Big Banks Hold Clues To Recession Question

some of the largest US banks earlier this morning? JP Morgan, Chase City, Wells Fargo. We also heard from PNC Financial, which fell to its lowest level intraday since November of twenty twenty. But JPM and City, they are your top performers in the S and P five hundred. All right, so let's get to it. Let's get some more deeper thought on the group and the reporting season so far.

Bloomberg News Wall Street reporter Shanali Bassak here in our studio along with Josh Rosner, managing director at the independent research consultancy firm, Graham Fisher, co author of the New York Times bestseller Reckless Endangerment, How outsized ambition, greed and corruption led to economic armageddon, as you know, a trusted voice that we really leaned on during the Great Financial Crisis. Hey guys, but the great to have you here. We've

got a couple of blocks to dig into it. So welcome, welcome, should onlie, I want to kick it off with you. So far, so good for the three banks, or walk us through some of the highlights and what you think

our audience needs to know. Well, a few things. One, coming into this period, we had the investment banks doing better in terms of trading than you had the regional banking system and even the consumer banks, even the largest ones, if you could believe, a Bank of America this morning before the market open was trading at below book value. And so but with that said, you did see JP

Morgan City Group beat on fixed income trading. There was worries here that the institutional businesses would be weaker, but guess what, they're common in hot still. And on top of that, you also have JP Morgan raising their net interest and come out. Look they're making money on the

heels of higher interest rates. But listen, it's from the credit card business largely, and that's why there are some unique stories for these big rank gun up dramatically, especially if you're not paying on time, and their deposit rates are still very low, right, and feels like a recession story to me. Am I reading that correctly. So what's interesting is when you look at the provisions for low losses are certainly rising at the banks, but they're not

at these massive danger levels. But with that said, you know, I think the biggest difference between now in two thousand and eight, and I'll let our guests also way in into this is it's not this big crash all at once, but this long, slow bleed of uncertainty that is killing everybody here and there. It's a bummer. It's a bummer. So Josh, come on in and how you see in terms of everything? No, I agree with all of that.

I'd also say that you have to remember that so much of the financial intermediation that used to exist within the banks doesn't really in the banks anymore. I mean, to some degree, it exists at some of the smaller banks, some of the regional banks, but a lot of it

has moved oft into the shadow banking. Whether that's a private area that's right, whether that's whether that's mortgage lending, whether that's other lending, whether that's even auto finance, right, So to some degree, the large banks have actually become much more dependent upon credit cards, other consumer and really playing the trading game, and they've done so quite successfully. I think that's going to insulate them, and it's part of the reason we're not seeing loan loss allowances rise

like we have in prior cycles. But I think at some point the net interest margin is still the risk to the point where I kind of feel like this is almost the best of what we're going to see in this cycle. Profitability being coming a big issue, plus a UCP and C slowing buybacks and investors just don't have a story to hang onto. Well, let's kind of play on that a little bit and then we'll get into some of what we're going to get next week.

P and C a regional player, yeah, And what's interesting about that is they are bigger than many of the regional players, so they're even among that group, they're safer than some of the other ones that we are even more worried about. So you can't even look at today and have said it wasn't all clear. The other banks have much bigger issues, arguably, but P and C even with the deposits coming in above expectations, you see the

market changing their mind already. They started today higher and now they are lower on the day, and it's because of a lot of those profitability questions that we've been talking about. Well, how do you think about the group overall? I mean I was looking at the KBW extuming it was going to be off the charts this morning. Are off the charts at some point, but it wasn't because there's a lot of names still in the sector. You

think still, Josh, a lot of questions out there. Well, I think there's a lot of questions out there because yes, we've seen the impact of rising rates on their ability to reprice cards as example, but we haven't actually seen an increase in demand for topod or it turns on deposits, so that any interest margin is one risk. And we're endering into the period and where the credit cycle ends up starting to play out because the FED rate hikes.

I haven't really started hitting the books yet. Really, Yeah, we're not really. I guess we'll be a year, but I think we're what a year in on the streets. Yeah, but again we're seeing we haven't seen this pricing of any assets. Yes, they're the assets that we're probably on a regular basis credit cards, but for the most part, a lot of it's locked and so that's where the risk is, which is why we're worried about commercial realists. Absolutely.

I think about commercial real estate, even corporate debt, they have to refinance at some rate, and at that rate you don't know just how expensive it's going to get for a lot of the industry, and there's a lot of worries not just about commercial real estate, but all of these companies that borrowed money during the pandemic that will protect right exactly, and not just corporate but smaller

and mid sized businesses well. And that's where to some degree, certainly the big banks don't really have the same worries. That is mostly community banks, local institutions, but we've also seen a lot of that migrate well outside to private equity. Again BDCs the shadows, and so that's that's the care

they are in the coal mine. As far as I'm king, Well, that's what he's going to ask you, and so is that the problem that that's likely to be the problem, and in some large measure it's also going to be the problem in some of the commercial real estate portfolios.

It's a strange one because on one hand, and I remember during twenty twenty in particular, I talked to a lot of the BBC's in private credit folks and they said to me at that time, yes, they stepped in a huge way where the bank stepped out, but they only stepped in so far. You know, they're they're risks, they're not willing to take. At the end of the day, they want to make money, and they make it at

maybe standards too. They have to, not all of them, but on YouTube, Josh on radio job because because in some places, in some places when libor mattered during the during the pandemic, they were still charging discrete credits libor plus five six hundred basis points at essentially is zero rate environment. How many of the discrete corporate credits are going to be able to reprice up from nine percent

plus to twelve percent and survive? And so I think you're going to end up with some real credit quality problems. Do you think it's fair to put a JP Morgan and a Jamie Diamond and maybe City because I think these were the top gainers in the S and P five hundred. Can we put them in a separate class? Think we have to, and and by the way, I think we have to as well, because although a Goldman and a Well's fire, let's just call it what it is.

You and I were here during the debates as to whether we want to ever again be exposed to companies that are too big to fail. Well, that bird has flown. And what everybody, they're bigger and we've told everyone a that they're bigger would be if you're concerned about your small bank. These are systemic run to them. And unfortunately we've we've reinforced all of the concerns, making it more

that they are government guaranteed. Yeah, utilities, we saw it right as kind of you know, the market doesn't love the concentration either. For example, you know, you think back to credit SPEECE and you know we're looking at these training numbers. Fine, they're blowout numbers, but at the same time, remember the banks even start to cap out at how

much leverage they can extend to the buy side. Right, And so I think, you know, the rest of the year is a big question mark, even for the big institutional safe guys, not that they will run into any big existential issues. You think about it this way, the fdi FN fees have already risen for JP Morgan their profitability. You don't even these fees are nothing. They're not. I mean, it's the question becomes, do the community and regional banks

have to compete for deposits? Yes? Where which we know the answer is yes, where the big bellies don't have to compete for deposits. But why wouldn't Washington hear these earnings from JP Morgan today and say, you guys can get in here and help us feed these regional banks and keep saving them. Well, I mean, I think we saw that to some degree a couple of weeks ago with them putting money in, you know. But all we're doing then is confirming that these companies are arms of

the government. They're not really private companies, though they are shareholder own. It's kind of an interesting thing when we're so suspect about like if I think of China or that aren't right it is. It's a little comfortable and frankly, if that is the case, should we at some point admit it just to own it tie them to utility type rates of return to reduce the trading risk. Yeah,

it's David Solomon calling. He's got well, you know, I mean that's why you hear Jamie Diaman on the call today talking about the need for more banks and not

a full scales consolidation of the system. The more you have that happen, I'll use the words from Aaron Klein at the Brooklyn Institution, who says, you know, the more we get into trouble and the more that we have to kind of bail out the banking system and not have a healthy system above and beyond the top five, you go towards a slow movement towards the nationalization of a banking system. That's right. It's never good to have no competition for the consumer at least. Yeah, what do

we look at to determine the health of the regional banks? Then? Today? What are you looking at? I mean, unfortunately, I think it really is not a health of the regional banks. I really think that it's geography by geography, and management

by management. Unfortunately, even more micro, much more micro, and I think, when you know, I think actually you have to dig into the call reports pretty dramatically to really assess the business line mix, how they're managing their their low lost provisions and how they're managing as we saw a couple of weeks ago, their health to maturity and available for sale portfolios. It's so funny we were saying that, you know, normally in an earning season, we don't really

care about the regional I'm dumping them all together. But all of a sudden, you're right, like, we have to go through those balance sheets. I think about the FA function on the Bloomberg. We have to be pouring over that to really understand, you know, the health or lack thereof of these individual names. All Right, so we've got through today markets digesting it. What do we need to think about or what do we need to think about? Right, We've got more big banks tomorrow next week, and we're

obviously going to get into the smaller players. Yeah, you have MNT really starting the smaller players quote unquote starting Monday. But you also have SCHWAB, which has been betting on

the bank and got killed. Yeah, there are a lot of concerns, and you know, we had one large investor, GQG tele Financial Times that it's not that they have an existential crisis, but this is a profitability question for them, which is also assuring, right, because it's such a big firm that's outside of the regional banks being impacted by

a lot of the same factors. Goldman Morgan Stanley, they're also interesting, not just because of the investment banking, but presumably Morgan Stanley would have taken a lot of the clientele as well from Silicon Valley Bank and potentially First Republic. So the way that Morgan Stanley may have benefited from some of this will be also interesting come Wednesday, and then we get back on the regional banks train right

after that. All right, when you look at the you know, when we went through the crisis moment and we were looking at call reports for both the health maturity books that were underwater and the available for sale books that were underwater, Schwab has three banks. All of them were among the top five worst banks in terms of their exposure or negative exposure to treasuries. And that's really a big piece of what kicked off. That's really a big piece of a kick kicked off. The concern are you

concerned about you? What? I'm not really? I mean, they're different, they're higher net worth customer. It's uh, it's a higher deposit it's a it's a lower uninsured deposit rate. So I'm not particularly concerned. I think there are questions as to why they did such a bad job of treasury management, but they also have to flow in and out of the securities firm as a separate and differentiating What about the other big banks that are reporting next week in

the other names, No, I mean I think you right. Yeah, I mean I think that we're going to see a pretty clean moment from everyone. Again, I'm more concerned about when the when the when the mouse starts going through the through the snake in terms of credit quality. Yeah. Um, and that's still probably two quarters out before we start a minimum Yeah. Absolutely year guys. Yeah, I think you could last long if you think about it. I think commercial real estate is really where kind of you know,

it's the Canarian the coal mine. Do you think it could be terrible? I'm expecting. I'm expecting we're going to

start hearing calls for the FED to start buying CMBs anytime. So, like David Weston talked to Blackstone this week, right, Yeah, Kathy McCarthy over a Blackstone, And I feel like everybody's like it's kind of a Listen, they're not really exposed to office that much, and so you have resident Yeah, and they've also exposed themselves to residential in places where they think that they can get you know, really you know, a boost from the population Sun belts, right, they think

that they can earn a lot from there. But they were buying the Florida properties right right off the crisis. Really yeah. And so the question is now there are a few things happening. I've been spending a lot of time in commercial real estate this week and anticipation of this, But what happened was, um, a lot of the private creditors are looking to the folks that are exposed to regional banks, or they're talking to the regional banks at this moment to see what they can do to help

them with that part of the story. I don't know how much that helps things. I don't know how much it more expensive it makes things for borrowers. So if rates, if for some reason the markets are right well right now they're pricing in now two more increases. But if for some reason, to think it changes and we start to get rate cuts, possibly, I don't know. I feel like that's farfetched. Would it help out the commercial. Well, I think no, I think that's really farfetched. Yeah, okay, right,

that we get cut there, we get cuts anytime soon. Okay, okay, Because does a pause help, I mean a pause doesn't. I don't think it actually helps. You're still gonna have the resets to the higher rate, So I don't think it really changes that anything. I just don't see the FED given the trajectory they were on and intend to be, and the fact that they need to take back, and you know, frankly, at some point, maybe we have to

set a different expectation of inflation target rates. It's no longer two percent, maybe it's you know, three and a half for they seem very committed to two. That's right, but but but I don't think that's realistic point they're going to have to compit well. Also, I mean there's at least from what you're hearing from some of the banks, a city group of pushed them on this, whether they expect higher for longer. They kind of won't get there.

But JB. Morgan's like, hey, we're preparing for six percent. We're not saying it will happen, but we're saying it could happen. And you should get on board because if the market is clearly not prepared for that kind of reality, are you thinking that we go six percent? I think it's I think it's more than more than not likely. Okay, yeah, And but the by side, by the way, there's a lot of like the large hedge funds and stuff, that's

what they're prepared for higher for longer. I think it's a contrarian bet when you look at the market and it's a risk management exercise. Here, I do want to give you some love in terms of a new book that's coming in or what we're gonna do. Okay, you're coming out with a book with Gretchen Morganson, Pulter Prize winning journalists New York Times. She has always been a must read. The book is called These Are the Plunderers.

How Private Equity Runs in Res America. My former co host Jason Kelly used to cover private equities, written many books about the impact it has had on the fitness wellness industry. Right, all of the investment private equity business becaus done cover stories on it like they are just in all walks of our life. Josh, tell us what you can literally, how you were thinking about fatal to grave. Right,

pick an industry, pick a company. Usually the consumer is not aware that when they're shopping at a brand, they're actually shopping at a private equity owned brand. Funeral homes. And yeah, when you go to the doctor, more likely than not, somehow the practice is owned by private equity. Certainly, when you go to the hospital, more likely than not it's owned by private equity. And really it does affect

every aspect of life. And you're seeing not only the impact in terms of cost, you're seeing the impact in terms of employment. You're seeing the impact in terms of you know, entire towns, cities wiped out because of the excessive debt that they put upon a company when they take it over, they get they extract the equity really quickly to pay themselves back, and then to some degree it doesn't really matter what happens to the carcass. To

be fair, is it really all bad? I would love to see an analysis of it across the board, because you're just talking about the companies they buy, But Josh, what about the what about you know, for example, the real estate they own is a real estate landlord, a private equity real estate landlord charging you more than your older landlord would have. Right, Well, no, I don't really so. I remember they were also separating the real estate assets into a different fund for the most part of the company.

But now their real estate hours they are so they've gone from private equit when you look at the bankruptcy events, ten times more likely to go bankrupt than other companies private. The model was always leverage, right, the model was always leveraged.

But on top of that, you also have to start saying, who is it that's feeding these funds to them, and it's it's your pension funds nationally, right, And so when you start actually dissecting and looking at the returns over the past five ten years, what you start realizing is their performance is fully in line with index funds, and yet you're paying large multiples of what you would be

paying for an index fund. So the benefit really has to be weighed as well, and they're still charging way more than it would can we all right, let's drama.

There's a bad ending. I think that to some would say it's created, you know, more liquidity of the market, right, provided a whole otherness of the banking system that the other big well so sound as to the banking system, although we were just saying, you're seeing so many of the activities move outside of the banking system, which is where some of the clinari in this coal mine comes.

But on top of that, there are also more and more of the leveraged buyout firms are buying insurance companies, and they're converting traditional defined benefit and retirement plans into annuity plans, and they're investing higher risking assets on behalf of those retirees, which ultimately creates a greater risk. We've

got final thoughts here. The weirdness of it is this is kind of the end of a more than decade long search for yield, and so do some of those models work in this next environment or do they start to go bustin I think that's part of the problem is look the fact that over the past ten years we've seen these firms more aggressively target industries like healthcare, education, industries that we always saw as as TBD. There's a

taste of the book. Josh is going to come back at you guys so incredible what we were hoping to do on this Friday. Josh Rosner of Grant Fisher and of course our own Shinnali bask Wall Street Reporter. You're listening to the Bloomberg Business Week podcast. Catch us live week afternoons from three to six Eastern Listen on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App,

or watch us live on YouTube today. All right, so lot going on as you and we did talk about this a little bit in our simulcast with remaining Katie Carol Master here with Madison Mills and Bloomberg Quicktake live in our Bloomberg Interactor Brokers Studio on YouTube and of

course on Bloomberg Originals. We have to talk about retail sales, Mattie, because down for a second month in March, indicating household spending is cooling, with Americans challenged by high inflation and rising borrowing costs, and our Bloomberg Economics team specifically noting that this second straight month of lackluster retail sales reflect

consumers expectation that the economy will worsen. And then we had spending on food services it's the primary proxy for services in the retail report nearly flat and March hinting at weakness in the consumer demand for discretionary services. So bottom line, it was a little bit of a mixed report, A little bit of a mixed report, especially when you look at the oil picture as well, which is another

thing consistently changing. We've seen gas prices up for seventeen days in a row here, so a lot to look at when it comes to the consumer and retail space. So we've got a great guest on this. This is Mary lou Garner, Associate partner for Consumer package Goods, Retail and Logistics at Infosis Consulting. She joins us on Zoom from Naples, Florida. Mary, thank you so much for making time to chat with us today. Let's start on this retail sales data. How does what you're seeing in your

role support or refute the numbers that came out today. Well, I think it actually supports the numbers that we saw today. We're not all that surprised given the fact that you know, we're in that balance of while inflation is slowing ever so slightly, and there's still the loom of the recession, and when in retail it's such a sensitive subject for consumers. And then we have the fact that a year ago people had a lot more money in their savings accounts,

and they've been spending some of that. Now they're taking a step back and saying, oh, no, what do I have in fun in front of me? Our costs going to go down? Or are they going to go up?

The gas prices are going up, and you know, the industries that are slowing down are the ones that you would expect to be kind of the leading indicators of UM what would slow down when we're heading into a place where consumers are pulling back under spending, like what specifically so specifically, I mean the slowest was just kind of the overall general merchandise retailers along with electronics, which have continually been, you know, UM consistently over the last

six months to a year been you know, slowing down along with things like building supplies, where building supplies we're actually on fire a year ago, and you know, they're really starting to see people pulling back and saying it's that's more discretionary than it is for to say, I've got to buy my groceries. You know, I still need to put gas in my car. So there there's just the pullback, and some of the industries that respond the

most the most when people are pulling back. This morning, off of the retail sales data put at a pole excuse me on Twitter, and I said, are you pulling back on spending? And just a little sampling, but sixty percent said yes, forty percent said no. So it does feel like there's a little bit of a tone change.

Is it, though, Mary, that people have less money to spend, or is it that they're just a little bit nervous about what's to come and so they're starting to kind of like a squirrel, kind of squirrel away just in case what I Okay, It is definitely a combination of both. I mean, we saw travel spending go through the roof over the past year. You know, there were people would just kind of let loose a little bit after some of the COVID restrictions and they had extra money to

do so. So there's the people that the credit card debt's gone up a little bit, they're starting to get conservative. But then there is the you know, probably year forty percent could have been more your higher income demographics that are more recession proof or more inflation proof are still willing to spend in the market. So I think there's a combination of several different factors that are that are contributing.

Can we talk high income for a second, because you mentioned that the play is to focus on high income shoppers in the retail space more broadly, how high income exactly are we talking middle class, upper middle class, upper middle class because you know so, I'll use just use. Walmart is an example where in a subset of their stores where the demographs surrounding demographics support it, they're bringing in higher end products, which they've always been very conservative

about doing that. One they didn't want it on their shelves and a lot of their places where they could lose it to shrink and theft. But they're trying to when there's a difference between a premium product in a mass retailer and a premium product in a luxury retailer. So they're trying to attract a consumer that has a little more disposable income. But it's not that target high high income because they're still shopping in the premium lanes. And you know that's why that section sector can tend

to be even way more recession proof. That interests me because I would have thought that Walmart would double down on what it's best at in this time, which is providing I don't want to use the word budget, but like more bane for your buck items for folks who may be struggling in this economic environment. Do you think it's a good move for them to double down on offering some of those slightly pricier items. Well, take that

with the grain of salt of that. They're only going to do it in the markets where that they can actually afford to do it and people will buy those products. But you know, Walmart is is always going to be one of the value players. But you know, they've had their margins contract, they had inventory problems, they've had supply chain issues. You know, they have had to struggle and still be able to you know, see if they're seeing their consumers they're lower in consumers spending less and their

baskets going down. They're still trying to figure out how to balance it right. They don't want to lose that consumer, and they won't because a consumer doesn't have too many other choices, Mary lou And help me out, And maybe you know, I'm kind of scratching my head over what you're saying. I do find it interesting too that you know that they're going to maybe higher end stuff at Walmart, and I guess they're trying to go after a better margin, which we know in these stores the margins are really

really slim. Having said that, what's the read on the demographics of who are going to Walmart? Has something changed dramatically? Well, it hasn't, because so it's it's interesting there is still the higher income families that shop at Walmart because they're also tend to be fairly conservative and want to keep that money in the bank. So there is still some of that in When you're talking like your your upper

middle class, I would say so there. I think they're just trying to balance that and make sure that they've got a solution that is going to meet all of their customer needs. But you know, that whole strategy is not at all at what their core consumer and so they're still going to have to have the offerings and have the value play. But that's what compresses some of their margins. You know, if you look across their beauty offerings, their OTC offerings, they cut their prices to make sure

people are buying their products. Hey, we just have about a minute and a half here left or minute, So you do look at logistics distribution fulfillment, which is such an important part of you know, the consumers story. The retail store is also a real estate story. So Jess got about a minute, what would you say about that space. Our companies, whether it's an Amazon, whether it's a Walmart, cutting back in a big way on that distribution and

logistics part of their business. So they're trying to make that much more efficient and productive for them. Does that mean by being by being fulfillers to other you know, so Walmart has offered some of their services out when

their trucks aren't full, they're moving other people's goods. So in that logistics space and then in the whole logistics, warehousing, supply chain space, it's all about automation, about leveraging AI and robotics to create a much more efficient and lower costs to serve because you know, you still you know, you've got the trucks on the road, you've got the fuel costs. You've got to figure out a way to

make that more efficient. So the launching of micro fulfillment centers, so launching of you know, commingling product has been right, it's a big trend right now. It's like a plane, right, you want to have all the seats full, you don't want to fly across country and you do what you can to feel it. And I'm assuming those distributions centers they want to make sure that they're, you know, move it along at full capacity or at least close to it. Mary,

Thank you so much. Mary lou Gardner, our associate partner for consumer package goods, retail and Logistics at Inmphasis Consulting. Joining us via zoom from Naples, Florida, you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business app, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station Just say Alexa playing Bloomberg eleven thirty. Would you want to talk

a little bit more? Learn more about the crypto space because investors no doubt about it, Mattie. This week heading into the crypto related area stock specifically, and again today we saw that move this as Bitcoin hold Or was holding about thirty thousand dollars after going above it earlier this week for the first time since June. So we had a lot going on, So let's get to it.

Our weekly check on the world of cryptocurrencies and back with us is Frascu, managing partner at Cosmo Ventures, joining us via zoom in Boston. Rob, Nice to have you here with us. Feel like the whims and fancy of crypto depending on the week, depending on the day in the news. Um, I have to ask you. You were a Navy fighter pilot during Operation Desert Storm and after the Gulf War ended. A little cheeky here, what's chick trickier being up a fighter pilot or navigating through the

crypto space? It's probably about the same difference. Is The difference is is you know you can't get killed in the crypto space? Right? Some id like to differ. I don't know, can right? You can? What's what's the case? We're investing in it right now? And maybe I'm being a little um, I don't know, devil a lot of fud carol, you know, like, why would you kind of invest in this space right now? And we're still really

trying to figure it out. Well, look, I'm you know, believe it or not, I'm an early dot com guy. So I started the very first financial service on the internet back in ninety three. I was twenty nine years old and into it. Wanted to buy in the company, and we had the first stock quote server, first mutual fund site. I put over one hundred financial institutions on the internet. I did another company in the AI space.

I've done a lot of companies, a lot of tech companies, and I see what's happening in blockchain and crypto almost an exact same light. You're absolutely right. It's early, just

like the early days of the dot com right. You kind of get you get the speculative phase, there's a bubble, everything gets excited, we get out over ahead of our skis, the bubble kind of pops, and then all of a sudden, people realize, Wow, this technology is actually really profound, and then the big boys kind of come in, the real players, the real institutions come in, and we kind of move right from this kind of early adopter phase to kind of the early majority phase. And when that happens, hang

onto your seats. That's where the alpha is. Now. There's alpha early, right, but it's just not at scale. When you go to that mainstream majority, that's when you get the alpha at scale. So as venture capitalists today, we're all in on blockchain, We're all in and crypto is blockchain in a lot of ways. And so for us, yes and no, yes and no, I actually think, I actually think that it's the it's bigger than the Internet itself. No, but no, no, no, but crypto being blockchain, blockchaine crypto

like and no, right, they're not apples to apples. I mean they're not. They're not, they're not. But you know what happens is is most blockchain technology are networks, and so the value exchange in building a network is the token of that network, which is crypto. So and so from a from an investor kind of value capture perspective, you got to pay attention to both. As venture capitalists, we invest in equity and we invest in tokens as well. So what I look for is this kind of magic

moment where you go from that speculation to realization. And it generally is signaled by what the institutions are doing. Right are they you know? Do they are they even in? Are they expect you know what institutions? Um And when I say institutions, they're traditional guys, right, So, like I don't know if you guys saw you know, Avalanche just did this deal with with a subnet okay called Spruce Like that's an indicator. Right, you got Wisdom Tree on board,

you got t row Price, Cumberland. Um, are they really on board or they just be No, they're playing, they're not on board, they're not using it, but they're but they've got teams of people looking at it, right, And and that's how it starts, is you you know I would I would go to investor conferences, you know, five five years ago, and there was nobody there from these

bigger institutions. Now they have a team. Okay, Right, I have to say when all this first started coming out and I was trying to get my head around it, blockchain, I understood in that how you could use that to transact, right and potentially make it more secure. I'm still not

quite sure about crypto. So can you have you know, the blockchain kind of take off without really having the crypto component to it, or does there have you know what I'm saying, like, help me help me here, because you're right, your tro price is you know you said test driving a new version of the Avalanche blockchain. They're trying to figure out how to use it to make

financial transactions more efficient. So yeah, I get it, like I can I get it with like ownership of cars and homes and stuff and art and like all of this stuff at IP intellectual property, I get that. Sure. Yeah, Well, ultimately, if you think about it, right, the old business model is, if I don't know you and you don't know me, and we want to have a transaction, what do we do. We put somebody we trust in the middle of us,

a bank, and what's the business model? It's pretty simple, right, the bank gets paid, they get they get they get they get a fee to clear the trade. Okay, or whatever it is we're doing, that's the business right. Well, what happens if we replace that bank now with a network and instead of one person clearing the trade, the entire network has to clear the trade. So if the entire network of all these millions of people have to clear the trade through consensus through the tech, right, how

do we pay people? Well, that's where crypto comes in. So the network ethereum right, is clearing these transactions, that's performing all these operations. And how do people get paid with the ethereum token? So isn't it just another are we then creating another middle layer? It's just well you always need a middle layer, right, you need to have a layer that clears the trade. The issue is do you want a single point of failure? Right? So a bank is a single point of failure. A blockchain is

a big network of people. So by definition, it's it's it's not it's resilient unless it's run by Sam Bankman freed. That's a single point of failure. That's not a network, right, That wasn't blockchain. That was the old that was the old way of doing things. Right. So uh and in fact, I actually it kind of it's it's not funny all right, in any way what happened, but it's got to make you got to look at it and go, wait a minute.

We've got this entire industry built on the concept of decentralization and networks, and what's the first thing we do. We create centralized exchanges to trade. Right. Is silly? Right, it is silly. It's like the antithesis of what it was supposed to be all about, exactly exactly, Okay, okay, So we have about a minute and a half left. So what's the investment play for you right now? As a venture capitalist? So I look, I'm looking at a couple of things. I think there's a there's an interesting

word you got to get familiar with. It's called on chain finance or on five. What on chain finances or on five is basically traditional markets, traditional industries and players using blockchain to solve their problem, make them more resilient, make them more transparent, make them more efficient. Is this like what tros trying to do with avalanche is exactly? It's like our tracks is doing. Uh, you know, Securitize

did a deal with tokenizing KKR. In fact, our venture fund is tokenized, so you can invest in our venture fun by buying a token. Now it's a security token. You know, you got to do the kyc AML. You know, it's a full blown security rights. It's an offering, a security is offering. So I think as an investment, that's important to look at, and we look at that. Another big area we're looking at is web three, particularly around

royalty management, those kinds of things. Can I ask you just real quickly, are we going to need a consistent token if we're going to start play like this? Does it make sense to have multiple tokens? Again? Yes? Well, does it make sense to have multiple networks and then each work has a token, right, so so you may you may have a network that let's say it's Facebook, like it's a social media network. You don't want a social media network operating a mutual fund network, right, So

you're gonna have two different networks. So we could have a network you're saying for mutual funds. We could have a network for real estate transaction, right, is that what you're saying. Oh, that's exactly that's exactly it. And you might have closed networks that only have specific trading partners and that's it, and and so and and by the way,

different different use cases have different needs. Right. Some networks need to be high velocity, high trans transaction through put right right the finality, whereas other networks, you know, there's only a couple of transactions going through it every every now and then. It doesn't need to be that high speed. Okay, you know, so so what we do we really look at that that landscape, Rob, we gotta run. Hey, thank you so much for Praska, managing partner at Cosimo Ventures

on Zoom from Boston. I'm Roca a journal Yeah, but you let me drive? No, no, no, no, honey, please, I'll do the riding gravels. I want to drive. It's good question, which is the drive to the globe? timUL Thing Well, Brian Dawn on Bloomberg Radio. I just got under eighteen minutes left in today's trading session. Carol Master, along with Madison Mills live in our Bloomberg Interactive Broker studio. We are down across the board on stocks, but off

our worst levels of the session. But it's an interesting trade here. Once again, man if I had a buck for every time I said interesting trade here in twenty twenty three. And low volume, I feel like those are and tech rally, like so many things, it's like it's just unbelievable, all right, So let's get to it with Cheryl Pape. She see your portfolio man Jared Angel Oak Capital. She's a portfolio manager for the Financial's Income Impact Fund

tickers an Fix. It's an aggregate bond fund roughly one hundred and nine million in assets under management at the end of last year, fun down nearly seven percent this year. She's also portfolio manager of the Financial Strategy's Income Term Trust. That's a closed end fund with a banking sector debt centric strategy. But keep in mind Agel Oak in total has more than seventeen billion in assets. Center Management Cheryl with us on the phone in Atlanta. Hey, Cheryl, nice

to have you here with Maddie and myself. I am curious in terms of the funds that you manage that among the earnings results in the news and the color we got, is there anything noteworthy in your view, especially when it comes to your strategy of the funds and where you might want to invest. Yeah, good afternoon, and thank you for having me. Look. I think, you know, obviously we kick off with the big banks first and our funds tend to be a little bit more community

bank debt centric. But you know, key things that we've been looking for, um, you know, number one, deposits. I think we've seen some stability starting to come out in the in the data. Clearly the big banks had been beneficias of some of the flight out of the regional banks. But deposit data is held in I think better than expected, and that's a positive that we take away from from what we've seen today. The other things that we're clearly

watching pretty closely are on the credit side. Consumer credit consumers still in pretty good shape. Here. We are, you know, clearly seeing some reserves being added to. I think the economic backdrop has become a little bit more challenging than it was at the end of the year, and we're

seeing some additions to reserves as a result. But outside of you know, the lower income, lower PHYCO score type consumer where we have you know, most concern at the margin, your core prime consumer is still holding up pretty well.

And then the third thing that we've been focused on is really commercial real estate M an office in particular, and I think, you know, we are expecting that that will be a little bit later in the cycle here, but I thought we got some good disclosure today at on sort of office as a percent of total How we're thinking about de risking portfolios and all that, you know, plays into our view of the sector overall as we're

thinking about credit and deposits. Cheryl, what are you going to look at to suss out just how bad the commercial real estate question could get by the end of this year. Yeah, I think, you know, it's interesting when we think about commercial real estate, it is a slower

cycle than what we see in consumer credit. And we look back to the financial crisis where consumer charge offs scenarios like card and auto where we're in the double digits, whereas commercial real estate hume loss is over you know, a multi year period where load of mid single digits, so it is a longer cycle to play out. It is important. I think the type of commercial real estate isn't more tilted towards multi family or strip center type,

service oriented type lending. We feel a little bit better about those pockets office in major urban areas, We feel a little bit more concerned about that exposure tends to not be as much in the community banks that we focus on. They tend to be a little bit smaller ticket, more rural, suburban type footprints. But but those are kind of the things that we're looking at. The type of real estate matters, the type of LTVs. The type of cap rates, and any additional color is something we're watching

pretty closely as we go through. And forgive me you did you say you do focus on the more regional players. We focus more on the community banks, so I would say the next step down from the regionals. So they tend to have a little bit different profile than the regionals. Yeah, what are you worried about them? In their existence and their ability to get through this especially you know, we just had a big bank conversation and just the bigger players just get bigger and bigger, and it makes it

kind of tougher on some of the community players. How do you see it? Yeah, I think you know, we've been more recommending a Barbell type approach here, and you know, there's clearly been a flight to safety in the in the large money center banks UM the community banks, and we sort of define that as the fifty billion in below type universe. UM has held in pretty well conversations that we've had with with bank management teams over the last month or so. M I think, you know, a

little bit different position than some of the regional banks. UM. There clearly is UM a lot of a relationship aspect to the type of lending UM that we're seeing out of you know, the core community bank space. It is typically tied to deposit relationships. They tend to have lower unensured deposits to total deposits, which is clearly something we've been watching pretty closely. UM. And the type of lending

they do, I think differs a little bit. It is smaller ticket, it's it's the small business sort of Heart of America type UM lending and when we think about the banking system was still you know, five thousand banks. I think it becomes the most difficult in the forward look for the regional space. I think that's where we're going to see a lot more regulation come to play

and get pushed down. Um. But I think you know that that's you know, where we're most um, you know concerned at the margin is how do the regional banks manage through? And do we see more consolidation there? And that's something that that we think will accelerate, Cheryl really quickly. Here, give me one, uh sector that you think we're going to see the biggest credit crunch in autos? Commercial real estate? What is the play there? I'm probably most concerned on

the consumer side on auto finance. I think, um, you know, we clearly had such a run up in prices the LTVs that you know, we're we're being underwritten against. Um and as we see used cars pricing come back down to more you know, typical levels, that's you know, I think where you see probably most consumers could get a little underwater on those types of loans that were done a little last couple of years. All Right, we're gonna leave it on that note, Cherry'll have a great week

in Cheryl paid at angel Oak Capital. This is the Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere else you get your podcast. Listen live week afternoons from three to six Easterning on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg German level