WEBVTT - Surveillance: JPM's Michele on the Fed 0:00:05.160 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.440 the Bloomberg Terminal and the Bloomberg Business App. By Michael 0:00:30.520 --> 0:00:34.400 joins us right now. He is with JP Morgan Asset Management, 0:00:34.440 --> 0:00:38.200 Global Head of well Equities, bonds, Currencies, Commodities. I don't 0:00:38.200 --> 0:00:39.320 know everything else. 0:00:39.640 --> 0:00:40.560 Let's stick with bonds. 0:00:40.600 --> 0:00:41.279 Let's stay with. 0:00:41.280 --> 0:00:46.440 Bonds for right now. Do you buy across the curve 0:00:46.640 --> 0:00:51.120 right now? Because simplistically it is going to be price up, 0:00:51.400 --> 0:00:51.960 yield down. 0:00:52.600 --> 0:00:56.160 So the product launch of the year isn't chat GPT, 0:00:56.560 --> 0:01:00.880 it's the bond market. It's the repricing of bond just 0:01:00.960 --> 0:01:04.520 across the system. And we are seeing money come in. 0:01:04.720 --> 0:01:07.880 And even though there's a soft landing cap, there's concerns 0:01:07.920 --> 0:01:11.600 about inflation, there's concerns that the Fed could keep rising 0:01:11.720 --> 0:01:17.600 rates indefinitely. Actually, the highs from October almost a year ago, 0:01:17.959 --> 0:01:20.679 have held pretty well in the long end of the 0:01:20.760 --> 0:01:24.200 curve five tens and thirties. So it's not just me 0:01:24.280 --> 0:01:27.320 saying take advantage of the repricing of the bond market. 0:01:27.560 --> 0:01:31.680 We have clients left, right and centered, domestically, foreign countries, 0:01:32.120 --> 0:01:36.679 retail platforms, institutional platforms looking at where to get into 0:01:36.680 --> 0:01:38.720 this bond market, and they are putting money to work. 0:01:38.720 --> 0:01:41.440 Are they chasing income, they chase in total return, worried 0:01:41.440 --> 0:01:43.640 about a slow down, taken on duration. How does the 0:01:43.720 --> 0:01:46.279 nature of that money shift in the last few months, Yes, 0:01:47.040 --> 0:01:48.320 exactly already above. 0:01:48.640 --> 0:01:51.760 They're doing all of those things, and it depends where 0:01:51.800 --> 0:01:57.120 they're coming from. Wealth management platforms are looking at municipal bonds, 0:01:57.160 --> 0:01:59.840 they're looking at corporate debt, they're looking at treasury debt, 0:02:00.080 --> 0:02:03.640 and they're putting ladders of maturities in place. So they're 0:02:03.640 --> 0:02:07.000 buying bonds out to ten years with maturities every six 0:02:07.080 --> 0:02:09.639 to nine months, something like that. So they just want 0:02:09.680 --> 0:02:14.560 to get into the bond market before these yields disappear. Institutions, 0:02:14.639 --> 0:02:19.079 whether they're insurance companies or their pension funds, they're looking 0:02:19.080 --> 0:02:22.440 at their liabilities having deflated, and they're looking to put 0:02:22.480 --> 0:02:24.760 money into the long end of the market, and you 0:02:24.840 --> 0:02:27.400 have a whole host of others that are looking for 0:02:27.480 --> 0:02:30.520 total returns, so you can do pretty much everything in 0:02:30.520 --> 0:02:33.079 the bond market. We haven't seen this since two thousand 0:02:33.120 --> 0:02:34.280 and six, two thousand and seven. 0:02:34.360 --> 0:02:36.200 There's only one sentence I heard in all of that 0:02:36.440 --> 0:02:39.560 before these yields disappear. These yields aren't disappearing. They've been 0:02:39.600 --> 0:02:42.440 quite stubbornly high through some and that's been unexpected for you. 0:02:42.520 --> 0:02:44.480 I know, Bob, relative to your call, what do you 0:02:44.480 --> 0:02:45.200 think is behind that? 0:02:46.000 --> 0:02:48.240 Well? I think there are a couple of things. This 0:02:48.800 --> 0:02:52.240 reminds me a lot of the second half of twenty 0:02:52.280 --> 0:02:56.440 twenty one, when yields were ridiculously low. The Fed was 0:02:56.480 --> 0:03:01.280 talking about transitory, the market bought it. We're looking at 0:03:01.280 --> 0:03:04.800 inflation going up and saying if they leave rates where 0:03:04.840 --> 0:03:08.600 they are, inflation's going to continue to accelerate. Now we're 0:03:08.639 --> 0:03:11.720 looking at rates very high, we're looking at very high 0:03:11.800 --> 0:03:15.640 real yields, We're looking at inflation coming down a lot, 0:03:15.880 --> 0:03:19.240 and the Fed is talking about leaving rates where they 0:03:19.280 --> 0:03:23.359 are indefinitely higher for longer. I want to see the 0:03:23.400 --> 0:03:28.280 summary of economic projections. Tom is it tomorrow? Next Wednesday, 0:03:28.320 --> 0:03:32.360 next Wednesday. Yeah, and the infamous dot plot. They've got 0:03:32.440 --> 0:03:35.360 one hundred basis points of rate cuts priced in for 0:03:35.440 --> 0:03:39.760 next year from the last dot plot, and they've also 0:03:39.840 --> 0:03:43.720 got inflation coming down, So they're acknowledging that if they 0:03:43.800 --> 0:03:47.040 key rates where they are and inflation comes down, then 0:03:47.120 --> 0:03:51.440 policy rates become progressively tighter and the economy may not 0:03:51.560 --> 0:03:54.320 be able to withstand that. I think what's keeping rates 0:03:54.320 --> 0:03:57.120 where they are is the market is believing the FED 0:03:57.200 --> 0:03:59.960 rhetoric and not believing that they may have to cut rate. 0:04:00.240 --> 0:04:02.040 Your previous call of the start of summer was cut 0:04:02.120 --> 0:04:05.320 by September. Clearly they won't be cutting a week tomorrow. 0:04:05.600 --> 0:04:07.960 I want to understand from your perspective, what's going to 0:04:07.960 --> 0:04:10.200 deliver those cuts. And when you're thinking about yields we 0:04:10.240 --> 0:04:13.240 haven't seen since six oh seven. Some people might be 0:04:13.280 --> 0:04:16.040 listening this morning thinking, well, bad things happened after that, 0:04:16.440 --> 0:04:18.599 the bad things happen now. And of course I'm not 0:04:18.640 --> 0:04:20.880 saying on the same scale to the same magnitude of 0:04:20.880 --> 0:04:23.240 what we saw in our way, but are you anticipating 0:04:23.320 --> 0:04:23.880 bad things? 0:04:24.360 --> 0:04:27.880 So at the start of this year we thought something 0:04:28.040 --> 0:04:30.760 like recession by the end of the year. Then we 0:04:30.839 --> 0:04:34.560 had the regional banking crisis, and we thought, well, that's 0:04:34.560 --> 0:04:37.960 going to bring recession forward a few months, so they 0:04:38.000 --> 0:04:41.480 should be cutting by September. And I think what we 0:04:41.960 --> 0:04:46.240 looked at and probably got wrong was the backstop that 0:04:46.520 --> 0:04:49.200 the central banks the FED put in place, the Bank 0:04:49.279 --> 0:04:52.599 Term Funding Program. And we likened it more to bear 0:04:52.680 --> 0:04:55.680 Stearn's ballot. It probably was more like TARP. It just 0:04:55.800 --> 0:05:00.440 created more liquidity, backstopped the entire banking system. These things 0:05:00.480 --> 0:05:04.080 are still hiding in plain sight. The regional banking crisis 0:05:04.320 --> 0:05:06.960 hasn't gone away. I wish you had asked Bill Dudley 0:05:06.960 --> 0:05:09.599 when he was patting himself on the back and the 0:05:09.640 --> 0:05:11.480 FED about no, no, this is all in the rear 0:05:11.560 --> 0:05:15.000 view mirror. Really look at the Bank Term Funding program. 0:05:15.040 --> 0:05:20.160 It's quietly increased in size nine consecutive the last nine 0:05:20.200 --> 0:05:23.600 consecutive weeks. It's at one hundred and eight billion. So 0:05:23.720 --> 0:05:26.920 the regional banks are not working down. They're borrowing and 0:05:26.960 --> 0:05:29.520 that's coming in at five and a half percent. That's 0:05:29.680 --> 0:05:34.280 telling us that they still need cash available to meet 0:05:34.320 --> 0:05:37.200 depositor outflows. So I think there are plenty of things 0:05:37.240 --> 0:05:40.520 out there that are slowing down growth and inflationary pressures 0:05:40.520 --> 0:05:44.040 are coming down for the FED to pause. We've said 0:05:44.040 --> 0:05:47.839 for a long time, you need disinflation and inflation to 0:05:47.880 --> 0:05:51.640 come down to levels they're comfortable with. I think tomorrow 0:05:52.320 --> 0:05:55.839 we're going to get the third consecutive core CPI print 0:05:55.920 --> 0:05:59.000 at point two. That's enough for them to pause. With 0:05:59.120 --> 0:06:02.039 a lot of the other disinflation that we're seeing. I 0:06:02.080 --> 0:06:04.560 think this time for them to cut rates, they're going 0:06:04.600 --> 0:06:09.240 to have to see unemployment go up. So it's possible 0:06:09.360 --> 0:06:13.400 that they may actually tip the economy into recession first 0:06:13.680 --> 0:06:16.320 before they start cutting rates, which would be something new 0:06:16.360 --> 0:06:19.279 for them. It would be positively ECB. 0:06:19.120 --> 0:06:22.520 Like okay, But going forward, then, how does this cohere 0:06:22.520 --> 0:06:25.680 with a three percent yield curve across the board, a 0:06:25.720 --> 0:06:28.720 flat yield curve in the near future by the end 0:06:28.760 --> 0:06:31.760 of this year or even by midyear next year. If 0:06:31.760 --> 0:06:34.440 you have a FED that's being patient, not willing to cut, 0:06:34.560 --> 0:06:37.159 and you have economic data that's coming in hotter than. 0:06:37.040 --> 0:06:41.560 Expected, well, this is the FED that promised us transitory 0:06:41.640 --> 0:06:44.240 and then within a couple months change their mind and 0:06:44.279 --> 0:06:47.159 start hiking rates. We think we're going to see the 0:06:47.200 --> 0:06:50.240 same thing this time. They're going to tell us that 0:06:50.800 --> 0:06:53.560 they're going to keep rates higher for longer until inflation 0:06:54.120 --> 0:06:57.880 is at their target. But the magnitude of the slowdown 0:06:57.920 --> 0:07:01.279 we're seeing across the board tells us that will probably 0:07:01.360 --> 0:07:05.400 still be hitting recession around year end, so they'll be 0:07:05.400 --> 0:07:09.440 cutting rates by then. So I'm still incredibly comfortable that 0:07:09.480 --> 0:07:11.560 we'll see three percent across the curve. 0:07:11.680 --> 0:07:14.200 You think Hyphalonger is just a bad call, or do 0:07:14.200 --> 0:07:15.960 you think they're just misleading us that that's what they 0:07:16.000 --> 0:07:17.480 want to signal currently. 0:07:18.120 --> 0:07:21.880 I think it's what they have to signal because they 0:07:21.880 --> 0:07:25.080 were already wrong once on inflation with the promise of 0:07:25.120 --> 0:07:29.680 transitory they can't be wrong again. They're telling us that 0:07:29.680 --> 0:07:35.080 they're prioritizing inflation overgrowth, and that means, like the ECB, 0:07:35.280 --> 0:07:38.040 you're willing to make the economy a casualty. 0:07:38.200 --> 0:07:40.280 I guess what I'm getting at is do you believe them? 0:07:40.600 --> 0:07:41.440 Do I believe Do you. 0:07:41.440 --> 0:07:45.080 Believe they're prioritizing inflation overgrowth or it's a sign of weakness? 0:07:45.080 --> 0:07:45.960 Do you think the back away? 0:07:46.400 --> 0:07:50.760 Well? I think the consumer is incredibly stretched right now. 0:07:51.200 --> 0:07:54.120 When you look at at the Beige book, you're seeing 0:07:54.160 --> 0:07:57.440 signs of that all over the place. They're talking about 0:07:58.120 --> 0:08:01.040 the last bit of pent up spending on leisure travel. 0:08:01.400 --> 0:08:04.840 They're talking about consumers that are trying to maintain their 0:08:04.920 --> 0:08:07.760 level of spending since their excess savings have run out 0:08:07.960 --> 0:08:11.760 by putting stuff on borrowing, which is a very high 0:08:11.760 --> 0:08:14.720 way to finance yourself. So things are going to slow 0:08:14.760 --> 0:08:18.160 down pretty quickly. We look at news coming out of 0:08:18.280 --> 0:08:23.480 Truest where they're starting to address cost pressures by laying 0:08:23.560 --> 0:08:27.640 people off. So the labor market doesn't look as robust 0:08:27.720 --> 0:08:31.800 as that mid threes unemployment rate. We think that starts 0:08:31.840 --> 0:08:34.560 to go up and it will force the Fed's hand. 0:08:34.720 --> 0:08:38.160 Boy, Michael, JP Morgan, asset management, what I was thinking about, 0:08:38.320 --> 0:08:41.200 and this goes back to you. The acclaimed toughest resume, 0:08:41.400 --> 0:08:45.439 toughest admit in banking, the analyst program of JP Morgan 0:08:46.200 --> 0:08:50.160 is the real yield we're at right now. Began within 0:08:50.200 --> 0:08:52.160 the data that we have in the modern age in 0:08:52.200 --> 0:08:56.760 two thousand and three, and that a huge body of 0:08:56.800 --> 0:09:01.640 our audience has never lived this ray structure and all 0:09:01.679 --> 0:09:04.719 of the follow on to it. What's your council? Does 0:09:04.760 --> 0:09:07.600 someone say, under thirty seven, thirty six, thirty eight years 0:09:07.640 --> 0:09:10.880 old of how to address a whole new world? After all? 0:09:11.559 --> 0:09:14.800 Well, I think you have to understand that markets go 0:09:14.880 --> 0:09:18.480 through cycles. The cycles can be very long. Probably the 0:09:18.559 --> 0:09:22.839 last fifteen twenty years weren't normal. They were the distorted years. 0:09:22.880 --> 0:09:26.000 They were the years that the baby boomers wrecked by 0:09:26.080 --> 0:09:30.000 overleveraging the property market, crashing it and then taking a 0:09:30.080 --> 0:09:33.400 decade to repair. We think we're going back to an 0:09:33.520 --> 0:09:37.240 environment that is more normal, where there is a demand 0:09:37.280 --> 0:09:40.400 for capital, there's a use for capital, it's productive, and 0:09:40.440 --> 0:09:43.400 there will be a cost for capital again, but you 0:09:43.440 --> 0:09:45.600 don't get there all at once. I think a five 0:09:45.720 --> 0:09:48.640 hundred and twenty five basis point rate hike is a 0:09:48.679 --> 0:09:51.400 shock to the system. It will slow things down. We 0:09:51.440 --> 0:09:53.920 think the next move coming out of the Fed will 0:09:53.960 --> 0:09:56.240 be to cut rates. We think you go back to 0:09:56.240 --> 0:09:58.400 two and a half to three percent. Yeah, the next 0:09:58.440 --> 0:10:01.000 tightening cycle, maybe they have to go to six percent 0:10:01.360 --> 0:10:04.640 and you start putting in place the mirror image of 0:10:04.760 --> 0:10:08.480 what we saw in the late eighties and the nineties 0:10:08.520 --> 0:10:12.240 with falling rates. You mean now see rising rates, So 0:10:12.679 --> 0:10:15.080 we have to get them used to. Inflation can be 0:10:15.200 --> 0:10:18.280 real and markets have to price that in, and central 0:10:18.320 --> 0:10:20.360 banks don't always value out. 0:10:20.520 --> 0:10:22.840 There's a lack of clarity in terms of how central 0:10:22.840 --> 0:10:25.840 banks really understand inflation. They say they look at core 0:10:26.240 --> 0:10:28.720 and then headline starts to move sentiment, and then they 0:10:28.720 --> 0:10:31.280 start going after that, how much to higher oil prices? 0:10:31.280 --> 0:10:35.000 Materially higher oil prices play into the risk that the 0:10:35.000 --> 0:10:36.600 FED remains higher for longer. 0:10:37.840 --> 0:10:40.720 There used to be a wonderful chart everyone would dust 0:10:40.760 --> 0:10:44.360 off every time oil prices went up that oil shocks 0:10:44.400 --> 0:10:48.480 create recessions, and it had. It was another one of 0:10:48.520 --> 0:10:53.360 these one hundred percent perfect predictors. And we're getting another 0:10:53.520 --> 0:10:57.880 oil shock at exactly the wrong time, after credit conditions 0:10:57.920 --> 0:11:01.760 have tightened dramatically, after the cost of funding businesses and 0:11:01.880 --> 0:11:05.560 households has gone up a multiple. We're talking about business 0:11:05.559 --> 0:11:08.920 and households having to spend on energy at a time 0:11:09.320 --> 0:11:12.120 when their real incomes are much lower, so they're going 0:11:12.160 --> 0:11:14.920 to have to cut back somewhere else. I think it 0:11:15.040 --> 0:11:18.600 actually is another one of these things that's a warning 0:11:18.679 --> 0:11:21.800 that recession may need more present than the market things. 0:11:21.960 --> 0:11:24.200 When does it count as an oil shock because we 0:11:24.240 --> 0:11:26.880 are seeing prices normalized, They're not necessarily going to the 0:11:26.960 --> 0:11:29.880 highest that we've seen of this particular cycle, but they 0:11:29.880 --> 0:11:32.480 are the highest going back to last year. What's your 0:11:32.520 --> 0:11:35.959 tipping point for when it is prohibitive of growth. 0:11:36.559 --> 0:11:40.480 Well, you have to look at the cost of production 0:11:41.080 --> 0:11:43.440 and the cost of getting a barrel out of the ground. 0:11:43.840 --> 0:11:46.760 And where we are now, and what we're seeing is 0:11:46.800 --> 0:11:51.040 that Opek is telling us maybe demand isn't quite there, 0:11:51.320 --> 0:11:55.079 but they're not willing to live with much lower oil prices. 0:11:55.240 --> 0:11:59.800 They want the volume to replace the demand. It's not there, 0:12:00.040 --> 0:12:02.160 they're going to make it back with pricing, and they're 0:12:02.200 --> 0:12:05.079 going to push prices up. We'll see how high it goes. 0:12:05.440 --> 0:12:09.040 But for me, it's another sort of yellow warning flag 0:12:09.080 --> 0:12:11.839 out there. I don't think it helps the economy at all. 0:12:12.120 --> 0:12:16.280 I think it's another thing that squeezes an already stretched 0:12:16.440 --> 0:12:17.800 consumer bracket. 0:12:17.800 --> 0:12:20.800 The inflation adjusted yield right now, at what level up 0:12:20.840 --> 0:12:23.440 above two percent, does it really begin to impinge on 0:12:23.480 --> 0:12:25.480 the system. 0:12:26.520 --> 0:12:31.400 I think, coming off of several years of infinite free money, 0:12:31.760 --> 0:12:36.000 we're seeing it bite right now. We're seeing it in 0:12:36.040 --> 0:12:40.000 the housing market, We're seeing it in the cost of 0:12:40.080 --> 0:12:44.559 funding credit card purchases. You look at businesses, they front 0:12:44.640 --> 0:12:47.439 end loaded a lot of they're borrowing, but now they're 0:12:47.480 --> 0:12:52.000 going back and they're addressing other cost pressures and they're 0:12:52.040 --> 0:12:55.000 not doing it by just borrowing more and absorbing the 0:12:55.040 --> 0:12:58.480 cost pressures. They're actually starting to cut costs, So I 0:12:58.520 --> 0:13:00.880 think it is now starting to buy. I don't think 0:13:01.360 --> 0:13:04.760 long and variable lags to monetary policy. That law has 0:13:04.840 --> 0:13:08.920 been repealed. I think it still takes time and we're 0:13:08.960 --> 0:13:11.320 still in the early stages of it. I think the 0:13:11.360 --> 0:13:13.160 next twelve months are going to be pretty painful. 0:13:13.240 --> 0:13:14.880 What would you have to say to make you change 0:13:14.880 --> 0:13:15.240 your view. 0:13:16.840 --> 0:13:21.680 I'd have to see a legitimate reacceleration of core inflation, 0:13:22.280 --> 0:13:25.520 and that would tell me that we're in a different regime. 0:13:25.600 --> 0:13:29.400 Maybe the X y Z generation is large enough, they're 0:13:29.400 --> 0:13:33.679 earning enough, they're spending enough that it is driving an 0:13:33.679 --> 0:13:37.199 economy that is going to a new high and central 0:13:37.200 --> 0:13:40.319 banks do have to come in and really dial down 0:13:40.760 --> 0:13:44.240 the desire of the consumer to spend. But right now 0:13:44.360 --> 0:13:45.400 we're not seeing that. 0:13:45.480 --> 0:13:47.880 Are you googling the X y Z generation? Is that 0:13:47.920 --> 0:13:48.600 what you just did? 0:13:49.280 --> 0:13:49.480 Yeah? 0:13:50.000 --> 0:13:50.800 What do you have to say? 0:13:51.080 --> 0:13:53.680 What is the X y Z generation? I've never heard of. 0:13:53.679 --> 0:13:54.760 It, x y Z. 0:13:55.200 --> 0:13:59.200 It's the X the Y one and the Z one. 0:13:58.440 --> 0:14:01.960 Yeah gen x ok, all like combined together. 0:14:02.760 --> 0:14:06.320 Yeah, so think the ninety one verse, the ninety one. 0:14:06.440 --> 0:14:09.960 Verse are now the largest population cohort and they're thirty 0:14:09.960 --> 0:14:12.960 two years old. So that's the one. And if we 0:14:13.040 --> 0:14:16.160 go back to the financial crisis, they were seventeen years 0:14:16.160 --> 0:14:18.520 old and we wondered, how would we get through this 0:14:18.679 --> 0:14:22.360 before they replaced the baby boomer as the dominant consumer. 0:14:22.680 --> 0:14:24.680 Now we're there. That's where we could be wrong. I 0:14:24.720 --> 0:14:25.680 don't think so either. 0:14:25.760 --> 0:14:28.280 The crew that you know after the secondary M album, 0:14:28.320 --> 0:14:29.280 they were never the same. 0:14:30.120 --> 0:14:32.680 Thanks Tom, Thank you, my pleasure. 0:14:32.760 --> 0:14:47.040 Jpmulkin joining us now Doctor Dudley, He writes her Bloomberg opinion, 0:14:47.080 --> 0:14:48.680 of course all of his work at the New York 0:14:48.720 --> 0:14:53.280 Fed in Definitive Market Economics with Bill mccav ed mckelvy 0:14:53.360 --> 0:14:56.000 years ago at Golden Sachs. Bill Dudley, thank you for 0:14:56.080 --> 0:15:01.640 this important essay on the calculus of diminishing turns. How 0:15:01.680 --> 0:15:06.120 efficacious is a lift in capital requirements of our big 0:15:06.160 --> 0:15:07.080 fancy banks. 0:15:08.440 --> 0:15:10.360 I think the question is what problem are you trying 0:15:10.400 --> 0:15:12.040 to solve. Is the problem that we saw in the. 0:15:12.080 --> 0:15:15.480 Spring lack of capital among the big money center banks, 0:15:15.840 --> 0:15:18.640 or is it a problem with supervision, problem with bad accounting, 0:15:18.960 --> 0:15:20.600 problem with bank management. 0:15:21.200 --> 0:15:23.080 I think the problem is not that the big banks 0:15:23.080 --> 0:15:23.880 in enough capital. 0:15:23.960 --> 0:15:28.120 If you remember, money was running towards the big banks 0:15:28.520 --> 0:15:31.120 during the turmoment, we saw and marked not away from 0:15:31.120 --> 0:15:31.760 the big banks. 0:15:31.960 --> 0:15:33.640 None of the bank none of the big banks got 0:15:33.680 --> 0:15:36.080 into any any great difficulty in the United States. 0:15:36.200 --> 0:15:38.640 The problem with raising capital requirements over and over again 0:15:38.720 --> 0:15:41.880 is you're making us banks less competitive, and that's going 0:15:41.920 --> 0:15:45.200 to push activity out into the unregulated non banking sector. 0:15:46.000 --> 0:15:48.480 That the question that that that createses that are you actually. 0:15:48.280 --> 0:15:51.000 Making the financial system safer where you actually make it 0:15:51.200 --> 0:15:52.000 more unstable? 0:15:52.640 --> 0:15:58.760 Should we raise the capital requirements of entrepreneurial upstart banks 0:15:59.400 --> 0:16:02.640 with a rategic gimmick to build growth. 0:16:03.840 --> 0:16:06.240 Well, I think we certainly want to be very close 0:16:06.880 --> 0:16:10.440 close attention to those banks that are using novel business models. 0:16:10.600 --> 0:16:13.600 And I think, as the FIT self admitted that we 0:16:13.640 --> 0:16:16.760 need better supervision. The problems that Silicon Value Bank were 0:16:16.840 --> 0:16:20.760 identified in a relatively timely way, but then the supervisors 0:16:20.760 --> 0:16:23.920 didn't force the banks to make the changes necessary to 0:16:23.960 --> 0:16:28.640 prevent its demise. So I think that better supervision, more 0:16:28.640 --> 0:16:34.480 diverse stress testing, better rules on interest rate risk taking 0:16:35.000 --> 0:16:35.840 could go a. 0:16:35.760 --> 0:16:37.520 Long way to avoid these kind of problems. 0:16:37.520 --> 0:16:39.880 I'm not sure raising the captal requirements of the biggest 0:16:39.880 --> 0:16:41.800 money center banks by fifteen to twenty percent. 0:16:41.840 --> 0:16:42.680 It's the answer here. 0:16:42.880 --> 0:16:43.080 Bill. 0:16:43.160 --> 0:16:46.000 You talk about in your column the importance to recognize 0:16:46.040 --> 0:16:49.600 non banking institutions as competitors and that you really just 0:16:49.760 --> 0:16:53.520 increase their share by restricting the lending capacity of big banks. 0:16:54.000 --> 0:16:59.160 Should regulators be basically going down to lowest common denominator 0:16:59.200 --> 0:17:01.720 of less regulator non banks, or should they put more 0:17:01.760 --> 0:17:05.400 of an eye toward non banks and regulate more closely 0:17:05.440 --> 0:17:06.480 some of those activities. 0:17:07.440 --> 0:17:09.560 I think they should be focusing on what's the best 0:17:09.560 --> 0:17:14.120 solution for the resiliency of the overall financial system banks 0:17:14.160 --> 0:17:15.000 and non banks. 0:17:15.359 --> 0:17:18.320 Obviously, if you increase requirements a lot on banks, you're 0:17:18.320 --> 0:17:20.840 just going to have a bigger non bank regime. 0:17:21.160 --> 0:17:22.879 And the question is does that make it safer or 0:17:22.880 --> 0:17:24.160 does that make it more vulnerable? 0:17:24.359 --> 0:17:26.800 So I think there needs to be balanced here. Also, 0:17:26.840 --> 0:17:30.240 I think that the real question here is what was 0:17:30.240 --> 0:17:31.280 the problem and what's. 0:17:31.160 --> 0:17:32.760 The right solution to solve the soot. 0:17:33.080 --> 0:17:35.920 It's not clear that raising capital requirements on large money 0:17:36.000 --> 0:17:38.840 center banks solves the problems that we saw in March 0:17:39.200 --> 0:17:39.560 this year. 0:17:39.880 --> 0:17:42.520 Can we say that the banking crisis is over to 0:17:42.520 --> 0:17:44.760 the extent that it ever happened, and that going forward 0:17:44.800 --> 0:17:46.959 this is not going to be some sort of bigger 0:17:47.000 --> 0:17:51.280 financial risk that could torpedo the Goldilock scenario, at least 0:17:51.480 --> 0:17:52.000 for the moment. 0:17:53.160 --> 0:17:55.560 You never know, but I think that so far the 0:17:55.800 --> 0:17:58.320 knock going to affect what happened in March are pretty modest. 0:17:58.760 --> 0:18:01.720 I think that's because was concentrated in a few banks. 0:18:02.080 --> 0:18:04.800 It was all happening in plain sight. People knew exactly 0:18:04.840 --> 0:18:07.520 why these banks were getting the difficulty. They could see 0:18:07.520 --> 0:18:10.160 their interest rate risk disclosure, they could see what's happening 0:18:10.240 --> 0:18:13.600 to their capital on a mark to market basis. So 0:18:13.640 --> 0:18:16.200 this is not like the Great Financial Crisis, where everything 0:18:16.320 --> 0:18:17.400 was happening in the shadows. 0:18:17.960 --> 0:18:20.240 People lost confidence in their counterparties. 0:18:20.480 --> 0:18:22.760 So I think, so far, at least, it looks like 0:18:22.840 --> 0:18:25.520 this is a pretty modest knock on effect to the 0:18:25.560 --> 0:18:26.280 new economy. 0:18:26.640 --> 0:18:28.399 So if that's not If that's the case and that 0:18:28.520 --> 0:18:32.040 isn't necessarily a headwind going forward, do you lean into 0:18:32.080 --> 0:18:35.280 this idea that maybe the FED should be done and 0:18:35.280 --> 0:18:37.679 that we are looking at a scenario where they have 0:18:38.040 --> 0:18:40.480 the opportunity to just wait and take a look at 0:18:40.520 --> 0:18:42.879 the data on a longer and longer term basis to 0:18:42.920 --> 0:18:43.840 make any decisions. 0:18:45.520 --> 0:18:48.680 I have no quarrel with the FED waiting to get 0:18:48.680 --> 0:18:49.440 more information. 0:18:49.560 --> 0:18:53.040 I mean, you know, they're pretty confident that Madre policies 0:18:53.040 --> 0:18:55.760 at a restrictive level. If that's the case, it should 0:18:55.760 --> 0:18:58.119 slow the ecomy down. As the economy slows. 0:18:58.160 --> 0:18:59.840 We should have more slack than the way market and 0:19:00.160 --> 0:19:02.080 just puts take away some of the upper pressure on 0:19:02.160 --> 0:19:04.600 wages and bring inflation down. I think the key question 0:19:04.680 --> 0:19:07.960 is how restrictive is manitre Falsy today. It's possible that 0:19:08.040 --> 0:19:10.760 mandre Palsy is not quite as restrictive as the FED thanks, 0:19:10.960 --> 0:19:12.919 and if they find that out over time, then they 0:19:12.920 --> 0:19:15.919 can obviously do more or keep rates higher for longer. 0:19:16.400 --> 0:19:18.840 Bill, I want to finish there. You wrote about this 0:19:19.160 --> 0:19:21.320 earlier in the summer. I don't think it was picked 0:19:21.400 --> 0:19:24.040 up on nearly enough. I've been talking about as much 0:19:24.040 --> 0:19:26.360 as I can. This quote from your column. The redd 0:19:26.400 --> 0:19:27.920 as follows, and I had the quote ready for you. 0:19:28.000 --> 0:19:28.240 Bill. 0:19:28.560 --> 0:19:32.040 There's considerable evidence that lacks have shortened, meaning that the 0:19:32.040 --> 0:19:35.199 economy has already found nearly all of the impact of 0:19:35.240 --> 0:19:38.280 the Fed's actions. Bill, talk to me about that evidence. 0:19:38.320 --> 0:19:39.880 Where do you see that evidence currently? 0:19:41.359 --> 0:19:44.120 I think the most obvious piece of evidence is what's 0:19:44.160 --> 0:19:46.320 happening in the housing sector. The housing sector, you know, 0:19:46.359 --> 0:19:48.680 obviously was hurt a lot by the backup and mortage 0:19:48.720 --> 0:19:52.399 rage from three percent to seven percent, but recently the 0:19:52.480 --> 0:19:55.440 housing market looks like it's bombed out and it isn't 0:19:55.560 --> 0:19:56.320 having any. 0:19:56.119 --> 0:19:58.719 Further weakness because of the rights and rates. 0:19:58.880 --> 0:20:01.080 Another thing is important to know here is Madre Bozi 0:20:01.160 --> 0:20:04.200 works faster than he used to because the FED uses 0:20:04.240 --> 0:20:07.200 for guidance seek guide the market not where it is today, 0:20:07.240 --> 0:20:09.840 but where it's headed. So financial conditions, most of the 0:20:09.840 --> 0:20:11.080 technique and financial conditions that. 0:20:11.119 --> 0:20:13.200 We've seen over the last couple years happened last year, 0:20:13.320 --> 0:20:13.960 not this year. 0:20:14.280 --> 0:20:16.280 I remember Bill, a conference that you and I did 0:20:16.320 --> 0:20:19.000 together together with Muhammad al Aaron in the summer of 0:20:19.040 --> 0:20:21.600 twenty twenty one. I think it was early summer, around 0:20:21.720 --> 0:20:24.160 June time, and you were both talking about how inflation 0:20:24.280 --> 0:20:26.359 may well be sticky than people think. And I remember 0:20:26.400 --> 0:20:29.280 you Bill, throughout the number the maybe rates have to 0:20:29.280 --> 0:20:32.480 go to five percent. Five percent back then sounded absurd 0:20:32.760 --> 0:20:35.880 with through five, with three five, and we've gone right 0:20:35.880 --> 0:20:38.000 the way through five. Bill, what are you thinking about 0:20:38.000 --> 0:20:41.560 now best case on way you think sufficiently restrictive might be. 0:20:43.400 --> 0:20:46.080 I think that it's more likely that they hold rates 0:20:46.119 --> 0:20:47.679 here or maybe one more rate. 0:20:47.800 --> 0:20:50.440