Speaker 1: This is Bloomberg business Week Inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebec from Bloomberg Radio.
Speaker 1: All right, I'm gonna say I'm so glad that we're
Speaker 1: doing this segment next because I feel like coming off
Speaker 1: that discussion. Yeah, it's all about banks and what happens next,
Speaker 1: So let's get to it. Because we did have some headlines.
Speaker 1: Let's get to our Bloomberg News Finance reporter Shree Natarajan.
Speaker 1: He's here in our Interactive broker studio along with Herman Chance,
Speaker 1: senior analyst for US Regional banks at our Bloomberg Intelligence team.
Speaker 1: Because we did have pack West sharing up it's liquidity first,
Speaker 1: Republic again under pressure, and then you had Janet yell
Speaker 1: and want wanta sure. Let me start with you, what
Speaker 1: are the headlines as you look at this situation that
Speaker 1: you think we need to be sharing with our audience.
Speaker 1: Look as I walked over to the radio booth, you
Speaker 1: could see the markets taking a nose dive into the close.
Speaker 1: But that's not all. When you look at someone like
Speaker 1: First Republic going down sixteen percent. That's a stock that's
Speaker 1: been beaten up this month, down ninety percent. This was
Speaker 1: a three digit stop. Now that long ago, the start
Speaker 1: of the month, this was around one hundred and thirty dollars.
Speaker 1: Why aren't things coming down for this one with all
Speaker 1: the assistance it's gotten so far? Well, the question is
Speaker 1: is that enough? And we have a very good story
Speaker 1: on Bloomberg right now if you read it, which gives
Speaker 1: you a very good explainer as to why there is
Speaker 1: such reluctance in any sort of White Knight coming forward.
Speaker 1: There is a big gaping hole in that balance sheet.
Speaker 1: They break it down there. Their securities portfolio has taken
Speaker 1: a four billion dollar hit their loan book. And this
Speaker 1: is a bank, First Republic, that has a big presence
Speaker 1: in the real estate market, is a big player in
Speaker 1: sort of that jumbo mortgage loans. Think about the dynamic there.
Speaker 1: They must have met so many major loans with two
Speaker 1: percent three percent fixed rate long term marketges that have
Speaker 1: obviously taken a hit. So you have a situation where
Speaker 1: there's this twenty six point five billion dollar hole, and
Speaker 1: tangible common equity is probably worth thirteen billion dollars, So
Speaker 1: there's still the hole that needs to be filled. So
Speaker 1: it's not quite easy for anyone to come in without
Speaker 1: possibly some sort of government backing. We've talked about that idea.
Speaker 1: We believe that is at least being studied, but is
Speaker 1: a solution on the horizon that's unclear to us. And
Speaker 1: at three pm, in the middle of a market day,
Speaker 1: in the middle of the Treasury Secretary speaking to the Senate,
Speaker 1: in the middle of a J. Paul press conference, when
Speaker 1: the bank has to put out a filing that says
Speaker 1: their top executives, their CEO, the chairman, and a few
Speaker 1: other executive officers are going to zero their bonus for
Speaker 1: the year, are going to take a salary cut. That
Speaker 1: doesn't really instill a lot of confidence, does it. Yeah?
Speaker 1: Three luck, I mean you know SVB signature first Republic
Speaker 1: Pack West term and feel free to jump in here.
Speaker 1: There are fifty banks in the KBW regional banking induction
Speaker 1: from Bank of Hay which is down thirty percent this year. That's,
Speaker 1: by the way, a few hours like I think I
Speaker 1: ran that thirty minutes ago to the New York Community
Speaker 1: Bank Work, which is up like ten percent in the year,
Speaker 1: which other banks seem most vulnerable to you? That's a
Speaker 1: risky question to answer, and in fact I would I
Speaker 1: would probably sort of try and get at that by
Speaker 1: looking at what has happened to the stock So what
Speaker 1: are equity invest is seemingly most concerned. But and some
Speaker 1: of the names that we flagged, our names like pack
Speaker 1: West and Western Alliance Bank of why pack West at
Speaker 1: least some good news this morning they put out a
Speaker 1: detailed press release which a at least indicated that they
Speaker 1: have showed ab liquidity measures. They've got help from Atlas
Speaker 1: sp fun fact backed and owned by Apollo, which recently
Speaker 1: bought the Securitized Products group from Credit SUAE rest in
Speaker 1: Peace and spun it off as the standalone investment firm
Speaker 1: that is now stepping in here to be a little
Speaker 1: bit of a rescue entity for pac West, if you may.
Speaker 1: They're not doing any of the capital race, but for
Speaker 1: now they have more cash than uninsured deposits, and that's
Speaker 1: good news. Hermann a PacWest issue. The big deposit outflow
Speaker 1: was in the venture banking business, which is what SPB does,
Speaker 1: what Silicon Valley Bank does. So when PacWest had venture
Speaker 1: banking deposits down forty three percent. It just shows that
Speaker 1: the herd mentality of the VC community affected SVB is
Speaker 1: affecting Pac West. And we also did a rid across
Speaker 1: in our research today looking at Westerner Alliance, which also
Speaker 1: has some technology related deposits. It's only fourteen percent of
Speaker 1: the total deposit base, which it should insulate them going
Speaker 1: forward if we do see a similar deposit outflow from
Speaker 1: the technology clients. So how are you guys? I mean,
Speaker 1: it's interesting because we were also just talking about kind
Speaker 1: of real estate exposure to and then you wonder, you
Speaker 1: know what that implications will be sore? The what do
Speaker 1: we need to be thinking about that should we expect
Speaker 1: there's going to be more problems? Tree, I mean, I
Speaker 1: don't know what are you hearing from your sources, But
Speaker 1: the FED chair was out there talking about the fact
Speaker 1: that there are some small banks that they are concerned about.
Speaker 1: At this point, everyone is focused on First Republic because
Speaker 1: as as the term they all likely use is it's
Speaker 1: a real bank. And the reason they say that it's
Speaker 1: not a small entity it has It had about one
Speaker 1: hundred and seventy five billion dollars in deposits at the
Speaker 1: end of at the end of the year, right, So
Speaker 1: it's a reasonably sized bank. It's clearly going through a
Speaker 1: lot of problems. Not just that, but it also had
Speaker 1: this consocium eleven of the country's biggest banks coming forward
Speaker 1: and trying to provide it. That might just have been
Speaker 1: financial hug. If you wear it is the ultimate financial hug.
Speaker 1: But did it really? Not very heavy though? Exactly thirty
Speaker 1: billion dollars when we estimate the whole in their deposit
Speaker 1: outflow was eighty nine billion, So it gives them a
Speaker 1: short term bridge to a longer term solution, which we're
Speaker 1: still waiting to hear what that is. Janet Yellen's comments though,
Speaker 1: it took out the banking sector again today, So did
Speaker 1: she make a mistake? Why did she do that? She
Speaker 1: had to know that there might be that impact. She
Speaker 1: spoke recently at the American Baker's conference on Tuesday and
Speaker 1: said that if there were a smaller institution that would fail,
Speaker 1: the regu layers would step in and guarantee of the deposits.
Speaker 1: So the market was working under the assumption that that
Speaker 1: was the case. But then she came out today near
Speaker 1: the market closed and said there's no blanket guarantee. So
Speaker 1: those two concepts aren't directly opposed to each other, but
Speaker 1: it just doesn't instill a lot of confidence with the
Speaker 1: broader market. I will point out that it is a
Speaker 1: common that was made in Washington, d C. It is
Speaker 1: a common that was made in front of a lot
Speaker 1: of politicians, and in that city, every single word matters,
Speaker 1: and there is careful word choice going on their blanket.
Speaker 1: For once, I am not considering for others, because we
Speaker 1: have reported that her stuff is actually considering measures on
Speaker 1: how they could perhaps have a temporary increase in deposits.
Speaker 1: They've certainly given a thought considering it. Not considering a
Speaker 1: blanket increase in deposit guarantee could well will mean that
Speaker 1: nothing zimminine. We're not planning to do that, but are
Speaker 1: the scenario planning perhaps so you mentioned Washington d C. Herman,
Speaker 1: you mentioned Apolo. I have to ask this. Apolo's rescue
Speaker 1: of pack West comes on the heels of the UBS
Speaker 1: acquisition of CS. My question is this he got talked
Speaker 1: now Warren Bethett trying to get back involved with some
Speaker 1: of these bailouts, right, I mean, if you remember the GFC,
Speaker 1: I mean he was involved with all the ZACS and
Speaker 1: made a killing. How do you think these deals are
Speaker 1: going to work out for people like Ubs, for some
Speaker 1: of these other banks out there that are the acquirer.
Speaker 1: I mean to me, it seems like things are setting
Speaker 1: up pretty nicely. Yeah. I would say that the UBS
Speaker 1: credit Sweet Steel. It was a bit different than what
Speaker 1: Apollo's doing. Apollo is doing a lunch back deal where
Speaker 1: if things go bad, they at least own the deposits
Speaker 1: and can monetize, so their risk is much lower versus
Speaker 1: taking an equity stake in a regional bank that is
Speaker 1: feeling some pressure. So that there are going to be
Speaker 1: other types of deals like what Apolo was doing, but
Speaker 1: they're not putting equity skin in the game at this point.
Speaker 1: No surprise. First Republic haut to be from w by
Speaker 1: Fitch maybe cut further, No surprise. Surely if First Republic
Speaker 1: can figure something out and there is something done, um,
Speaker 1: does it start to calm down? Yes? Because if if, if, if, if,
Speaker 1: the current thinking across the spectrum is there is no
Speaker 1: obvious solution, there is no easy solution. Suddenly tomorrow morning
Speaker 1: you come and tell me that they have found out
Speaker 1: a solution that should help even with the broader sector. Yes,
Speaker 1: because when this is, this has been sparked by a
Speaker 1: crisis of confidence, not not sort of any obvious irresponsible
Speaker 1: risk taking to the hilt, right like these these people
Speaker 1: are talking about hits to their security s portfolio, which
Speaker 1: is which is not because they invest in the riskiest
Speaker 1: stuff out there, but afford to let First Republic fall
Speaker 1: real quick hard to say, but the obvious answer I
Speaker 1: would have to assume is no they would because then
Speaker 1: if you have to find a whackamole solution, it then
Speaker 1: becomes a whackamle literally because then okay, then another FDIC
Speaker 1: has to step in. Then every investors then go and
Speaker 1: see which other bank would be most pressure. Then you
Speaker 1: go from one to one to one to one to
Speaker 1: the next, and that's not a fun game to play.
Speaker 1: I wish we had half an hour more, but folks,
Speaker 1: that's what you needed to know when it comes to banks.
Speaker 1: That's where we are. Four seventeen pm. Moll Street, Time Street,
Speaker 1: Thank you so much. You're listening to the Bloomberg Business
Speaker 1: Week podcast. Catch us live week the afternoons from three
Speaker 1: to six Eastern Listen on Bloomberg dot com, the Ihard
Speaker 1: radio app, and the Bloomberg Business App or watch us
Speaker 1: live on YouTube. So, by one measure, do you know,
Speaker 1: at a bit of research ahead of this segment, the
Speaker 1: global cloud communication platform market likely to reach more than
Speaker 1: fifty one billion by twenty thirty compound annual growth rate
Speaker 1: of nearly twenty percent. So one player in that market
Speaker 1: is the cloud based communications provider you know, the name
Speaker 1: Vantage are owned by Ericson and with us here in
Speaker 1: her Bloomberg Interactor Broker studio, Rory Reid, he is a
Speaker 1: CEO of on It. She's also a senior VP at Ericson. Welcome, Welcome,
Speaker 1: Nice to have you here with Damien and myself here
Speaker 1: in our studio. How are you and how do you
Speaker 1: feel the business environment is amid what we're seeing continued
Speaker 1: volatility in parts of the financial market. Well, I'm great. So,
Speaker 1: first of all, thank you for having me here in
Speaker 1: New York at the beginning of spring tonight. And I
Speaker 1: suppose you know, in the macro level it's going to
Speaker 1: be choppy. There's no question and volatility, but there's choppy.
Speaker 1: There's financial crisis choppy, there's choppy, Like I'm not short choppy,
Speaker 1: you know, I'm you know, three four decades in the
Speaker 1: tech space. I've seen all these cycles before. Yeah, one
Speaker 1: thing is the market's going to turn, particularly in tech,
Speaker 1: and when it does, it turns hard and it turns well.
Speaker 1: It's going to be choppy for a couple, a few
Speaker 1: more quarters, whatever it is. But in the meantime, what
Speaker 1: we have to do is focus on cash flow management.
Speaker 1: Make sure you're managing your cash. Invest where you can
Speaker 1: in market dislocations, in M and A and in your
Speaker 1: product get differentiation right now because the market's there. The
Speaker 1: long term tech trend is intact, and the opportunities are
Speaker 1: right now to take advantage or right North America advantage
Speaker 1: is core market, right. I wonder if you could just
Speaker 1: help me understand what scares you more the thought of
Speaker 1: our recession or persistently higher inflation. You know, from a
Speaker 1: standpoint of the business, our business is actually a third
Speaker 1: or third or third across the globe. I think from
Speaker 1: a business perspective, inflation has a long term negative impact
Speaker 1: on everything. It's just not good. You have to clean
Speaker 1: it up. A recession is temporary, it doesn't usually last
Speaker 1: a long time. I'm hopeful that we can move through
Speaker 1: this period of volatility and what you're going to see
Speaker 1: with Ericson support, we're in a very unique position. Many
Speaker 1: of our editors won't make it through this issue. We've
Speaker 1: got the support of a company like Ericson. We can
Speaker 1: double down, we can build in the better products at differentiations.
Speaker 1: Why won't they make it down, make it through. Well,
Speaker 1: many of them in the tech space have lived off
Speaker 1: of cheap money for a long time, so they've been
Speaker 1: very speculative. So this big moving rate to the past
Speaker 1: hurt them and then the Valley Bank, right, I mean,
Speaker 1: how does that impact that? It hurts them, So you
Speaker 1: want what you're seeing is we've always had a positive
Speaker 1: cash flow and we've managed because we had that historic
Speaker 1: voiceover of IP business. And then we have the vantage
Speaker 1: communication platform business. That's the future, that's the cloud. We'll
Speaker 1: use that cash flow to make sure we have the support.
Speaker 1: Now you also have a huge corporate parent, right right,
Speaker 1: Ericson waters for six point two billion dollars last year.
Speaker 1: They then give us the support underneath that we make
Speaker 1: the investment. Not only can we grow a core business
Speaker 1: now it's not growing at the same rate it was
Speaker 1: a year ago, probably half, but we'll see somewhere between
Speaker 1: fifteen and twenty business and residential both not growing equally
Speaker 1: or residentials definitely on a decline. That's just a cash
Speaker 1: flow engine for us. The cloud is the future that
Speaker 1: have been growing at thirty thirty five percent right now,
Speaker 1: it's probably grown somewhere between eighteen and twenty percent. Still
Speaker 1: a great business, yeah, and it's going to continue to
Speaker 1: be critical because those multimodal communications you interact with companies
Speaker 1: now twenty four to seven anywhere around the world, whether
Speaker 1: it's voice, video, you want support, you want commerce, that's
Speaker 1: just the way of the future. Every industry, you know,
Speaker 1: every vertical is going to need this, and that's why
Speaker 1: we got to invest now to create the differentiation for
Speaker 1: our audience and those who are unaware. Eric's inquired voltage
Speaker 1: just last year in July, right for six point two
Speaker 1: billion dollars. My question is, you know, talk to us
Speaker 1: about the AGM that's coming up next week for Ericson.
Speaker 1: Where does vantage fit into the company's you know, the
Speaker 1: company enterprise five G market, Where does that fit into
Speaker 1: the company's future plans. You know, Ericson's amazing company. They're
Speaker 1: they're they're driving almost half of the traffic and the
Speaker 1: five G space outside of China around the world. I
Speaker 1: mean this is a technology leader. They see an opportunity
Speaker 1: to take our communication APIs that's really the cloud base,
Speaker 1: bits of code that allows every enterprise to interact with customers,
Speaker 1: whether it's telling you your coffee's ready or having a
Speaker 1: telemedicine environment. What they see is now we can take
Speaker 1: the network. What's in the network that we can expose
Speaker 1: to these APIs so we can create better quality of service,
Speaker 1: we can create location, we can create silent authentication. Now
Speaker 1: instead of you just having to type in six digits,
Speaker 1: it'll know who you are by traversing the information that's
Speaker 1: in the network. We're going to create a whole new
Speaker 1: generation of APIs based on the network. That's a first mover.
Speaker 1: And if you were at Mobile World Congress in Barcelona
Speaker 1: a couple of weeks ago, yeah, this was a big
Speaker 1: theme in the industry. This is going to drive that
Speaker 1: TELECOO space for the next five ten years. API you
Speaker 1: mean application programming interface right, what they are is, that's
Speaker 1: exactly what it is, Carol. And there bits of code
Speaker 1: that allows enterprises like you know, chocolate companies, ride sharing companies,
Speaker 1: telemenacing companies to embed video voice messaging into their applications
Speaker 1: to reach anyone around the world who has a smartphone,
Speaker 1: and the smartphone what five billion of them? Yeah, there's
Speaker 1: a few out there, Okay, just a few. I want
Speaker 1: to ask you, because you were talking about geography. You
Speaker 1: are global, so when you look around the world, it's
Speaker 1: great when we have somebody like you in studio when
Speaker 1: we are at this moment of we talk recession, we
Speaker 1: talk hard landing, we talk soft landing, certainly here in
Speaker 1: the US, but we're looking around the world. Are the
Speaker 1: stronger markets geographically we're the weaker markets. Sure, in the
Speaker 1: tactical time frame. I still like the US it's strong
Speaker 1: because it's growing. It's definitely growing. All our businesses are
Speaker 1: growing in all geographies right now. Where the rate? Okay,
Speaker 1: where's it not growing there as strongly? I think if
Speaker 1: you thought about it in terms of Europe and China
Speaker 1: are probably the most under pressure. For sure. Would you
Speaker 1: think that that has something to do with data privacy
Speaker 1: concerns and piracy issues and all the things that are
Speaker 1: going Yeah. Sure, where Europe, I think there's been more
Speaker 1: pressure because of the inflation, the Ukraine Russia war, that's
Speaker 1: put some pressure on it. Still growing India, strong, Africause,
Speaker 1: reasonably strong, parts of Asia good. But it's all temporary.
Speaker 1: There's definitely kind of a dislocation that's occurring, but it's
Speaker 1: going to turn and we have to be prepared for
Speaker 1: that term. Even China and Gia politically, we certainly have
Speaker 1: lots of conversations around this table about that. It's a
Speaker 1: different relationship with China going forward. Certainly between the United
Speaker 1: States and ship it seems that way. But we have
Speaker 1: a good you know, we're going to continue to deliver
Speaker 1: messages for multinationals wherever they need to get that multimodal
Speaker 1: communication out there. You know, it seems like a problem,
Speaker 1: but again, thirty forty years things change rather quickly. Two
Speaker 1: years from now, I think things could be very different
Speaker 1: than they are today. I'm an optimist, for sure, but
Speaker 1: I also plan. I'm an optimist. I cover emergent markets
Speaker 1: and I'm a I'm a New York Jet fan, so
Speaker 1: I'm a I'm an ever optimist, but I've managed by
Speaker 1: opics and I make sure I keep the headcount under
Speaker 1: continent political pressures between the US and China. And yet
Speaker 1: as a global company, you guys still have a lot
Speaker 1: of business in China or with China. We have a
Speaker 1: reasonable presence in China, but you can say that the course,
Speaker 1: even though there can be that disconnect between you never know.
Speaker 1: So you never know. But what we have to do
Speaker 1: is continue to grow, continue to deliver the value to
Speaker 1: our multinationals, the digital natives around the planet, and continue
Speaker 1: to create the differentiated product solutions that they need. Well,
Speaker 1: let's bring it back today. I mean, let's bring it
Speaker 1: back close at a home there. Let's talk about the
Speaker 1: reason the US banking system and SVB in particular. You know,
Speaker 1: I mean, are there any lasting damage that you see,
Speaker 1: maybe not to your company, but to your clients that
Speaker 1: this is going to leave them with? I mean, do
Speaker 1: you see do you potentially see some of these venture
Speaker 1: in early stage growth companies going under because of US? Well,
Speaker 1: I don't think Silicon The bank issue, particularly that one,
Speaker 1: is huge. I think what they have to do is
Speaker 1: contain it now, and I think they're working to make
Speaker 1: sure they do that. I think the bigger pressure is
Speaker 1: companies that were able to survive on a very marginal
Speaker 1: business model. Yeah, because money was so cheap. They need
Speaker 1: to create business models that are more cash flow positive
Speaker 1: and with less burn, and I think because of the
Speaker 1: market entreprenturnialists will adjust so orrige just ten seconds or
Speaker 1: does that mean because of some of the cracks you
Speaker 1: may be seeing with a smaller competitors, I think there's
Speaker 1: an acquisition move potentially as a result, real quickly. There's
Speaker 1: no question, there's absolutely you need to take advantu Yes,
Speaker 1: And there's always an opportunity. These market issues and volatility,
Speaker 1: they're opportunities. Find them. The market will change and it
Speaker 1: will return, and it will return fast and strong. Well,
Speaker 1: you were fun with us, and we were a little
Speaker 1: bit of a rapid fire, but we really appreciate it.
Speaker 1: Thank you so much. Rory Reid, Chief Executive Officer A vantage.
Speaker 1: Here in our Bloomberg Interactive Broker studio, you're listening to
Speaker 1: the Bloomberg Business Week Podcast. Catch us live weekday afternoons
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Speaker 1: jog down on Bloomberg Radio. All right, very good afternoon, everybody.
Speaker 1: You are listening and watching Bloomberg Business Week Karl Masser
Speaker 1: along with Damien's ass hour watching the markets making sense
Speaker 1: of the FED decision. And it's been an interesting trade,
Speaker 1: no doubt about it. Yeah, yeah, no, all right, all right,
Speaker 1: all right, I mean we are down across the curve.
Speaker 1: The two year is down below four percent again, I
Speaker 1: mean a twenty three basis point move on the two year,
Speaker 1: but it's also extending into the belly. I mean the
Speaker 1: five years down another twenty three BIPs. So yeah, you know,
Speaker 1: I mean we're seeing you know, we're seeing buying a bonds. Yeah,
Speaker 1: it's really interesting, right, and you look at the markets
Speaker 1: and I feel like the treasury trade telling you one thing.
Speaker 1: The equity trade, which rallied initially on that FED decision,
Speaker 1: has come on down and now we're below the levels
Speaker 1: and we're seeing losses across the board. So let's get
Speaker 1: to it with Aaron Kennon, co founder and chief executive
Speaker 1: at the registered investment advisory firm, Clear Harbor Asset Management.
Speaker 1: They've got over a billion in assets under management. Aaron
Speaker 1: back with us on the phone in Stanford, Connecticut. Actually,
Speaker 1: I think via zoom, Hey Aaron, good to have you here.
Speaker 1: Market reaction. What is it telling you in terms of
Speaker 1: what we've seen with stock reaction? And then the Treasury
Speaker 1: trade post fed decision. Well, I wouldn't call today a
Speaker 1: pivot earl, but certainly a pause, and I think a
Speaker 1: justified one. And I say a pause because yes, they
Speaker 1: went twenty five basis points, but if you look at
Speaker 1: the SEPs or their dot plot or predictions for future
Speaker 1: rate moves, they're essentially saying we're on hold here and
Speaker 1: we're going to monitor economic conditions. There's some natural tightening
Speaker 1: occurring in the market due to the banking crisis, due
Speaker 1: to prior policy prescriptives, ie higher rate heights, and this
Speaker 1: really is something that I think the market welcomed, and
Speaker 1: you could see that on the Treasury front. Certainly a
Speaker 1: devish posture. And yeah, I mean, as as Damien just indicated,
Speaker 1: rates have moved about eight to twenty odd basis points
Speaker 1: across the curve today, equities are under pressure, and that's
Speaker 1: because there's a real concern that we've passed sort of
Speaker 1: the peak growth cycle and the curve is still inverted.
Speaker 1: And when the curve is inverted ahead of in a
Speaker 1: cycle like the one we've been in, which is a
Speaker 1: tightening cycle, you tend to it tends to signal a recession.
Speaker 1: And and even though the curve is less inverted today,
Speaker 1: that's often the case just before a recession. And so
Speaker 1: I don't think that should be a positive signal that
Speaker 1: we're now at forty five basis points two is tends
Speaker 1: and not one hundred and ten was for just a
Speaker 1: couple of weeks ago. Right, Yeah, if we're not at
Speaker 1: the depths we once were, but you know, you mentioned
Speaker 1: this interest rate vall move and it's still pretty high.
Speaker 1: I'm wondering if you could focus. I mean, let's go
Speaker 1: back to your days at RBC and CIT group. Your
Speaker 1: day is treading ig credit. Talk to me about spreads.
Speaker 1: You know, what are you taking from the gap wider
Speaker 1: and spreads? And then you know the correction we're seeing
Speaker 1: right now. Yeah, Well, you know we've gone from you know,
Speaker 1: we're sort of past the peak inflationary period. Damion, and
Speaker 1: I also think we're past you know, peak tight spread
Speaker 1: levels and for the most part we're seeing spreads trend wider.
Speaker 1: Frankly been surprised with the move index as high as
Speaker 1: it has been for many years, and not really the
Speaker 1: levels since seeing since two thousand and eight two thousand
Speaker 1: and nine financial crisis, which I remember quite quite well.
Speaker 1: My view is as the probability of recession hits our shores,
Speaker 1: we will continue to see high yield spreads widen. An
Speaker 1: investment great spreads wide, but certainly not as much as
Speaker 1: the high yield sector. So can high yield s frends
Speaker 1: move back out to eight hundred bases points over? You
Speaker 1: bet they can. And I think I was going to
Speaker 1: just say sorry to cut you off, But to me,
Speaker 1: what that means is that, you know, when spreads widen
Speaker 1: like this, I mean it means that borrowers are reassessing
Speaker 1: the external funding environment. Right, So does that mean that
Speaker 1: as investors we should be pacing greater emphasis on you know, coverage,
Speaker 1: ratio's repayment risk and the like. Absolutely, you know, you
Speaker 1: look at the regional bank outflow of deposits and what
Speaker 1: does that really mean? That means lending standards are tightening.
Speaker 1: That means there's less credit availability. When that happens, it
Speaker 1: tends to be by about a delay of two or
Speaker 1: three quarters prelude to a recessionary period. Higher rates have
Speaker 1: huge consequences for public funding. But of course you just
Speaker 1: alluded to, you know, the commercial real estate market. We
Speaker 1: have almost a trillion dollars of commercial real estate debt
Speaker 1: coming due within the next twelve months. That needs to
Speaker 1: be you know, repriced, repriced wear at higher levels and
Speaker 1: higher spreads, wider spreads well, and I have to say
Speaker 1: that if you take a look towards the end of
Speaker 1: that press conference, j Pale specifically talked about financial conditions
Speaker 1: tighter than index is indicated, and talked about how many
Speaker 1: of the indexes that we all talk about are all
Speaker 1: about the equity trade and that he said, in terms
Speaker 1: of talking to banks and so on and so forth,
Speaker 1: you're seeing those tighter conditions. He also mentioned commercial real estate.
Speaker 1: Is that potentially Aaron, We all talk about it a
Speaker 1: lot here at Bloomberg, and I don't want to be
Speaker 1: kind of alarmist, if you will, but we are kind
Speaker 1: of wondering coming off the pandemic, you know, ultimately, with
Speaker 1: commercial real estate being used differently, vacant if you will,
Speaker 1: is that the next big shoe to drop in the
Speaker 1: financial community. What was interesting today during the Q and
Speaker 1: A Chairman Powell sort of put a rather rather rosy
Speaker 1: picture on commercial commercial real estate in the risk that
Speaker 1: it may pose to the economy. And I understand why
Speaker 1: he's the FED chair and cracks do not appear at
Speaker 1: least in the public domain yet. But we look at
Speaker 1: the vacancy rates. Of course, the most magnified issue is
Speaker 1: probably still in New York. But I think, um, you know,
Speaker 1: there's and not all commercial real estate is created equal.
Speaker 1: You have office, you have distribution segments, you have multi family,
Speaker 1: which still is reasonably strong. So you guys left New York, right,
Speaker 1: you left New York during the pandemic. Forget me, but
Speaker 1: go ahead, we did, um, and we're here in Connecticut
Speaker 1: and Fairfield County, and we still make our way in
Speaker 1: New York. We still have our many meetings in New York.
Speaker 1: But you know, certainly big fan of New York wanted
Speaker 1: to thrive. But certainly the current concern, as it should
Speaker 1: be for real estate exists in the marketplace due to
Speaker 1: higher rates wider spreads and tighter lending standards. Not to
Speaker 1: mention too, the consumer out there is experiencing tighter you know, spreads.
Speaker 1: You look at your credit card. If you pay it
Speaker 1: off every month, that's great, but if you look below
Speaker 1: where the amount is, it tells you you're probably going
Speaker 1: to be charged an APR rate of twenty percent. And
Speaker 1: the problem with that is the revolving lines of credit
Speaker 1: are increasing. People are more more leveraged at the household
Speaker 1: level over the last several quarters. And you look at
Speaker 1: the household savings rate and it has a two odd
Speaker 1: percent handle, which is below any sort of historic norm.
Speaker 1: So you know, we're certainly aligning for a period of uncertainty.
Speaker 1: And I think the FED was very justified in signaling
Speaker 1: verbally and in their written statement, and that was a
Speaker 1: nice thing to see too, the written statement and the
Speaker 1: Q and A was a little more consistent this time. Totally. Yeah, No,
Speaker 1: I mean, Aaron, I aged up one really question. You
Speaker 1: mentioned that one trillion dollars of the commercial real estate
Speaker 1: loan that are supposed to be maturing between now and
Speaker 1: the end of next year. That seems to be a
Speaker 1: huge maturity wall. I mean, what are your thoughts on
Speaker 1: cap rates. I mean, what are your thought if you
Speaker 1: know banks can't extend and there's no equity cushion available.
Speaker 1: I mean sponsors that own the property, you're going to
Speaker 1: have to come up that with that additional equity. No,
Speaker 1: I mean are they capable of doing that? Well, we'll
Speaker 1: have to see, Damian. I think that is the Yeah,
Speaker 1: the short the short answer um cap rates certainly our problem.
Speaker 1: But you're gonna have adjustments in price, and so the
Speaker 1: question is by by how much? And you know, I
Speaker 1: think the leverage ratio is a big question, you know,
Speaker 1: loaned to value on a refinance. Yes, Aaron, sorry, I
Speaker 1: mean we have a million questions for you were venting
Speaker 1: at a time, so twenty seconds left here, So how
Speaker 1: what are you doing differently with your investors portfolio right now?
Speaker 1: Just quickly? Well, you know it in a stormy period,
Speaker 1: we hope and we do ensure that our clients asset
Speaker 1: allocations are not just reflective of their risk tolerants, stirring
Speaker 1: the rosiest periods of the ecout, but also during these
Speaker 1: these more uncertain moments. So the half sufficient liquidity are
Speaker 1: we positioning them for that and for the long term
Speaker 1: needs that they have, so I'm gratified that we try
Speaker 1: to do that work beforehand. We don't always get it
Speaker 1: perfectly right, but we've done it. We've done it quite
Speaker 1: well here and really proud of the team. Aaron Kennon
Speaker 1: a Clear Harbor Asset Management. Thank you so much. This
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