Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
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Speaker 2: Marvin Love joins US now sceney global macro strategist to
Speaker 2: State Street. Marvin, wonderful to have you with us on
Speaker 2: a program. Tom, want us to talk about the note
Speaker 2: from Selfgen's Kit Jookes this morning. He said, this US
Speaker 2: data will dominate sentiment and will probably deliver solid retail sales,
Speaker 2: decent industrial production. The debt limit remains a major issue,
Speaker 2: but for now, evidence of recession is missing. Marvin, Is
Speaker 2: recession evidence missing right now? For you?
Speaker 3: Yeah, I mean it's certainly not clear. I still think
Speaker 3: that a recession is unfortunately someone unavoidable after the banking
Speaker 3: a situation, and you know, we're waiting for that to
Speaker 3: make its way through the economy. But the consumers still strong,
Speaker 3: jobs are still of you know, robust based on the
Speaker 3: latest numbers, and inflation is proving sticky.
Speaker 1: I look, Marvin, at the inflation proving sticky, and yet
Speaker 1: there's a single headline from home depot. Granted it's a commodity,
Speaker 1: Granted it's volatile, but lumber deflation. Are we going to
Speaker 1: see more headlines like that?
Speaker 4: You know what?
Speaker 3: Probably, you know, the good, the good side of things
Speaker 3: has been a bit more volatile in this discussion. You know,
Speaker 3: it does come down to services wages in this economy,
Speaker 3: and that's really where the FED is focused on. And
Speaker 3: it is the stickiest of the sticky, if you will,
Speaker 3: parts of the incation discussion.
Speaker 1: But on a global basis, I mean I looked at
Speaker 1: copper very carefully this morning. I looked at Newcastle coal
Speaker 1: and Australia folks, this is north of Peth, and you know,
Speaker 1: I look at these commodities and effect is they're rolling over,
Speaker 1: indicative of a slowing China, maybe a misguess on the
Speaker 1: Pacific rim. How do you fold that into your investment allocation?
Speaker 3: It stays strung, Yeah, I mean, I mean, for sure
Speaker 3: it is signs that you've got growth problems that are
Speaker 3: starting to emerge as we go through you know, the
Speaker 3: one year anniversy of this aggressive Titan cycle. Within the
Speaker 3: developed markets, those recessionary signals are are all over the place.
Speaker 3: It is this kind of one slice of the American
Speaker 3: consumer that's making it harder to play. But I think
Speaker 3: if you can look past the timing of this consumer,
Speaker 3: which again with some of these retail earnings, with some
Speaker 3: of this data that's coming out softer, you do get
Speaker 3: to a much slower growth type of discussion. And you know,
Speaker 3: if you're willing to put those investments in place, they're
Speaker 3: out there.
Speaker 5: Do you think that this is disinflationary to the degree
Speaker 5: that would give a bit of a reprieve to the Fed,
Speaker 5: especially if the stress that we're seeing in the banking
Speaker 5: sector is there is real, but a slow burn that
Speaker 5: isn't going to necessitate some sort of real response.
Speaker 1: Yeah, for sure.
Speaker 3: So I definitely am in the camp that this had
Speaker 3: a tightening that I expect in the second half of
Speaker 3: the year is going to have a bigger impact on
Speaker 3: the economy than you know, maybe some of these risk
Speaker 3: assess are saying, particularly on the default side of things,
Speaker 3: particularly on just overall loan growth slowing, and you do
Speaker 3: get a more disinflationary type of world. Once we get there,
Speaker 3: it's you know, the timing is really hard. It's not
Speaker 3: really the expertise of global macro to pick one month
Speaker 3: over another. But you know, going into twenty twenty four,
Speaker 3: I think that those headwinds seem much stiffer.
Speaker 5: Where's the death healing debate on your radar? Are you
Speaker 5: excited to wake up every morning to get a sense
Speaker 5: of the machinations between the different discussion points that the
Speaker 5: two parties have.
Speaker 3: You know what, if you talk to my coworkers, they
Speaker 3: would say, I get overly excited about it. So yeah,
Speaker 3: I certainly do think that the market is a bit
Speaker 3: sanguine about it this time, particularly given the volatility on
Speaker 3: the deficit side of things.
Speaker 4: It's just a lot harder.
Speaker 3: To pick the date when we're going to run out
Speaker 3: of money, and that really creates a problem for Washington,
Speaker 3: which seems to need that impetus to get things moving.
Speaker 3: I'm also very cognizant of the amount of reserves that
Speaker 3: moves around once we get the deal, and that in
Speaker 3: and of itself creates more challenges for bank deposits, at
Speaker 3: least in the in the short term, potentially in the
Speaker 3: intermediate term kind of just given how the shape of
Speaker 3: all these short term curves are somewhat inverted at this.
Speaker 2: Point, Marvin, Let's say we knew the X state was
Speaker 2: June one, June first, would there be a different practical
Speaker 2: X state, a deadline that we had to really come
Speaker 2: to an agreement on to pass the legislation needed to
Speaker 2: ultimately skip the dreadful outcomes that most people are predicting
Speaker 2: if we do go through that X state.
Speaker 3: Yeah, I think there would be a greater sense of urgency.
Speaker 3: For sure. We are running out of time very very quickly.
Speaker 3: You know, the President is still apparently going to the
Speaker 3: G seven. So you know, again the litany of of
Speaker 3: of conversations that are coming out of Washington show and
Speaker 3: degrees of concern, and that in and of itself is
Speaker 3: a concern when you're talking about a date to two
Speaker 3: weeks away.
Speaker 4: How you get how you get.
Speaker 3: There is really some sort of hopefully acknowledgment that June
Speaker 3: first is a date that we should focus on in
Speaker 3: a temporary agreement to get us past or else, you know,
Speaker 3: we go into territory that we've never been before.
Speaker 2: I thought you had done them. Movin just got trigger
Speaker 2: happy on the sun of the I just hit the gap. Yeah,
Speaker 2: it's nice straight, I'm worse than you, mama.
Speaker 1: Thank you. Really important here, I think to look at
Speaker 1: the retail data, rip it apart and someone that can
Speaker 1: do that, of course as a general lady from Pimco.
Speaker 5: And this really is the question, especially after we were
Speaker 5: talking about a discretionary recession, are we seeing that in
Speaker 5: the data? Joining us someone who is someone who focuses
Speaker 5: on this all day, every day, Tiffany Wilding, economist at Pimco,
Speaker 5: five point thirty am their local time. Thank you for
Speaker 5: waking up and keeping Eastern times the Jacob partake. But
Speaker 5: I'm curious, Tiffany, from your vantage point, are you seeing
Speaker 5: signs of some sort of discretionary recession or is that premature?
Speaker 6: Yeah? Well, I mean I do think that the consumer
Speaker 6: some of the momentum in consumption has decelerated since the
Speaker 6: beginning of the year. So, you know, the first quarter
Speaker 6: was extremely strong in terms of consumption growth over three percent,
Speaker 6: you know, but a lot of that, as we know,
Speaker 6: if we look at the sequential monthly data, it was
Speaker 6: really boosted by warm weather in January, and then we
Speaker 6: saw deceleration in March, and it looks like we're getting
Speaker 6: a little bit of a pop back. But as as
Speaker 6: Michael suggested, there's probably some noise around Mother's Day here,
Speaker 6: so you kind of have to smooth that over, you know.
Speaker 6: So we would suggest you are seeing some decline or
Speaker 6: you know, growth deceleration in consumption. But overall, you know,
Speaker 6: as as was said, the consumers are hanging in there,
Speaker 6: you know, and of course that's also going to be
Speaker 6: a function of the labor market, you know, and it
Speaker 6: is still it is still reasonably strong.
Speaker 5: Hanging in there and willing to pay the prices that
Speaker 5: are being demanded are two different things. Is there a
Speaker 5: sense that there really is starting to be some pushback
Speaker 5: to the inflation that's being borne out in consumers pocketbooks
Speaker 5: and in the fattening margins of profits at companies.
Speaker 6: Yeah, well so, I mean we're definitely starting to hear
Speaker 6: more of that coming from you know, the various earnings
Speaker 6: releases from some of the consumer companies. You know, they're
Speaker 6: saying obviously that consumers are a little bit more price
Speaker 6: sensitive in various categories. I would say, when when I
Speaker 6: look at the macro data, you know, I don't see
Speaker 6: it as much and of course we need more macro data.
Speaker 6: You know, we're starting to see these trends at the
Speaker 6: company level, they're noticing it, you know. Then note it
Speaker 6: will come out with the macro data with a lag,
Speaker 6: you know. But but overall, I would say inflation is
Speaker 6: actually still you know, still reasonably robust. I mean, obviously
Speaker 6: at five percent or more, it's over the FEDS target.
Speaker 6: You know, we do expect it to come down, but
Speaker 6: it's been I think it's been continues to be stickier
Speaker 6: than expected.
Speaker 1: Tiffany, I'm I need to ask you this because in
Speaker 1: the equity market, I've been looking at the slow motion
Speaker 1: convergence of moving averages down to what Lisa and I
Speaker 1: call a snooze fest. I got the same thing in
Speaker 1: the bond market. If I look at the two year yield,
Speaker 1: there's a tenC weed see two bases point differential in
Speaker 1: the three moving averages I use. Does your own Powell
Speaker 1: call that a success? To see the lethargy the boredom
Speaker 1: within the bond market described by the two year yield?
Speaker 6: Well, you know, I you know, I do think that
Speaker 6: the bond market does listen to the Fed. You know,
Speaker 6: I think sometimes commentators like to look at, you know,
Speaker 6: just the forward curve, which is which does suggest you know,
Speaker 6: a significant probability that rates will be lower by the
Speaker 6: end of the year, to suggest that, you know, the
Speaker 6: markets aren't listening to the Fed. I do think the
Speaker 6: markets are listening to the Fed. But I just think
Speaker 6: the markets probably have you know there in terms of
Speaker 6: their distribution of risks, they assign more downside risk the
Speaker 6: economic outlook than the Federal Reserve does. If you take
Speaker 6: a historical look at banking sector crises and stresses defined
Speaker 6: by you know, thirty percent drops on average and banking shares,
Speaker 6: you do see tendencye the economy decelerating after that, you
Speaker 6: know that'll that'll of course come to tighter credit conditions
Speaker 6: for consumers and households.
Speaker 1: What do you hear from then, your PIMCO portfolio managers,
Speaker 1: without giving away the crown jewels, what does Pimco say
Speaker 1: about the dynamics in this banking crisis in agency paper?
Speaker 6: Yeah, well, of course there's some you know, banks that
Speaker 6: failed obviously held you know, they held a lot of
Speaker 6: treasuries as well as agencies. You know obviously that won't
Speaker 6: need to be sold. We think that's probably priced into
Speaker 6: the market, though there's a pretty good understanding of exactly
Speaker 6: what that is, you know, in terms of the how
Speaker 6: much it is, you know, And obviously the Federal Reserve
Speaker 6: is also shrinking its portfolio, you know. But on the
Speaker 6: other side of that, you don't have a refinancing wave
Speaker 6: because interest rates are so high. So overall we think
Speaker 6: it's it's priced in. We actually like agency nbs, and
Speaker 6: we think that they actually provide pretty good value right now,
Speaker 6: just because volatility has been high and the level of
Speaker 6: interest rates are high, and those things can mean revert
Speaker 6: back down.
Speaker 5: As we prepare for a slew of retail earnings, particularly
Speaker 5: tomorrow with respect to Target and then Walmart, do we
Speaker 5: get a sense that perhaps people are too barish, that
Speaker 5: home Depot was an outlier, and that otherwise, to your point,
Speaker 5: the consumers are still spending and they can keep borrowing
Speaker 5: to do so.
Speaker 7: Well.
Speaker 6: I mean, so the data that we got some credit
Speaker 6: data from the Federal Reserve, which did look like there
Speaker 6: was some reduction in credit card there was a deterioration
Speaker 6: in credit card loans and things like that in the
Speaker 6: first quarter, you know, So I do think there are
Speaker 6: consumers out there that are feeling pain, and I do
Speaker 6: think banks are tightening credit conditions.
Speaker 5: You know.
Speaker 6: The other piece of this obviously is just demand for credit,
Speaker 6: and demand for credit is also falling just because rates
Speaker 6: are so high. You obviously it's more expensive to take
Speaker 6: out loans, et cetera. So you know, all of this
Speaker 6: to me is suggestive that you know, monetary policy is working.
Speaker 6: You know, the consumer, you know, ultimately it is they
Speaker 6: are getting squeeze, some of the lower income consumers more
Speaker 6: so than others, you know, and you are seeing some
Speaker 6: deceleration in credit growth as a result of of the
Speaker 6: current environment.
Speaker 5: So as you put this all together, is inflation decelerating
Speaker 5: enough to really get the FED where they want? Or
Speaker 5: are we looking at a sort of higher inflation but
Speaker 5: also higher growth kind of area for a longer period
Speaker 5: of time.
Speaker 6: Yeah, I mean, I think that's yet to be seen.
Speaker 6: You know, as I as I mentioned, we do think
Speaker 6: this banking sector stress is going to impact the economy.
Speaker 6: It's going to slow things down. Higher interest rates take
Speaker 6: time to work their way through the economy with a lag.
Speaker 6: And you know, I would even say inflation even lags
Speaker 6: you know, activity momentum, so growth, So you know, we
Speaker 6: I think we're seeing these lags start to play out.
Speaker 6: You are, you have seen inflation decelerate. It's probably going
Speaker 6: to continue to decelerate given the monetary policy restriction that's
Speaker 6: in place and the Federal Reserve, you know, just needs
Speaker 6: to be patient, as does markets just needs to be
Speaker 6: patient to see that.
Speaker 1: You know.
Speaker 6: So we think inflation does decelerate to three percent core
Speaker 6: CPI for example, by your end three to three and
Speaker 6: a half, you know, but obviously that's still above target.
Speaker 6: There's still some sticky trends and inflation, you know, but
Speaker 6: ultimately the Fed probably will be successful in getting it back.
Speaker 6: The question is, you know how you know, how big
Speaker 6: of a recession do they need to do that?
Speaker 1: I think, thank you, Tiffany will greatly appreciate it.
Speaker 2: With pim Core, Lindsey Rosena of Paging Fixed Income wang
Speaker 2: in on the market reaction right in the following there's
Speaker 2: a kink and the tea bill curve around the next
Speaker 2: day with one hundred basis points of extra yield. If
Speaker 2: we don't get a resolution, we're just kicking the can
Speaker 2: down the road and not eliminating the problem. This makes
Speaker 2: the T bill market tom a challenging plan.
Speaker 1: To be really good note from someone who really qualified
Speaker 1: to talk about this, and of course, with all the
Speaker 1: hierarchy of PGM and the excellence they've done over the years,
Speaker 1: Miss Rosner joins us. At right now, Lindsay, the note
Speaker 1: really goes to the opportunity that's out there. What is
Speaker 1: the opportunity given a discontinuous function in the three month
Speaker 1: T bill? How do you play it? Right?
Speaker 7: I think the answer is you you don't play it.
Speaker 7: There's so much talk right now about getting this extra
Speaker 7: one hundred basis points, but if you think about it
Speaker 7: the downside, if we actually do have a default, which
Speaker 7: we think happens with a five percent probability, one hundred
Speaker 7: basis points is just not good enough upside downside analysis.
Speaker 7: So for us, it's skip the games in the front
Speaker 7: end of the curve and get more into the intermediate
Speaker 7: duration space where you can take advantage of doing the
Speaker 7: right kind of things.
Speaker 1: I mean, what's so important here, lindsay, And this is
Speaker 1: to the elasticity or responsiveness of the belly of the
Speaker 1: curve five to seven years I'll call it as well. Well, then,
Speaker 1: what's the opportunity there? How do you play that?
Speaker 7: I think there are a lot of opportunities and you
Speaker 7: can go kind of any which way you want. So
Speaker 7: if you want to be more conservative, you want to
Speaker 7: stay more investment grade, great opportunities and agency mortgage back securities,
Speaker 7: even commercial mortgage backed securities, if you stay high quality
Speaker 7: on top of the cap structure trip as with a
Speaker 7: lot of credit enhancement, there's good stuff to do in
Speaker 7: an investment grade space, a lot of opportunity there. But
Speaker 7: if you want to seek more risk, go for more yield.
Speaker 7: There are idiosyncratic opportunities in high yield. So you've got
Speaker 7: kind of a diner menu of options in the middle
Speaker 7: of the curve, and you don't have to get stuck
Speaker 7: in this noise or the anxiety that you all were
Speaker 7: speaking of in the very front end of the curve
Speaker 7: that is really hard to play. And the big problem
Speaker 7: is is that if the debt ceiling, if the quick
Speaker 7: solution is prioritization, that's just kicking the problem a couple
Speaker 7: a month, two months down the road, you're going to
Speaker 7: be right back in it. And so if you thought
Speaker 7: you did something cute and you bought T bills two
Speaker 7: months out, well you may now be back at the
Speaker 7: X state before you know it, and it's just not
Speaker 7: a game worth playing.
Speaker 5: Okay. That said, if this, let's say, gets resolved, do
Speaker 5: you then get more risk on do you start to
Speaker 5: get more aggressive in other areas that go beyond just
Speaker 5: simply the idiosyncratic trades?
Speaker 7: So we go back to with your prior catch you're asking, Okay,
Speaker 7: it just gets resolved, what's next? And what's next is
Speaker 7: we go back to what we were concerned about, which
Speaker 7: is we still have the central banks across the globe
Speaker 7: that are trying to fight inflation, and they're parts of
Speaker 7: the globe where we still have double digit inflation. So
Speaker 7: this battle isn't over, and we need to think about
Speaker 7: how does the curve respond. Right now, we all know
Speaker 7: that there's a significant amount of cuts priced in in
Speaker 7: the US, for example, at the end.
Speaker 4: Of the year.
Speaker 7: How does that work out moving forward? And so we
Speaker 7: go back to inflation watch. We get out of debt
Speaker 7: ceiling watch, and we move back to inflation watch and
Speaker 7: figuring out is a recession happening, will it be a
Speaker 7: soft landing? And in that scenario, it still isn't yet
Speaker 7: green light going.
Speaker 5: We've been talking about that Bank of America fund manager survey,
Speaker 5: and one aspect of it was the allocations to bonds
Speaker 5: are the biggest going back to two thousand and nine.
Speaker 5: This is the latest one from May. How much does
Speaker 5: that give you a sense that things are crowded in
Speaker 5: the duration trade? Basically this idea that longer term, there
Speaker 5: is a confidence that we're going to be low inflation,
Speaker 5: low rate kind of you know, trading the same way
Speaker 5: that we were over the past few decades.
Speaker 7: I think what we've got here are some big shifts
Speaker 7: in asset allocation or portfolio allocation. Forever there was a
Speaker 7: discussion of the sixty forty sixty forty is not really working.
Speaker 7: If you have a move to this fifty to fifty
Speaker 7: or even more fixed income, that then tells you that
Speaker 7: these flows make sense and they are stickier than one
Speaker 7: may think. Also, as we've been saying all year, you've
Speaker 7: got income and fixed income, this isn't a place that
Speaker 7: you just park it because you're scared. There's a lot
Speaker 7: to earn here, and so I think that movement into
Speaker 7: fixed income is well founded. I'm obviously biased as a
Speaker 7: fixed income manager, but I think it makes a lot
Speaker 7: of sense now and it didn't make much sense for
Speaker 7: a very long time.
Speaker 5: Do you think the allocations are just generally increasing in
Speaker 5: a structural manner to fixed income and decreasing to equity
Speaker 5: so that it might be more of a fifty to
Speaker 5: fifty kind of new portfolio.
Speaker 7: I think time will tell. I do think it's moving
Speaker 7: in that direction, and I think that direction makes a
Speaker 7: lot of sense.
Speaker 2: Lindsay, go to wrap it up there, Alice Enjoy. You're inside,
Speaker 2: particularly on the debt sating, you know, for once Urction
Speaker 2: having some intelligent conversations Tom on the debt stalend this morning,
Speaker 2: Lindsay rose to the on the bond mal ket.
Speaker 1: Right now in Washington, and we're going to try to
Speaker 1: take a different spin here. Isaac Multanski joins this, director
Speaker 1: of policy research at bt IG. Exquisitely good on the
Speaker 1: distill it of when we're done with this, Isaac, first question,
Speaker 1: the morning after this is fixed, what happens.
Speaker 4: We go on to fight about other things, you know,
Speaker 4: then the morning after then we're going to refocus on
Speaker 4: whatever the next big legislative deadline, and that baby, the
Speaker 4: spending bill at the end of September, maybe the farm dell.
Speaker 4: But when we get this off the table, I think
Speaker 4: the market can go back to worrying about everything else
Speaker 4: because the debt ceiling is so important.
Speaker 1: All right, Look, Isaac, and this goes back, folks, to
Speaker 1: Pete Peterson, the gentleman from Nebraska who called me up,
Speaker 1: is quite elderly at the time, and he and I
Speaker 1: talked about his ageless concern, Isaac, where the former Secretary
Speaker 1: of Commerce made clear he was forever worried about this debt.
Speaker 1: Peterson Foundation publishes that CBO interest expense over the next
Speaker 1: ten years will go from six hundred and forty billion
Speaker 1: to one point four trillion dollars. That's the interest expense.
Speaker 1: Every American knows. That's nuts. Why shouldn't we be concerned
Speaker 1: about this?
Speaker 4: We absolutely should. We absolutely should. But DC hasn't. Is
Speaker 4: an inability to focus on the long term, right. We
Speaker 4: are focused definitionally on short termism. And even when we
Speaker 4: have these discussions regarding the debt ceiling and maybe spending,
Speaker 4: we've already taken off the table talks about addressing long
Speaker 4: term entitlement reform, which as we know, is one of
Speaker 4: the larger drivers of our debt. And so we've also
Speaker 4: taken off the table defense spending and other items. And
Speaker 4: so when you start with so many sacred cows, it's
Speaker 4: impossible to actually get anywhere over the long term. So
Speaker 4: the most we can hope for Tom from these negotiations
Speaker 4: is just not shooting ourselves in the foot with a
Speaker 4: technical default and having to go through the mess of
Speaker 4: prioritization and whatever else may come from not doing the
Speaker 4: basic job of lifting the debt.
Speaker 5: Sealing, Isaac, I'd love you to build on what Wendy
Speaker 5: Schiller was talking about at Brown University earlier this morning
Speaker 5: when she said that in our ultrapolarized world, she expects
Speaker 5: things to sort of be a repeat of twenty eleven
Speaker 5: in a bit, but with a less satisfying legislative solution,
Speaker 5: basically saying that Republicans tend to want the government to
Speaker 5: go into some sort of default or at least some
Speaker 5: sort of non payment because it plays well in terms
Speaker 5: of them taking a hard line on spending. Is that
Speaker 5: true or is that not really born out in your experience.
Speaker 4: I don't think that we're there, you get, and I'm
Speaker 4: still operating under the old maxim that things in DC
Speaker 4: are impossible right up until the point that they're inevitable,
Speaker 4: And I do hope that we're able to get some
Speaker 4: progress today where we're able to move forward on that
Speaker 4: list of menu items that we've all seen reported about
Speaker 4: over the past few days, to the point where perhaps
Speaker 4: President Biden leaves his G seven meeting early, or skips
Speaker 4: Australia and some of the other stops, comes back as
Speaker 4: a one on one with Kevin McCarthy as early as
Speaker 4: next week, and then at least in my base case
Speaker 4: here is we just have a deal that pushes the
Speaker 4: debt ceiling deadline to the end of September, which then
Speaker 4: aligns it with the federal spending deadline and gives negotiares
Speaker 4: a little bit more time, because look, they're trying to
Speaker 4: solve some pretty thorny issues when in reality, you got
Speaker 4: to have something lady to move its way through the
Speaker 4: legislative process. By the beginning of next.
Speaker 5: Week, as we wait for paying to dry and get
Speaker 5: a sense of when things get to be a little
Speaker 5: bit more urgent, we're going to have the hearings with
Speaker 5: respect to what happened with Silicon Valley Bank and all
Speaker 5: of the regulatory oversight. We already got a look at
Speaker 5: some of the pre released questions from the former CEO
Speaker 5: of SVB, blaming the FED, blaming regulators, blaming social media.
Speaker 5: What do you expect the response to be?
Speaker 4: Look, the reality is hearings very rarely change the policy trajectory,
Speaker 4: and we need investors to know that the regulatory framework
Speaker 4: is going to be tightened for banks. They're going to
Speaker 4: start with super regionals for their total long term debt
Speaker 4: requirements and resolution requirements, and then they're going to go
Speaker 4: down to the one hundred billion plus bucket and start
Speaker 4: to deal with things like AOCI. But my issue here
Speaker 4: is I don't think this banking crisis is over. I
Speaker 4: think it's going to flare up again. And what we're
Speaker 4: going to have to deal with when we look at
Speaker 4: the post mortem for this crisis is what was the
Speaker 4: logic behind us tying the hands of the regulators on
Speaker 4: the front line to address these crises. The fdiic has
Speaker 4: nothing else it can do administratively to address this deposit
Speaker 4: insurance issue. So once again we're waiting on a Congress
Speaker 4: it's either unwilling or unable to act on the matter.
Speaker 4: And frankly, that scares me because we're not through the
Speaker 4: woods yet on the banking issue.
Speaker 2: Well, Isaac, let's tast out a little bit more of that.
Speaker 2: What about the tension in the last couple of months
Speaker 2: do you think has the potential to flare up again?
Speaker 4: Look, I think that we have not addressed the mismatch
Speaker 4: of assets and liabilities across the banking system. I think
Speaker 4: that we have not dealt with some of what I
Speaker 4: think we can all agree we're supervisory failures. And we
Speaker 4: spoke earlier about the federal reserves mandate, and the Federal
Speaker 4: Reserve is also going to take some flak here there's
Speaker 4: a hearing about Federal reserve reform later this week, worrying
Speaker 4: that perhaps their guiding star is just monetary policy and
Speaker 4: that leads them to fall down on their job as
Speaker 4: a bank supervisor sometimes. So I think that's still out there.
Speaker 4: And look, I listened to Jamie Diamond when he also
Speaker 4: says that he's concerned that it's not over. So I
Speaker 4: put all that together. I put into that mix the
Speaker 4: fact that you still have some policymakers talking about the
Speaker 4: need for a short selling band on banks, and I
Speaker 4: look and say that our option set for addressing another
Speaker 4: flare up, especially if it's in a bigger, more systemically
Speaker 4: important bank, is pretty limited to just Congress passing legislation quickly,
Speaker 4: and they're not good at that.
Speaker 2: Isaac, thanks for the perspective. I a botanskin. They're brutal.
Speaker 2: Honesty there at the end from btig.
Speaker 1: Elise is an expert on this because she's in Home
Speaker 1: Depot three times a week. John and I are clueless
Speaker 1: on this. Somebody really confident is Charles Gram. Chuck. Graham
Speaker 1: is senior retail analyst at Gordon Haskett and joins us
Speaker 1: right now. And what's so very cool about this out
Speaker 1: of the College of the Holy Cross is this is
Speaker 1: one of the coolest things in the securities research side.
Speaker 1: This gentleman is a CPA and a CFA, and that
Speaker 1: is bulletproof across Wall Street. Combine the two, combined the accounting, Chuck,
Speaker 1: and also the financial analysis of the CFA designation. Is
Speaker 1: Home Depot a different company than the company we've known
Speaker 1: for twenty years?
Speaker 8: No, not at all. I mean, I think there's a
Speaker 8: lot going on with the consumer right now, and you
Speaker 8: touched on it in terms of the weather impact. But
Speaker 8: I think the key line out of the Home Depot
Speaker 8: release today was demand starting to normalize, and I think
Speaker 8: that's something we haven't heard from home depot in quite
Speaker 8: some time, and I think that's the big issue, and
Speaker 8: understanding how long that's going to last is really going
Speaker 8: to weigh on shares here in the near term. But
Speaker 8: when you, let's face it, I mean, March was very
Speaker 8: unfavorable from a weather perspective, but April wasn't. And we
Speaker 8: don't know the exit rate for the month of April,
Speaker 8: but we suspect it was weak, and so you can't
Speaker 8: high behind weather right now.
Speaker 1: One of the distinctions they have is they own the
Speaker 1: pro market, or at least that's the verbiage. Do they
Speaker 1: still own the pro market? Is that the home depot
Speaker 1: distinction forward.
Speaker 8: Oh a hundred percent? I mean, let's face it, nothing
Speaker 8: really structurally has changed here with home depot stocks down
Speaker 8: a little bit. Pre market, they didn't have a great
Speaker 8: first quarter, they're cutting the guide for the year, but
Speaker 8: pro business north to fifty percent of their sales, they
Speaker 8: still dominate that part of the market, particularly relative to
Speaker 8: Piers Lows is way behind it, close to twenty five percent.
Speaker 8: So again that has not changed.
Speaker 7: At all today.
Speaker 5: How much is this really a housing specific sector issue,
Speaker 5: a construction related issue, just simply because there has been
Speaker 5: so much investment in people's homes. There has been purchases
Speaker 5: and prices have gone up so much.
Speaker 8: Yeah, I think it's all I think it's all of that.
Speaker 8: I think demand normalization again is the key here. But
Speaker 8: you know, when rates are this high, people are not moving.
Speaker 8: But let's say that people have jobs, so they're still
Speaker 8: investing in their homes. We're just seeing category demand normalization
Speaker 8: across the board, and I think that their seasonal business
Speaker 8: will learn more on the nine o'clock call was also
Speaker 8: soft because of some of the issues with weather.
Speaker 6: Here.
Speaker 5: We are seeing those shares down in sympathy, as you
Speaker 5: can see those shares down almost four percent as well,
Speaker 5: so people seeming to believe this is a sector specific issue.
Speaker 5: Moving ahead to Target tomorrow and then Walmart on Thursday,
Speaker 5: how much we're going to see a similar trend in
Speaker 5: those retailers at a time when a lot of different
Speaker 5: stores are saying that they can pass along price increases
Speaker 5: and then some I think.
Speaker 8: Retailers are going to have a much harder time, you know,
Speaker 8: taking price from here. I think we're starting to see
Speaker 8: the consumer pushback. We're seeing consumer starts to trade down
Speaker 8: into companies like Walmart and into categories and private brands
Speaker 8: in particular. So we're we're cautious on Target, we're more
Speaker 8: optimistic on Walmart. I think that the key thing here
Speaker 8: is we're starting to go through a discretionary or recession
Speaker 8: across retail, and I think we're actually already in it.
Speaker 8: And I think we're going to start to hear that
Speaker 8: from a lot of companies over the next couple of weeks.
Speaker 8: If you rewind the clock, you know, the past couple
Speaker 8: of weeks we've heard from Costco their business has been softer.
Speaker 8: It's very typical for Costco to have that volatilt in
Speaker 8: their business. So if Costco's volatility is there, Home Depot's
Speaker 8: businesses softening, that's happening everywhere.
Speaker 1: One of my big things, Chuck, is managements adapt. How
Speaker 1: does retail adapt to the slowdown you describe? Is it layoffs?
Speaker 1: Is it protect the margin at ebit that it all costs?
Speaker 1: What's the prescription here looking at.
Speaker 8: History, Well, I mean the number one thing they need
Speaker 8: to do is protect the balance sheet and control inventory levels.
Speaker 8: And if there's anything that could happen in twenty twenty two,
Speaker 8: was demand started to soften and inventories started to get
Speaker 8: in better shape.
Speaker 2: Are they there yet?
Speaker 8: Not really across the board, but they'll start to get there.
Speaker 8: And you know, for Home Depot their their s g
Speaker 8: Anda expense control was very, very good in the first quarter.
Speaker 4: That's why even with.
Speaker 8: Softer business they were able to come in with earnings
Speaker 8: of three eighty two. So the first thing will be inventory,
Speaker 8: second thing will be cost control, and I think the
Speaker 8: third light would be would be job cuts down the
Speaker 8: road if business continues to deteriorate.
Speaker 2: Chuck that phrase discretion red recession. Can we dig into
Speaker 2: that just a little bit more. Is that up and
Speaker 2: down income brackets? Does that go from goods to services?
Speaker 2: Can you give me a little bit more detail on
Speaker 2: what you're looking for there.
Speaker 8: Well, I think it's a little bit more goods than
Speaker 8: services right now. I mean, you look at the travel
Speaker 8: industry and anybody that's been at the airport or been
Speaker 8: on an airplane in the past few months, they're always full.
Speaker 8: So people are definitely shifting spend towards services. But I
Speaker 8: think it's the categories that that my companies sell into.
Speaker 8: We're just seeing softness across the board. You know, whether
Speaker 8: it's whether it's consumer electronics, whether it's home furnishings, whether
Speaker 8: it's home improvement in this case. You know, again, all
Speaker 8: three of those are starting to see weakness.
Speaker 6: Chuck.
Speaker 5: How much is this going to really challenge the fact
Speaker 5: that companies have been raising prices beyond their input prices.
Speaker 5: In other words, that profit margin has to come in
Speaker 5: much more than people are expecting.
Speaker 8: Yeah, I mean, that's a really good point. I mean,
Speaker 8: and that's what we're going to have to watch elasticity
Speaker 8: across the board. You know, we're starting to see it
Speaker 8: in discretionary areas start to normalize on the price front.
Speaker 8: We'll start to see it and see areas food areas
Speaker 8: in the coming months as inflation starts to starts to
Speaker 8: pull back. I'll just point out that just traffic across
Speaker 8: retail has been very, very soft over the past two months,
Speaker 8: and that's always a harbinger of things to come. And
Speaker 8: it doesn't look good. Consumer's pulling back, and frankly like
Speaker 8: none of this should surprise after the past couple of
Speaker 8: years of splurging across the consumer space.
Speaker 6: Chuck.
Speaker 1: I'm looking at this weekend buying the American pushmower for
Speaker 1: eighty two dollars from home depot. I mean, we got
Speaker 1: a most central park. I got to do my part
Speaker 1: for Mayor Adams. Where's their perfume section? What part of
Speaker 1: home Depot is where they really make the margin as
Speaker 1: they get to sixteen percent EBITDA, it's really.
Speaker 8: Pretty even across the board. Really in the seasonal areas,
Speaker 8: home furnishing area that that's where the margins tend to
Speaker 8: be the best. But if you go back to hear
Speaker 8: that this print from Depot again, like it's not pretty,
Speaker 8: but the gross margins are actually pretty well protected and
Speaker 8: their inventory levels are in good shape. So it's not
Speaker 8: a great print from Home Deepot this morning, but it's
Speaker 8: also not the end of the world in my opinion.
Speaker 2: Chuck, this was smart. Let's say this again soon. Chuck Grumnet,
Speaker 2: I've Golden HASKI. Thank you, buddy. I appreciate it.
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