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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best an economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal and the Bloomberg Business App.

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Speaker 2: Marvin Love joins US now sceney global macro strategist to

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Speaker 2: State Street. Marvin, wonderful to have you with us on

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Speaker 2: a program. Tom, want us to talk about the note

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Speaker 2: from Selfgen's Kit Jookes this morning. He said, this US

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Speaker 2: data will dominate sentiment and will probably deliver solid retail sales,

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Speaker 2: decent industrial production. The debt limit remains a major issue,

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Speaker 2: but for now, evidence of recession is missing. Marvin, Is

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Speaker 2: recession evidence missing right now? For you?

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Speaker 3: Yeah, I mean it's certainly not clear. I still think

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Speaker 3: that a recession is unfortunately someone unavoidable after the banking

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Speaker 3: a situation, and you know, we're waiting for that to

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Speaker 3: make its way through the economy. But the consumers still strong,

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Speaker 3: jobs are still of you know, robust based on the

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Speaker 3: latest numbers, and inflation is proving sticky.

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Speaker 1: I look, Marvin, at the inflation proving sticky, and yet

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Speaker 1: there's a single headline from home depot. Granted it's a commodity,

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Speaker 1: Granted it's volatile, but lumber deflation. Are we going to

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Speaker 1: see more headlines like that?

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Speaker 4: You know what?

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Speaker 3: Probably, you know, the good, the good side of things

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Speaker 3: has been a bit more volatile in this discussion. You know,

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Speaker 3: it does come down to services wages in this economy,

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Speaker 3: and that's really where the FED is focused on. And

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Speaker 3: it is the stickiest of the sticky, if you will,

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Speaker 3: parts of the incation discussion.

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Speaker 1: But on a global basis, I mean I looked at

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Speaker 1: copper very carefully this morning. I looked at Newcastle coal

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Speaker 1: and Australia folks, this is north of Peth, and you know,

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Speaker 1: I look at these commodities and effect is they're rolling over,

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Speaker 1: indicative of a slowing China, maybe a misguess on the

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Speaker 1: Pacific rim. How do you fold that into your investment allocation?

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Speaker 3: It stays strung, Yeah, I mean, I mean, for sure

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Speaker 3: it is signs that you've got growth problems that are

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Speaker 3: starting to emerge as we go through you know, the

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Speaker 3: one year anniversy of this aggressive Titan cycle. Within the

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Speaker 3: developed markets, those recessionary signals are are all over the place.

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Speaker 3: It is this kind of one slice of the American

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Speaker 3: consumer that's making it harder to play. But I think

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Speaker 3: if you can look past the timing of this consumer,

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Speaker 3: which again with some of these retail earnings, with some

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Speaker 3: of this data that's coming out softer, you do get

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Speaker 3: to a much slower growth type of discussion. And you know,

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Speaker 3: if you're willing to put those investments in place, they're

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Speaker 3: out there.

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Speaker 5: Do you think that this is disinflationary to the degree

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Speaker 5: that would give a bit of a reprieve to the Fed,

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Speaker 5: especially if the stress that we're seeing in the banking

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Speaker 5: sector is there is real, but a slow burn that

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Speaker 5: isn't going to necessitate some sort of real response.

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Speaker 1: Yeah, for sure.

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Speaker 3: So I definitely am in the camp that this had

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Speaker 3: a tightening that I expect in the second half of

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Speaker 3: the year is going to have a bigger impact on

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Speaker 3: the economy than you know, maybe some of these risk

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Speaker 3: assess are saying, particularly on the default side of things,

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Speaker 3: particularly on just overall loan growth slowing, and you do

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Speaker 3: get a more disinflationary type of world. Once we get there,

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Speaker 3: it's you know, the timing is really hard. It's not

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Speaker 3: really the expertise of global macro to pick one month

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Speaker 3: over another. But you know, going into twenty twenty four,

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Speaker 3: I think that those headwinds seem much stiffer.

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Speaker 5: Where's the death healing debate on your radar? Are you

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Speaker 5: excited to wake up every morning to get a sense

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Speaker 5: of the machinations between the different discussion points that the

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Speaker 5: two parties have.

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Speaker 3: You know what, if you talk to my coworkers, they

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Speaker 3: would say, I get overly excited about it. So yeah,

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Speaker 3: I certainly do think that the market is a bit

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Speaker 3: sanguine about it this time, particularly given the volatility on

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Speaker 3: the deficit side of things.

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Speaker 4: It's just a lot harder.

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Speaker 3: To pick the date when we're going to run out

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Speaker 3: of money, and that really creates a problem for Washington,

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Speaker 3: which seems to need that impetus to get things moving.

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Speaker 3: I'm also very cognizant of the amount of reserves that

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Speaker 3: moves around once we get the deal, and that in

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Speaker 3: and of itself creates more challenges for bank deposits, at

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Speaker 3: least in the in the short term, potentially in the

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Speaker 3: intermediate term kind of just given how the shape of

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Speaker 3: all these short term curves are somewhat inverted at this.

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Speaker 2: Point, Marvin, Let's say we knew the X state was

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Speaker 2: June one, June first, would there be a different practical

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Speaker 2: X state, a deadline that we had to really come

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Speaker 2: to an agreement on to pass the legislation needed to

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Speaker 2: ultimately skip the dreadful outcomes that most people are predicting

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Speaker 2: if we do go through that X state.

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Speaker 3: Yeah, I think there would be a greater sense of urgency.

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Speaker 3: For sure. We are running out of time very very quickly.

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Speaker 3: You know, the President is still apparently going to the

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Speaker 3: G seven. So you know, again the litany of of

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Speaker 3: of conversations that are coming out of Washington show and

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Speaker 3: degrees of concern, and that in and of itself is

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Speaker 3: a concern when you're talking about a date to two

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Speaker 3: weeks away.

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Speaker 4: How you get how you get.

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Speaker 3: There is really some sort of hopefully acknowledgment that June

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Speaker 3: first is a date that we should focus on in

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Speaker 3: a temporary agreement to get us past or else, you know,

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Speaker 3: we go into territory that we've never been before.

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Speaker 2: I thought you had done them. Movin just got trigger

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Speaker 2: happy on the sun of the I just hit the gap. Yeah,

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Speaker 2: it's nice straight, I'm worse than you, mama.

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Speaker 1: Thank you. Really important here, I think to look at

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Speaker 1: the retail data, rip it apart and someone that can

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Speaker 1: do that, of course as a general lady from Pimco.

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Speaker 5: And this really is the question, especially after we were

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Speaker 5: talking about a discretionary recession, are we seeing that in

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Speaker 5: the data? Joining us someone who is someone who focuses

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Speaker 5: on this all day, every day, Tiffany Wilding, economist at Pimco,

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Speaker 5: five point thirty am their local time. Thank you for

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Speaker 5: waking up and keeping Eastern times the Jacob partake. But

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Speaker 5: I'm curious, Tiffany, from your vantage point, are you seeing

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Speaker 5: signs of some sort of discretionary recession or is that premature?

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Speaker 6: Yeah? Well, I mean I do think that the consumer

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Speaker 6: some of the momentum in consumption has decelerated since the

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Speaker 6: beginning of the year. So, you know, the first quarter

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Speaker 6: was extremely strong in terms of consumption growth over three percent,

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Speaker 6: you know, but a lot of that, as we know,

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Speaker 6: if we look at the sequential monthly data, it was

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Speaker 6: really boosted by warm weather in January, and then we

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Speaker 6: saw deceleration in March, and it looks like we're getting

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Speaker 6: a little bit of a pop back. But as as

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Speaker 6: Michael suggested, there's probably some noise around Mother's Day here,

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Speaker 6: so you kind of have to smooth that over, you know.

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Speaker 6: So we would suggest you are seeing some decline or

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Speaker 6: you know, growth deceleration in consumption. But overall, you know,

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Speaker 6: as as was said, the consumers are hanging in there,

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Speaker 6: you know, and of course that's also going to be

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Speaker 6: a function of the labor market, you know, and it

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Speaker 6: is still it is still reasonably strong.

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Speaker 5: Hanging in there and willing to pay the prices that

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Speaker 5: are being demanded are two different things. Is there a

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Speaker 5: sense that there really is starting to be some pushback

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Speaker 5: to the inflation that's being borne out in consumers pocketbooks

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Speaker 5: and in the fattening margins of profits at companies.

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Speaker 6: Yeah, well so, I mean we're definitely starting to hear

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Speaker 6: more of that coming from you know, the various earnings

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Speaker 6: releases from some of the consumer companies. You know, they're

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Speaker 6: saying obviously that consumers are a little bit more price

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Speaker 6: sensitive in various categories. I would say, when when I

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Speaker 6: look at the macro data, you know, I don't see

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Speaker 6: it as much and of course we need more macro data.

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Speaker 6: You know, we're starting to see these trends at the

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Speaker 6: company level, they're noticing it, you know. Then note it

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Speaker 6: will come out with the macro data with a lag,

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Speaker 6: you know. But but overall, I would say inflation is

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Speaker 6: actually still you know, still reasonably robust. I mean, obviously

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Speaker 6: at five percent or more, it's over the FEDS target.

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Speaker 6: You know, we do expect it to come down, but

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Speaker 6: it's been I think it's been continues to be stickier

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Speaker 6: than expected.

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Speaker 1: Tiffany, I'm I need to ask you this because in

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Speaker 1: the equity market, I've been looking at the slow motion

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Speaker 1: convergence of moving averages down to what Lisa and I

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Speaker 1: call a snooze fest. I got the same thing in

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Speaker 1: the bond market. If I look at the two year yield,

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Speaker 1: there's a tenC weed see two bases point differential in

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Speaker 1: the three moving averages I use. Does your own Powell

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Speaker 1: call that a success? To see the lethargy the boredom

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Speaker 1: within the bond market described by the two year yield?

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Speaker 6: Well, you know, I you know, I do think that

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Speaker 6: the bond market does listen to the Fed. You know,

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Speaker 6: I think sometimes commentators like to look at, you know,

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Speaker 6: just the forward curve, which is which does suggest you know,

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Speaker 6: a significant probability that rates will be lower by the

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Speaker 6: end of the year, to suggest that, you know, the

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Speaker 6: markets aren't listening to the Fed. I do think the

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Speaker 6: markets are listening to the Fed. But I just think

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Speaker 6: the markets probably have you know there in terms of

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Speaker 6: their distribution of risks, they assign more downside risk the

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Speaker 6: economic outlook than the Federal Reserve does. If you take

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Speaker 6: a historical look at banking sector crises and stresses defined

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Speaker 6: by you know, thirty percent drops on average and banking shares,

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Speaker 6: you do see tendencye the economy decelerating after that, you

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Speaker 6: know that'll that'll of course come to tighter credit conditions

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Speaker 6: for consumers and households.

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Speaker 1: What do you hear from then, your PIMCO portfolio managers,

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Speaker 1: without giving away the crown jewels, what does Pimco say

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Speaker 1: about the dynamics in this banking crisis in agency paper?

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Speaker 6: Yeah, well, of course there's some you know, banks that

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Speaker 6: failed obviously held you know, they held a lot of

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Speaker 6: treasuries as well as agencies. You know obviously that won't

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Speaker 6: need to be sold. We think that's probably priced into

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Speaker 6: the market, though there's a pretty good understanding of exactly

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Speaker 6: what that is, you know, in terms of the how

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Speaker 6: much it is, you know, And obviously the Federal Reserve

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Speaker 6: is also shrinking its portfolio, you know. But on the

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Speaker 6: other side of that, you don't have a refinancing wave

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Speaker 6: because interest rates are so high. So overall we think

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Speaker 6: it's it's priced in. We actually like agency nbs, and

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Speaker 6: we think that they actually provide pretty good value right now,

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Speaker 6: just because volatility has been high and the level of

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Speaker 6: interest rates are high, and those things can mean revert

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Speaker 6: back down.

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Speaker 5: As we prepare for a slew of retail earnings, particularly

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Speaker 5: tomorrow with respect to Target and then Walmart, do we

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Speaker 5: get a sense that perhaps people are too barish, that

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Speaker 5: home Depot was an outlier, and that otherwise, to your point,

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Speaker 5: the consumers are still spending and they can keep borrowing

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Speaker 5: to do so.

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Speaker 7: Well.

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Speaker 6: I mean, so the data that we got some credit

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Speaker 6: data from the Federal Reserve, which did look like there

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Speaker 6: was some reduction in credit card there was a deterioration

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Speaker 6: in credit card loans and things like that in the

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Speaker 6: first quarter, you know, So I do think there are

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Speaker 6: consumers out there that are feeling pain, and I do

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Speaker 6: think banks are tightening credit conditions.

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Speaker 5: You know.

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Speaker 6: The other piece of this obviously is just demand for credit,

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Speaker 6: and demand for credit is also falling just because rates

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Speaker 6: are so high. You obviously it's more expensive to take

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Speaker 6: out loans, et cetera. So you know, all of this

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Speaker 6: to me is suggestive that you know, monetary policy is working.

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Speaker 6: You know, the consumer, you know, ultimately it is they

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Speaker 6: are getting squeeze, some of the lower income consumers more

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Speaker 6: so than others, you know, and you are seeing some

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Speaker 6: deceleration in credit growth as a result of of the

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Speaker 6: current environment.

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Speaker 5: So as you put this all together, is inflation decelerating

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Speaker 5: enough to really get the FED where they want? Or

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Speaker 5: are we looking at a sort of higher inflation but

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Speaker 5: also higher growth kind of area for a longer period

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Speaker 5: of time.

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Speaker 6: Yeah, I mean, I think that's yet to be seen.

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Speaker 6: You know, as I as I mentioned, we do think

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Speaker 6: this banking sector stress is going to impact the economy.

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Speaker 6: It's going to slow things down. Higher interest rates take

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Speaker 6: time to work their way through the economy with a lag.

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Speaker 6: And you know, I would even say inflation even lags

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Speaker 6: you know, activity momentum, so growth, So you know, we

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Speaker 6: I think we're seeing these lags start to play out.

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Speaker 6: You are, you have seen inflation decelerate. It's probably going

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Speaker 6: to continue to decelerate given the monetary policy restriction that's

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Speaker 6: in place and the Federal Reserve, you know, just needs

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Speaker 6: to be patient, as does markets just needs to be

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Speaker 6: patient to see that.

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Speaker 1: You know.

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Speaker 6: So we think inflation does decelerate to three percent core

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Speaker 6: CPI for example, by your end three to three and

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Speaker 6: a half, you know, but obviously that's still above target.

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Speaker 6: There's still some sticky trends and inflation, you know, but

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Speaker 6: ultimately the Fed probably will be successful in getting it back.

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Speaker 6: The question is, you know how you know, how big

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Speaker 6: of a recession do they need to do that?

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Speaker 1: I think, thank you, Tiffany will greatly appreciate it.

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Speaker 2: With pim Core, Lindsey Rosena of Paging Fixed Income wang

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Speaker 2: in on the market reaction right in the following there's

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Speaker 2: a kink and the tea bill curve around the next

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Speaker 2: day with one hundred basis points of extra yield. If

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Speaker 2: we don't get a resolution, we're just kicking the can

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Speaker 2: down the road and not eliminating the problem. This makes

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Speaker 2: the T bill market tom a challenging plan.

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Speaker 1: To be really good note from someone who really qualified

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Speaker 1: to talk about this, and of course, with all the

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Speaker 1: hierarchy of PGM and the excellence they've done over the years,

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Speaker 1: Miss Rosner joins us. At right now, Lindsay, the note

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Speaker 1: really goes to the opportunity that's out there. What is

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Speaker 1: the opportunity given a discontinuous function in the three month

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Speaker 1: T bill? How do you play it? Right?

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Speaker 7: I think the answer is you you don't play it.

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Speaker 7: There's so much talk right now about getting this extra

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Speaker 7: one hundred basis points, but if you think about it

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Speaker 7: the downside, if we actually do have a default, which

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Speaker 7: we think happens with a five percent probability, one hundred

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Speaker 7: basis points is just not good enough upside downside analysis.

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Speaker 7: So for us, it's skip the games in the front

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Speaker 7: end of the curve and get more into the intermediate

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Speaker 7: duration space where you can take advantage of doing the

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Speaker 7: right kind of things.

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Speaker 1: I mean, what's so important here, lindsay, And this is

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Speaker 1: to the elasticity or responsiveness of the belly of the

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Speaker 1: curve five to seven years I'll call it as well. Well, then,

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Speaker 1: what's the opportunity there? How do you play that?

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Speaker 7: I think there are a lot of opportunities and you

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Speaker 7: can go kind of any which way you want. So

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Speaker 7: if you want to be more conservative, you want to

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Speaker 7: stay more investment grade, great opportunities and agency mortgage back securities,

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Speaker 7: even commercial mortgage backed securities, if you stay high quality

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Speaker 7: on top of the cap structure trip as with a

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Speaker 7: lot of credit enhancement, there's good stuff to do in

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Speaker 7: an investment grade space, a lot of opportunity there. But

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Speaker 7: if you want to seek more risk, go for more yield.

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Speaker 7: There are idiosyncratic opportunities in high yield. So you've got

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Speaker 7: kind of a diner menu of options in the middle

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Speaker 7: of the curve, and you don't have to get stuck

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Speaker 7: in this noise or the anxiety that you all were

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Speaker 7: speaking of in the very front end of the curve

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Speaker 7: that is really hard to play. And the big problem

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Speaker 7: is is that if the debt ceiling, if the quick

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Speaker 7: solution is prioritization, that's just kicking the problem a couple

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Speaker 7: a month, two months down the road, you're going to

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Speaker 7: be right back in it. And so if you thought

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Speaker 7: you did something cute and you bought T bills two

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Speaker 7: months out, well you may now be back at the

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Speaker 7: X state before you know it, and it's just not

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Speaker 7: a game worth playing.

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Speaker 5: Okay. That said, if this, let's say, gets resolved, do

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Speaker 5: you then get more risk on do you start to

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Speaker 5: get more aggressive in other areas that go beyond just

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Speaker 5: simply the idiosyncratic trades?

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Speaker 7: So we go back to with your prior catch you're asking, Okay,

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Speaker 7: it just gets resolved, what's next? And what's next is

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Speaker 7: we go back to what we were concerned about, which

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Speaker 7: is we still have the central banks across the globe

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Speaker 7: that are trying to fight inflation, and they're parts of

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Speaker 7: the globe where we still have double digit inflation. So

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Speaker 7: this battle isn't over, and we need to think about

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Speaker 7: how does the curve respond. Right now, we all know

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Speaker 7: that there's a significant amount of cuts priced in in

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Speaker 7: the US, for example, at the end.

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Speaker 4: Of the year.

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Speaker 7: How does that work out moving forward? And so we

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Speaker 7: go back to inflation watch. We get out of debt

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Speaker 7: ceiling watch, and we move back to inflation watch and

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Speaker 7: figuring out is a recession happening, will it be a

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Speaker 7: soft landing? And in that scenario, it still isn't yet

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Speaker 7: green light going.

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Speaker 5: We've been talking about that Bank of America fund manager survey,

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Speaker 5: and one aspect of it was the allocations to bonds

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Speaker 5: are the biggest going back to two thousand and nine.

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Speaker 5: This is the latest one from May. How much does

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Speaker 5: that give you a sense that things are crowded in

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Speaker 5: the duration trade? Basically this idea that longer term, there

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Speaker 5: is a confidence that we're going to be low inflation,

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Speaker 5: low rate kind of you know, trading the same way

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Speaker 5: that we were over the past few decades.

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Speaker 7: I think what we've got here are some big shifts

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Speaker 7: in asset allocation or portfolio allocation. Forever there was a

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Speaker 7: discussion of the sixty forty sixty forty is not really working.

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Speaker 7: If you have a move to this fifty to fifty

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Speaker 7: or even more fixed income, that then tells you that

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Speaker 7: these flows make sense and they are stickier than one

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Speaker 7: may think. Also, as we've been saying all year, you've

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Speaker 7: got income and fixed income, this isn't a place that

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Speaker 7: you just park it because you're scared. There's a lot

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Speaker 7: to earn here, and so I think that movement into

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Speaker 7: fixed income is well founded. I'm obviously biased as a

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Speaker 7: fixed income manager, but I think it makes a lot

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Speaker 7: of sense now and it didn't make much sense for

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Speaker 7: a very long time.

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Speaker 5: Do you think the allocations are just generally increasing in

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Speaker 5: a structural manner to fixed income and decreasing to equity

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Speaker 5: so that it might be more of a fifty to

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Speaker 5: fifty kind of new portfolio.

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Speaker 7: I think time will tell. I do think it's moving

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Speaker 7: in that direction, and I think that direction makes a

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Speaker 7: lot of sense.

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Speaker 2: Lindsay, go to wrap it up there, Alice Enjoy. You're inside,

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Speaker 2: particularly on the debt sating, you know, for once Urction

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Speaker 2: having some intelligent conversations Tom on the debt stalend this morning,

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Speaker 2: Lindsay rose to the on the bond mal ket.

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Speaker 1: Right now in Washington, and we're going to try to

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Speaker 1: take a different spin here. Isaac Multanski joins this, director

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Speaker 1: of policy research at bt IG. Exquisitely good on the

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Speaker 1: distill it of when we're done with this, Isaac, first question,

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Speaker 1: the morning after this is fixed, what happens.

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Speaker 4: We go on to fight about other things, you know,

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Speaker 4: then the morning after then we're going to refocus on

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Speaker 4: whatever the next big legislative deadline, and that baby, the

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Speaker 4: spending bill at the end of September, maybe the farm dell.

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Speaker 4: But when we get this off the table, I think

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Speaker 4: the market can go back to worrying about everything else

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Speaker 4: because the debt ceiling is so important.

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Speaker 1: All right, Look, Isaac, and this goes back, folks, to

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Speaker 1: Pete Peterson, the gentleman from Nebraska who called me up,

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Speaker 1: is quite elderly at the time, and he and I

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Speaker 1: talked about his ageless concern, Isaac, where the former Secretary

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Speaker 1: of Commerce made clear he was forever worried about this debt.

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Speaker 1: Peterson Foundation publishes that CBO interest expense over the next

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Speaker 1: ten years will go from six hundred and forty billion

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Speaker 1: to one point four trillion dollars. That's the interest expense.

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Speaker 1: Every American knows. That's nuts. Why shouldn't we be concerned

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Speaker 1: about this?

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Speaker 4: We absolutely should. We absolutely should. But DC hasn't. Is

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Speaker 4: an inability to focus on the long term, right. We

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Speaker 4: are focused definitionally on short termism. And even when we

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Speaker 4: have these discussions regarding the debt ceiling and maybe spending,

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Speaker 4: we've already taken off the table talks about addressing long

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Speaker 4: term entitlement reform, which as we know, is one of

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Speaker 4: the larger drivers of our debt. And so we've also

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Speaker 4: taken off the table defense spending and other items. And

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Speaker 4: so when you start with so many sacred cows, it's

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Speaker 4: impossible to actually get anywhere over the long term. So

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Speaker 4: the most we can hope for Tom from these negotiations

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Speaker 4: is just not shooting ourselves in the foot with a

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Speaker 4: technical default and having to go through the mess of

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Speaker 4: prioritization and whatever else may come from not doing the

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Speaker 4: basic job of lifting the debt.

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Speaker 5: Sealing, Isaac, I'd love you to build on what Wendy

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Speaker 5: Schiller was talking about at Brown University earlier this morning

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Speaker 5: when she said that in our ultrapolarized world, she expects

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Speaker 5: things to sort of be a repeat of twenty eleven

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Speaker 5: in a bit, but with a less satisfying legislative solution,

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Speaker 5: basically saying that Republicans tend to want the government to

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Speaker 5: go into some sort of default or at least some

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Speaker 5: sort of non payment because it plays well in terms

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Speaker 5: of them taking a hard line on spending. Is that

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Speaker 5: true or is that not really born out in your experience.

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Speaker 4: I don't think that we're there, you get, and I'm

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Speaker 4: still operating under the old maxim that things in DC

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Speaker 4: are impossible right up until the point that they're inevitable,

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Speaker 4: And I do hope that we're able to get some

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Speaker 4: progress today where we're able to move forward on that

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Speaker 4: list of menu items that we've all seen reported about

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Speaker 4: over the past few days, to the point where perhaps

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Speaker 4: President Biden leaves his G seven meeting early, or skips

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Speaker 4: Australia and some of the other stops, comes back as

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Speaker 4: a one on one with Kevin McCarthy as early as

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Speaker 4: next week, and then at least in my base case

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Speaker 4: here is we just have a deal that pushes the

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Speaker 4: debt ceiling deadline to the end of September, which then

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Speaker 4: aligns it with the federal spending deadline and gives negotiares

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Speaker 4: a little bit more time, because look, they're trying to

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Speaker 4: solve some pretty thorny issues when in reality, you got

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Speaker 4: to have something lady to move its way through the

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Speaker 4: legislative process. By the beginning of next.

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Speaker 5: Week, as we wait for paying to dry and get

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Speaker 5: a sense of when things get to be a little

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Speaker 5: bit more urgent, we're going to have the hearings with

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Speaker 5: respect to what happened with Silicon Valley Bank and all

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Speaker 5: of the regulatory oversight. We already got a look at

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Speaker 5: some of the pre released questions from the former CEO

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Speaker 5: of SVB, blaming the FED, blaming regulators, blaming social media.

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Speaker 5: What do you expect the response to be?

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Speaker 4: Look, the reality is hearings very rarely change the policy trajectory,

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Speaker 4: and we need investors to know that the regulatory framework

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Speaker 4: is going to be tightened for banks. They're going to

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Speaker 4: start with super regionals for their total long term debt

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Speaker 4: requirements and resolution requirements, and then they're going to go

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Speaker 4: down to the one hundred billion plus bucket and start

438
00:21:44,119 --> 00:21:48,320
Speaker 4: to deal with things like AOCI. But my issue here

439
00:21:48,359 --> 00:21:50,879
Speaker 4: is I don't think this banking crisis is over. I

440
00:21:50,880 --> 00:21:52,920
Speaker 4: think it's going to flare up again. And what we're

441
00:21:52,960 --> 00:21:54,320
Speaker 4: going to have to deal with when we look at

442
00:21:54,359 --> 00:21:57,159
Speaker 4: the post mortem for this crisis is what was the

443
00:21:57,280 --> 00:22:01,040
Speaker 4: logic behind us tying the hands of the regulators on

444
00:22:01,080 --> 00:22:05,000
Speaker 4: the front line to address these crises. The fdiic has

445
00:22:05,160 --> 00:22:09,240
Speaker 4: nothing else it can do administratively to address this deposit

446
00:22:09,560 --> 00:22:12,400
Speaker 4: insurance issue. So once again we're waiting on a Congress

447
00:22:12,440 --> 00:22:15,680
Speaker 4: it's either unwilling or unable to act on the matter.

448
00:22:15,720 --> 00:22:18,280
Speaker 4: And frankly, that scares me because we're not through the

449
00:22:18,280 --> 00:22:19,560
Speaker 4: woods yet on the banking issue.

450
00:22:19,560 --> 00:22:21,320
Speaker 2: Well, Isaac, let's tast out a little bit more of that.

451
00:22:21,359 --> 00:22:23,200
Speaker 2: What about the tension in the last couple of months

452
00:22:23,200 --> 00:22:25,080
Speaker 2: do you think has the potential to flare up again?

453
00:22:26,320 --> 00:22:29,480
Speaker 4: Look, I think that we have not addressed the mismatch

454
00:22:29,680 --> 00:22:32,480
Speaker 4: of assets and liabilities across the banking system. I think

455
00:22:32,480 --> 00:22:35,440
Speaker 4: that we have not dealt with some of what I

456
00:22:35,520 --> 00:22:38,320
Speaker 4: think we can all agree we're supervisory failures. And we

457
00:22:38,359 --> 00:22:41,600
Speaker 4: spoke earlier about the federal reserves mandate, and the Federal

458
00:22:41,600 --> 00:22:44,680
Speaker 4: Reserve is also going to take some flak here there's

459
00:22:44,720 --> 00:22:48,840
Speaker 4: a hearing about Federal reserve reform later this week, worrying

460
00:22:48,880 --> 00:22:52,439
Speaker 4: that perhaps their guiding star is just monetary policy and

461
00:22:52,680 --> 00:22:54,719
Speaker 4: that leads them to fall down on their job as

462
00:22:54,760 --> 00:22:58,120
Speaker 4: a bank supervisor sometimes. So I think that's still out there.

463
00:22:58,119 --> 00:23:00,600
Speaker 4: And look, I listened to Jamie Diamond when he also

464
00:23:00,720 --> 00:23:03,199
Speaker 4: says that he's concerned that it's not over. So I

465
00:23:03,240 --> 00:23:06,520
Speaker 4: put all that together. I put into that mix the

466
00:23:06,560 --> 00:23:09,760
Speaker 4: fact that you still have some policymakers talking about the

467
00:23:09,800 --> 00:23:13,639
Speaker 4: need for a short selling band on banks, and I

468
00:23:13,760 --> 00:23:18,040
Speaker 4: look and say that our option set for addressing another

469
00:23:18,080 --> 00:23:22,480
Speaker 4: flare up, especially if it's in a bigger, more systemically

470
00:23:22,480 --> 00:23:27,240
Speaker 4: important bank, is pretty limited to just Congress passing legislation quickly,

471
00:23:27,520 --> 00:23:28,560
Speaker 4: and they're not good at that.

472
00:23:29,440 --> 00:23:32,240
Speaker 2: Isaac, thanks for the perspective. I a botanskin. They're brutal.

473
00:23:32,280 --> 00:23:35,119
Speaker 2: Honesty there at the end from btig.

474
00:23:45,000 --> 00:23:47,000
Speaker 1: Elise is an expert on this because she's in Home

475
00:23:47,000 --> 00:23:49,160
Speaker 1: Depot three times a week. John and I are clueless

476
00:23:49,200 --> 00:23:52,640
Speaker 1: on this. Somebody really confident is Charles Gram. Chuck. Graham

477
00:23:52,640 --> 00:23:55,080
Speaker 1: is senior retail analyst at Gordon Haskett and joins us

478
00:23:55,359 --> 00:23:58,240
Speaker 1: right now. And what's so very cool about this out

479
00:23:58,280 --> 00:24:00,800
Speaker 1: of the College of the Holy Cross is this is

480
00:24:00,840 --> 00:24:04,680
Speaker 1: one of the coolest things in the securities research side.

481
00:24:04,960 --> 00:24:09,320
Speaker 1: This gentleman is a CPA and a CFA, and that

482
00:24:09,440 --> 00:24:14,680
Speaker 1: is bulletproof across Wall Street. Combine the two, combined the accounting, Chuck,

483
00:24:15,280 --> 00:24:19,560
Speaker 1: and also the financial analysis of the CFA designation. Is

484
00:24:19,600 --> 00:24:22,640
Speaker 1: Home Depot a different company than the company we've known

485
00:24:23,000 --> 00:24:23,919
Speaker 1: for twenty years?

486
00:24:25,000 --> 00:24:26,960
Speaker 8: No, not at all. I mean, I think there's a

487
00:24:26,960 --> 00:24:29,600
Speaker 8: lot going on with the consumer right now, and you

488
00:24:29,720 --> 00:24:32,720
Speaker 8: touched on it in terms of the weather impact. But

489
00:24:32,800 --> 00:24:34,560
Speaker 8: I think the key line out of the Home Depot

490
00:24:34,600 --> 00:24:38,120
Speaker 8: release today was demand starting to normalize, and I think

491
00:24:38,160 --> 00:24:40,800
Speaker 8: that's something we haven't heard from home depot in quite

492
00:24:40,800 --> 00:24:43,199
Speaker 8: some time, and I think that's the big issue, and

493
00:24:43,320 --> 00:24:45,840
Speaker 8: understanding how long that's going to last is really going

494
00:24:45,880 --> 00:24:47,680
Speaker 8: to weigh on shares here in the near term. But

495
00:24:48,280 --> 00:24:50,439
Speaker 8: when you, let's face it, I mean, March was very

496
00:24:50,520 --> 00:24:54,520
Speaker 8: unfavorable from a weather perspective, but April wasn't. And we

497
00:24:54,560 --> 00:24:57,000
Speaker 8: don't know the exit rate for the month of April,

498
00:24:57,359 --> 00:24:59,800
Speaker 8: but we suspect it was weak, and so you can't

499
00:24:59,840 --> 00:25:01,000
Speaker 8: high behind weather right now.

500
00:25:01,560 --> 00:25:04,000
Speaker 1: One of the distinctions they have is they own the

501
00:25:04,040 --> 00:25:06,520
Speaker 1: pro market, or at least that's the verbiage. Do they

502
00:25:06,560 --> 00:25:09,399
Speaker 1: still own the pro market? Is that the home depot

503
00:25:09,440 --> 00:25:10,960
Speaker 1: distinction forward.

504
00:25:11,560 --> 00:25:13,560
Speaker 8: Oh a hundred percent? I mean, let's face it, nothing

505
00:25:13,600 --> 00:25:16,160
Speaker 8: really structurally has changed here with home depot stocks down

506
00:25:16,160 --> 00:25:18,240
Speaker 8: a little bit. Pre market, they didn't have a great

507
00:25:18,240 --> 00:25:20,840
Speaker 8: first quarter, they're cutting the guide for the year, but

508
00:25:21,040 --> 00:25:23,639
Speaker 8: pro business north to fifty percent of their sales, they

509
00:25:24,200 --> 00:25:26,720
Speaker 8: still dominate that part of the market, particularly relative to

510
00:25:26,760 --> 00:25:29,480
Speaker 8: Piers Lows is way behind it, close to twenty five percent.

511
00:25:29,760 --> 00:25:31,320
Speaker 8: So again that has not changed.

512
00:25:31,080 --> 00:25:31,639
Speaker 7: At all today.

513
00:25:31,840 --> 00:25:34,399
Speaker 5: How much is this really a housing specific sector issue,

514
00:25:34,440 --> 00:25:38,520
Speaker 5: a construction related issue, just simply because there has been

515
00:25:38,560 --> 00:25:41,040
Speaker 5: so much investment in people's homes. There has been purchases

516
00:25:41,080 --> 00:25:42,440
Speaker 5: and prices have gone up so much.

517
00:25:42,960 --> 00:25:44,879
Speaker 8: Yeah, I think it's all I think it's all of that.

518
00:25:45,080 --> 00:25:48,280
Speaker 8: I think demand normalization again is the key here. But

519
00:25:48,560 --> 00:25:51,879
Speaker 8: you know, when rates are this high, people are not moving.

520
00:25:52,000 --> 00:25:54,040
Speaker 8: But let's say that people have jobs, so they're still

521
00:25:54,080 --> 00:25:57,840
Speaker 8: investing in their homes. We're just seeing category demand normalization

522
00:25:57,960 --> 00:26:01,359
Speaker 8: across the board, and I think that their seasonal business

523
00:26:01,359 --> 00:26:03,240
Speaker 8: will learn more on the nine o'clock call was also

524
00:26:03,280 --> 00:26:05,000
Speaker 8: soft because of some of the issues with weather.

525
00:26:05,080 --> 00:26:05,280
Speaker 6: Here.

526
00:26:05,400 --> 00:26:07,879
Speaker 5: We are seeing those shares down in sympathy, as you

527
00:26:07,880 --> 00:26:10,440
Speaker 5: can see those shares down almost four percent as well,

528
00:26:10,480 --> 00:26:13,359
Speaker 5: so people seeming to believe this is a sector specific issue.

529
00:26:13,880 --> 00:26:16,720
Speaker 5: Moving ahead to Target tomorrow and then Walmart on Thursday,

530
00:26:16,960 --> 00:26:19,040
Speaker 5: how much we're going to see a similar trend in

531
00:26:19,080 --> 00:26:21,560
Speaker 5: those retailers at a time when a lot of different

532
00:26:21,560 --> 00:26:23,800
Speaker 5: stores are saying that they can pass along price increases

533
00:26:23,880 --> 00:26:25,440
Speaker 5: and then some I think.

534
00:26:25,400 --> 00:26:27,479
Speaker 8: Retailers are going to have a much harder time, you know,

535
00:26:27,520 --> 00:26:29,600
Speaker 8: taking price from here. I think we're starting to see

536
00:26:29,600 --> 00:26:32,440
Speaker 8: the consumer pushback. We're seeing consumer starts to trade down

537
00:26:32,480 --> 00:26:36,639
Speaker 8: into companies like Walmart and into categories and private brands

538
00:26:36,680 --> 00:26:40,720
Speaker 8: in particular. So we're we're cautious on Target, we're more

539
00:26:40,720 --> 00:26:43,280
Speaker 8: optimistic on Walmart. I think that the key thing here

540
00:26:43,359 --> 00:26:45,680
Speaker 8: is we're starting to go through a discretionary or recession

541
00:26:45,720 --> 00:26:48,520
Speaker 8: across retail, and I think we're actually already in it.

542
00:26:48,680 --> 00:26:50,080
Speaker 8: And I think we're going to start to hear that

543
00:26:50,119 --> 00:26:52,280
Speaker 8: from a lot of companies over the next couple of weeks.

544
00:26:52,280 --> 00:26:54,600
Speaker 8: If you rewind the clock, you know, the past couple

545
00:26:54,600 --> 00:26:57,240
Speaker 8: of weeks we've heard from Costco their business has been softer.

546
00:26:57,359 --> 00:27:00,199
Speaker 8: It's very typical for Costco to have that volatilt in

547
00:27:00,240 --> 00:27:03,680
Speaker 8: their business. So if Costco's volatility is there, Home Depot's

548
00:27:03,720 --> 00:27:06,120
Speaker 8: businesses softening, that's happening everywhere.

549
00:27:06,480 --> 00:27:10,400
Speaker 1: One of my big things, Chuck, is managements adapt. How

550
00:27:10,440 --> 00:27:15,400
Speaker 1: does retail adapt to the slowdown you describe? Is it layoffs?

551
00:27:15,680 --> 00:27:18,440
Speaker 1: Is it protect the margin at ebit that it all costs?

552
00:27:18,680 --> 00:27:20,720
Speaker 1: What's the prescription here looking at.

553
00:27:20,720 --> 00:27:23,399
Speaker 8: History, Well, I mean the number one thing they need

554
00:27:23,440 --> 00:27:26,719
Speaker 8: to do is protect the balance sheet and control inventory levels.

555
00:27:27,119 --> 00:27:29,960
Speaker 8: And if there's anything that could happen in twenty twenty two,

556
00:27:30,240 --> 00:27:33,920
Speaker 8: was demand started to soften and inventories started to get

557
00:27:33,960 --> 00:27:34,560
Speaker 8: in better shape.

558
00:27:34,600 --> 00:27:35,840
Speaker 2: Are they there yet?

559
00:27:36,040 --> 00:27:38,800
Speaker 8: Not really across the board, but they'll start to get there.

560
00:27:39,320 --> 00:27:41,760
Speaker 8: And you know, for Home Depot their their s g

561
00:27:41,840 --> 00:27:45,280
Speaker 8: Anda expense control was very, very good in the first quarter.

562
00:27:45,359 --> 00:27:46,480
Speaker 4: That's why even with.

563
00:27:46,560 --> 00:27:48,840
Speaker 8: Softer business they were able to come in with earnings

564
00:27:48,880 --> 00:27:51,560
Speaker 8: of three eighty two. So the first thing will be inventory,

565
00:27:51,680 --> 00:27:54,280
Speaker 8: second thing will be cost control, and I think the

566
00:27:54,400 --> 00:27:56,639
Speaker 8: third light would be would be job cuts down the

567
00:27:56,720 --> 00:27:58,560
Speaker 8: road if business continues to deteriorate.

568
00:27:58,880 --> 00:28:01,920
Speaker 2: Chuck that phrase discretion red recession. Can we dig into

569
00:28:01,960 --> 00:28:03,960
Speaker 2: that just a little bit more. Is that up and

570
00:28:04,119 --> 00:28:06,960
Speaker 2: down income brackets? Does that go from goods to services?

571
00:28:07,080 --> 00:28:08,399
Speaker 2: Can you give me a little bit more detail on

572
00:28:08,480 --> 00:28:09,280
Speaker 2: what you're looking for there.

573
00:28:09,680 --> 00:28:11,560
Speaker 8: Well, I think it's a little bit more goods than

574
00:28:11,680 --> 00:28:13,679
Speaker 8: services right now. I mean, you look at the travel

575
00:28:13,720 --> 00:28:15,840
Speaker 8: industry and anybody that's been at the airport or been

576
00:28:15,880 --> 00:28:18,040
Speaker 8: on an airplane in the past few months, they're always full.

577
00:28:18,119 --> 00:28:22,440
Speaker 8: So people are definitely shifting spend towards services. But I

578
00:28:22,480 --> 00:28:25,960
Speaker 8: think it's the categories that that my companies sell into.

579
00:28:26,080 --> 00:28:28,600
Speaker 8: We're just seeing softness across the board. You know, whether

580
00:28:28,680 --> 00:28:31,840
Speaker 8: it's whether it's consumer electronics, whether it's home furnishings, whether

581
00:28:31,880 --> 00:28:35,800
Speaker 8: it's home improvement in this case. You know, again, all

582
00:28:35,840 --> 00:28:37,760
Speaker 8: three of those are starting to see weakness.

583
00:28:38,200 --> 00:28:38,400
Speaker 6: Chuck.

584
00:28:38,440 --> 00:28:40,960
Speaker 5: How much is this going to really challenge the fact

585
00:28:40,960 --> 00:28:43,800
Speaker 5: that companies have been raising prices beyond their input prices.

586
00:28:43,840 --> 00:28:46,320
Speaker 5: In other words, that profit margin has to come in

587
00:28:46,640 --> 00:28:48,040
Speaker 5: much more than people are expecting.

588
00:28:48,640 --> 00:28:50,280
Speaker 8: Yeah, I mean, that's a really good point. I mean,

589
00:28:50,360 --> 00:28:52,560
Speaker 8: and that's what we're going to have to watch elasticity

590
00:28:52,640 --> 00:28:55,240
Speaker 8: across the board. You know, we're starting to see it

591
00:28:55,320 --> 00:28:58,280
Speaker 8: in discretionary areas start to normalize on the price front.

592
00:28:58,560 --> 00:29:01,600
Speaker 8: We'll start to see it and see areas food areas

593
00:29:01,960 --> 00:29:04,840
Speaker 8: in the coming months as inflation starts to starts to

594
00:29:04,920 --> 00:29:08,440
Speaker 8: pull back. I'll just point out that just traffic across

595
00:29:08,560 --> 00:29:11,560
Speaker 8: retail has been very, very soft over the past two months,

596
00:29:11,600 --> 00:29:14,200
Speaker 8: and that's always a harbinger of things to come. And

597
00:29:14,320 --> 00:29:17,360
Speaker 8: it doesn't look good. Consumer's pulling back, and frankly like

598
00:29:17,880 --> 00:29:20,760
Speaker 8: none of this should surprise after the past couple of

599
00:29:20,920 --> 00:29:23,760
Speaker 8: years of splurging across the consumer space.

600
00:29:24,320 --> 00:29:24,520
Speaker 6: Chuck.

601
00:29:24,560 --> 00:29:28,320
Speaker 1: I'm looking at this weekend buying the American pushmower for

602
00:29:28,440 --> 00:29:30,719
Speaker 1: eighty two dollars from home depot. I mean, we got

603
00:29:30,760 --> 00:29:32,520
Speaker 1: a most central park. I got to do my part

604
00:29:32,560 --> 00:29:36,680
Speaker 1: for Mayor Adams. Where's their perfume section? What part of

605
00:29:36,800 --> 00:29:39,959
Speaker 1: home Depot is where they really make the margin as

606
00:29:40,000 --> 00:29:44,120
Speaker 1: they get to sixteen percent EBITDA, it's really.

607
00:29:43,960 --> 00:29:47,120
Speaker 8: Pretty even across the board. Really in the seasonal areas,

608
00:29:47,120 --> 00:29:49,480
Speaker 8: home furnishing area that that's where the margins tend to

609
00:29:49,520 --> 00:29:50,920
Speaker 8: be the best. But if you go back to hear

610
00:29:50,960 --> 00:29:54,560
Speaker 8: that this print from Depot again, like it's not pretty,

611
00:29:54,600 --> 00:29:57,200
Speaker 8: but the gross margins are actually pretty well protected and

612
00:29:57,280 --> 00:30:00,040
Speaker 8: their inventory levels are in good shape. So it's not

613
00:30:00,160 --> 00:30:02,000
Speaker 8: a great print from Home Deepot this morning, but it's

614
00:30:02,000 --> 00:30:03,640
Speaker 8: also not the end of the world in my opinion.

615
00:30:03,960 --> 00:30:06,560
Speaker 2: Chuck, this was smart. Let's say this again soon. Chuck Grumnet,

616
00:30:06,800 --> 00:30:08,880
Speaker 2: I've Golden HASKI. Thank you, buddy. I appreciate it.

617
00:30:09,080 --> 00:30:12,840
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618
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