0:12:56.480 not been this two percent or so, it would have 0:12:56.520 --> 0:13:00.160 been downside surprise. So I think backward looking data. But 0:13:00.200 --> 0:13:02.720 it is an economy that's on his feet and resilient 0:13:02.880 --> 0:13:06.600 and that's the worst right and therefore growing stronger than potential. 0:13:06.760 --> 0:13:09.040 Then could we theyll get potentially what you know, like 0:13:09.080 --> 0:13:12.680 a rolling recession. We saw housing take a hit, go 0:13:12.800 --> 0:13:15.000 back what a few months, go back last year right 0:13:15.200 --> 0:13:17.320 as rates started to tick higher. So could we that 0:13:18.280 --> 0:13:19.760 at this point people like I got to buy a 0:13:19.760 --> 0:13:22.640 house or something. Could we see that there's just going 0:13:22.720 --> 0:13:24.520 to be different parts of the economy so that it 0:13:24.559 --> 0:13:26.199 won't be felt so severely. 0:13:26.840 --> 0:13:29.640 Yeah, because if you if you could say no, yeah, 0:13:30.520 --> 0:13:36.720 I don't like to say that, but you probably have 0:13:36.760 --> 0:13:39.720 a good point. You know, we come out of a 0:13:39.720 --> 0:13:43.000 pandemic and we're getting a big inventory correction first, then 0:13:43.040 --> 0:13:45.400 it spills over to the housing market. Then we're seeing 0:13:45.400 --> 0:13:48.200 an auto is a big correction, and then we probably 0:13:48.240 --> 0:13:50.959 see at some point that the travel leisure chector will 0:13:51.000 --> 0:13:53.840 slow down. It's going to be no, it's sound unstatable 0:13:53.880 --> 0:13:56.120 to mend but it's going to taper off at some points. 0:13:57.040 --> 0:14:00.680 And obviously we have seen on the manufacturing side quite contraction, 0:14:01.559 --> 0:14:06.880 but it doesn't feel the traditional Mber recession definition really 0:14:06.960 --> 0:14:09.840 because we haven't seen unemployment rate going up so quick 0:14:09.880 --> 0:14:12.800 so fast that it makes you really wonder like, Okay, 0:14:12.920 --> 0:14:15.400 we're having a lot of layoff announcements, we're having layoffs, 0:14:15.720 --> 0:14:19.640 but it having no really material impact on widespread unemployment. 0:14:19.800 --> 0:14:21.640 I think that's the key missing agreement. 0:14:22.400 --> 0:14:24.520 So is the issue. 0:14:24.800 --> 0:14:29.240 You know, corporations are sufficiently financed better than they have 0:14:29.400 --> 0:14:33.440 been in the recent past, and households have bigger bank deposits, 0:14:33.920 --> 0:14:38.720 people have you know, thirty year fixed interest, fixed rate mortgages. 0:14:39.000 --> 0:14:44.480 So basically these long and variable effects are taking even 0:14:44.560 --> 0:14:46.960 longer to make a difference. 0:14:47.440 --> 0:14:49.320 Yeah, and maybe not what you ate us said that 0:14:49.360 --> 0:14:52.080 it takes twenty five years like in Japan, but it's 0:14:52.080 --> 0:14:56.840 definitely taking longer because in an air off QE actually 0:14:57.640 --> 0:15:00.200 generate all the benefits you just describe math. You know, 0:15:00.240 --> 0:15:02.560 if you have, indeed companies that have been able to 0:15:02.560 --> 0:15:05.800 refinance their debt at double the maturity that they had 0:15:05.880 --> 0:15:12.040 pre financial crisis, if you have corporate sorry households that 0:15:12.080 --> 0:15:16.040 are better positioned in terms of savings and bound sheet. 0:15:16.360 --> 0:15:18.120 Why I had only a cover more than two thirds 0:15:18.160 --> 0:15:21.880 of the economy. So interstrates will take time to work 0:15:22.000 --> 0:15:26.320 through the system. Interstates will take time also to actually 0:15:26.680 --> 0:15:29.520 change people's behavior ultimately. I think that's the other part 0:15:29.520 --> 0:15:32.960 of it. You know, we haven't seen really a significant 0:15:33.040 --> 0:15:36.520 change of Oh I'm looking at treasury yields now over 0:15:36.560 --> 0:15:39.280 five percent, say I'm going to really pair back and 0:15:39.320 --> 0:15:41.240 to sit at home and say if that's not really 0:15:41.280 --> 0:15:41.880 what was happening. 0:15:41.920 --> 0:15:44.520 And we've actually seen money coming into the equity markets. 0:15:44.240 --> 0:15:45.800 Right, people are comfortab with the last one. 0:15:45.960 --> 0:15:47.680 Let me ask you something in terms of the Fed's 0:15:47.760 --> 0:15:50.000 dual mandate. Right, you've got inflation, and you've got the 0:15:50.040 --> 0:15:52.440 jobs market. Might have fed as much as we are, Like, 0:15:52.440 --> 0:15:53.480 I don't know if they're going to get back to 0:15:53.520 --> 0:15:56.120 two percent. Might the FED more likely have to abandon 0:15:56.800 --> 0:15:59.160 in terms of more weakness and pain in the job 0:15:59.200 --> 0:16:02.680 market because maybe there's just demographics going on. I've had 0:16:02.760 --> 0:16:05.440 family members who would have been still working, but you know, 0:16:05.480 --> 0:16:06.920 at the pandemic hit and they're like, you know, I'm 0:16:06.920 --> 0:16:08.880 going to go in an early retirement. I keep hearing 0:16:08.960 --> 0:16:12.240 stories about you know, companies wanting to bring back older 0:16:12.280 --> 0:16:14.960 workers because teenagers aren't taking jobs and so on and 0:16:15.000 --> 0:16:17.240 so forth that they used to. Is there we don't 0:16:17.280 --> 0:16:20.800 have immigration like an aging of the population. Is there 0:16:20.800 --> 0:16:24.200 a chance that demographically there are some macro forces going 0:16:24.200 --> 0:16:27.120 on that are going to keep a tight labor market 0:16:27.120 --> 0:16:27.960 going for longer? 0:16:28.400 --> 0:16:30.280 Have you take a very simple metric of the labor 0:16:30.280 --> 0:16:33.520 force participation rate, you're looking at that twenty year history. 0:16:33.960 --> 0:16:36.680 You're seeing the blow that happened in two thousand and 0:16:36.720 --> 0:16:39.880 eighth of yes, big fall in that labor force participation 0:16:40.000 --> 0:16:43.200 because people were sidelined and did not come back into 0:16:43.200 --> 0:16:46.440 the labor force and then being either discouraged or early retirement. 0:16:46.480 --> 0:16:48.640 And we had the same blow again in twenty twenty, 0:16:49.120 --> 0:16:52.280 only that labor force participation rates went down just as 0:16:52.360 --> 0:16:54.080 much like interust rates went down, same with so with 0:16:54.080 --> 0:16:57.640 big trough pig trough. So it will take a lot 0:16:57.720 --> 0:16:59.760 to get more and more people back into labor force. 0:17:00.080 --> 0:17:03.280 In other words, current rage is running somewhere three and 0:17:03.280 --> 0:17:05.199 a half four and a half percent range. We'd have 0:17:05.240 --> 0:17:08.440 to probably double to get people really pulled back in. 0:17:08.760 --> 0:17:10.800 And then there's still groups of people that say, like 0:17:11.440 --> 0:17:13.560 you know what, I got enough money to retire. I 0:17:13.560 --> 0:17:15.360 don't want to go back into this, and I think 0:17:15.400 --> 0:17:18.600 this economy could become way too cyclical or I'm uncertain 0:17:18.680 --> 0:17:21.520 about it, or I have other things to do and 0:17:21.600 --> 0:17:22.800 I don't want to want to. 0:17:22.760 --> 0:17:24.960 Work, so it could stay strong, Yes, I. 0:17:24.960 --> 0:17:26.800 Think so, I think if we're dealing with a demographic 0:17:26.800 --> 0:17:29.560 effect that we've had in Japan, Yeah, only Japan has 0:17:29.640 --> 0:17:31.560 you know, at least ten years ahead of us with them. 0:17:31.720 --> 0:17:34.359 So the Fed has to then keep raising rates, and 0:17:34.800 --> 0:17:37.840 you know, by Dudley's math, we could see treasuries hit 0:17:37.880 --> 0:17:41.159 four and a half percent on the tenure. At what 0:17:41.240 --> 0:17:42.840 point do you say, okay, now I want to lock 0:17:42.880 --> 0:17:43.560 in these rates. 0:17:44.640 --> 0:17:47.720 Yeah, you know, one that we do get a decisive 0:17:47.800 --> 0:17:50.840 change in that core inflation number. Right, So if the 0:17:50.880 --> 0:17:55.840 core PC number tomorrow and subsequent months shows really decline 0:17:56.400 --> 0:17:58.919 and never getting more more confident like okay, fat, you 0:17:58.960 --> 0:18:01.480 are winning this game, You're going to bring that infratirate 0:18:01.520 --> 0:18:02.240 indeed down. 0:18:02.359 --> 0:18:04.080 Then you want to buy treasuries. You do want to 0:18:04.080 --> 0:18:05.480 buy a treasure. At what point do you start to 0:18:05.480 --> 0:18:06.840 go out further out on the curve. 0:18:07.280 --> 0:18:10.560 So what happens then is that as that core number 0:18:10.600 --> 0:18:13.600