Credit Suisse Chaos Could Spread Risk

Credit suites reeling after that top shareholder ruled out uping at stake in the bank, so shares, the credit suees having their biggest ever one day sell off in Europe. We've seen ADRs down about twenty five percent here in the US, the whole banking sector under pressure. So Jess and I have been watching that. So let's get to our roundtable of what you need to know and kind of where we are. So with us is Bloomberg News Wall Street reporter Shinelli Basik on the phone in New

York City. Also with us Bloomberg Intelligence senior Global banks analyst. We are talking about Alison Williams. She is on the phone from BI headquarters in Princeton, New Jersey. Should only want to kick it off with you. So Credit Swie. They've been in trouble for a while. How did they get here? What's the outlook? What's the most important thing that we have to understand about what's going on with

Credit Suie and its strains right now? Well, the breaking things that we have to think about is a few things we've recently reported, or just about up an hour or so ago that BNP is the first thing we learned on of that is reducing counterparty risk in the swap market in a significant way. And so do others continue to follow up? What does that mean specifically when

they do that? What does that mean? It means that you know, they have these bilateral agreements right swap In this case, it's the swap markets that we're talking about, and it sounds very esoteric, but it is just financial contracts in which credit sez counter party and now they're just reducing their exposure to Credit swe being that counterparty. Allison can stat me explaining this in a really horrible way,

but that is what's happening. And the reason that's happening is because if something were to happen more drastic to credits, please, because remember, people were not necessarily worried about the banks liquidity. This is a matter of people worried about the psychology here to people pull deposits more. The stock is trading at scary lows. Cbs, which are basically insurance contracts that ensure against the potential for default, are at record wides here.

So that's the fear that you're seeing in the market. And the news now also is that bank leaders and government officials have talked about options that include a public statement of support of potential liquidity backstop so people know

that they're safe and they're supported by the government. And ideas that were floated include a separation of the banks slipt unit or a tie up that everybody has been thinking about a long time in watching for a long time, a tie up in some way with ubs, which is a long shot, but that's something that they would consider. All right, great summary, Allison, come on in on this.

Is this all about psychology or is this about potential you know, fundamental problems that are out there within global banking. So it's about the psychology. But the concern is that the markets can create a reality and that's I mean, that is the concern and I do think, um, you know, at Nale's point. You know what a lot of people are worried about now with the US banks, the bigger banks, is that is that counterparty risk. The one thing I would note is that you know, this is not an SVB,

which happened almost overnight. It was stunning how quickly that happened. You know, Credit Suites has had some issues for a couple of years, and to be clear, they did raise capital in the fourth quarter. All they had, you know, very strong capital ratio exiting the air, they had very strong liquidity. Uh. You know that the last time that we saw a significant stress in the stock was back in October, and I think the concerns there were that people knew that they had to raise capital, and so

that was when we saw these very dramatic outflows. There was a lot of media attention, There was a lot of talk about the health of the bank and that manifested in client outflows. They completed their capital raise, they got that behind them, they said that things started to study. There's some questions around those statements, but the CEO, I believe was told Francy Lacois, who's one of our European

anchors on one of the programs. So I believe it was yesterday that they did see inflows on Monday, So that's one positive thing, but we really need more than that. We need something to boost confidence. The company coming out and saying they don't need capital that tends not to be supportive of banks chairs so I think that it really does. You know, the one biggest investors, so they're not stepping in. They had another investor, a longtime investor,

which sold their stocks. So I think at this point it really is up to the regulators to come out and say something to calm the market. Sinally, I wanted to bring you back in where specifically are other cracks forming right now? You know, this is an interesting you're asking if there's a fundamental issue or if this is a confident issue. And of finance executive, who's the counterparty to criticise who I spoke to literally like minutes ago. What he was saying was what he's afraid of here

as the whisper campaign. Remember Silicon Valley Bank, even when they lost deposit there was about more than forty billion dollars. Essentially, overnight fear can cause bank runs. That is the worry, and the worry here is that the market will look for cracks, and then they will take those cracks and they will break them wide open again. We can't say that's happening. You don't want to cause that to be happening.

But investors right now because of the by the way, I remember the markets have experienced an extraordinary amount of pain already. And remember their credit sleet as a globally systemic financial institution with tentacles across the entire globe, not only with wealth management. Clients have big institutions. They've been big lenders to corporations, and so you know, even if they're reduced presence here causes a strain in the market

because they were such a big player. And even the counterparties who are reducing risk right now are saying, we hate this because it means we're concentrating our risk to a smaller number of banks, and that sucks. All right, So let's go to that, Allison. I'm looking at JP Morgan, down almost six percent as lows. It's still down about

five percent in today's session. I guess my first question is do we have to be worried at all about JP Morgan or Bank of America or City or Goldman any of those big banks at this point, and as a result of what's going on, do they just get stronger, bigger and the like. So it does seem that the latter is the more likely case. Uh. And in fact, one thing that you know, one thing I think that needs to become more clear in the coming days or week is exactly what is going to be the policy

on insurance deposits here in the US. So we have to failed banks where depositors are outrightly insured now, so there is a question in terms of is that the precedent that does that effectively mean all US deposits are insured? And um, you know, that sort of an interesting angle, you know, if you think about that versus some of the other countries. You know, does that make the US banks, which have been a safe haven have gained share in

the training businesses because of their stronger balance sheets? You know, does that make them even stronger internationally? From a local perspective, you know, JP, Morgan Bank, America, Wells Fargo, these are banks that are in all the local markets. You know, wild Smarco does have the asset cap, They're not as well positioned. City Group is as much smaller in terms

of the branch network. So it's really JP Morgan and Bank of America that are in a lot of these markets with these smaller regional banks, and as I said that they are insured or backstopped, but I think people will still look and think about putting their money in a stronger bank. Into the extent they're doing that in local markets, it's really JP Morgan and bancam America that

look to be best positioned on that front. Sationally, we just with Alson talking about when you're looking at the bigger banks, which on ones could potentially hold up better. But I was curious as far as when you're looking at the banking industry in general, where are you seeing potential types of industries that might be less scathed more so than others. You know, It's the reason that's such an interesting question is because think about it this way.

You have a market right now where investors are sorely burned, and investors in this market today are being earned that one out drastically last year. These are the quants. These are the hedge fund managers that were macro traders. These are the people that made a lot of money off a volatile market that are now feeling a lot of pain. Why does that matter? Because when the investors feel pain, it's very difficult for them to redeploy more money into

different trades. And so there you start to have like a ripple effect here of the pressure on pricing when you look at the market, and so I think that, you know, I'm biased, right, a cover hedge funds, so right, I watched them really closely, and so I think about where the pain starts, and then we're an infult trades and so you have to here, here's what my sources are saying. What is safety? Is it gold? Right? Because even the treasury market is looking really scary out there. Yeah,

I mean it's really kind of remarkable. Hey, Allison, thirty seconds left here. You talked earlier about like regulators having to come out. Do we need Jay Powell? We know there's a FED beeting next week to come out and say guys were on it more to come. Don't you worried or something? Just quickly? I mean I feel like the Fed did that right. They did that when they said we're going to week that we're going to protect the depositors and we're going to put this backstop in

place for a year. They basically said look, we're you know, shutting down the immediate risks. Yeah, and we recognize that there is an issue, and so well we'll see what more they have to say. You guys, I know you've had busy days, busy weeks, and we so appreciate you just kind of setting the stage for us on this Wednesday of all that is going on and it's just

you know, happening in real time. Alison Williams, Senior Global Banks Analyst at Bloomberg Intelligence from BI headquarters in Princeton, New Jersey, Shinoli Bossak while shoot your reporter at Bloomberg News on the phone in New York City. This is Bloomberg. You're listening to the Bloomberg Business Week Podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot Com, the Ion Radio app, and the Bloomberg Business App, or watch us live on YouTube. I want

to get right to our guests. Bill Isaac is a former chairman of the fdi C there during the eighties nineteen eighties when some three thousand banks and thrifts failed. He's now chairman of the consulting firm Secura Isaac and a member of the boards of directors of Immigrant Bank and New York Private Bank and Trust who joins us via Zoom from Sarasota, Florida built So nice to have you here with us. How do you see what is

going on? Silicon Valley Bank, three regional banks in the past week here in the US collapsing, You got credit suites. Is this great financial crisis banking breakdown two point zero or something different? We don't know what it is right now. And you know it's it's not a surprise that these things are happening. Why Why Well, because the federal government has been out of control for a long time. It just reminds me very much of the of the nineteen eighties when I was chairman of the sci C of

late seventies and through the eighties. We had guns and butter approach in the nineteen sixties with the Vietnam War that was not paid for by taxes and big deficits, and we had the Great Society programs went in Johnson and note they were not paid for, So we had very very high budget deficits, and we had a very accommodating, will say, loose fed policies, monetary policies and that led to a decade or more of very high inflation, and

finally Paul Boker was appointed chairman in nineteen seventy nine. I was appointed in the FDIC in nineteen seventy eight, and we worked together. But Paul Boker was determined in the FENDER was determined to bring down inflation, and they did. They raised ridge very high, and that led to all sorts of problems. And we're repeating that period right now. I don't I don't know how long it's going to last.

I don't know how many firms it's going to happen, but I do think we're trying to chanke your bill. If things are different us right, what specifically is different this time around is the issue because of specifically depositors. What's different about about the depositors? In your mind, well, the issue surrounding depositors with those FDIC limits. Also usually when you'd think back, that was more geared toward individuals,

but now you're dealing with companies. Is that the hurdle this time around versus in past crises that you've seen. I don't. I don't think that's materially different. Uh, we had a lot more depositors back then, in terms of numbers and numbers of banks, we had thirteen thousand banks when I was Cairman of the FDIC, and now we have about forty five hundred banks. And but we I mean, I'm not saying that things aren't different there. It's a lot of different things today, but some of the things

are not different. Let's take let's sake s B, the Silicone Valley Bank, that's not new at all. That's that I mean, they were doing new types of financing, but it was the same problem. We had a crisis we had in nineteen seventy nine with First Pennsylvania Bank, the largest bank in Pennsylvania, the oldest national chartered bank in the country, and they've decided they had a great idea, let's invest in government bombs, which they did. They loaded

up on government bombs at fixed rates. And then Paul Boker became Chairman of the FED and decided he was going to raise rates very high and kill inflation. So history has shown us that we've been here before, is basically what you're saying. We've been here before. And why these guys did this again, I don't know. It was not very smart. Well, so then do you fault regulators here? You were a former regulator? I mean, is it regulators in the United States elsewhere, FED, FDIC, Treasury and Moore

that have to some extent once again failed us. Yeah, I'm not trying to pick on anybody, but this is primarily the problem of a bank banks that had a board of directors that was not doing its job properly, and a bank that had managements that was not doing its job properly. And they and they did a bunch of things that they should not have done, and they weren't they and it failed. And now we're trying to clean it up, and and the FDIC and the FED

and so horror will clean it up. This is not something we haven't done before, even in bigger ways than this. So we will clean it up. And should we faulter regulators, of course we should. The regulators did not do their job. As this bank grew in two years from sixty billion in size to over two hundred billion dollars in size. That's insane. So it is that a red fleix. So help help us out here because oversight obviously lacking. So what stones should we as analysts, as investors, as regulators

be overturning what balance sheets? What sectors are the financial system? Would you be focusing right now and asking lots of questions about since we've already missed some big things. The red flags were out here. You tripled the size of the more than tripled the size of the bank in two years. That is a huge red flag that every regulator, every analyst, every board member, everybody ought to be on top of. Why is this thing growing tripling in two years?

That's that's that's a huge red flag. And and I don't know how. I don't know how they got away with it, frankly, without being without being brought down faster and sooner. I mean, I really don't understand. Yeah, how this took so long to find? Bill, we only have about twenty seconds left. Could you tell us should the FDIC limit of two hundred and fifty thousand dollars? Should that be changed? I'm sorry to do. What should the FDIC limit be changed of two hundred and fifty thousand dollars?

So as they kind of look forward and think about maybe what we should be doing differently. I think there's been a lot of conversation about that two hundred and fifty thousand deposit levels. Should that be changed in your view? Well, I shouldn't. I don't believe it should be increased. It was, it was I think it was forty when I arrived at the FDIC, and then it went to one hundred, and that went to two fifty. And I don't see

why it keeps on growing. But there's one thing that we really could do, and that is we need to pay attention to non interest bearing business accounts. Those those, in my opinion, should have much more coverage, much more protection. We need to do that because that money is not hot money. It's it's money that's been supporting payrolls and business and you know, and we really should not have that money running and so I believe that we really

need to pay attention to that. I recommended that when I was at the FDIC before I left, that we needed to increase coverage on nine interest bearing business accounts. That would be very, very helpful to the economy when times gets tough. Well, so appreciate your perspective. I know it's a busy day for everybody, including yourself. So Bill, thank you so much. Be While Bill Isaac, He's former chairman of the FDI, see chairman of Secure at ISAAC. It is a consulting firm and, as we mentioned, on

the board of directors of a few banks. 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, Jo Say Alexa play Bloomberg eleven thirty. All right, everybody, we are going to talk about budgets. It's certainly it's on the minds of many consumers. We saw that play out

a little bit in the retail sales numbers today. It's not just about global banks, although that is obviously very important US retail sales. We got a data point this morning. Jess has been talking about it. We all have been US retail sales falling in February after surgeon the prior months, suggesting consumers spending while holding up is getting challenged by high inflation. The value of overall retail purchases decreased four tens of a percent after revised three point two percent

advance in January. Back out gasoline and autos retail sales were flat. So let's get into what's going on with retail and the health of the consumer with us Katie Thomas. She's lead at Carney Consumer Institute, their consulting firms. She joins us via zoom from Pittsburgh, Pennsylvania. Katie, nice to have you here with Jess and myself. So retailers and retail getting tired, getting nervous? Are consumers running out of money to spend? How are you seeing it? You know

right now, I'm still not that nervous. I've been pretty bullish on the consumer, and I say that way. You know, we talked to consumers about their spend over the last six months. Two out of three said they were still spending the same or they were still buying the same products and services despite the price increases. They're saying that

continue to be pinched. But today's number is given that they were flat X gas and auto, it's actually pretty reasonable for February, you know, when you take into account weather sort of removing the hangover of January numbers, New Year's resolutions and all of that. So I think, you know,

you're seeing consumers are making trade offs. So are they evaluating some degree of pullback perhaps, but what they're really doing is making trade offs across their wallet and across sectors, rather than feeling like they have to have some massive pullback and spend overall. Something I was curious about is the goods versus services equation. Are you've seeing any changes continuing on that front a little bit? I mean, that's a great example is looking at the restaurant number there,

so you're seeing consumers. You know, there was a little bit of softness there, down two point two percent versus last month. And when we talk to consumers, they said, that's actually an area where they like to cook at home now, so they can splurge on a nice cut of meat, a nice bottle of wine, and they're willing

to spend on those goods rather than the services. More broadly speaking, there's still a little bit of the pandemic where we're still happy to be back out and about, and really you're seeing a bit more of an investment in services from hospitality to concerts and events, and you know, kind of supplanting some of the material goods. But you know, it's really a mixed bag depending on the consumers in

their financial situation. So when you talk about the consumer and retail though you can't talk about it in a vacuum. And so I'm thinking about the newsflow of the past week and I haven't heard you mention it. So how do you factor that in? Because I feel like we were just talking about psychology versus fundamentals. Psychology can affect fundamentals. It does impact fundamentals. There's got to be folks out there,

consumers are saying, I'm getting a little nervous bank runs. Yeah, I would have thought I lived through a pandemic and now I'm talking about bank runs. This is things that people dealt with, you know, a hundred years ago. Yeah, I love that psychology fundamentals. I heard you say that I may have to steal that. Well. The interesting part there is, you know, consumer sentiment has been pretty meek, medio good for a while now, but worse than actual

consumer spend. So I think that's what you're continuing to see with the issues with the banks, is you're seeing that uncertainty, that frustration. To your point, consumers are like, when is all this going to end? So sentiment is mediocre, but it's not necessarily driving a huge pullback and spend because people like the wage market is still strong, the labor market is still strong, so they're still feeling like

they have money to spend. So some ways, it's sort of that battle of like sentiment versus reality, and it is that psychology of look, i'm sick of bad news, I'm sick of one thing after another. But then you almost get a little bit of a shift into that Yolo mentality, the pent up demand from the pandemic of like, with everything that's going on, I'm just going to keep living my life and spending on the things I want

to spend on. That's interesting because we've seen some of this wage inflation data pull back a bit, but it sounds like you're not seeing that change yet in the consumer behavior. Not totally. I mean, consumers are evaluating. So it's just really that nuance of if you want to think of it as like a major pullback versus a tradeoff, I think consumers are being incredibly thoughtful about those spend

versus splurge categories. So we've heard from you know, big box retailers through dollar discount stores, they've seen an uptick higher income consumers. That means people know they want to get their best bang for their buck on those everyday items where they are feeling inflation. Food and gas is where people have felt inflation the most. That's where they're really being thoughtful, but in order to save there, they're also shifting that spend into other categories where they're still

wanting to splurge or save a little bit. So it's really about evaluating, you know, all those different things. And I think that's why you haven't seen it necessarily hit one sector that hard is because in a lot of ways, consumers it's very individual in terms of where you know, they're really deciding they want to spend. So when you look, you know, you talked about the past six months of data, So I'm just curious as you try to get kind of data in real time, what do you look at?

Is it revolving debt? What is it that you look at to see more about the health of the consumer than ultimately it's impact on retail. Yeah. Absolutely, those are the numbers right now that do give me a little pause, do give me a little concern. So while I've generally been bullish that consumers are just informed, thoughtful, savvy in terms of how they want to spend, looking at savings rates, looking at credit card increasing credit card debt, likelihood of defaults.

We're seeing all of those numbers moving a wrong direction, yes, exactly. So those are the numbers where you're seeing there really is the reality in the market kind of moving in the wrong direction. And those are the most concerning to me, especially as you start to break it down by income and sort of the disproportionate defense. Yeah, a couple of days ago, like within the last week. I mean, it's

gotta be worrisome, exactly. And you know, for a while, people have these record savings rates and the stimulus checks, so you know, you'll see you're seeing people evaluate those bigger projects delay maybe you know, the bigger spend. So that's when it comes to big household purchases. You saw a little bit of softness, for instance, this month in

furniture furniture stores. People invest in their homes. Now they're pressing pause, they're evaluating a little I'm gonna explorage on a beauty and new lift stick instead of you know, a new couch this month. But that's really some of that, you know, kind of moderation and the cautious outlooks you're hearing from. Honestly, most retailers. Right now, you brought up

specifically the savings rate in people. Adding to that, where exactly do you think when you're crunching the data, or people more willing to save on certain things rather than spin Because I know you brought up the furniture and those other details, but is it more geared toward a way to gauge as far as where the economy is headed and is that why they're going to potentially put

more money aside? Well, I actually meant quite the opposite, which is we had record high savings during the pandemic from the stimulus checks, which have now go down to I think the last number I saw was two to three percent, right, so almost record lows there. So yeah, I think, you know, in general, consumers are really it's sort of some of the things related to the pandemic. So you know what was I able and not able

to do during the pandemic. Like I said, I think that everyday items is where you're seeing consumers want to be almost as frugal as possible, where they're being what they want to make sure they're getting the best bang for their buck, and that quality, that quality really works hard for them. I mean over seventy percent of consumers said they will spend more on things they feel like

quality is there. So that's again where you get into these muddy definitions of like, it's not just low price, it's got to be that right sort of nebulous price value equate. So, Katie, you work in the consumer space, You've got clients, and I'm just curious what those clients you know, whether they're you know, consumer product companies and the like, how what's the question that they're coming most often to you about right now? And just got about

forty five seconds. Yeah, I mean, it's just what we're all saying right now, which is how do we try to predict for the unpredictable? And what we've seen throughout the pandemic is just so much change, so fast, consumers buying a category one day, stopping buying it the next.

So it's really trying to hone in on how to think about these behavior a little bit differently, How do we plan for them, How can we become more agile and you know, rethink the way that we're thinking about our forecasts and demand planning in a way that allows for some of these shifts that are happening. Really quickly, and you know, allows for these potential supply chain risk. It's really continues to be those discussions around agility that

are really top of mind for clients right now. Five seconds. Do you think we'll see some consolidation as a result in this space right now? In consumers in the consumer space, absolutely, consumers are overwhelmed with options, as are the brand So I think you'll continue to see a little bit of culling of options to make life easier for everybody. All right, Good to check in with you, Katie Thomas. She's a leaded at the Carney Consumer Institute. Joining us via zoom

from Pittsburgh, Pennsylvania. Carol Mass or Jess Manton. You're listening and watching Bloomberg Radio. 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 Ihard Radio app and the Bloomberg Business App. Or want us live on YouTube. I want to get to our next guest. You know the backdrop Global markets on edge Fresh termoil

at Credit Suite. Just a few days after the collapse of some American regional banks spurred a frantic rush for cover. You've got the FED working with the Treasury to review US financial sector's exposure to credit sweets, and then we've seen a real repricing when it comes to expectations on the FED. So jam pack Day great to have back with us. Peter Atwater, adjunct Professor of Economics at William and Mary, former Wall Streeter, someone who really so smartly

connects Wall Street and Main Street and Washington. He is the person who coined the term K shaped economy, and he's a financial historian and he is joining Sva Zoom in Pennsylvania. Peter, good to have you here with Jess and myself. I gotta first ask you, if you were still on Wall Street, would you be hunkering down and moving assets into safe havens because you thought, Okay, there's more to this crisis and we've seen so far, and I as soon you use crisis, I think, actually it's

three banks that have gone down. Credit Spiece has had problems for a long time, So I've got to be careful in what I say. Yeah, I think we're in the midst of a panic, and so I think that's a good term because it describes the environment in terms at least in terms of confidence in the way people feel. You know, I think everybody is hunkering down. It's a

natural response to our low confidence. So I expect that every firm on Wall Street, if not regional banks and global banks right now are looking at all their positions. It's a natural, impulsive, emotional response to what we've seen. Peter, you mentioned the environment. How important is it for us to really understand how did we get here? So it's critically important because the backdrop of confidence really drives what

we do. And I think underappreciated, particularly for the last six or nine months, has been the fact that at least American confidence, if not global confidence, has been really low. And when that happens, we are predisposed to act impulsively, dramatically. If you look at history, these are the times when banks fail. Bank runs don't happen when everybody is confident. They only happen when people feel powerless and uncertain. And

that's what this sort of environment is fostering. Is a lot of it too, that we've just quickly moved from. It feels like a very low rate, negative rate environment, easy money, liquid environment. How many adjectives can I use here, Peter to a very different environment where we're tightening as the FED moves to rain and inflation. Yeah, I would frame it a little differently. I think we went from extreme confidence in fixed income reflected in the trillions of

dollars of negative interest rates. So we had that peaking at the same time that we had all of this abstraction, NFTs, crypto, all the different coins and spacts, and so what I think we're seeing here is a collision in the falling confidence, not only in terms of abstraction and what we've seen in the equity market, but the same decline and confidence

that's hitting us in fixed income. And so those two really came together with a Silicon valley where you had this double whammy of people fearful of the crypto connection as well as the bond connection. You talked about how this is a panic. I want to know more specifically, why do you think this is a panic this time around? Versus people who are arguing, well, this is more if you're looking at the types of midsize banks that had

these exposures, specifically towards deposits. Because I'm looking at the behavior and so the behavior reflects panic, which is that movement that we have as our sense of powerlessness and uncertainty swell, and that happens generally towards lows and confidence and panic. If you think about it, if you've ever experienced a panic attack, what that is is anticipate. It's

an extrapolation of the trend. And so that's what we're seeing here at lows and towards this low and confidence is people are extrapolating the fact that one bank has gone bad, therefore others will occur. And that's that's the nature of this panic contagion that you see throughout history. Totally get that. And this is part of what we were talking earlier about psychology and how you know, versus fundamentals, but how psychology can drastically change fundamentals that can really

play out. Having said that, Peter Bill Isaac, former head of the FDI, see, you know there in the late seventies and eighties, saw a lot of bank problems. You know, said, you know, looking at Silicon Valley Bank, this is a bank who's balance sheet just exploded in terms of assets. So it makes me wonder, where is the regulatory oversight?

What are we missing in either shadow banking or the private markets that I feel like there isn't that much transparency over So I think, as as with everything, when confidence sores the way it did certainly in financial services up until a year or two ago, you see the regulatory environment follow suit. So regulation naturally becomes more laxed before confidence turns down. And sadly, this is a phenomenon that we see again repeated in history, and so you're

seeing regulators now playing catch up. And you know what we'll see is once things you know, once the barn door is you know, the animals are out, they will once again close the barn door after them. Are there more animals to come out? Pigs can move kind of fast, Cows can move kind of slowly, you know what I mean? Though, But should we expect that there's more to happen here? So I think we have to watch how people are behaving because if mood continues to deteriorate, there will be

more contagion, Things will move more quickly, more widespread. If this was the bottom in terms of some sort of capitulation, then we should see start confidence begin to rebound. But I think we need to be cognitists of the fact that after a traumatic event like this, we are continue to be hyper vigilant, and so we have to be careful that we don't have this false start and then roll over again. Carol mentioned earlier about how you popularize this term the key shaped recovery. What are we in

store moving forward? What kind of shape here are we talking about? Well, I actually think what we're witnessing is a lot of confidence at the very high end that preceding this was extraordinarily confident is receding. And so I'm seeing this beginning of this closing of some sort of an alligator jaw where you know, those at the top

moved substantially higher and they're starting to move down. And remember for those at the bottom, you know, is this continues to be an extremely difficult environment because of inflation, because of you know, particularly food and energy and certainly housing in cars. Just got about twenty seconds, Peter, your thoughts on what the FED needs to do next week. I think the Fed has done a remark workable job this past weekend in terms of trying to instill confidence

in the system. As far as what they do next week, I'm watching the tebow market because the tebow market is going to lead the FED into where they position themselves. I think they have to be very conscious of not unsettling things and making investors feel more powerless and uncertain than they feel today. This was so great, Peter, Thank you so much. Really appreciate you joining us on this Wednesday. Peter Atwater, he's adjunct professor of economics, Everet Will even

Marry joining us via zoom from Pennsylvania. 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. We are talking about walking on a fine line. It certainly feels that way in terms

of the banking sector, feels a little fragile. Although, as you've heard from a lot of our conversations today, a lot of folks saying, this isn't, you know, another financial crisis, this isn't another banking maildown, but nonetheless we are all keeping a watch on it. You are listening in watching Bloomberg BusinessWeek on this Wednesday. Carol Master along with Jess Metton. So we did talk a lot about credit suees today.

The stock spiraling as it was unable to line up a top shareholder to up at stake in the bank, as you know, did cause shivers through global banking on top of an already heightened nervousness following the collapse of three regional banks in the past week, most notably Silicon

Valley Bank. So let's get into how Silicon Valley banks collapse threatens an already fragile economy that's storing the upcoming new issue of Bloomberg Business Week on newsstands starting tomorrow, already online at Bloomberg dot com, slash BusinessWeek and on the Bloomberg Let's get to it with Bloomberg News Fed and US Economy reporter Chris Condon on the phone in Washington, DC, and also with us the editor Bloomberg BusinessWeek, Joel Webber

here in our Bloomberg Interactive Broker's studio. Um, Joey, you know, we talk about black swans or unknowns when we talk about the economic outlook. Who would have thought a couple of weeks ago that we would be talking about you know, it feels like some continued problems in the banking sector, and it all started off It feels like with SVB um or maybe jo j Yeah, right, there's that guy who uh, you know, been raising interest rates and at some point, Um, we're maybe going to see some cracks

in a facade, as as Chris has in his story. Um. And and I think we were all kind of maybe waiting for something somewhere to track, and now we've seen what that looks like. Um. And you know this is also interesting, Chris, because we're gonna have maybe some more movement next week. Right, So what's on the docket from the Fed may thing of course to I think J. Powell is going to be testifying again. Um, and then

maybe we're not too long. The foc is going to meet and they're going to have to decide how to handle their interest rate policy. People had been expecting at least a twenty five basis point increase, if not fifty. Powell signal the door was opened to fifty in his last appearance before Congress. Now the calculations are going to

have to change. Obviously, the Fed is not only focused single mindedly on inflation, but they have to worry about financial stability, so that will certainly kind of change the entire mix. They have to steal unemployment because that's the other part of that dumanded. But okay, let's say let's stay with it, because there's this lag that has been talked about a lot. How much does J POW care

about that lag? Very much so, because we'll look at how much they've already raised, Joel, you know that they went from just above zero to where they are here almost at five percent. The full effect of those increases has an not really been transmitted into the economy. So even if they stopped now, you can expect the economy will continue to slow because of that, make financial conditions tighter, make it more difficult for firms and households to borrow money,

purchase things, and invest. So they have to think about, you know, how those previous increases will be transmitted into the economy and when, and then how much they want to add on top of that makes their calculus always a pretty complex one and it's not always clear and looking at the economy how much of the past increases has been fully realized yet? Well, the good news no,

there is none. There is some historical precedent for what interest rate increases you know, can do, and the implications that they can have for their kind of I walk us through some of what you wrote about in the story. Well, the history of rate hiking cycles is not a very pretty one. It's not only, of course, everybody says it's very difficult to pull off the so called soft landing, but even more than that, when you don't get the soft landing and you get a recession, you almost never

glide gently into that recession. Generally, the economy is slowing down, things start to become fragile, weak points begin to get exposed, and then something breaks, something like an SVB or in previous cases of the dot com bubble burst or another bank failure happened, and then it serves as a trigger point, and it shakes the confidence of investors, shakes the confidence of consumers and the lending, and you get this retrenchment.

And so suddenly the economy previously just kind of gently slowing down kind of just tips over and turns into a recession. And then unemployment can very sharply ramp up after that. And so the big question of Chorus now is is this SVB incident going to be that kind of trigger point? It's really not certain yet. The credit SWEE situation that is greatly complicating it. Of course, it's

not really very similar to svbing. It's but it's suffering from now this leaking away of confidence in financial markets. And so I don't think it's clear yet that these really will be the break point. But we're at a very perilous moment, that's for sure. Okay, so maybe I'm trying to find the silver lining. If we do see this collapse or this triggering of a recession, does that mean inflation? Actually Chris gets back down to two percent,

and they fed like, whoa, I can start cutting rights. Well, yeah, there are a couple of things, Carol. In fact, number one, yes, if we go into recession, the inflation problem will very likely disintegrate. The other thing that is a bit of a silver lining. Economists will will point out that, you know, outside certain sectors, the economy is in pretty good shape. Balance sheets pretty good. The banking sector, particularly the largest banks, are very well capitalized. They were forced to be sold

by the twenty and ten Dodd Frank changes. Household balance sheets are also pretty darn good shape. And so most economists say that they're expecting a recession, but a shallow one. So if that's the silver lining, perhaps that's what you're looking for. So, Chris, with this week's data, when you're looking at CPI, the we're coming a little bit hotter than expected, but you're seeing these sort of maybe silver linings with producer prices easing up again and then also

some softwarese in the retail sales. Where exactly does this leave the FED as we're heading into next week with this big, great decision. You know, I do think they're not going to be so worried about the latest inflation data points. First of all, you know, they are never they're not expecting this to be a straight line inflation. The inflation figures months to months will always be bumpy. They're gonna want to look at friend line first of all.

And then in the context of these bank issues and the financial stability questions, they're just going to want to kind of thread the needle here and first and foremost, do no more additional harm, Do not spook the markets with something the markets are not expecting on the hawkish side. And at the same time, they're going to want to say, look, even if we pause, we're we're going to get right. You know, once things are settled down, we're going to

get right back to fighting inflation. That job is not done. They're gonna want to signal that one way or another. Okay, Well, just to put a bow on all this, I'm gonna give you the quote that Chris has in the story from David Wilcox, who's the director of US Economic Research at Bloomberg Economics, also a former division director at the FED, who said, it's hard to be totally certain of anything once a crack has appeared in facade. So yeah, I have a glass of wine. Yeah, good idea. That facade

crack is what I think we're all watching. That is for sure. All right, Chris Connin, thank you so much, FED and US Economy reporter at Bloomberg News on the phone in Washington, DCR. Thanks to the editor of Bloomberg Business Week, Till Webber. Here in our interactive broker studio, this store in the upcoming new issue on newstands tomorrow, online at Bloomberg dot com, slash business Week, and already on the Bloomberg terminal, you're listening to the Bloomberg Business

Week podcast. Catch us Live weekday afternoons from three to six Eastern. Listen on Bloomberg dot com, the Ihard Radio app and the Bloomberg Business app, or watch us live on YouTube. Road journal. Now, bet you let me drive? Oh no, no, no, no, who's going to drive home? Honey? Please? I'll do the riding drivels. I want to drive. Good question drives? This is the drive to the globe coming well?

Driver up down on Bloomberg Radio. All right, everybody, just about eighteen minutes to go until we wrap up this trading day only Wednesday. How to check you, Jess. There's been a lot going on. We had a repricing going on in assets. We've got the Fed now pricing in what a one percent rate cut this year? I mean, what a different week makes if you think about where the two year was one week ago exactly, and just seeing those roundabout moves, and then especially repricing, if you're

looking at those world interest rate probabilities. Now all of a sudden, we're going from a potential we thought the veeder was going to continue to high rates into the summer. Now they could potentially cut by a hundred basis points after this next meeting. It's like whiplash, all right. So let's get with it and to it with our drive to the closed. Guests with us is Phil Taves. He's founder, president and CEO at Taves Asset Management. They're about a

billion dollars. They're a registered investment advisor, tactical asset manager. And he's here in our Bloomberg Interactive Broker's studio. So how do you see what's going on and what it means for the investment environment. Well, so we view it as a potential slow meiltdown. One of the ways we frame the market is whoa, whoa, whoa slow maildown? You got my attention? You had me at hello? What exactly?

What kind of slow mailtdown? That sounds worrisome? Well, sou with the markets, everyone tends to you know, you get in this orderly state of things, and last year, even even the decline last year, for the most part, was pretty orderly, and everyone just assumes that that's the way it's going to be. So the problem, however, is that often these things come out of nowhere, and like this is a perfect example. I mean, prior last week at this time, who was talking about a run on the bank.

So we all basically woke up to it this weekend we hear about run on the banks, we start to think about it and the fact the way that rates sort of create lack of profitability for banks. Why aren't we talking about it last week? I don't know. But then in addition to that, you've got the fact that really tried a little bit because you would look at the bank sector, even though its rate expectations were going up, right, bank stocks weren't going up exactly. Yeah, to me, that

was a disconnect exactly. Well, so that that was there, that was evidence. But so then you've got the fact that the FDIC is we all realize, or we all knew, but only as ensuring two hundred fifty thousand dollars. You've got these massive deposits that are uninsured, and so a run on a bank is actually a real thing again, right, I mean right, So it's a real thing. And this statement that the that the FED made when they came

out to protect everything. And by the way, I think the thinking was coming into Monday, is the FED, either or the government or whoever or whoever else protects everything or is massive outflows out of these small banks into big banks. So I think they made the right move. But their statement said that there's systemic risk with these two banks and so we're going to come in and backstop them. So that that's an incomplete statement as it pertains to small banks, right, so maybe there are small

banks out there that don't have represent systemic risk. So I think it's an evolving situation. I think, yeah, Credit SUITEE it was. It's a horrible situation today with their stock price and uh, you know, with for pr for them. But I think it's like a slow moving situation and we're not going to KNOWE today or tomorrow, and I think it's just going to have to play out over time. But it creates nothing is more credits we separate from what we're seeing in the three banks have failed. Yeah,

I think so. I think so because they've had problems for a long time, and and there's they've they've had a hard time managing risk. But you know, I just I think it's important to like think in terms of people and their portfolios, to think about contingency planning right now, to consider even if we think we may not move lower, I think it's probably not the end. They're probably aren't a lot of people saying wow, potential long term term

systemic crisis with banks. Let's invest now. So I think it's it's it's probably going to get worse rather than better over the next three to six months. And I'm glad you brought up people's portfolios because I know you have a very unique way with how your funds work, with a sort of defensive type nature. But contrarian would say, you're in a situation environment like this, how are you

positioning at this point? Yeah, So with all of our strategies, what we do as affirm is we try to provide investors with ways to be in the markets, so to participate paid in the kind of conventional assets like stocks and bonds that everyone wants to be in. But what we do is we with our methodology, try to address the contingency of significant dislocations. And we do that through one of two different ways. It's like a hedge fund strategy kind of, although many hedge funds are super complex

and are betting short and long and taking leverage. So with our strategies, all we're doing is across the board. With our strategies, when we're invested, we're just one notional We're just trying to own the markets, just like an index fund when we're invested, but we try to hedge risk in two different ways. One of them is through trend following algorithms that attempt to move out of the markets in the very early stages of declines before big

declines happen and just live on the sidelines. The sidelines don't look terrible right now when one month treasuries we're paying around five percent. The other way we do it is we have, for example, we have an ETF for example that has able to just have options for full notional protection. So with the market moves down, you have

offsetting potentially offsetting appreciation in those option contracts. So in either case, what the thinking is then is you may not do as well during the rising market, but if the market, you know, falls into the ice, into the cold water, as we may be doing over the next six months, it allows you to just sort of be chill and maybe have some losses, but hopefully not as

much losses as the market. So are you seeing more people come in to your funds now in this situation not as a result of what's happening in the market. So I mean, we have a sales effort and we try to bring assets in and we market primarily to advisors. But we're nowhere near the point where I think the public is looking at this with their stock investments and saying this is a panic mode. I mean, you know, obviously for those of the works, should they be. I mean,

you did say slow meltdown before. That to me says a little bit gets my heart, you know, like, so so we did. So You've got the fear index, which is the VIX index, right, and you know it's a contrarian indicator, and when it's the lowest around ten or eleven, that's when you should have them most fear. And when it's the highest, that's when you actually want to invest

in the markets. It's at twenty six and change right now. Yeah, so we're I mean, it's elevated, but it's not like as high as it can be up in the sixties or seventies or even higher. But so people aren't panicking. I'm I'm not sure I would say that people should panic. You know, our approach, which we're trying to spread the word and we have been for decades now, is that that most people get it wrong. Like the idea is not to outperform the markets, aren't necessarily even to perform

as well as the markets. The vast majority of people just want to have gains above inflation. But to address the contingency of big falling markets. Why is that so hard? Right now? It's so hard because even during the financial crisis the decline only lasted six months. It can get much worse. And I think that's what one needs to think about, and you know, not panic, but address, like, address that possibility. Think about it when you're building your portfolio.

It does feel like a churn, and it does feel like, certainly if the Fed, even if it pauses and then resumes the interest rate hikes because inflation is still a problem, that this could go on for a while. You know, just quick think five second. Yeah, So the Fed is in this new situation, they're creating what's brother thinking their web? All right, come come back soon. This was fun. Phil taves He is chief executive Officer at TVES Asset Management.

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