Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz.
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Speaker 2: app o. Lindsay Pigs is a joining us now from
Speaker 2: Stefel here to distill this and move forward as well.
Speaker 2: Let me ask you the same question good Morning, good
Speaker 2: that I asked Michael McKee. First look at GDP, What
Speaker 2: will the second and third look look like?
Speaker 1: When do we get them, like a month out?
Speaker 3: Do we get a second look exactly? We'll get them
Speaker 3: periodically throughout now going forward for this next several weeks.
Speaker 3: But I think to your point, this is going to
Speaker 3: set the tone. So the first look is very important. Yes,
Speaker 3: we do expect some revisions, there always are, but this's
Speaker 3: the tone for what the expectation of the US economy
Speaker 3: was at the start of the year. And it tells
Speaker 3: us two things. One, we're losing momentum from what we
Speaker 3: saw excuse me at the end of last year. But two,
Speaker 3: the economy is still proving resilient despite the fact that
Speaker 3: the FED is engaged in a very aggressive upward pathway
Speaker 3: to tame inflation. And the consumer particularly, forget about all
Speaker 3: the other details. The consumer is the backbone to the
Speaker 3: US economy, and the consumer is proving surprisingly resilient.
Speaker 4: And we've seen this consistently throughout a lot of the earnings.
Speaker 4: I mean, I feel like a broken record. The Productor
Speaker 4: and Gamble price increases of ten percent. Consumers have absorbed it,
Speaker 4: and you can see on the margins companies actually saying
Speaker 4: we'd rather raise prices even if we lose volume.
Speaker 5: How long can that last?
Speaker 3: Well, it can last for another month, two months, maybe longer.
Speaker 3: Because when we look at the household balance sheet, so
Speaker 3: we're looking at debt relative to disposable personal income, we're
Speaker 3: talking about.
Speaker 5: A decade low.
Speaker 3: So I'm not necessarily advocating for consumers to take on
Speaker 3: new amounts of credit card debt, but if that's where
Speaker 3: they need to go, there's quite a bit of additional
Speaker 3: room to grow that household balance sheet before that becomes
Speaker 3: a red flag that the consumer needs to cut.
Speaker 4: Back, and the real break in the cycle is when
Speaker 4: jobless rates start to go up, and that's the reason
Speaker 4: why people if it waiting for that to happen as
Speaker 4: sort of a signal, and we aren't really seeing it,
Speaker 4: at least not in the initial jobless claims. Yet what
Speaker 4: Michael McKee was talking about with business spending coming down,
Speaker 4: that was the reason for the weakness that came into GDP.
Speaker 4: How long will that take before that translates into job cuts.
Speaker 3: Well, what's interesting is, yes, we saw business investment come down,
Speaker 3: but we also saw a drawdown in inventories. So if
Speaker 3: the consumer continues to prove resilient going into the second quarter,
Speaker 3: we're going to have to see a build back up
Speaker 3: of inventory growth, which will significantly then contribute to Q
Speaker 3: two GDP.
Speaker 5: So we will have to.
Speaker 3: Keep an eye on that. But I think broadly speaking,
Speaker 3: businesses are anticipating a slowdown in the economy. They're anticipating
Speaker 3: a recession to come in the second half of the year,
Speaker 3: and they responded in kind across the first three months
Speaker 3: of the year.
Speaker 6: Let me just throw these please went quickly on inventories.
Speaker 6: I got the dollar figures here. Inventories grew in the
Speaker 6: fourth quarter by one hundred and thirty six and a
Speaker 6: half billion dollars. They shrank by one point six billion
Speaker 6: dollars in the first quarter, which is extraordinarily unusual. So
Speaker 6: business basically stopped producing stuff and started selling out.
Speaker 4: Of their war So, Lindsey, can you weigh in on
Speaker 4: this basically, as this company's more bearish than the consumer
Speaker 4: is letting on that they were prepared for an environment
Speaker 4: that was not as bleaking nearly as consumers approved.
Speaker 3: Well, I think it's businesses and economists alike. We were
Speaker 3: anticipating the consumer to have a significant pullback at the
Speaker 3: start of the year, but we found that consumers were
Speaker 3: increasingly willing to turn to credit cards draw down the
Speaker 3: last of that pandemic savings.
Speaker 5: And we also saw.
Speaker 3: An unexpected sputtering of state and local stimulus filter into
Speaker 3: the economy that provide that additional support to the consumer.
Speaker 1: Nomenal GDP.
Speaker 2: I'm going to go back a year here, long ago
Speaker 2: and far away, eight point five percent, big inflation, big
Speaker 2: real GDP seven point seven percent, six point six percent,
Speaker 2: and now I observe five point one percent. Do you
Speaker 2: ascribe to a diminished real GDP? A diminished inflation, where
Speaker 2: nominal GDP gets back to I'm going to say a
Speaker 2: four percent normal.
Speaker 3: I would suspect that the longer term run rate of
Speaker 3: real GDP is sub two percent. I would suspect that
Speaker 3: it's around correct, around one point eight percent longer term,
Speaker 3: once we smooth out some of these cyclical movements, the
Speaker 3: FED gets inflation under control, the US economy falls into
Speaker 3: a downturn or outright recession, and we see recovery. The
Speaker 3: long term trajectory of the US economy I do see
Speaker 3: as a real rate of under two percent.
Speaker 2: The business people listening here, the animal spirit of the
Speaker 2: country overlay that, say two percent real GDP or less
Speaker 2: on your inflation guest, is this nominal GDP decline from
Speaker 2: the pandemic in place where we get a four percent
Speaker 2: top line GDP absolute.
Speaker 3: Two percent real place two percent inflation two there's our
Speaker 3: four percent nominal GDP, and I do think that that's
Speaker 3: a realistic expectation. Without a significant growth in productivity, we're
Speaker 3: going to struggle to see a real rate of activity
Speaker 3: above two percent for quite some time.
Speaker 4: So this is really the conundrum that markets have been
Speaker 4: struggling with.
Speaker 5: And this is sort of you know, you want.
Speaker 4: It to be good, but not too good, because if
Speaker 4: the FED comes it to play in. Right now, we're
Speaker 4: pricing in a four point two percent FED funds rate
Speaker 4: come January of next year. Is that consistent with what's
Speaker 4: required to bring that inflation given the economy you just portrayed.
Speaker 3: No, it's certainly not that we know from history, from
Speaker 3: history historical cycles, that the FED is going to need
Speaker 3: to raise rates above that peak level of inflation, and so,
Speaker 3: as we've long advocated, the FED is likely to need
Speaker 3: total policy firming to get up near six percent. Now,
Speaker 3: I'll concede that if we see tighter credit conditions do
Speaker 3: some of the Fed's work and pull down inflation faster,
Speaker 3: that maybe the FED doesn't need to raise rates quite
Speaker 3: as high if that total policy firming reflects additional rate
Speaker 3: hikes as well as an organic change to conditions. But
Speaker 3: right now we're not seeing that organic change, And with
Speaker 3: inflation where it is and a solid level of activity
Speaker 3: both in the consumer and the broader economy, the FED
Speaker 3: needs to continue to move forward raising rates to tame inflation.
Speaker 2: Were a summer here from Michael mckee're on what page
Speaker 2: fourteen of the report.
Speaker 6: Well, it looks like this was in large measure inventories
Speaker 6: and cut back in business spending. As Lindsay was talking
Speaker 6: about what exports imports, exports and imports were little changed,
Speaker 6: so we didn't get a major contribution either way. A
Speaker 6: little bit of an addition to GDP. Not much.
Speaker 7: Help, Lindsay, Help here, what is inventory?
Speaker 3: Well, when you produce goods, but they're sitting not being
Speaker 3: purchased yet, So just as you would expect, it's the
Speaker 3: inventory of production the consumers haven't yet absorbed.
Speaker 6: Yeah, it's the value of the goods that have been
Speaker 6: produced that then haven't they're sitting in the warehouse.
Speaker 1: Yeah.
Speaker 6: Well, just the easiest way to think about it is
Speaker 6: all the cars that are parked outside the automobile Manu
Speaker 6: facturers waiting to be shipped off to dealers.
Speaker 4: And Tom, just to sort of confirm the theme of
Speaker 4: the morning, which is that businesses have been too pessimistic
Speaker 4: based on where consumers really are. Caterpillar CEO comes out
Speaker 4: with this, twenty twenty three will be better than we
Speaker 4: previously anticipated. Time and again, Tom, they didn't have as
Speaker 4: much inventory as they needed to meet the demands. They're
Speaker 4: drawing down from it, raising questions about how much more
Speaker 4: they're going to have for to produce later.
Speaker 6: That's going to be the big issue that'll be debated
Speaker 6: around the FED conference table. They don't have the big
Speaker 6: Mahogany table anymore, but they're going to be talking about
Speaker 6: this because if consumer spending is remaining strong and there's
Speaker 6: not enough goods a that contributes to inflation, and B
Speaker 6: that could luger a big increase in production in the next.
Speaker 8: Couple of quarters.
Speaker 6: It's all going to depend on what businesses think is
Speaker 6: going to happen.
Speaker 1: I like this tech team, Lindsay Jiggs and Michael McKee.
Speaker 1: This is really good.
Speaker 2: Let's talk to a security analyst about this, John in
Speaker 2: this big move. Michael Nathanson joins us. How different than
Speaker 2: David Kirkpatrick. Maybe not the author of the Facebook effect,
Speaker 2: but he's looked at the new Zuckerberg effect as well.
Speaker 2: You nailed it in your note, Michael. And what I
Speaker 2: see here in terms of the maturity of this generation
Speaker 2: is mister Zuckerberg wants to be a serious technology company.
Speaker 2: Is this a systemic Silicon Valley shift?
Speaker 7: I think it is.
Speaker 8: Tom.
Speaker 9: It's interesting that I asked him last year if his
Speaker 9: mote was his social graph that he had built, and
Speaker 9: he's like, no, our moat is that we are a
Speaker 9: technology company that moves fast and changes things right. And
Speaker 9: John I over the years talked about Meta and the
Speaker 9: Stockers in the dumbs and they had to pivot away
Speaker 9: from a couple of things that were hurting them, and
Speaker 9: very quick order they did. It's because they are a
Speaker 9: technology company. And then Mark became much more aggressive ruthless
Speaker 9: on cost control and that was a big aha because
Speaker 9: people thought he was just not going to cut costs
Speaker 9: and he's taken it about eleven and twelve billion dollars.
Speaker 7: Out of cost base in six months. And that's extraordinary.
Speaker 8: Right.
Speaker 9: So the combination of accelerating a revenue and then cost
Speaker 9: cuts the story.
Speaker 8: I mean, Stock's is gonna keep going.
Speaker 7: I think it's three dollar stop.
Speaker 2: You really do, Michael, I want to look at this
Speaker 2: on a broader basis. Maffatt Nathanson is iconic.
Speaker 1: Onest.
Speaker 2: We had your colleague in crime, Rich Greenfield on the
Speaker 2: other day. You guys have followed these children from out
Speaker 2: of their dorms to the modern era. Is right now
Speaker 2: when these guys grow up, as it appears Zuckerberg has
Speaker 2: grown up.
Speaker 8: Oh, with that doubt.
Speaker 9: I think having a founder who his entire life work
Speaker 9: is tied up in this, that's the pay if you're
Speaker 9: getting right. He was not going to let this company die,
Speaker 9: and he took aggressive steps, and that's you're right, Tom, Like,
Speaker 9: this is the evolution of his leadership.
Speaker 8: It's a great point.
Speaker 1: We forget, Lisa, he's thirty eight years old. We forget that.
Speaker 2: You know, we're talking like he's six fifty or sixty's
Speaker 2: thirty eight years old.
Speaker 1: He's a kid.
Speaker 4: We've known this, and now he's proving himself in the
Speaker 4: actual bread and butter earnings. Michael, you increased your price
Speaker 4: target to two hundred and ninety five dollars from two
Speaker 4: hundred and seventy five dollars. Where is that extra profit
Speaker 4: going to come from? Based on the earnings we just saw.
Speaker 9: Lisa, it was a revenue story, right, So if you
Speaker 9: look at their guide to the next quarter on revenue growth,
Speaker 9: it was between two percent and ten percent on the upside.
Speaker 9: We're at five, so we're smack in the middle of that.
Speaker 9: So we took our revenue numbers up to eight percent
Speaker 9: next quarter, and if you look at the rest of
Speaker 9: the year, you have probably doubled digit revenue growth by
Speaker 9: the end of the year.
Speaker 7: So that's what drove art.
Speaker 9: I mean, we were always above the street and here's
Speaker 9: our price target, but now we're close to three hundred
Speaker 9: dollars because the revenue story is now starting in KKA.
Speaker 4: Is there a dirty secret that it's been exposed by
Speaker 4: the earnings of some of these tech giants that have
Speaker 4: been cutting staff that they didn't need as big of
Speaker 4: a footprint, They don't need as many bodies, and so
Speaker 4: they're are that much lower.
Speaker 7: That's a great point. That's a dirty secret.
Speaker 8: You know, back when.
Speaker 9: We cover media, if there was a great ad cycle
Speaker 9: at CBS, they didn't hire more people. If you look
Speaker 9: at what happened in twenty and twenty one twenty two,
Speaker 9: as revenues were ramping, they hired more people and there
Speaker 9: wasn't there was not a benefit to that, right the ad.
Speaker 7: Revenue came through.
Speaker 9: So now these companies are going back to pre pandemic
Speaker 9: staffing levels and the revenue base is coming back. So,
Speaker 9: I mean, we sound crazy, but we cannot be more
Speaker 9: bullish on meta and alphabet as well, just because of
Speaker 9: what you said, and they all learned a lesson which
Speaker 9: is they overstaffed and they can cut, cut, cut, without
Speaker 9: really hitting the top line.
Speaker 4: Michael, given the fact that you did increase your earnings,
Speaker 4: how much does that include the potential banning or sale
Speaker 4: of TikTok and the read through implications for Meta for Snap.
Speaker 9: No banning of TikTok in our in our thought process.
Speaker 9: You know, TikTok's about ten billion.
Speaker 8: US revenue base.
Speaker 7: It would flow to Meta a little bit Snap, It's
Speaker 7: not our numbers.
Speaker 9: That would be a that'd be a home run, obviously,
Speaker 9: but you know, we've not contemplated that because it just
Speaker 9: seems so far removed. But what they've done though, you know,
Speaker 9: with Reels, is that they quickly adopted the best part
Speaker 9: of TikTok, right, So they saw weakness in their business model,
Speaker 9: short form video and a quickly engineered solution, and now
Speaker 9: they're starting to monetize that solution.
Speaker 8: So you know, TikTok exists today.
Speaker 9: I believe they're taking share from TikTok given what they've
Speaker 9: just accomplished.
Speaker 10: This is just amazing story. This was an eighty eight
Speaker 10: dollar name in ears, and you've got Michael Nathanson talking
Speaker 10: about three hundred.
Speaker 7: But JOHNA.
Speaker 9: We stuck by this thing, and some people did because
Speaker 9: was the revenues were self destroyed. They had basically where
Speaker 9: they're hit by Apple. Remember Apple changed their IDFA signifiers
Speaker 9: on their mobile system, and then these guys had introduced reels,
Speaker 9: which was not monetizing, right, But what killed the stock
Speaker 9: was just believe that Thuckerberg was an empire builder and
Speaker 9: women cut costs. Go back to that October conference call.
Speaker 9: Some folks jumped on through because like, look, this guy
Speaker 9: doesn't understand what's happening. But that's to me, it was
Speaker 9: all about self created revenue crisis that they've now engineered
Speaker 9: themselves past.
Speaker 8: Right.
Speaker 9: That was what was so interesting is that this was
Speaker 9: not fickical.
Speaker 7: It was in a way because twenty twenty one.
Speaker 8: Was so good.
Speaker 9: They had a hard time lapping twenty twenty one, and
Speaker 9: then IDFA hit from Apple and then reels occurred, So
Speaker 9: it was like just all these waves were hitting the stock.
Speaker 10: So Michael, squeeze this in because they've only got about
Speaker 10: forty five seconds left. I apologize. There will be some
Speaker 10: people who don't hold this name who look at this
Speaker 10: as some kind of cyclical signal. You just said that
Speaker 10: maybe last year wasn't cyclical to some extent, is the
Speaker 10: success this morning cyclical? Is that a broader signal about
Speaker 10: the cycle.
Speaker 9: Because Alphabet is a bigger company that's inserching YouTube and
Speaker 9: their results were okay, but they're not like this. This
Speaker 9: is this is a separate cycle tied to Meta and
Speaker 9: what they were trying to do last year.
Speaker 10: Michael, just perfect and great coal buddy for sinking by
Speaker 10: this name at a difficult time.
Speaker 5: Michael, m SVB.
Speaker 2: John, I want you to bring in Andrew slim And
Speaker 2: this guy has decades and decades of experience, and I'm
Speaker 2: gonna guess he's going to say, to your good questions,
Speaker 2: he's never seen.
Speaker 5: It like this, Andrew SLIMM. And that's where we are joined.
Speaker 10: Just now have more than Stanley Investment Management portfolio manager.
Speaker 10: I guess we should start there than Andrew. Have you
Speaker 10: ever seen it like this before?
Speaker 8: Yeah?
Speaker 11: I mean Tom said, all right, my head is spinning.
Speaker 11: It's a it's a tough environment, but it's all tough, right.
Speaker 11: The markets are never clear. The light never shines, you know,
Speaker 11: it's green light, all clear to invast, So is it? Yeah,
Speaker 11: it's definitely a consumer consumer you know, confusing I think
Speaker 11: Lisa said it best, which is the consumer says remarkably resilient.
Speaker 11: But look, financial conditions are tightening and that's going to
Speaker 11: affect many businesses.
Speaker 8: And that's the push pulls.
Speaker 11: Which do you lean towards a consumer or tightening financial conditions?
Speaker 11: That determines your you know, really outlook for the economy.
Speaker 11: You had a number of lead in people talking about
Speaker 11: as slow down in the economy except the S and
Speaker 11: P sits at forty one hundred.
Speaker 8: You know, that's incredible to me.
Speaker 11: What's transpired since beginning of March.
Speaker 4: You've been bullish though, so are you getting more bearish now?
Speaker 11: Well, you know, I've been bullish since the beginning of
Speaker 11: the year only because we came off a bad last year.
Speaker 11: Pessimism you know, I wrote a piece pessimism is rampant,
Speaker 11: and I think the market predicted a down earnings year
Speaker 11: this year. But you know, the market has had a
Speaker 11: good first part of the year. We're moving into the summer.
Speaker 11: I could see a stall out, but there's no question
Speaker 11: in my mind the earnings collapsing scenario that's going to
Speaker 11: retest the low. That scenario is running out of time
Speaker 11: because markets price in a recovery of earnings, which should
Speaker 11: happen next year, and they will trade to a pretty
Speaker 11: high multiple on that recovery and then let the e
Speaker 11: work into that. That's historically what's happened, So I wouldn't
Speaker 11: be surprised if we get another leg up in the
Speaker 11: second half.
Speaker 8: Of the year.
Speaker 11: I just think, you know, it's been a pretty good
Speaker 11: move and we just don't know this, you know, what's
Speaker 11: going on the next leg of this bank crisis.
Speaker 2: And just someone you were at Pennsylvania studying Larry Summer's
Speaker 2: father in economics a few years ago, and I'm sure
Speaker 2: you went through the nifty to fifty and all that.
Speaker 2: If we got a nifty seven or a nifty twenty
Speaker 2: right now, do you run a portfolio less diversified.
Speaker 11: Scared of the but Jesus out of me time. I mean,
Speaker 11: this is the you know stocks, you know, acid price
Speaker 11: of tricky. You know, you know, there's an area of
Speaker 11: the market that's getting extreme relative to the rest of
Speaker 11: the market. But it looks over the last couple of
Speaker 11: days and days to included, it's going to get more extreme.
Speaker 11: I know, over time, very very big companies have a
Speaker 11: hard and hard time growing companies don't stay top five
Speaker 11: in the S and P forever.
Speaker 8: Because it gets tougher to grow.
Speaker 11: Governments begin to cause problems and getting.
Speaker 8: Approvals on acquisitions.
Speaker 11: Hello, you know, those are all the seeds that bring
Speaker 11: down these top companies. But that's not happening yet. So
Speaker 11: it's tricky. You need to own some exposure. But I
Speaker 11: think you got to look under the surface because the
Speaker 11: rest of the market has been left behind, and they're
Speaker 11: pretty cheap.
Speaker 2: So Charles Canter's in the other day with newburg or
Speaker 2: Berman big love of big tech and so Apple. Are
Speaker 2: you predicting, Andrew that with the Apple somewhat exponential growth
Speaker 2: trends in the income statement, that the government will step in,
Speaker 2: say in a eurosque way against big Dech.
Speaker 11: You're already starting to see it, you know, not anyway,
Speaker 11: you're already starting to see it where they're they're questioning
Speaker 11: the dominance of these companies. But that doesn't mean these
Speaker 11: docks can't do spectacularly well for the next quarter.
Speaker 8: This is a longer term issue.
Speaker 11: I just know that when you have such a waiting
Speaker 11: of these large companies and with the government starting to
Speaker 11: turn against them, uh, that's a bad combination.
Speaker 8: But It doesn't.
Speaker 11: Necessarily mean they'll they'll be brought down, and I'm always
Speaker 11: mindful of you know, look, let's look back General Electric,
Speaker 11: at and t ibm Exon, Bethlehem Steel. You know, they
Speaker 11: all got to be the big dogs, and you know,
Speaker 11: something happened, and you know, I remember my dad saying
Speaker 11: to me a long time ago, why would I ever
Speaker 11: sell General Electric.
Speaker 4: Which is a similar kind of statement today for the
Speaker 4: tech Andrew, I'm curious you mentioned the C word crisis
Speaker 4: in the banking sector. Does that become the driving factor
Speaker 4: once again in markets that seem to have one eye
Speaker 4: on it but not all that closely all the time.
Speaker 11: Yeah, I mean that's fascinating. So you know, you had
Speaker 11: this crisis early March. The market dropped to you know,
Speaker 11: kind of thirty eight hundred and thirty eight to fifty
Speaker 11: and then lo and behold the economic data X. The
Speaker 11: banking crisis wasn't so bad. The market runs to forty
Speaker 11: one hundred and now we're having a second round. It's
Speaker 11: causing anxiety, But the flip side is it's coming during
Speaker 11: earning season, and earnings aren't quite as bad as you
Speaker 11: point out, Lisa, Even not only Megacap but some of
Speaker 11: the consumer socks where expectations were pretty brought you know,
Speaker 11: brought down, they're surprising. So I just think we're in
Speaker 11: this range. I don't think we're going to break out
Speaker 11: of it. I don't see a big retest of the low,
Speaker 11: because you know, everywhere I go people ask me all
Speaker 11: the time, when when's the retest coming? I got cash
Speaker 11: on the sidelines, I want to put to work. I
Speaker 11: want to put to work because I raised it last year.
Speaker 11: So I just think we're kind of well, continue to
Speaker 11: knock around this range, and now we're back to the
Speaker 11: crisis focused. So could we head down that, you know,
Speaker 11: kind of thirty nine hundred. I think it's very possible.
Speaker 11: I just don't see a breakout until later this year.
Speaker 11: I think the market will end the year higher than
Speaker 11: forty two hundred, and we'll look back and say, boy,
Speaker 11: oh boy, yet another example of a year post a
Speaker 11: bad year when expectations were so thoroughly washed out.
Speaker 10: Do you remember the start of the year, wasn't it
Speaker 10: first half dip and second half rip from the consensus?
Speaker 10: It seems like, boy.
Speaker 8: Boy was that? And I questioned that, I remember we
Speaker 8: were on it that.
Speaker 10: Talks about that anymore. Do you remember that it was
Speaker 10: like guest stuff the guests, apart from enter of course.
Speaker 4: And then and then and then it became the rip,
Speaker 4: and then it and now it's the rip and the rip.
Speaker 4: It's a little light and little lighter rip, and then
Speaker 4: you know, eventually.
Speaker 5: Some stealthy rallies there, you know.
Speaker 10: And Andrew, thanks for doing this, by the way, Andrew
Speaker 10: slim and standing, Thank you, buddy. Yes, looking forward to it.
Speaker 10: Bob Dollars as well. He joined us now the CIO
Speaker 10: at Crossmark Global Investments. Bob, good morning to you.
Speaker 8: Audi.
Speaker 10: Let's look at the numbers so far. Double digit price
Speaker 10: increases at Kibley Clock, Docter and Gamble Coke, PEPSI take
Speaker 10: your pick. Looking at the numbers from Tech cloud spending
Speaker 10: still pretty decent, Microsoft at spending, pretty decent.
Speaker 5: Meta. What recession?
Speaker 8: Great question?
Speaker 12: Is the most anticipated one we know in history. I'm
Speaker 12: disappointed that full year estimates for the S and P
Speaker 12: of five hundred are not going up after all this
Speaker 12: good news. Maybe they've stopped taking the numbers down, but
Speaker 12: they're not moving up. Estimates are still too high, is
Speaker 12: what that points out. You give me more than I expect.
Speaker 12: In the first quarter. I don't change my number. That
Speaker 12: means I'm taking something out At Q two, three and four,
Speaker 12: the slow down is still upon us. All those lead
Speaker 12: indicators pointing to slow down slash mild recession.
Speaker 8: I don't see how we escape it.
Speaker 12: And you've adequately the systemic risk and the financial system
Speaker 12: handicapping that is very difficult. But I want to come
Speaker 12: back also at John two what you said earlier, McCarthy
Speaker 12: pulled a victory that you know, only losing four Republicans
Speaker 12: was pretty amazing. So now the burden is on the
Speaker 12: Democrats to come to the table and have a conversation.
Speaker 8: We'll see how that goes.
Speaker 1: In our ut, there was a nifty to fifty. Now
Speaker 1: we've got the nifty five as well. Can I hide
Speaker 1: out in the Bob Doll caution in big tech?
Speaker 12: Yeah, that's certainly a way to do it. But with
Speaker 12: the multiples where they are not just for tech, but
Speaker 12: you mentioned the soft drink and the staples companies, you know,
Speaker 12: Coke and Pepsi, their multiples are in the mid twenties.
Speaker 12: You know, I'm not sure that's a great deal. So
Speaker 12: the defensive areas to include some of those tech names
Speaker 12: have certainly had a bid, and they're getting expensive and overall,
Speaker 12: I look at my screen and I see the S
Speaker 12: and P five hundred pe ratio, twenty point five on trailing,
Speaker 12: almost nineteen on forward, and the numbers are probably too high.
Speaker 12: If interest rates and inflation where you know two, that's
Speaker 12: probably a good valuation. But I really struggle with where
Speaker 12: we are, So I'm notbearsh We paid that price last year,
Speaker 12: by I'm cautious, all.
Speaker 4: Right, as we point to the future. You mentioned McCarthy,
Speaker 4: So let's go there. Let's sit on that for a minute.
Speaker 4: Does that deal that we saw in the house, even
Speaker 4: though it has basically no chance of making it and
Speaker 4: seeing the light of day, does that give you confidence
Speaker 4: that the US can avoid a debt ceiling enough to
Speaker 4: price it out as a potential tail risk.
Speaker 12: I think, Lisa, it definitely increases the probability we get
Speaker 12: something done. Had that failed yesterday, we're kind of nowhere.
Speaker 12: Neither party has anything on the table.
Speaker 7: Now.
Speaker 12: The Republicans, with an incredible victory, put it on the table.
Speaker 12: The Democrats have to come back with some kind of conversation,
Speaker 12: which probably raises the probability we get something done. In
Speaker 12: the eleventh hour, the twelfth hour, maybe the thirteenth hour.
Speaker 5: You say they have to see no indication overnight that
Speaker 5: they will do.
Speaker 12: No, it never happens until it has to happen. We've
Speaker 12: seen that before. I don't think either party wants to
Speaker 12: be blamed for default or decline in the dollar because
Speaker 12: of a potential default. So all I'm saying is the
Speaker 12: onus is now in the Democrats to have a conversation.
Speaker 10: Is it your impression of things that you think that
Speaker 10: the Democrats in this White House are looking to see
Speaker 10: some market pressure build to gain some leverage over Republicans.
Speaker 5: Is that what they're waiting for?
Speaker 12: Very possible. You know, a couple of folks in Congress
Speaker 12: have said that in the last forty eight hours, gim
Speaker 12: give us a smack in the face and the markets
Speaker 12: and maybe we'll come to the table sort of thing, so.
Speaker 5: That market participant. Do you find that really frustrated?
Speaker 8: Yes, very much.
Speaker 5: It drives me.
Speaker 10: It drives me absolutely insane. I'm with you and with
Speaker 10: politicians are willing to let that to involve financial markets
Speaker 10: and use that as a position to rich.
Speaker 7: A little toy, isn't it, Tom.
Speaker 5: Don't you find that ridiculous.
Speaker 10: And I know we've been doing this for a long
Speaker 10: long time, but I just find it's so irresponsible that
Speaker 10: that's the direction of travel. And by the way, that's
Speaker 10: not a political statement. It's politician on both sides of
Speaker 10: the aisles trying to play games with markets.
Speaker 2: Can you see in the First Republic too, the key
Speaker 2: I think it's an adverb, but maybe an adjective. I
Speaker 2: flunk grammar, John, But the key word in every report
Speaker 2: on First Republic, which goes to the politics of the
Speaker 2: nation is wealthy. The basic idea that everything we do
Speaker 2: with First Red Republic is wealthy clients, jumbo mortgage is
Speaker 2: we know the drill, But there's a huge politics in
Speaker 2: our day to day newsgrind and finance, and also in
Speaker 2: how the stock market's treated.
Speaker 10: F I saved trying to bounce up by one point
Speaker 10: six percent. Let's just finish that briefly. Both there is
Speaker 10: a fear and we talked about some of the robust
Speaker 10: nature of the numbers of the earning so we can
Speaker 10: pick several indicators about tag financials whatever. Looking forward, lead
Speaker 10: indicators are terrible. You look at First Republic right now,
Speaker 10: and there's a big debate at the moment, it's that
Speaker 10: a First Republic problem or a broader banking issue that's
Speaker 10: going to lead to some kind of credit crunch.
Speaker 5: Where are even the team on that now?
Speaker 12: The systemic risks are always there, they're just a lot
Speaker 12: higher than usually now. Remember the FED took grates from
Speaker 12: zero to four and three quarters percent in twelve months.
Speaker 12: There are consequences. It's not just okay, Silicon Valley Bank
Speaker 12: its signature and we get up and dust ourselves off
Speaker 12: and ride off into the sunset. There are more consequences.
Speaker 12: Might it be another financial institution or two could be.
Speaker 12: My view is it will include a mild recession. Hopefully
Speaker 12: it's only mild.
Speaker 2: Joining us to rodd Cassidy with decades of experience and
Speaker 2: practice and the quiet of a management and boardroom where
Speaker 2: there are tough decisions to make. Use with RBC Capital Markets, Gerard,
Speaker 2: I've never seen anything like this. The lack of communication
Speaker 2: of the management team at First Republic, the conference call
Speaker 2: non event, and even their communicating of dialogue with the
Speaker 2: government and other more solvent bankers.
Speaker 1: Are you surprised by their silence?
Speaker 13: Tom, thank you for having me on the program, And
Speaker 13: I would say that obviously there is at a critical
Speaker 13: stage right now. They're being advised by some very smart people,
Speaker 13: and I think it's a strategy that they have chosen.
Speaker 7: It's hard.
Speaker 13: I was surprised that, as you put it out on
Speaker 13: their earnings call, that was a fifteen minute call. I
Speaker 13: think a better strategy a matter it would have been
Speaker 13: just to release the earnings and not you know, have
Speaker 13: that fifteen minute call. So certainly talking to the public
Speaker 13: is not something that should be pursued, and they're.
Speaker 7: Not doing that.
Speaker 13: But hopefully they are talking to very high level officials
Speaker 13: in the government at the char Federal Reserve to try
Speaker 13: to resolve this issue.
Speaker 2: From the time of Bill Isaac, Robert McTeer and others
Speaker 2: on other bank failures that you lived and died with
Speaker 2: Gerard Cassidy, just very simply here have the rules changed
Speaker 2: where the government doesn't have a function here like we
Speaker 2: were trained in school, Tom.
Speaker 7: I think they've evolved.
Speaker 13: I think the government always has a function because there's
Speaker 13: a regulated industry. The government, as we all know, guarantees
Speaker 13: deposits up to two hundred and fifty thousand dollars per account.
Speaker 13: So there's always going to be government involvement because the
Speaker 13: government's guaranteeing those deposits. But it has evolved and changed
Speaker 13: over the years, maybe when Todd Conover was the OCC
Speaker 13: head of the OCC back in the early eighties.
Speaker 4: So what's the challenge for the US right now? If
Speaker 4: they bail out FRC in some capacity, even if it's
Speaker 4: just guaranteeing the potential losses on their loan portfolio to
Speaker 4: facilitate a sale to a private buyer, they will essentially
Speaker 4: be bailing out the banks that they had come to
Speaker 4: the table and deposit thirty billion dollars with the First Republic.
Speaker 4: If they don't, this bank collapses and prolongs the story
Speaker 4: of regional bank with weakness, which is worse.
Speaker 13: It's a really tough dilemma for them, and they're stuck
Speaker 13: between a rock and a hard place, the FDIC and
Speaker 13: the Federal Reserve, because, as you point it out, at
Speaker 13: least there, you know, the choice is not very favorable,
Speaker 13: and so it's something that they have to weigh which
Speaker 13: is going to have the least negative impact to the
Speaker 13: banking system into the economy. And clearly, you know, shareholders
Speaker 13: and bondholders in these situations like we've seen with Silicon
Speaker 13: Valley and signature. They of course don't get bailed out
Speaker 13: at all, but it's the depositors, and it's the depositors
Speaker 13: over the insurance limit is where the focus is, and
Speaker 13: that's where the debate is at this time.
Speaker 4: JROT on a larger point here, we've seen this tug
Speaker 4: of warre in markets, whether it's the tech giants that
Speaker 4: are apporting fantastic earnings and other discretionary companies, or then
Speaker 4: on the other side, there's this overhang of potential weakness
Speaker 4: in regional banks that could continue. Is that enough to
Speaker 4: offset the strength elsewhere? In other words, is what you're
Speaker 4: seeing not enough to give you confidence that they're going
Speaker 4: to materially provide the credit and the imput that this
Speaker 4: economy needs right now?
Speaker 13: The DEFED has been very clear that they're in monetary
Speaker 13: tightening since April of twenty twenty two. You know, deposits
Speaker 13: in the banking system were down almost a trillion dollars.
Speaker 13: You might remember during QE during the pandemic, the fed's
Speaker 13: balance sheet went from just under four trillion dollars to
Speaker 13: almost nine trillion by the first quarter of twenty twenty two,
Speaker 13: creating over three trillion of deposits in our estimate to
Speaker 13: the banking system, and now they're taking them out. So
Speaker 13: I think the stimulus or you know, monetary policy to
Speaker 13: stimulate the economy right now obviously is not there because
Speaker 13: they have to fight inflation, so inflation has to come down.
Speaker 13: Once that comes down, hopefully the Fed not only will
Speaker 13: stop raising church term interest rates, but they get back
Speaker 13: off qt jege.
Speaker 10: Just to find a question for me, maybe slightly unfair
Speaker 10: on First Republic, just to be really specific, is there
Speaker 10: a real risk here they lose access to some of
Speaker 10: the FEDS funding vehicles.
Speaker 7: There's a possible ability to that.
Speaker 13: You never rule anything out, and so certainly in their
Speaker 13: public statements they have indicated they still have access.
Speaker 7: They still have loans and securities to pledge.
Speaker 13: We have not heard anything official from the Federal Reserve
Speaker 13: saying that they wouldn't do is closed to them. So
Speaker 13: from their public documents, they still have access there, but
Speaker 13: it is limited because there's only a limited amount of
Speaker 13: loans and security that are remaining that could be pledged
Speaker 13: for that type of borrowing.
Speaker 10: Jared, from your perspective, what would lead regulators officials to
Speaker 10: close that access to them?
Speaker 13: What would lead it there is if they think the
Speaker 13: situation is so dire that it's best off to stop
Speaker 13: allowing them to have access to that source of funding
Speaker 13: because it will cause less losses to either the.
Speaker 7: FDAIC or the Federal Reserve.
Speaker 13: That would be potentially one of the reasons for them
Speaker 13: doing it.
Speaker 10: Feeding based on our reporting that maybe we're getting closer
Speaker 10: to that moment.
Speaker 5: Jed, Thank you for being with sir.
Speaker 10: Thank you, Jeff Cassidy of MBC the Markets on the
Speaker 10: financial set of My Mind.
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