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Under an hour. Here, we're going to get First Republic earnings, and that's going to really put a spotlight on deposit flows, funding cost expectations. We're seeing that shares are rallying ahead of earnings, so here to discuss that. We've got a great guest, Anton Schultz. He's president and chief investment officer of Mending Capital Advisors, and he joins us on zoom from Florida. Thank you so much for making time to chat with us on all things First Republic ahead of
these earnings. I know that you invest in both big and small banks. You've got a really great broader outlook for the entire industry. How would you categorize the health of regional banks specifically?
Though right now the.
Health is actually very strong. The stocks don't tell you that, but really even the statistics that we all get about deposit flows are kind of misleading in terms of where they've gone and how they've gone. All of us have expected deposits to shrink in the industry. It's really simple.
I mean, twenty twenty comes around. You know, the US government prints a ton of money, sends it out to corporations and individuals, they put it in the bank and they've been whittling it down over the last you know, year plus, and that's fully expected. The run on the banks not expected, and it was very specific to a few institutions, and that money scattered right that money left, you know, some of the left First Republic clearly left
Silicon Valley, you know, definitely Signature as well. So that money, you know, just first went to some of the bigger institutions spread around the industry. But you would still expect the industry to experience outflows as people take down their deposits. You know, one of the regional banks I talked to said, well, our average consumer deposit went from thirteen thousand a person
in nine thousand. That's not a fearful thing. It's just people spending the money that they got from the government.
So anton, of course, deposits in focus after the belt to day the First Republic. But look, something that's really sticking with me is what Jamie Diamond said of JP Morgan last week. I believe and you guys said, look, by the end of the year, a lot of these deposit flows they're going to shake out, they're going to normalize. For a company like First Republic that's really dealing with a confidence issue, what do we take away from.
That, Well, I mean, at the end of the day, the confidence issue was certainly helped by the largest banks putting thirty billion dollars deposits in. Certainly, I would think the regulators and the large banks nobody wants to see First Public fail. I'm a customer, right, I love them. They're great service. But at the end of the day, deposits matter, and the deposits matter versus how you've built your asset book. Right, what are you have in your
asset book? Do you have a lot of bonds well that you know, kind of undid Silicon Valley people looked at the mismatch and ran and in this case, they had a lot of fixed right long term mortgages. And when you match that against higher short term interest rates, that's a tough match. And when you undermine confidence, then that those deposits ran a lot of the venture capital mining ran really fast, and that's you know, what companies had in common, or you know, clearly Silicon Valley had
the largest concentration. First Republic would have been would have been next in terms of dollar amounts, in terms of you know, the regionals, and then pack Western Western Alliance. Western Alliance really startings last week. I mean, you know that was that was quite a pleasant surprise to people who owned it. Still down a lot, but up substantially from its lows.
Yeah, So do you anticipate getting another upside surprise heading into the clothes today with First Republic?
I mean it's absolutely you know, binary the way the stock reacts, but I certainly think that confidence has been restored without thirty billion dollars of inflow, and clearly they've been reaching out to customers and finding ways to diversify deposits. There are all sorts of programs out there that help diversy deposits. So of course, what also is important is
everybody talks about two undred fifty thousand. Well, if you have an account with your spouse, or if you have account with your spouse, your two children, but it's two fifty of persons, So that's a million dollars right there. So you know, clearly, I think some of that money is going to come back. I think some of the confidence will be back. We want to resolve that company, so it's a very good company. But yeah, the outcome
is going to be binary. My thirty four percent short interest, So clearly you can have a very large move in that stock.
Anton get a little nerdy with me here if you will. When we're looking at price to book ratios for some of these regional banks, what is so striking to me is that they have fallen far below that key one level. And for our non stock audience around the world, when it falls below one, it is kind of this glaring buy signal, and it has been for a lot of these companies. Why is it not it is a no brainer to share buybacks for a lot of these regional banks.
You're worried about a confidence issue, you're worried about your stock losing all this kind of value.
Why not deploy that cash?
Well, I mean, that's a brilliant observation. You get high honor marks for me being nerdy. I might, but if you really think about it, you know what the swings of this business, if you really think about it. You're absolutely right, all right, you're supposed to be buying regional banks below book value, and why are they not buying stockback?
Some are right, but I think at the end of the day, people want to have confidence of strong capital ratios, lots of liquidity, and I think the industry is going to be a second half of the year buyback story, right as capital bills, as some of those bond portfolios start to you know, a cree back into value of book value in capital, you know, as rates potentially fall again, as we had potentially of mild recession. And by the way,
regional banks can really outperform in a mild recession. Everybody goes back to two thousand and seven and eight, which is a you know, once in a century kind of timing period. I don't think we have the bad products. I don't think we have the irresponsible lens. I don't think we have the same capital ratios for the industry, and so I think it's a really good time. I also think we have a lot of latent m and
A that will happen. Right, if you're a bank CEO and you're in your late fifties early sixties, you've been through two thousand and eight, You've been through twenty fifteen, you know Stockston Act. Well, then you've been through twenty twenty and twenty two. Boy, when you have a chance to sell your bank, you're going to And by the way, the gap from a MidCat bank and small cat banks is about four you know, handles in terms of pe
ratios getting nerdy here. So that means the larger bank can buy the smaller one in a very creative manner and pay a forty percent premium immediately.
I mean, and that's exactly what we're potentially expecting from First Republic as we talk about just how much kind of liquidity and a lifeline that we've gotten from GP Morgan, from Bank of America and others, and how much further they're willing to go.
So that's simply something that we're.
Going to be watching after the bell Anton. From your perspective, though, when we talk about exposure for some of these community banks and regional banks, talk to us a little bit about crypto exposure. That was at the heart of the issue with signature with SBB as well. Your take on whether we were let's say, ten years too early on that exposure you know, I.
Think I'm disappointed that we didn't have a chance to sort of regulate and make things like like crypto or stable coins sort of a safe part of the marketplace because those deposits. Again, if you combine that with you know, the crypto and the venture together, Signature's case really twenty five percent deposits of you know, crypto and certainly similar
Mountain venture. You know that money can go really quickly, right, you lose that confidence, you know, click the mouse, and by the way, that's a risk with FED now, the money can move really quickly on FED. Now, if you really think about going back to the financial crisis, you know, first Union or Wacoba failed, you know, was handed basically to Wells Fargo. They had sixteen billion run out over a week. I believe Silicon Valley had one hundred billion
of demands on that Friday it failed. So you know, that ability to click the my house and move that money. So yeah, I would have loved to see crypto reregulated. I would love to see it part of the banking system in a regulated way. And look, deposits are obviously key, and that's important. And then you add up, you know another another factor is cannabis banking, you know? Is that legal?
Right?
There's a lot of cash people have, you know, their money in safes and things like that. So if you think about where that money is and where it should be, it should be in the banking system, it should be regular.
Sure. Hey, we've got about forty five seconds left, So I do want to get to some names because our audience loves to hear some investment advice from the smart folks like you that we bring on the air. Talk to me about some of your top holdings and maybe some of your more unique ones. You've got a New York community bank down the list here. Talk to me about what's looking good to you right now?
Perfect, well, you just let it off with with my one of my near term favorites. And look, I've loved in your community for a long time, non management for decades. Literally. I like the fact they got those signature deposits right. It definitely selves some positiveshoes for him. They're one of the top mortgage lenders in the country. That's not a great place to be now, but when rates come down, that's going to be a really great place to be.
And I really think they're concentrating on improving their branch system. You know, the CEO of Tom Kagemi was the CFO for a long time. He's only had a you know, a couple of years as CEO, and I think he's really remaking that big. So I love the big dividend yield. I think that's important. So I'll give you to others with big dividend yields. First, Interstate FIBK. It's one of
my top top positions as well. And I'll give you another one that's in the middle of a merger of you know, PFS Providence Financial right across the river from youre, New Jersey, and again big dividend yield. They've got a pending merger to close. They have some very big index activity has to happen when that merger closes, which again
is another sort of technical reason to own it. But I really like management, knowing them a long time as well, so I like getting a big dividend and waiting for you know, these prices to recover.
Anton Shoo's president and chief and best an officer over at Mendon Capital Advisors joining us on the line from Florida. We thank you as always.
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 iHeartRadio app, and the Bloomberg Business App, or watch us live on YouTube.
The SMP's basically been in one hundred point range going back to March here. So the big question as we get earnings from the likes of First Republic again down by about seven percent in the close here off of those earnings, but will continued earnings We've got about one hundred and seventy companies reporting this week. Will that change the needle as we move forward here? We're only about
a fifth of the way through this earnings season. So joining us to discuss is Bloomberg Intelligence is Gina Martin Adams. She joins us on zoom from New Jersey. Gina, thank you so much for being here. What are your expectations? Are we going to continue to see beating estimates, beating estimates headlines over and over again?
Well, thank you for having me into delight to be here. And certainly this is a critical earning season on a number of fronts. We tend to see companies beat earnings, so it's important to keep that perspective. On average, even in the worst of earning seasons, at least sixty five percent of S and P five hundred companies beat estimates. We're looking at seventy five percent so far, so it's
been an above average earning season so far. But really we've only gotten financials and a few companies from other sectors thus far. If the analyst consensus is correct, earnings are now on pace to fall about seven percent year over year. The expectation at the start of the season was eight percent. That includes all of the analysts downgrades that are continuing for the non financial sectors. So so far,
so good for earning season. I do think tech in particular, the megacap stocks in the S and P five hundred that are tech or tech adjacent are going to be the most critical reporters, not just because of the biggest stocks, but also because generally they're training at the largest premium, so they have the biggest hurdles to overcome Gina.
It's interesting when you look at kind of the historical pattern that tech has performed at because in some ways in this last tightening cycle, every time rates go higher, there's an expectation of rates going higher, tech are the first ones.
That get hit.
But then if you go back to the twenty sixteen tightening cycle, tech outperformed in line with those rate hikes.
I could argue both ways for recessions too.
You've seen recessions where tech has been the go to and recessions where tech is the first to get hit.
What happens this time around?
Yeah, I think this is an excellent point. One key difference between this cycle and twenty sixteen is in twenty sixteen tech stacks in the S and P five hundred, we're not trading at a premium to the rest of the SMP, so that would argue that there might be a bit more risk in tech STAPs. Another key difference between the current period of earnings recession and that of twenty twenty is in the twenty twenty recession, recall tech earnings we're growing at an exponentially stronger pace than the
rest of the S and P five hundred. They were still in business, not shut down, and actually experiencing accelerated demand because of the uniqueness of the pandemic cycle. So
I think that this is something of a mix. Right now, tech is trading at a very premium valuation to the rest of the S and P five hundred about fifty percent above the rest of the S and P five hundred in fact, but also experiencing an earnings downdraft about double the index, particularly when when you remove those key buybacks from the tech sector, net income is falling more than more like twenty percent for the tech space and the S and P five hundred. So right now you've
got a really tough climate. Now, Naturally, historical precedence is not necessarily perfectly relevant for any given cycle. There are unique characteristics of this cycle. Investors are more and more beholden to the tech space as the results of sort of hiding there throughout the pandemic and really not releasing their grasp on those tech stocks over the last couple of years, despite the fundamental evidence that suggests that this
space is ruggling somewhat. So I think that this is a really unique spit in unique time point in time for tech. We can get some historical evidence to suggest that the combination of valuations and really suppressed earnings should not be great for tech. That said, interest rates play a role too, and there are a lot of moving parts to consider. For investing in this segment.
So, Gina, before we move away from tech, I want to ask one final question on this. Micron and Seagate not doing so great with their earnings, is that a key indicator of what we might continue to see throughout the rest of the week.
Yeah.
Well, typically semiconductors are a leading indicator for the technology sector, so anything happening in this semiconductor space is likely to feed through to technology over the future quarters. They're the leading edge of the cycle. So what happens in semiconductors now maybe a harbinger of conditions emerging for the rest of the tech space going for I actually think though in the end because Apple, I almost merged Apple and
Microsoft there. But because Apple and Microsoft are such a huge market caab portion of the tech space, they also really dominate earnings trends and their priced at premium levels relative to the index. These two will matter most without a doubt or current sentiment toward tech because they're just so large and they have dominated price trends for the sector. They're also very important to driving price trends for the S and P five hundred as a whole. But I
don't want to ignore the rest of the indicators. I definitely think semiconductors' prices have performed very well, hinting to an emerging improvement in earnings trends for that segment. We want to pay attention to that pretty closely as an
indicator for the broader sector. But really what matters from a sentiment perspective right now is can Apple and Microsoft continue to hold up sentiment toward their stocks which are definitely premium priced, and earn a are not particularly strong to support those premium prices.
Well, talk to us then a little bit about kind of the valuations here, because it just feels like if you are and we've heard this time and time again when it comes to growth stocks and not necessarily your alphabet's, your metas, but even going back to the fifties or the sixties, kind of these growth stocks that were Walmart, IBM, Disney at the time, that in a decelerating macro environment, you lean towards the growthiest parts of the market because value as the alternative is not the way to go.
If a recession is coming down.
And I'm just thinking aloud here, teach me gena as a recession is kind of coming down, that just means a direct drop in things like CAPEC spending or infrastructure and things like that. So naturally you go in the opposite direction to the growthy names. Why aren't we seeing a bigger push towards the growthy names if everyone's convinced a recession is just around the corner.
Yeah, I think it's a matter of a couple of things. Critie I would say, first, it's a function of inflation. You know, this has been a really unique cycle over the last year. All of the earnings weakness has really been accounted for by price trends and inflationary conditions that
really suppressed margin growth. We did see some volume sales deceleration certainly amplify those margin struggles for companies, but that margin struggle was found in the part of growth companies much more than that for value companies, And as a matter of fact, many value companies actually exhibit a degree of pricing power over the last year. The second thing
I think it is about sequence. I mean, frankly, everybody's talking about and still debating economic recession, but earnings are in recession, and they've been in recession for a year now. So we are about to post our fourth consecutive quarter of x Entergy earnings declines on a year ago basis
for the S and P five hundred. While everyone debates economic recession, earnings recession maybe hitting its worst of it, it's worst point already and is projected to the earning stream is projected by analysts to start to recover in the second half of twenty twenty three and into twenty twenty four. That sequence makes a really big difference. Where
is the earnings recovery going to come from? While the analyst consensus actually thinks that the stronger earnings areas of the market are a bit more value centric this time around. A lot of it is the classification of who's a value stock versus who's a growth stock. But when much of your value segment is in financials as well as some industrials, some consumer discretionary stocks, and these are the stocks expected to lead that earnings recovery that can really matter to the sequencing.
I'm investing, Gina thirty seconds. When to put you on the spot here you mentioned margins. What's more important in this earning season? Top line or bottom line growth?
Oh? I think bottom line is almost always more important. Creaty, the only thing the top line really matters for are those growth stocks because they do have longer duration cash flows and investors want to see some persistence in that growth outlook emerge for those companies. But margins are always most meaningful, So I'll pick bottom line bottom line.
It is the top line growth I think coming handy when we're trying to price in whether the consumer is still spending. Gina Martin Adams, the chief equity strategist over at Bloomberg Intelligence, answering every question that we're throwing at her and staying after hours for us.
We thank you as always.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter 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, play Bloomberg eleven thirty, Maddie.
One of these stocks that we have not talked about in today's trading session is this company called C three. It is an AI company. The ticker is literally AI and we know AI.
Is all the rage.
Yeah. We actually we had the CEO of C three AI on the show while ago a couple of weeks ago, and it was a great conversation. It was right after some very big news for the company. He talked a lot about the health of the company, staying intact, and it's part of the bigger discussion that we can't get away from Business Week Radio here about the future of AI, specifically with regards to chat GPT. It feels like any company with AI in the name right now is taken off.
Yeah, and an enormous story. And in today's session you had AI drop the ticker AI. I should say, not AI generally, but C three shares drop some eleven percent off, just an analyst downgrade saying, look, this is an AI story that has gone too far, too fast, and it's something that took a lot of the kind of momentum out of the stock and out of perhaps the secret at least from a market perspective.
But let's talk about someone.
Who's in the nitty gritty of the AI story, Maddie. I want to bring in Ashley Still, senior vice president of Creative and Digital Media over at Adobe. She joins us from San Jose, California. We think he has always actually for making the time to talk to us a little bit about AI, simplify it for our audience and for myself, by the way, who is not super familiar with.
What AI actually entails. What is Adobe's vision for AI?
Sure?
So first you know, Adobe, our mission overall is to enable everyone, whether you're professional or just someone who wants to post compelling content to social media, to bring your creative vision into life. And our vision for AI is to help people do that, to put even more power
in the hands of creators. I mean, we have award winning filmmakers that use our video tools, and then we have students and entrepreneurs and solopreneurs that use Adobe Express, which is our application to just make quick, easy, fun content. All of that can become more powerful, more fun, more intuitive through AI.
So talk to me about the video editing capabilities specific I'm on our social team here at Bloomberg, so I spend a lot of my time editing text on screen videos and I would be thrilled to outsource that to your AI.
Absolutely. Yes, Not all of us are destined for OSCAR winning filmmaking, so there's so many ways that we can again accelerate video editing. There's a big National Association of Broadcasters show last week where we launched a new feature called text based Editing, where you can literally edit video by copying and pasting text through the transcript. So all of us, I think, can copy and paste text as a way to get started. But that was really just
the beginning of our vision. We introduced a new service called Adobe Firefly, which is Adobe's family of Creative Generative Models, which is the same family of approach of AI's Chat GPT, but focused on images, and we will extend that to video. And some of the things that we showed through that vision were things like changing the time of day of a video, so you might have a video that you shot in the morning but you wanted to be sunset and being able to do that automatically, or looking for
sound that goes along well with the video that you're editing. Right, often you're not just editing a video, you're adding sound. You're adding elements and being able to automatically create sound effects that go really well with that video content. And of course a lot of times people are finding b roll and other assets to incorporate into video, and we
believe Jenny I can help do that too. So there's a lot of ways you don't have to just create the video by typing text completely, but there are a lot of ways video can be easier.
Yeah. No, and it's funny that you made the joke about we're not all destined for oscars, but it does feel like we're moving more and more towards you know, the TikTokers, the Instagram influencers of the world being the people at the forefront of the content creation conversation because of the reach that they have on those platforms. And our own analysts say that Adobe creative growth could top fourteen percent just due to the explosion of social content.
So I wonder, Ashley, if you can give me some insights into kind of to what extent this move is related to that explosion of social media content creation. Is this a play to get those content creators using creative cloud products more specifically as they create their content.
Absolutely, you know, the demand for content is growing exponentially, and it's growing in two vectors. I would say first is more people are creating content, and certainly social media is driving a lot of that, and of course we want all of those content creators to use and love and find value you in Adobe tools. This second vector
is large companies are creating more content than ever. And of course these companies have enterprises have always had creative departments and have been creating content, but it's growing exponentially, and so large companies also need more tools and services to help them scale their content, not just through adding
people or agencies, but through technology. And so we see this as an opportunity to both expand our business to new people, but also provide more value to the customers that we already have.
And what does that mean then for the competitive landscape here? I mean, we have a lot of the big tech names that from a market's perspective, we love to look at the meta story, the Alphabet story, the Microsoft story, But just how much of corporate America can really engage on the AI front?
Oh?
You know, I think if technology companies do it right, their existing products and services will just get better. Right, It's and and so the responsibility I think we feel at Adobe is to productize AI in a way that's useful and an adoptable for our customers, and of course to find ways to make it accessible to new customers as well.
And on that customer discussion, do you see this as more of a B to B play something where you'll be selling the technology to big newsrooms like the one that we're in, or do you see it as individual consumers? Just about thirty seconds here.
Both absolutely both. So again I mentioned Adobe Express. It's a free web based tool to create content and social media posts. We will absolutely introduce AI powered features into Adobe Express. Any consumer that has access to a browser can use Adobe Express, and then we clearly their opportunities to introduce enterprise products as well.
Ashley Still the senior vice president of Creative and Digital Media over at Adobe, joining us from San Jose, California.
She is in the heart of it.
She's in the heart of the California story and of course the tech story. Brodley, I mean, Maddie. AI is taking over and I mean, who knows is this a story for five years?
Ten years? One year?
Yeah, I mean I always think about this. We don't even know what the top tech companies are going to be in the next year, because I mean AI, it's just coming in hot.
Brother Marc.
A journal Now about you?
Let me drive?
Oh no, no, no, no, DG honey, please how do the driving gravels?
Let's mate, I want to try it. It's a good question time.
This is the drive to the Globe.
Dons me. I think, well, bun.
Ja don on Bloomberg Radio.
I gotta say, I am loving this music. This is this is fun.
Just wait until at four am, any baby, won't You're one more time gets stuck in your head and it's on a loop and you're thinking about this show in your dreams.
Yeah, it's great looking forward to that tonight as a perfect precursor to the earnings where we're going to get tomorrow.
Folks.
It's kind of a cautious day in the markets, but I got to say hold on tight, because in about twenty four hours, everything's gonna change. We're gonna get a ton of earning Zeta, a ton of economic data. The question is how do you play it. Let's bring in our next guest here. John LaForce joins us. He's a head of real asset strategy over at the Wells Fargo Investment Institute.
He joins us on the line from Sarah Soda, Florida.
John, A pleasure to have you. I hope that song doesn't get stuck in your head in twenty four hours. Talk to us about the trade here.
What are you watching, h.
We're really watching the safety trade more than anything. So what we've done recently that you don't see a lot out of Wall Street now is we've gotten very defensive. With an S and P at forty two hundred, we think your upside's cat. So we're starting to shift money from many risk assets, so stocks, more into the fixed income side, and particularly the short term fixed income that one to three years. So that's kind of what we're focused on at this point. The risk asset that frankly
we do believe is okay or commodities. They're more in a super cycle ball and this is just the pause before prices go.
Higher, before we get to commodities. I want to talk to you about risks specifically with regards to tech. To what extent do you see tech as being risk on and potentially overvalued right now?
Yeah, as big as they are of a waiting in the S and P five hundred, it definitely matters. But when you get defensive. The one thing that's very clear in the data, when you get defensive with equities, you want growth, and you still have that out of tech. There are very few areas that can grow. Energy maybe the second that can grow at that level, but what histories suggest is when you try to get defensive with stock,
it's really smart to go towards growth. So even if they are a little overvalued, still think you're going to see money put there.
Does that feel defensive to you though?
I mean, when we're looking, I'm stealing Madison Mill's question just to be completely.
Clear, well butrased.
You know, it's interesting you're seeing that's not defensive, and yet tech has actually outperformed, and yet you're seeing these cross assid moves that are pretty similar commodities, bonds, even the dollar hatch funds the most along the green back and quite some time here. So why not be defensive if you're talking about inflation and recession?
Why not?
Yeah?
Yeah, So it doesn't have to be defensive. Doesn't have to be to be clear, it doesn't have to be utilities and healthcare and that kind of defensiveness. We're in a market that's trying to find a way forward, but you have a FED that still wants to raise rate. You have a lot of this economic data is showing slow down globally here and also in the rest of the West, in Europe, so it's trying to find its
way through and while it's doing that. I don't think we have to get super defensive with equities that would be that utilities, healthcare of staples. I think what you really are looking for is just be prepared that the upside is kind of capped and so while you are sitting here waiting, growth is one of those areas. That's why we do like tech, we do like energy. Those are the two plays that, frankly, we believe have the most upside when it comes to earning.
So what changes that, What brings a little bit of momentum into this market?
Oh, you probably have to have the FED just stop raising rates. So essentially, what you if you look out into the future, frankly, what history shows is the S and P doesn't bottom until an average six months after the first FED rate cut, we're still hiking. So that's kind of that. What we're looking for is we really need to turn that corner where the Fed's looking at actually cutting rates, and then we'll probably get more constructive on the S and P.
Yeah, that makes a lot of sense. I guess since you brought it up, I do have to just get your Bloomberg take on the Fed's terminal rate. When you think they're gonna pause, and when you think they're.
Going to start to pivot.
Yeah, we don't have a specific date for that pause or pivot. We do believe that the next two meetings we will see two more twenty five basis point hikes. Then we think you'll get the pause. So I guess technically you could say the pause might be this summer after those two if they're so data dependent though, if we don't want to get too far ahead of ourselves, but we are anticipating a recession later this year, so we believe that will make them pause, and then we
might be into cut mode. Come you know, the beginning of twenty twenty four, maybe this time next year.
Well, I gotta say that you have to then look at the commodity market, the bond market as well. If you're forecasting into twenty twenty four, is all that priced into the market a ten year yield to three fifty one?
I know, nuts, huh. I love to say no, But markets are pretty forward looking, so possibly, But yeah, that's a really really tough call because markets are pretty good at anticipating what the heck is going on. But we'd expect that long end to eventually move up. So we are inverted on the curve today, which shows or flash's recession coming. But by this time next year, we believe we're going to be back in that speaking, We've.
Been inverted for like two years now, though I'm almost like twos tens at negative sixty three base points to be fair to your credit.
Look, we're not as inverted as we were.
We hit almost I think one hundred and fifty basis points of negative inversion on the twos tens, but look inverted for a while. A lot of folks are saying this gauge is quite broken. But to me, I think what's scary is a two year old at four thirteen. It's the bond volatility that I'm more worried about because a month two months ago, we were hitting five percent, getting really close to that terminal rate. What is driving this bond market inflation or recession? Thirty seconds both, but I got.
To pick one man.
Inflation is not coming down fast enough. I think that's what's driving it is. Everyone's anticipating this move from our five to six percent level now to we need to get to where the FED is at two and we're just not getting there. We're getting these intermittent type readings that are like, oh, we we're going to get there eventually, and markets just don't have much patience so they kind of want it now. So it's both. I would say they are frustrated with inflation's not coming down fast enough.
And then two, most of these economic numbers we see clearly show slowing end of this year. So I think it's both. I think it's inflation frustration and then its recession right around the corner.
Man, it's like having your cake and eating into.
John LaForge, head of Real Act Strategy over at the Wells Fargo Investment Institute, joining us on the line from Sarasota, Florida.
We thank you as always.
This is the Bloomberg Business Week podcast of a little on Apple, Spotify, and anywhere else you can get your podcast. Listen live weekday 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 journyalone.