Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
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Find the Bloomberg Markets Podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's bring in some smart people who do this stuff for a living. We'll kind of see if you can break it down a little bit. Chris Whalen, founder of Whale and Global Advisors, joins us here and Hugh Henry have Aklectica Asset Management. They joined for an extended round
table on what we might be seeing in these markets. Hugh, thanks so much for joining us here in our studio here. What do you make of the past few days that fed the ECB. We've got some banks kind of I don't know if it's crisis or not. That's debatable, but there's a lot going on out there. What do you make of it?
I don't think it's debatable. Okay, you know this is and we went over the clip, but I mean, seriously, this this is real, right. I think the FED will stand charged with the greatest FED folly in a very long time.
And in terms of raising rates too fast or what so or too late.
So it is a fact that they raise rates fast, yeah, in terms of the timeline and the magnitude. And typically the FED doesn't do that. And there's a reason for that because your bank is effectively like a hedge fund. Yeah it has it gets the money from deposits, right, but there's no gate. Yeah, you can take like with a hedge fund, they insist. I mean, if you're in like one of those big hedge funds, try getting your money out. It takes you to like, you know, it
takes you two years with that with the iPhone. With the banks, so the gate issue, right, But the other issue is that the assets are loans and it takes kind of like two years to reprice your loan book so that you can raise your CDs without destroying your net interest margin like with our going into losses. So the FED is cognizant of that, right, and it takes its time. This was an impatient Fed, okay, And then what we've discovered.
Well, first two patient, right, and then impatient.
Well, I think the world of economicists has changed profoundly. But we may come back to that. But yeah, and then impatient. But it's the deposit flight revealed. There's always a revelation in markets, and the revelation has been the conceit and the arrogance of a whole to maturity bond portfolio. And that was fine, okay when rates were stable, but
when you aggressively hid them. And then with this technology jump, with the iPhone and with the deposit flight, suddenly you had to mark because deposits were fleeing, You had to reduce the HTM portfolio, and suddenly you discover that you've wiped out your shareholder funds. There was a FED report back I think to the twenty third of March, which revealed, as we know that total bank assets in the US twenty three trillion dollars. What does that give? Give us
a reference? That's one time's GDP. Yeah, and you had about twenty three billion of shareholder funds in fractional reserves and we're kind of leveraged entities. But the marked market or the unmarked loss was two point three trillion dollars. Okay, Right, so we're talking about your metaphorically the kind of notion of the dead people walking the banking sector, and that's
kind of I'm afraid that's on the Federal reserve. We are staring at a scenartio which is very similar to nineteen thirty where we had the widespread failure of the US banking community.
Chris Whalen, what do you think about that? I want to bring you in here because you're one of the foremost bank analysts in the country. What do you think about Hugh's point that the FED really kind of has blood on its hands.
Well, I think I totally agree with Hugh in the nineteen thirty metaphor is the correct one, because you know, this isn't the two thousand and eight which was basically just a bit of a tantrum around private mortgages. This is solvency. This is a FED induced you know, panic that looks a lot like the eighties. By the way, with Paul Volker, the last time we had benchmarks four or five points about bank deposit rates, it was back in the eighties. We destroyed the snls, but the snls
didn't matter. These banks matter. That's the difference. And I think that the FED is badly miss you know, they panicked in twenty eighteen with the money market crisis in December. They started dumping reserves into the system the next year, a year before COVID. You can see it on the Bloomberg look at the index for Ginny May duration. Wonderful chart you guys have on the turbinil. It tells the story.
So by the time we get to COVID, the duration on two point two trillion dollars in Giny MA securities is one, which is almost impossible.
But Chris, I mean we we've heard from some analysts that most or a lot of these I would say most of these banks they have enough capital.
And let's talk specifically about pac West. I had our regional banks analyst in here, Herman Chan. He said they have one hundred and eighty eight percent assets to deposits.
I know, but it doesn't matter. These are going concerns. When the stock price gets two point three times buck, that tells you that the bank's going out of business. It's like the politicians. They get voted on every day in the stock market. Right, we're voting on pack West this morning.
And you explains to me like I'm five, okay, if every if every deposit goes into pack West and says I want my money out. They can have it out as far as I understand it right now.
No, you're thinking of this like it's a wonderful life. No, that's not the way financial markets work. They want to know that that bank is a going concern, and when the stock price gets as low, the business counterparties back away, and the formula and the bloomberg by the way that generates probability of default is geared off of the equity price. Uh huh, okay, what do you think the hedge funds use? That's how it works.
So I'm typing it in right now, Jack W Equity DRSK.
What is it like four hundred basis points?
So yeah.
So my point is there's a lot of banks behind this flat and you know I own Western Alliance. I love that bank Ato point seven times book. I think they'll be fine. They had already traded off because the mortgage market had come off. That was one of the best performing banks in the country in twenty twenty one.
So you know what's happened is the FED wants to pretend that they can have a traditional anti inflation scenario raising target rates, but they're ignoring the manipulation of the bond market that came with quantitative es.
Let me get you in here, because the securities. You made your money and your name by figuring out how this kind of thing is going to play out? Right, how does how does this look to you right now? I mean we've had a few days of this sixty, you know, fifty percent drops in these bank prices, and yet the FED came out yesterday and said, you know, the US banking system is sound and resilient.
Yeah, lyyer puns on fire. So you know, I mean, I'm now really representing acid capitalism. You know, the eclectica is no more. This is the world of us at capitalism. There are occasional ripples through risk assets when people kind of get excited with this notion that the Treasury might come in and ensure old deposits. I want to tell you that we are past the point of relevancy for that procedure, my fear, and I do not say this lightly.
I've given it great consideration given the peril present peril with regard to the magnitude of losses on security portfolios held within predominantly the regional banks. Okay, you have to cast your mind back to nineteen thirty four and the Gold Reserve Act back then, as everyone knows, the US
citizens in their gold was confiscated. I can actually conceive of a federal or Treasury rule coming in and saying for the next one hundred and eighty days, you can't pull your money out of the banking sector.
That would be terrified.
That would be terrified. But let me tell you that the issue people are the deposit flight today is not people fearing uninsured deposits. It's people saying I'm getting paid ten basis points on a CD I need five hundred. And what was castraphic about yesterday was the FED raised hate hiked again. It went, hey, why don't we just encourage more deposit flight. They are do gooders, but they're
incompetent and they're not seeing the picture. We are on the verge of a catastrophe which will rival two thousand and eight.
They keep trying to separate. You know, every FED speaker you've heard the last couple of weeks says they want to separate monetary policy on the one side with financial stability on the other, and they don't want to mix the two. Right and and the FED fundraid is a monetary policy tool. Chris, what do you think because I've asked a lot of people, you know, who do you blame for the collapse of SBB, Who do you blame for the collapse of signature? And now a first Republic? Is it possibly?
You know?
The FED raising rates five hundred basis points in a year and two a man. Until today, everyone has said no, Well.
Look, these banks did stupid things. I've written about the Silicon Valley particularly, But the key thing is that the FED is in a very and dantic sort of way. And I love what your guest has been saying. By the way, I totally agree, but they want to continue to think they can separate monetary policy from financial policy
when we execute monetary policy in the bond market. For Christ's sake, it's not credible for the chairman of the FED to get up and tell us yesterday that the banking system is fine when the FDIC has already published numbers to show that it's insolvent. Okay, the two agencies need to talk to one another, and I've spoken to governors about this in the past. You know, I worked at the FED in New York. They don't talk to the Bank supervision people, and when they were on the hill,
you saw a vice chairman Barr. He was asked, did you talk to the bank supervisory staff about your monetary policy, about quantitative easing? And the answer is numb. So I think we should make economists where ankle bracelets are really do. These are the most dangerous people in our society right now, and they are going to crash the system. It is very, very close to nineteen thirty three months.
Yeah, yeah, you we had it. Seems like a lot of folks are saying we had JP Morgan come in and buy First Republic, but Jamie Diamond he can't be literally JP Morgan and go out and support the system. You have a solution. Do you feel like our regulators need to do something now? And if so, what would that be.
Yeah, it's called zup, It's called we gotta be humble and we gotta say we kind of got this wrong.
My point.
Hey, listen, we've got debt which is approximately four times the economy. Okay, We've got interest rates which are five percent. Okay, if we make the comparison with Jay's idle, mister Volka, in the seventies, we had twenty percent interest rates, and we had debt which was one time's GDP. We've gone back to the future. Effectively, we're at the point where the FED was at twenty percent interest rates and it was breaking everything in nineteen eighty two.
Say in nineteen eighty two we had twenty percent rates and what was debt to one time?
Well, one times twenty is twenty, right, and now we're at four times debt and we're five five and a quarter, right, So we've actually surpassed right where we're all So, Jay, you did it? Okay, Now get your ass and get those rates down to zero. Other thing's gonna blow up.
Where do you get four hundred times? Do you four hundred percent GDP?
Where are you?
Okay? I'm We're like three point six seven or something, right, and I'm running up to the neatest destiny point. But if you add government debt, household debt, financial debt, industrial dead, you.
Get yeah, just real quickly, guys come across a Bloomberg terminal, another red headline. Western Alliance Moll's options including a potential sale. So here we go. Yeah, it's a Financial Times. You want to credit the Financial Times.
I think if we have another major bank failure. J Powells can have to his sign and this system cannot tolerate that kind of uh, you know, coming to Jesus if you will, on the part of an agency like the FED, because we depend on them to get it right, and when they don't get it right, you know, to the earlier comment, what should they have done? They should have gotten FED funds up to three and a half or four and sold assets. That was the astute thing
to do given their past policy moves. But instead they're pretending it's twenty years ago and they could just raise you know, target rates as fast as they want to reclaim their credibility, because that's what's really driving this. I want a panic of Powell. And then you had the fact that they were caught out on inflation and they were so embarrassed as an agency that now they've tried to regain their credibility in what eighteen.
Months, right, I want to reset this. Just so listeners understand, we're talking to Hugh Henry, who was the founder of Eclectica. Now he's a surfer and a hotelier.
I tweet I'm the Acid and he's.
On Twitter, and then we're and then we're talking about to Chris Whalen, I'm going to say, for me at least one of the foremost banking analysts in the country, and of course he's also the chairman of Whaling Global Advisors. We had yesterday pack West saying they're gonna look at strategic options, including the possibility of a sale. Their shares
now are down more than fifty or fifty percent. Western Alliance now is saying it's smalling options, including a potential sit sale, and their shares are down about thirty percent.
Haulted there for Western Alliance.
I'm I'm good getting goosebumps to some extent because this is so scary and so dramatic. But I don't know if I'm just not smart enough to push back against these two geniuses. Here we have a listener writing in and asks of Hugh, do you think any of this is imminent? And then he's got a list of three things, government intervention, deposit guarantees, or a ban on short sailing.
Oh Heaven's buns on short selling. Let's bond the truth.
Let's pretend. I mean, I think is are we in a real crisis here? That's about snowball.
This is wild Coyoto we've gone over the cliff. THEO what happened yesterday. The FOMC is no longer relevant. Right, policy's too tight. Policy will be like I say, my one fear if you're talking about government regulation, government intervention, and I don't say it lightly, but I fear that they may have to get the deposit base of the US within the banking sector.
I agree, that's Chris.
Do you really think that that regulators are going to put up gates? I mean, that would cause the biggest bank run since the nineteen thirties.
I imagine that's what happens when the central bank injects volatility into this system. That's what they have done. You know, to Hugh's earlier point, right, you can't move interest rates this much when the average coupon in the mortgage space is three percent. Everyone listen, solve it, just do the math, right, But unfortunately these PhDs that the FED can't do math.
So but I guess, just my again, I'm not you guys are the experts, but their focus, or one of their key focus, is to fight inflation. So if the only tool they have or one of the main tools they have, is raising interest rates, do you suggest that they should have stopped at three percent or something like that, or they just go to best.
I want to let me take that one. Let me take one, because what we are seeing here is we are seeing the crucifixion of the common man on the cross of the vanity of JPOW. In twenty twenty, Jpower went on US prime television, daytime television and he said, folks, we got this. We are we at the Federal Reserve. We're printing money. I was like, J, don'll send you to prison. You're not allowed. You have no federal sanction to print money. What are you doing. But again, the
Fed business is in the business of camouflage. To see, it's in the business of aura. We are all powerful. And so it made that comment. And then you get this profound supply shop which was COVID right, and prices get elevated, and people go, hey, J, you're printing money. And now prices are like running double digit and J went in to meltdown in terms of the institution and the repidity of the rate hikes was to protect and safeguard and pull back that comment that they had printed money.
Inflation I believe is transitory. I'm now with bad deflationary money running through the banking sector. I would anticipate that we're going to see prices that, hey, this in ninety days. CPI is going to be running at three and a half percent. By the end of the year, then we're going to be close to zero again. We're going to be low the Fed's target.
Chris is terrifying.
What do you think, Well, no, but to his point, if you're a banker right now and you're trying to survive, what have you done? You told your loan officers to step back and turn it down. So you know, this economy is going to slow down because the supplier credit from the banking system, from the bond market is going to be greatly reduced. Because everybody who's got this problem we've been talking about with interest rates, it's got to raise cash. Everything is for sale.
So J.
Powell has basically put the whole banking industry, and I mean big and small banks. Don't think the big guys are immune here. They're all for sale now. They're all in liquidation mode. And I think the FED is going to come out of this greatly weakened. I think you're going to see Powell force to resign and then I think, yell, and I'll be following them out the door because you.
Know, Chris, do you believe that's.
Ceiling this week?
Right?
Yeah?
Well, now we have a tsunami. Before the tsunami, do you believe that the that regulators could put up gates to deposits?
Yes, it's inevitable. It's very third world, But here we are. You know, we've got to start practicing, practicing our Portuguese. I really think, you know, I worked in the emerging markets years ago, and it is scary to me watching this because it's like deja voo. And it's not just Wiley coyote. I think that's very clear. But it is the hubris and the personal convenience of J. Powell and the other members of the FED board that we're seeing.
They're not acting in the public interest right now. They're covering their ass because they don't want to admit they made a mistake.
But let me ask a question, Chris, me just go to your real quickly. The money comes out of the banks, don't I just put it into money market funds? Isn't the cash still in the system.
Because in the T bills at five percent?
Right, So it's still there. It's not like I put it under my mattress.
Yeah, but is in there?
Right?
You know, you have to let me take this, Chris. The you when you pooh the deposits out of the banking sector, they've then got to sell assets, right, What are their assets? Well, their assets are loans to the bank.
Accounting thing is very difficult.
Money. Money is complicated. It is easy to spend, difficult to decipher.
All right, Chris, what are what are some of the next steps you're looking for in the evolution of what we're seeing out there or what should we be on the lookout for.
I think the FED needs to come forward and offer to finance all of these legacy assets that the banks have a problem with at par at whatever the coup pund rate is. So, if I have a gy may two, defense should charge me two indefinitely until rates fall. That's how you take this off the table.
All right. So, but but we've had some of the bank's regional banks report and most of them are saying don't worry.
I mean, well they have to say that, right, but they can't say freak out. But there's everyone panic.
Look at our balance sheet, look at our stuff work okay, hughe, I mean, do we not take them at their word?
I guess?
Or is it or is the problem too big for an individual bank per se?
But do you have any bank deposits in the US?
Hugh, No, I don't. I'm in a very fortunate position. But I owe the banks a lot of money. I recommend that, in fact, to everyone, I'd recommend your panic. I mean, this is a good time to panic.
Do you recommend gold? Do you like bitcoin? I?
So gold has a logic, okay, But when we look at that kind of Bell curve of distribution of where we are on distribution of returns, like gold presently is a little bit too far on the right axis in terms of like it's kind of rich, it could be richer.
Yeah, twenty fifty four, we're almost at the all time You know what I like?
Well, I like the Bell curve. I like when it's hitting the x axes at zero on the left hand side, which is to say, you're like two three standard deviations below the price norm over the last forty years.
Right.
Welcome to the world of the ultra long treasury, the most despised security because we got the ballgame ount of inflation right. So the TLT, the ETF has halfed right, one hundred and eighty to ninety today it's one hundred. I think that's an easy moonshot back to one hundred and forty hundred and fifty.
Wow.
Wow, take a long long duration treasuries TLT. Chris, what do you think, I mean, where would you put your money right now?
Well?
I think you is right. It's hard to argue with the treasury. I mean, my god, why wouldn't you be.
Everybody's at the short end of the curve, right, I mean, hence the price. Yeah, but the head.
It's a function of let like so it's like with duration. So if you've got a drug dealer storry I meant to say, is their contract with a prime broker?
Right?
Then you get but mountains of leverage and you can own two year. But if you've got an ny view of a billion dollars, you might have one hundred billion dollars in the two year and you'll make money. When in the ordinary world we own the t LT, you've got to own duration to get the to sup up your returns for the retail invest So that's how that that equation works.
All right, We're gonna let Hugh gosse you have some TV coming up, so well you appreciate the time with Hugh. We're gonna kick you out now.
I just want to quickly ask, I see at Hugh under at Henry Underscore Hugh for your for your Twitter darling, I love you, Yeah, okay. At Henry Underscore Hugh is where you find Hugh Henry of course the founder of Eclectica. And as I said, uh, surfer, Chris Whalen, what what what do you think? What do you think we need to be watching today? What where should I be faced at kr E? Should I be looking at you know, rates? Should I be looking at stocks? What's the most important thing to follow?
Well, I think you're looking at long rates for the flight to quality. I also think that there's gonna be enormous pressure on short term rates in terms of buyers because they're going to be running out of risk assets. You know, the US is playing with fire. I think we're going to see dollar swaps flip back to a positive premium. They've been negative since it's a great financial crisis. And then I think this is going to start to weigh on the dollar and on the US financial system.
Because we're demonstrating the people that we don't know what we're doing. You know, when the Fed chairman tells everybody banks are fine and then you see the market going the other way, that's not a good picture. And I think it raises questions of credibility to go to the top of the government. So you know, the president has a problem. I think he needs to make some changes in his team very quickly.
Well, that's right where I was going to go, Chris. This has not made the pages of the local papers. I mean, unless you're happen to be in a town with and I've heard nothing from Washington really, from Congress or the administration really about this issue.
Well, I've been hearing from career staff. Okay not the political staff, but the career people. And most of these agencies are deeply concerned and they're moving, but there's only so much they can do. They execute government policy, they don't make policy. So you know, right now, the government, I think, unfortunately, is a very we can't I work in the mortgage business. I deal with most of these agencies in Washington, and they really don't have people that
are financial professionals. They have politicians mostly, so I think we have an issue. You know, Washington wants to continue to pretend that we can just fight inflation in a very traditional sort of way without the implications for financial stability that are clearly in our face.
Well, Hughes says we're headed for deflation by you know, a year end.
I agree with him. I agree with him because look again, if the bankers are stepping back to raise cash, what does that mean. That means they're going to cut people off from credit and that leads to default. I think by third quarter, credit is going to be the headline, Matt, you and I are going to be sitting here talking about credit.
All right, All right, Chris, thank you so much for joining us. Really appreciate getting some of your time and getting your formed opinion. Chris Whalen, chairman of Whalen Global Advisors, along with Hugh Henry from Eclectica Asset Management. What an incredible roundtable, Matt, of just getting these quite frankly very dire views of kind of some of the risks in the financial sys.
It's really freaking me out. I think we need to talk to some optimistic bolts. I know, because I'm terriff. I'm running home, right now sell the house, sell the car, sell the kids, and yep, we'll see.
All right, let's say down to Washington.
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All right, let's flip it. Maybe we can get a different perspective. I'm not sure, but we've certainly got somebody here who has a learned perspective, Doctor Richard Portus. He's a professor at the London Business School, but that does not begin to explain kind of his background, his experience, because the CV just goes on and on and on, undergraduate of elphd at Oxford, all the other kind of
stuff that goes on there. I'm looking for perspective, and that's why we asked doctor Porters to join us here. He's based in London, buddy, joining us here in our Bloomberg studio here. So we appreciate that, Doctor Porters, thanks so much for coming in. How concerned should investors be about the US banking system?
I think very concerned. I certainly wouldn't want to be holding shares in any of the mid sized banks, any of the midsize banks, but certainly not those that have profiles that look anything like First Republic or Silicon Valley or whatever that is to say, specialized, specialized, clontel I net Worth maybe whatever. Okay, you just don't want to be concentrated in that way, and you don't want to
be sensitive to deposit runs. That's what we call the deposit beta, right, Okay, how much how much deposits will move out in response to an interest rate differential that you can get elsewhere, And what we saw with what we've seen in a number of these cases is precisely that.
So what is the answer to stop this? You know, it seemed like we had it in the rear view mirror when Jamie Diamond and JP Morgan came in and bought First Republic, or at least that was you know, at the Milken conference, that was the general feeling that fears had been calmed. Now, you know, the concerns are front and center again, and the Federal Reserve grays rates even further, which seems to be the crux of the problem.
It is the crux of the problem, but that's because rates were nominal rates were low for a very long period of time. People took risks they shouldn't have taken. They accumulated portfolios that were very long duration, and that's coming home to roost. So it's very straightforward and it should have been expected. Supervisors should have been much more vigorous in their investigations of the various of these banks. But where we are, where we are, and you know,
it made me think today. The Westpac story made me think of the of the line about you know, how does a bank stock come down by ninety percent? The answer is that comes down by eighty percent the first day and fifty percent the next day.
Oh good point.
Right, that's the myth and.
That's what's happening. And they can't survive like that. So we will see more failures whatever you want to have to call them.
But I had my foot of reserve yesterday. Tell me there's not a problem with the banking system sound and resilient.
Yeah, you know, I've heard that one, that resilient line before. When the chair of the Financial Stability Board in twenty seventeen, Mark Kinnie, then the Governor of the Bank of England, said we've now created a market based financial system that is resilient. Right three years later March twenty twenty wasn't resilient at all. And the answer is that that there
are some contingencies you can't provide for yep. But also there are structural structural weaknesses, and you have to you have to try.
To deal with those in the short term. How do they deal with that? Do we see some kind of government or regulatory intervention. Do we see deposit guarantees? Do we see a ban on short selling? It seems archaic, but you know, the.
Ban on short selling won't do you much good. The suggestion that you might stop deposits from running. That won't do. That just won't pass.
Putting up gates is what our last two guys said was a possibility that will pass politically.
It's completely out of the question. I mean, you can put up gates on a real estate an open end real estate fund if there starts to be a run on that, that makes sense, okay, And they can then consolidate their position, liquidate some of their assets, and so forth in a reasonable time. But you can't put a gate on the positives. Come on, give me a break. It's not gonna it's not gonna happen.
Right, Okay, that's the political stage.
They did, it would be the last thing they ever did.
If they did, it would be the last time anybody put their money in a bank.
Yeah, yeah, that's right. Doctor Portershyer based in London at the London School of Business. We heard from the ECB today raising rates again. What's your view on the ECB and kind of what they're trying to do with the economy in Europe.
I think the general mood of the ECB is this was a hawkish twenty five b raises point rise in the sense that the President announced that she didn't expect this to be the end, and I think that's probably what we're going to see. Unless something thrown out happens, We're going to see more twenty five basis point rises up until the autumn. Probably my view they'll peak at four four percent, but that's a sort of consensus few there's no news there. I think they're wrong in the
sense that I think they should have paused. There is a credit crunch developing as it is here, by the way, for small and medium sized enterprises, it's going to be very tough with the consumers, and yeah, and consumers too, absolutely, but I'm worried about I'm worried about firms that won't have access to credit. They and that's just you know,
that is a big thing in Europe. You know, the system, the system is much more bank dependent in Europe than it is in the United States, and that's where financing comes from for the most part, and it's not going to come. It's not coming.
I just had to jump in here with a quick head line because we told our listeners earlier that Western Alliance is mauling options, strategic options, including a potential sale that came from the Financial Times. Western Alliance itself comes out and says the report of deal talks is absolutely.
False.
So you know, this is the Financial Times reporting, Western Alliance is denying it. Nonetheless, we do see shares of Western Alliance down right now sixty one percent, so and then of course they're halted, so you know, this is absolute free fall. They've already done the eighty percent drop that you talked about in the fifty percent drop.
And.
They have come down. Western Alliance shares have well eighty one percent so far this year to date. But we're watching. Of course. Pack West as well reports yesterday that pack West is looking for strategic options. They're down eighty eight percent year to date.
Outfits are dead men walking, Oh right, all right, and that's there are going to be several of them. I would not want to count, right, but that's where we.
Are, all right. Doctor Richard Porters, thank you so much for joining us. We really appreciate you taking the time coming into our students studio, Doctor Richard Porters. He's a professor at the London Business School, giving us some of his perspective and wisdom on kind of what we're seeing out there in the economy.
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This segment's called Don't Fight the Fit. Barry Ridols, founder of Bertholts Wealth Management and host of Masters in Business, joins us here on the access line, and Danielle di Martino Booth CEO and chief strategists at QI joins us in studio. We're gonna have an extended kind of couple blocks toscussion with these two very smart people. And Daniel, let's start with you here. Matt and I just had you know, we were scared to death about it. Forty five minutes ago. We had it a panel of folks
saying this banking crisis is bad. It's like nineteen thirty.
Surely you met Hugh Henry in the green room, because I saw you were both in there.
Yes, I did recently yesterday I think he postponed an interview with me. He said, I think I need another week to prepare.
Okay, So what's your feeling here just about the banking system out there? And is a FED contributing to some of this stress there? How all importance to you?
So I certainly think that the FED, that the Fed's aggressive policies have obviously made quite the mark, if not, if not a scar. But that being said, you know, I was looking back at FED rate hikes, but by the time we got to June July twenty twenty two, I think the market should have ordered the banks at least should have figured out that j.
Powell was serious.
You know, the day that he was confirmed by the US Senate May the twelfth, twenty two, after being basically an a holding puner for six months. After being renominated, he went on NPR's marketplace and he did an interview and he said, inflation is now my number one target. We have to get it down to two percent period. And he changed his tune that day. He has not
deviated and it's been almost a full year. So there's an argument to be made that there was time to prepare because by then he was lobbing out seventy five basis point rate hikes.
Fair enough, they should have prepared. But in the absence of action from bank managers, don't they have regulators that are there to force them. I mean, what was Mary Daily doing all this time?
Well?
What was Janet Yellen doing when New Century went down?
I mean, and in fact, you know, the very last chapter of fed Up argues that we needed fewer banking districts than we have today.
Fed Up is Danielle di Martino Booth's book, Yes High.
Riders take on why the Federal Reserve is bad for America.
It really subtles up. I think Hugh Henry agrees with you.
Yeah, but better place.
I really do think that he's got noble Aames. Listen to what's coming out of the Milking conference this week. There's a lot of fear running through the private credit markets right now that something is going to give, and yet private credit makes the rules.
They dictate monetary policy.
They have for years, ever since Dodd, Frank and all of the talent went bleeding out of the conventional banking system. They're like, wait a minute, we can't make egregious amounts of profits. Fine, We'll just leave and set up our own little non banking system that's bigger than the conventional banking system.
Hey, Barry, want to bring you in here again. Matt and I we kind of got, you know, freaked out by some of our previous guests talking about the banking situation. I kind of feel like, just from my personal view, I've kind of term it now a crisis where a few days ago I wasn't there. How are you viewing what's going on out there in the banking world, you know what?
I look, I have a slightly different view than than Daniel does about the impact of the FED and why you don't want to unilaterally disarm and not have a central bank. But that said, the FED was very belated in recognizing inflation. Some people have made the claim it was because Chairman Powell was in that holding pattern, waiting to be confirmed that the FED was sitting on their hands.
They didn't want to be seen raising rates. I don't know how true that is, but it's pretty clear that the fastest rising rate environment of the modern era has broken things. You can't take rates from zero to five hundred bases points in twelve months and not cause some sort of damage. So some of this is the Fed's responsibility. Now, some of this is responsibility of the private sector bankers who don't seem to understand duration risk in a rising
rate environment. That's pretty obvious. Even when we look at Silicon Valley Bank. People forget those geniuses actually put a hedge on on and were fine in their whole to maturity book. They just realized how valuable that hedge was and said, hey, if we sell this hedge, we can all give ourselves bigger bonuses, not realizing but we're taking
our hedge off and putting our portfolios at risk. So so I'm less inclined to blame fed supervision of all the banks under them for not they were doing what the banks were supposed to do, which is manage their own risk.
Barry.
There there were red flags at Silicon Valley Bank, and the regulators knew it, and the regulators did nothing about it. And this was a presentation made in February of last year.
Yeah, yeah, they probably should have done something in February of last year.
It wasn't nearly as catastrophic as it became.
But they were wive hundred bats later. They knew about the whole to maturity portfolio. By the way, what, Danielle, why don't they mark that stuff to market like weekly? Why why are they allowed to just because we know that then the valuations are insanely detached from reality. If they only have to they never have to market, or.
Have an entire generation of banking regulators that are effectively used to operating at the zero bound. I mean, but that being said, Okay, the rules have changed, change your methodology, change your approach. And if you've got all these red flags on these banks and you know that they're making insane commercial real estate loans, or that they've got a highly concentrated book or that they're only banking to the venture capital industry.
Then, for heaven's sake, factor that in.
I just don't barry. What do you think is the bond market? Two? Opaque? Is it? Do we not have the technology? Should we create a machine a terminal so to speak? Could that allows GPT? Can AI help in terms of why don't they mark their Why didn't First Republic mark their mortgages on a regular basis? Is it not possible?
Sure? All that stuff is possible. Keep in mind there were some rules that required more aggressive disclosure and more aggressive marks that the banking industry lobbied and actually got approved a couple of years ago, which arguably certainly would have helped. Singing that your bank probably would have helped
Silicon Valley Bank. You know, every time we go through this cyclical from too much regulation to too little regulation, it seems that banks demanding less oversight have a tendency to blow themselves up.
But it was Silicon Valley Banks CEO Greg Becker himself who sat on the San Francisco Board of Directors and who personally successfully lobbied Congress to loosen the regulation. And I mean clearly Chair Powell has now somebody's had their.
Behind handed to them.
I thought that I had to stop myself there. But somebody's had their behind to hand it to them. And now we know that we need to be stress testing banks of a certain size and with bigger stress the small community banks. However, that was a complete regulatory fumble with Dodd Frank to target banks with ten billion dollars of assets, and then they went out and made up for having to cover the cost of compliance by making go go commercial real estate loans.
So, Barry, are we going to see or do you believe we will get to the point where the government needs to step in somehow, whether it's the FDIC or the FED and prop up this banking.
By the way, Barry, we should point out that we had a Chris whalen on and Hugh henry on earlier and they made some pretty extreme forecasts. They said that regulators are going to have to come in and put down deposit gates for US banks. I feel like, if that's the case, that's the last thing that the government will ever do.
Yeah, what are they? Hedge funds are in private equity. They're allowed to not have people leave that. That doesn't make any sense. I think what the real key is that we need to have much more robust approach to oversight, and that allowing banks this mad lobbying approach to say we want less oversight, less regulation, less capital reserves required is really problematic. But here's the key thing I think
we should focus on. When when we had the financial crisis, everybody had eaten at the same poisoned buffet, and so you had this systemic problem of every bank, every broker, every non regulated bank all had consumed the same toxic things which they either securitized or subsequently bought, and so the whole system was put at risk. Yeah, the FED has raise rates too quickly and they've broken things. It doesn't appear that the entire system is at risk just yet.
If the FED keeps raising if they if they keep breaking things, then we could have other issues. Maybe these banks should be holding their long term treasuries in hold to maturity instead of assets that could be sold. Maybe that's one solution. This all comes back to, you're less profitable if you have more capital on the books. Maybe you need to think of yourselves as a sleepy utility in bank and accept lower profit margin in order to increase stability.
We've had a couple of days of central bank speak. They fed yesterday, the ECB today, they seem to be in sync. Anything kind of jump out of you from either bank.
Yeah, I continue to be struck by how both central banks seem to be far far behind the data about when inflation peaked and how much further it's going to come down. And I know the phrase transitory has gotten a bad rap, but transitory seems to have taken longer than expected by most measures. Goods peaked June twenty twenty two and have come appreciably down. I heard you guys call talking earlier this morning about oil at sixty seven dollars.
Wherever we look at the things that were really prime drivers of inflation over the past couple of years, lumber prices, medals, car prices, shipping containers, even just the course of costs of transport, they've all come down appreciably. In some cases, like lumber, they're below where they were when the pandemic started. And so yes, services remain elevated. But the largest part of services is owner's equivalent rent, and that's driven in
large part by where mortgage rates are. And guess who's driven mortgage rates higher in the United States. It's the FED. Europe is a little different set of circumstances. They are behind us both in terms of the economic recovery and inflation, but it always seems like they're late to the party and fighting the previous lies.
So is inflation coming down rapidly? Do you think because Powells seem to think yesterday Danielle that inflation could still rear its ugly head. He's very careful and has been about this. He doesn't want to repeat Arthur Burns. What do you think?
So I have a little bit of a different view on this. I believe, and we were talking about this during the break.
I believe that j.
Powell wants for monetary policy to actually affect the non banking sector. So it's he's not dim. He knows that inflation's coming down. He knows that Barry and I are mutual friend, Peter book bar He knows that there's at least a half a percentage point of additional tightening as of First Republic. Now we might have one hundred basis points of additional tightening in the form of the credit credit crunch that we're seeing.
Peter book far from Miller tayback.
And back in the day now, is it blately?
Yeah, the book report, the book report boosk.
But the fact is, I think J. Powell knows this, and I think J. Powell wants to continue with quantitative tightening. He wants to continue that in the back background, and he's got to have something to hide behind, for lack of a better word, in order.
To keep this going, keep what going, keep quantitative tightening going, keep shrinking the balance sheet.
Yeah, but that can happen gradually, and the.
Problem is exaggerary gradual already. Yeah.
The problem isn't the actual absolute level of rates, it's how quickly we've gotten here by historic measures. FED funds rate and even mortgage rates are not crazy, they're just crazy relative to the past. Doesn't the acute level hurt as well? I mean, this is Hugh Henry was making that, you know, twenty percent in nineteen eighty when total debt was you know, one time's GDP, it's just as bad as five percent now when total debt to GDP is
four times. I don't really buy that. I've been hearing my entire adult life that you know, if we keep running debt and deficits. You know, no one will lend to Uncle Sam. The economy will crash and the dollar will collas.
Just that the caring costs are very high.
Yeah, they're going to continue to be caught high. But you know, look at Japan, they're double our GDP to debt ratio. It hasn't affected their ability to borrow it practically zero or for their GDP to continue chugging along. They have other demographic concerns, but I worry much less
about the actual level of debt. Would it be better if rates were a little lower, Sure, but I don't think a couple of percentage points are going to make a big difference to something like seeing that your bank or Silicon Valley Bank or First Republic or any of the other banks that ran into trouble for very specific managerial errors that were exacerbated by the rapidity of the Fed race.
So think about think about this for just a second.
Remember Standard Impoorsy, we were there in Maine. Standard impor Is downgraded the debt of the United States August the fifth, twenty eleven because there had been no reforms done during the debt ceiling kerfuffle. What if this moment of higher interest rates actually brings a serious discussion to the table about some of the reforms that are desperately needed with
our fiscal spending. And I'm not necessarily talking about the level of debt and or deficits, but being rational about the trajectory of the growth and going to the table and seriously taking this debt situation serious.
So, Berry, I'm sure you read that a couple of days ago, Stan Druckenmiller was speaking I think it was USC at the USC School of Business, and he said that we're all sitting here worried about a thirty foot wave in the form of the debt sealing problem, when we should be worried about the two hundred foot tsunami just ten miles out in the form of the total debt.
So so first, let me just remind everybody that shortly after the S and P five hundred I'm sorry, shortainly after the SMP as a ratings agency lowered the US credit worthiness.
I guess what happened to treasuries?
Rates went lower, went lower, Right, It's like, oh, hold my beer, watch this. And so if we if the financial crisis didn't teach us that the least valuable entity in the entire known universe are the credit rating agencies. Then you weren't paying attention, there were worthless. Then they're worthless. Now they'll be worthless in the future. Nobody should care about.
It, So fade the credit rating agencies.
Isn't it still nice to think that we could, actually, like adults, approach fiscal reform again?
If you if you look at what the market is telling us, it doesn't matter all thatch Are you a mathematic say that again?
Are you a magic money tree guy? No, I'm you know, I'm a hemmingway guy.
That it's very gradual until all at once, and right now it's still very gradual. And when we look at Japan, they're much further down the debt rabbit hole than we are, and they're still in that gradual process. At some point in the future, all of this debt will matter, but it's going to be the way people go bankrupt gradually and then all at once, and we're still in the gradual thing.
I would too.
I've got kids, and they'll have kids, and we should be thinking about future generations and not necessarily.
What we're trying to do is rip them off to pay for our retirement.
Yeah, but that's been going on for that's been going on right forever, forever, exactly.
All right, at a certain point when to keep it going the boy who cried wolf. At a certain point, nobody pays attention, And all.
Right, we guys, we got to cut off there. Thank you for the extended stay.
We appreciate it.
Barry Ridolts, founder of Ridolts Wealth Management, and Danielle Di Martino, Booth CEO and chief strategists at QI helping us kind of frame out what's going on in these markets. Well more coming up. This is Bloomberg.
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All right, let's get right back to the discussion here. We're going to bring in our next guest. We really always appreciate getting a few minutes of ret I'm Claudia Sam, founder and independent economists at Some Consulting. Claudia, We've had a lot of Federal Central Bank discussion and moving over the past couple of days, but it seems to be pushed a little bit to the background by what's going on with the US regional banks. How are you viewing
what's happening out there with the banks? How concerned are you about how this may be maybe more systemic than others think?
Right this week has really been a competition for the worst thing happening in the US economy. I mean, it's pretty amazing to have the dead ceiling eclipsed. In addition, I absolutely think that there should be concern about what's happening with the regional banks. Would chair Pow said yesterday the banking system is resilient in sound. That is a true statement, and yet fundamentals are not enough to bring contagion and this kind of downward spiral that we're seeing
under control. So it's really disconcerting that this is continued and it's not clear how this ends, whether we really are seeing the end of it. It doesn't appear that way.
Are you concerned about I mean, it doesn't seem like regulators did much in terms of stopping this collapse of SVB or First Republic. Are they gonna Is there something they can do now? Claudia that that you can think of.
They're in a difficult position. In the beginning, they were just flat footed, right, Silicon Valley Bank came out of nowhere.
I mean it should but they've known for They've known for a year.
Yeah, no, they.
Knew, but I mean it's it's different between knowing something and acting in a serious way, and they acted in a serious way. They're at a point now and the FDI see like this is they're doing the playbook. Now banks are in trouble and then they you know, find a buyer and so things are in more of that state of now quote unquote business as usual when you
have banks understrain. And yet the piece that is really hard for policy makers, and this is why the genie out of the bottle was such a big problem, is you have this psychology. J Pal can tell people all he wants the banking system resilient, nothing to see here, and they are not believing it right. And so this
is the tricky part. And honestly, I don't know how the policy makers pull this back in because you say the wrong word like pac West said last night about their you know, strategic looking for a buyer, and things can really go south. Quickly.
So, Claudia, how concerned are you that you know this banking crisis that many people are calling and I think I might be in that camp now, will in fact have a material impact on the availability and the affordability of credits such that it really will have a big impact on this economy.
You will absolutely have a big impact on small businesses that do a lot of their business with smaller and regional banks. It will have an impact, though it may be slow moving, and impact on commercial real estate, which again does a lot of business with regional banks. It's and we're going to see this not just in the interest rates, right the Federal Reserve continues to raise interest rates though there's a lot going on in the markets.
What we are seeing, and I think we're going to absolutely see next week when we get the Senior Loan Officer and Opinion survey, is that we see standards tightening. So this is about the supply of credit getting harder, and that you know, it's one thing to just say, hey, i'm a business, I'll pay more for the credit. It's another thing to say I just can't get it right. And that does limit the kind of opportunities that they have to grow and expand and have keep their workers right.
So it can have a lot of effects, and it will have effects in these local, more localized communities. It's an open question as to how much it spills over like in aggregate, But the longer this goes on, the higher those chances go.
And I think that this conversation then dovetails nicely with your column, with the column that you put on the Bloomberg Terminal about labor market tightness and the issue of yes, we're at a nationally a record low for unemployment, but if you look in pockets, you know, big important states like New York and Ohio, we still don't have employment
levels back up to where they were pre pandemic. I was listening to Diane Swank talk yesterday on our FED special and she pointed out the importance of small and medium sized companies as employers, and these are the companies that are going to be directly affected by a regional banking credit crunch. Does that, you know, does this exacerbate the problems that you know, these these localities and especially you know, underfunded, underbanked communities have in terms of getting jobs back.
Absolutely, Diana's right, The small businesses or the heartbeat of the employment that we have in the country, and they're the ones that are going to have difficulty accessing credit. In the column I was talking about today, where like we should be careful on Safe Jobs Day tomorrow when we get the aggregate numbers and we have Chair Powles saying we have a very tight labor market, we need to be careful. There's a lot of variation across the country.
Right now, about forty percent of the US states haven't achieved their pre pandemic employment levels, and then you've got another twenty percent that are well above it. So we don't have a tight labor market in every labor market we have kind of when you add it all up, it looks like, you know, there's a shortage of workers. That's not the case. The Federal Reserve and by letting them dominate the conversation about the economy, their tools are
very blonde, their mandates are national. But we have so many other policy makers that can be much more targeted. But we have to actually, you know, admit that there's this diversity and then think about how how to address it.
So how do we I saw one of the lines in your in your column, geographic realignment could help address some of the national labor shortages, and I was trying to think of, you know, how the FED could be involved in geographic realignment. But as you point out, their tools are blunt, which regulators need to be you need to be brought in and what do they need to do.
Well when that, you know, we have a potentially looming recession that we should be preparing for. You know, hope for the best, but prepare for the worst. And one thing that we can do, and we're putting policies in place, is to target and particularly when the policies phase out, to the local labor market conditions. So the unemployment insurance ought to phase out is that state's unemployment rate gets
back to normal. We saw a lot of problems with the politics of it when we had just a date in the last you know, in the last recession where it turned off, and they just didn't take into account that some states it took a lot longer for them to recover, they're still recovering, and others really came back strong.
So if you want to use money effectively and equitably, then you know, look at the reality of what's going on in terms of now to build resilience because a lot of our communities that were struggling before COVID, they got hit really hard and they're still struggling. And we have large programs like CHIPS infrastructure that you could say, let's give some priority to communities that haven't recovered yet.
So a question came up in my head reading your column. And I want to preface this by saying, I'm a total idiot when it comes to economics, and so don't get angry if this is a bad question. Is there some kind of mobility program that we could put out there which would which would help the realignment? I mean, I guess if you're looking for a job in New York and you can't find one, you're probably not in a position to relocate to Florida.
Right.
Is there is there any way that we could help that relocation that mobility Would that be a good solution.
For a long time, economists had been big proponents of moving people to prosperity, right, So moving people from the heartland to the New York cities, the Bay areas, you know that had a lot of jobs, and you know, I grew up in the Midwest. The last thing my family wants to do in Indiana is moved to New York City, right, Like, that's just it's a non starter.
Yeah, but what about Orlando. New York's not a great place right now? If the sun Dell's a good place to.
Go, It's true, and it right like the communities now, I think where we've come around to is we must figure out a way to invest in the communities. There's a lot of you know, Atlanta took a lot of effort after the Great Recession. They really struggled with some of the comeback in jobs as a lot of the and they really built up their workforce development networks. That's
one of those are hard to build up. But when you take the view that you've got to make it better on the ground, as opposed to telling people, well, you know, you can stick around, but really you ought to go to ship out right.
Exactly, all right, Claudia, thank you so much for joining us. Really appreciate it.
I wish I wish we had more time about you know, I grew up at Grandville right Brandall, Ohio. I know, I know Claudia went.
To Dennis Dennison. That's right. That makes it all come home Claudia Soom, founder in independent e commerce for some consulting.
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Talking about central banks this week raising rates, the FED and the ECB each raising by twenty five bases point. And obviously that's been just maybe the end of what has been an unbelievably stark increase in rates across the world, including here, most notably here in the US. And what does that mean for the real estate business. Well, we're going to check in with Brad case. He's the chief economist and director of research at middle Bird middle Bird Communities. Brad,
thanks so much for joining us here. I mean, I don't know, I just took out a mortgage for a property, but I kind of feel like I'm the exception rather than the rule. And oh, by the way, I fully plan on refinancing that bad boy in twelve to eighteen months at materially lower rates.
But talk to us.
About kind of good luck, talk to us about kind of what you're seeing in your business. Bread.
Well, what we're seeing in the commercial part of the real estate market is is that financing is still available, but it is a little bit harder to access. And
that's and that's not really a problem. You know, if when there's concern about the banking system, when something makes borrowing more difficult, whether it's the rise of interest rates, or whether it's the concern about about the regional banks that have that have gotten in trouble recently, you know when when when that makes it harder to borrow money, it's not everybody who fails who you know who has difficulty accessing capital. It's the weakest projects. And so that's
that's why it doesn't really doesn't really bother me. It makes us work harder to get financing for the projects that we have that are really good projects. If you've got a if you've got a development project, for example, that makes sense only because the capital is easy to get, then it doesn't really make sense. You don't really want projects like that happening, as you know, on an economy wide basis. So yes, it's harder to get financing, and that's not really a problem.
So and the other thing is refinancing.
Uh.
You know, I think a lot of people hear what you're saying and visualize a project getting started. But there are a lot of refiles that need to happen out there, and if they don't, asset values will dropped dramatically, won't they.
Oh yes, And I mean asset values have dropped already over the past year, and I expect that there is more to come. However, again, it's not that that all asset values drop, It's that it's that average asset value drop, which is to say, some projects that that you know you've got to you've got a retail project where no one really wants to shop, or you've got an office project in a place where where there's not a lot
of office employment. It's going to be difficult to convince your source of capital that they should that they should refinance a loan that's coming due when you don't really have the fundamentals to support continuing to pay make payments on that debt. So so, uh, the pain of something like that is not spread evenly at all. It's uh, you know, other parts of the real estate market that
are just doing just fine. They are not going to have have difficulty getting new financing to replace their existing loans.
Right, We're experiencing a lot of turmoil in the regional banking space over the last four or five six weeks, and it's really picked up steam again over the last several days with some of these names really being taken to the woodshed in terms of their stock price. From your perspective, from your business perspective, how are you viewing this development?
Well, it's a concern. But you know, if if you if you use a lot of if you use debt frequently, then what you have been doing is setting up a range of options because for any any particular use of debt, it may be that, you know, one source of capital is just not looking to fund that kind of a kind of a project or an acquisition or whatever it is. And so you're lining up several sources of capital so that when one one of them says, now we have
too much of that sort of work. Uh, then you go to somebody else who says who says, yeah, we're ready to ready to finance that, and so you know, that's a that's a normal way of doing business. So so there aren't there shouldn't be a situation where the regional banks that are you know, that are having difficulty are your only sources of capital. So so going forward, we will see other sources of capital picking up the slack.
Did you. I mean, one thing I've been thinking about is anyone who needs financing, Ay should have taken care of it as he saw rates rising, you know.
But the Jersey is sure a state did not come on the market when we're.
Okay, I'm not talking about you. I'm talking about Brad's business. You know, people developing, you know, big businesses or you know, even medium sized businesses should already have gone out there or should be getting out there now. Brad, have you have you at Middleburg community has already taken care of your financing needs as you see, as you saw rates coming higher and higher.
Well, there's always this process of looking at our pipeline and making sure that we have the financing, the right financing in place for all of the projects in the pipeline. But yeah, it's very important to be looking forward and anticipating issues like this. You can't you can't do it perfectly. But if you look at what happened back back before the liquidity crisis of two thousand and eight and two thousand and nine, there were companies that anticipated that things
were going to be tighter. It doesn't mean they anticipated a crisis, but they anticipated that things were going to get more difficult, and they addressed that. You know, maybe they refinanced some some borrowing before they had to, but because they were concerned that they might be more difficult
going forward. And if you were one of the people who who you know, looked forward, made it, made a guess, made a pretty good guess, and acted on it, then you came out of that crisis much more solid than companies that, you know, just sort of let the market
happen to them. So, you know, what what we tried to do is we try to do a better job of than other than our competitors, of anticipating that kind of development in the market and responding to it in terms of when we're raising capital, how much raising capital, and who we're raising it from.
And Brad, in terms of deploying that capital, are you just building stuff down in Florida and Texas where everybody seems to be going, Where where are you guys seeing the opportunities you look several years ahead.
So we were so our our our area is basically from Virginia to Texas, and yes, it includes includes Florida, Georgia, and North Carolina, South Carolina, Alabama, Tennessee. You know, so those are very good markets. But one of the things that we pay very close attention to, of course, is what other people are doing, because we don't want to be building a new, a new rental housing community in
a place where there is too much construction. And fortunately in that part of the market, you know, there is still so much unmad demand. But we look market by market and we say, we may say, all right, here's a particular city that that you know, it looks terrific, but look how much new supply is coming on online.
We don't want to be locked into a big development that's coming online in the middle of you know, what may be a softening of rent growth or or an increase in vacancy, or it's because there's too much supply coming along online. So yeah, we we we pay close
attention to it. And and again our goal is to be a little bit better than our community, than our competitors in terms of anticipating how much new supply there's going to be, how much new demand there's going to be, not just nationwide, but but in particular markets.
Yeah, it just seems like the regional aspect that I guess it's pretty straightforward, and of the markets you're in, I seem to be some of the higher growth areas. What do you think about when you if you when you think about going into uh A, is it who are like, who are your competitors? Are there other builders you're competing against, or are there other modes of living that you kind of look at, or is it just simply oh boy, our big competitor cross the street is
building a big property in this market. Let's let's stay away from it now.
You know, we we are a full service company, so we we we we build rental housing communities, we buy them, we manage them, including sometimes manage for other people. So we're looking at competitors on a whole range of the uh you know, of parts of the business. But so so part of what we're trying to do is to say, all right, you know, right now it looks like a
really good time to develop. Let's, you know, let's make sure that we have a good development pipeline, or at a different time we may be saying, all right, development is really not the best, you know, best place to focus our efforts. You know, let's be thinking about acquiring properties. And it has to do and there's a lot of differences both by market and by segment of the rental housing market. So, for example, we were among the earliest in terms of the you know, building single family rental
housing communities. Uh, you know, because you know, the the some of the single family rental housing is scattered site and what we work on is a community with amenities and it's sort of a professionally managed place to live where instead of sharing a wall with your neighbor, you've got your own four So we were a little bit earlier than many of our competitors in terms of figuring out that that's what a lot of people were gonna want and what kind of house would work well for them.
All right, good stuff, Brad, thanks so much for taking the time. We really appreciate talking about the real estate biz and the economics of the real estate business. Brad Case he's a chief economist and director of research at Middelburg Community talking about kind of some of the real estate opportunities around the country.
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We'll talk about cross currents. We got earnings coming at us seemingly left right and center this week. It's been a busy week. We've got the FED and the ECB raising rates, maybe gonna pause, we have to pay attention to that. We've got some uncertain yet of Washington over this whole debt ceiling thing. And then if that's not enough, throw in some real concerns brewing in this marketplace about some of the banks in the United States. So how's
a professional suppost to deal with that? Well, fortunately, we have one that has a lot of perspective, a lot of experience. Margy Pateel, Senior portfolio manage at all Spring Global Investments, joins us. Margy, I'd like to to start with kind of what we've been experiencing really over the last couple of days, but over the last four or five weeks with some of these regional banks. How concerned are you that this is something systemic that could be a problem for the economy.
Well, it definitely is, and I would say in almost all cases, the banks really weren't doing anything wrong. They simply structured their balance sheets according to zero rates and simply couldn't adjust for a five point increase in short rates in a year. So I think that the fragility that we're seeing is really caused by FED actions, and the FED scenes rather immune to the damage they're causing.
And we haven't heard that in the comments from Jay Powell yesterday that whereas the banking system, his estimation is pretty sound. Where do you think we are with this Federal Reserve? And do you think that they are pausing to risk or is there a chance that they may be cut in the face of what could be some challenges in economy stemming apart from the banks.
Well, it seems to me they are so focused on bringing down the inflation rate that they're really losing track of what's going on in the real economy, particularly in
the financial sector. We're we're seeing lots of stress, again precipitated by Fred actions and really looking at his comments, he was really rather high handed about what happens to banks, and oh, well, if we have a number of banks continue to shrink, then that's just the way it goes, rather than looking at how much of that is really due to what the Fed has done to limit them. So we think that there is something to be concerned about because the Fed, just the FED doesn't seem very
concerned about the financial system. They're looking at the inflation rate and so that's why they think the course is still steady and they're missing the bigger picture.
Yeah, is that comes back to bite them In terms of earnings, Margie, we're about eighty percent through I guess the S and P five hundred reporting, and the good news is there was some revenue growth close to four percent, but the earnings growth a negative three percent, indicating some real margin pressure out there. What's your takeaway from this earning season so far and maybe what that means to your sense of evaluation.
Well, just like the fourth quarter surprised by better results than we expected, the first quarter has actually been better than the market expected. It's true we're starting to see some pressure on revenue growth, and we're also seeing some pressure on earnings, but it's been less than the market expected,
and it shows companies so far have held up pretty well. However, I think the question is what we're seeing in some of the companies that are disappointing is really telegraphing that we may see a much more sharp deterioration as we go into the next few quarters.
So are you are you baking into your outlook an outright recession and if so, kind of what duration.
I'd like to think we could avoid a recession. But honestly, when you look at the signs that we're seeing bank lending officers becoming more conservative, we've seen hiring statistics really roll over, and we've seen signs that consumers are starting to feel a little stressed, especially in the lower chier consumers. So we think that we rather suddenly are seeing some pressure on the economy. Plus a lot of the things that make the economy look good are going to go away.
For example, if student loans come back to start to take a bite out of income. And also many state and local governments have been spending their COVID money. That's why construction by public entities has hauled up so well, so that's going to come to an end. So we may sort of go off more of a cliff than we see right here in the first quarter.
All right, given all those cross currents, if you will, and maybe even some headways out there, what are some of the sectors that you guys are still find attractive. You might be doing some work.
In well thinking and that basically everybody over the next few quarters is going to have disappointing earnings compared to what we're seeing today. We still like the technology sector, especially semiconductors. We think they're working through their inventory issues. They're well understood the inventory, and we expect to see long term growth there. We like the industrial sectors because we do believe that the reshoring and the increased capital
expenditure is going to increase. And selectively, we like part of healthcare. We think that companies that can innovate and avoid some of the price pressures of the drugs coming off patent will still have a sustainable growth path, and companies that have good balance sheets in case we do have real financial stress.
Yeah, it's interesting on the tech side. You know, I don't know, I guess all I know are what I really know about that the chip business is Boy, it's long cycle, and you better really get the cycle right. So do you see demand picking up for chips in the back half of this year?
Well, we're thinking in the back half of the year that we should see the excess inventory be largely worked off and then looking for a pickup and demand as we get in the second half. And if we see more pressure on the economy, we may have to push that out a bit. But at this point that's our thinking.
And on this the restoring issue that was certainly a very really hot topic during the beginning of the pandemic when some of these supply chain issues became really apparent, including chips, and you know, we say, boy, we got to start restoring some of the stuff, and I know the rhetoric was hot and heavy at the time. Have we actually seen businesses across you know, sectors really start to reshore some of this stuff.
Yes, we have, of course at the margin, it's still a small part of the economy. We've also seen companies move to, if not in the United States, close to the United States, save Mexico for an example.
Right, friendshuring, I guess is what they tell about.
Yes, to make those but we think that's a permanent change, a permanent swing away from particularly sourcing from China. We don't think that's going to be reversed.
And it's interesting in the healthcare space, you know, we've seen some deals happening and that always seems to be kind of a merger Monday on the pharmacy space, and is that when you invest in healthcare do you try to keep that in mind? Do you ignore that or do you just stay with some of the bigger names that kind of give you a broad diversification diversification in the space.
Yes, we try to stay with the larger names that have good cash flow, that are diversified said that won't be hurt by fall off in anyone product. And rather than looking for companies that might be acquired, we think good companies or the companies that eventually get acquired, and so we're looking for companies that can have sustainable cash flow through what might turn out to be a more difficult period than we're thinking right now.
Right yep, absolutely, all right, Margie, thank you so much. We appreciate getting your time as always. Argy Btel, she's a senior portfolio manager, Offspring Global Investments.
Thanks for listening to the bloom Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Faull Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio