Banking, Markets, And The Fed (Podcast)

at Bloomberg dot com slash podcast. I've been in the equity research game a long time on Wall Street, and ever since I've been on the street, the folks at Keith, Brett and Woods have been the acts in banking stocks. And what I like about their research, Um, it's big cap and it's small cap, and they cover it on. If you want to get really smart on the banking biz, you go to those folks at KBWI. There now with Stephole Company, Chris McGrady joins us. He's head of US

bank Research. Chris, give us a sense of what your banking call is right here. Um, you know, for just a sector in general, people, we've seen the interest rates rise to eight people like me. That's a good thing for interest rate margin. But give us the expert call. Sure, thanks for having me on. Um. Yeah, at the highest level, higher rates are are actually very good for the banking industry, one of the few sectors of the economy where rates

moving higher will actually expand profit margins UM. And so our call on the group has been for the past year that you want to own the banks. We we made a call last September that we saw loan demand returning after after a couple of years of absence. We saw rates poised to move higher, and we really thought the balance sheets were in great shape. So you put those factors together and what you're seeing now is revenue growth accelerating and that's leading to UM recently some better

performance in the group. So UM do you expect to continue? I mean, how difficult is it to to look out as the FED UM kind of fights the market, or the markets fighting the FED, which Paul says they shouldn't do. Yeah, visibilit it is tough, right, The markets can change on

a dime. UM. And as you've seen over the past few days, UM inflation expectations UM coming down a bit has actually put a bit into the market and so visibility is improving UM and and right now we believe that revenue growth is poised to accelerate, particularly for the mid cap banks. UM. So you have the largest banks which have capital markets pressures, and those those revenues are really and have been in a recession for the past

couple of quarters. If you go down cap to your earlier comments, we see some really strong growth emerging, and we saw it this past quarter, and we see it for the next several quarters. So so we think even though inflationary pressures are with us, we think revenue growth will accelerate and exceed that. And what you're gonna see

is expanding profit margins. What about head count? You know, I was just walking back from the gym with a guy who was on the buy side for the last thirty years and he's now shifted over UM to investment banking just because he saw the layoffs coming. And he says, everybody on the streets sees it. You know, uh, right now, talent, you know, good talent is hard to come by, and

so right now, UM, the employees have a lot of leverage. UM. You know, what we've seen over the past year is wage pressures increase UM and there maybe you know, this is a cyclical industry. There could be layoffs over over the cycle, but right now that the industry is fairly profitable, they're fairly efficient, and they're figuring out how to work in a world where it's, um, we're remote. Is part of the part of the part of the narrative on Paul.

Weren't we just talking aboutale about bonuses, Like last year everybody was like, pay me double and this year it's like, please give me what you gave me last year. If is that not the case? Chris? You know, talent is always going to be in demand. If if if good talent. We always want to pay for talent. Um, but there's still choices out there. A mobility is pretty high, but um, you know, but talent is is something that that is

at a premium right now for sure. Hey, Chris, you know what, I'm really a fan of the kind of the you know, the small cap, the regional banks, the mid cap banks, and I know for that business model, loan growth is a big revenue driver. Talk to us about loan growth out there. Are we seeing good signs? Where is it? Yeah, that's that's a great question. Um, you know what we've seen over the past several quarters.

Is it building in the economy of loan demand? And part of it's coming out of COVID part of its inventory is being rebuilt. But what we saw last quarter and what we see into the back half of the year is we're seeing solid double digit loan growth and so you put that together with the benefit of higher rate and you get this dynamic, a one two punch

of accelerating revenue growth. So um, you know, there are questions about whether we are late cycle and whether the banks should should be growing this quickly, but we've been in such an unusual period where loan demand hasn't been with us that that we're finally starting to see it, and we think we think the banks have learned a lesson in terms of underwriting and the quality of the loans are putting under bounce she Chris Villanova, how's her?

I know you played baseball there? How's the hoops team going to be the year? It's a transition year? Transition year? Wait a minute, that's what you some companies say about you know there. You can't do a transition year at Villanova. By the way, what was it like playing college baseball? I've always been it's kind of mysterious because everybody plays either basketball or football, you know, maybe soccer if you're kind of a stoner. But what's the baseball crowd like,

because I've always wondered about that. You know, it's a it's a great group of guys, um. But but make no mistake about it's a basketball school. Um. It's been a basketball school and and we are going to have a good year for the basketball team. It's just our expectations. We've been spoiled over the past decade with Jay. Yeah, Jay right, the great, great coach retired kind of unexpectedly. There. I wonder where he's gonna land next. Chris McGrady, thanks

so much for joining us. He's head of US bank Research and that means something, folks, because KBW they are focused exclusively on the banking sector, research and investment banking. KBW now is a staple company and steples a good regional investment bank that maybe some people don't know of, but they've been growing. They focus on kind of the mid size um companies out there, good investment banking, good research, and their acquisition of k b W made them an

instant player in covering all things financial services. So good getting Chris McGrady on there. You know, a couple of maxims I learned early on in my careers. Don't fight the tape and don't fight the Fed. Well, the FEDS raising rates not good, but the tape has been going up for the last four or five six weeks. I don't know what's going on, but hopefully our next guest does.

Lizzie Evans, managing partner Evans may Wealth. She got her undergraduate degree from Indiana University, so maybe she can tell us, Matt what a hoosier is, because I have no idea what no one knows what. Lizzie, what are you doing with this market here? What are you telling your clients here? Good morning, Paul and Matt. Excited to be here. UM this, you know, I think that we've seen what's you know,

what's the out look for the markets? We've seen are very welcome reprieve in the markets over the last six weeks to really just an absolutely brutal first half of the year. But you know, I think that, um, we are certainly cautiously optimistic for the for the second half of the year, but I expect, well, we'll volatility is here to stay. I think we'll have a lot of volatility surrounding inflation and economic data points. So from an investment standpoint, I think you have to be very selective

and you have to focus on quality. Know what you own, know why you own it? All right? So what is quality out there? What do you want to focus on? I think you need to, you know, you need to be careful about making a broad call about the market or a sector style of investment. You know. I think if you think about how dollars will be spent if the economy continues to soften, what what are what will customers cut? What won't they cut? What will CFOs or

business line managers cut? What won't they cut? So, in essence, you want to have companies that are the best, most

indispensable businesses in their particular sector or industry. All right, Lizzie, I mean I think I'm probably like a lot of investors where my investment outlook has kind of been shaped by the whole time period following the Great Financial Crisis, when my portfolio did great because I just saw an Apple and Amazon and the Microsoft, the big growth names, and then there was this rotation into some of the

cyclical names, maybe the reopening trades. I don't know, but I think I just feel more comfortable in lately owning those big cap growth names are those companies you're talking about. Do you like my strategy? Well, I think I do. I like the you know, particularly how much a lot of the big mega cap text doox have been hit since the first of the year. You know, you look at Microsoft, Microsoft off it's high, Amazon's percent off its high, Google's twenty three percent off its high. Disney had a

great report. Um they're really, you know, finally showing signs of some resiliency both across parks and Disney plus or streaming percent off its tie. So I think there are certainly some companies that offer attractive values. But you know, I think you want to be careful about moving in or out of Do you have growth names and then do you go into a more defensive play. I think you need to have a balance because just like timing in the market, you can't time when a style of

investment or a sector will outperform. So the key is to know the companies you have and be selective as opposed to just making you know, a broad call across a style or um a sector. Is the FED driving this market? I mean, is it all about the FED or um? Is it really the underlying economy? And earnings. I think all eyes have been on the FED, you know, all year. Certainly the CPI pp I figures we've seen

this week are encouraging. You know, for the last six weeks, if you look at the softening and commodities future pricing, we thought we had seen peak inflation. So I think that's certainly that combined with a good earning season and really the market thinking we're going to have somewhat of a catastrophic earnings season has been positive. But um, you know, I think there is still uncertainty as it relates to the said there's still uncertainty geopolitically. Um, there there's a

lot of risks out there. So you know, I think that right now where someone in a sideways trading pattern, and we're likely going to be there until the fall when we have some more certainty. So fe're earlier point. Know what you own, know why you own it, owned companies that are going to continue to do well even in periods of time when there is prolonged economic slow down. All right, Lizzie, thanks so much for joining us. Really

appreciate getting your thoughts there. Lizzie Evans, managing partner for Evans may Wealth. We think about the last seven days, pretty good news on the economic front. We've had good jobs number, We've had some better and expected inflation data both at the consumer and producer level. Then today we get the University of Michigan UH sentiment survey came in better than expected in a nice improvement month the month.

So for a lot of market participants, a lot of market watchers, the question now becomes, what is this economic data mean to our Federal Reserve? And is our way for them to screw it up? Maybe? Vince Signarella, Global macro Strategistrom Bloomberg News, Hey, Fence, do you have any opinion on this? Uh? Just a little um. Let's get let's take a look at the fed's track record and forecasting. And Paul, you've been on the street. If if you traded like that, would would you have lasted long in

the trading room? So? Uh, neither would. I think we would have probably gotten the hook after about three months of losses because that's what the FED forecasts would have resulted. I just want to make a point to this, I think is a really serious point that no one on

the street is talking about at all. No one in the media is talking about Today on the CNBC Interview, Barkin was asked about the balance sheet and he gave maybe the most NSS answer for the summer when he said, we must believe the balance sheet shrinking has a tightening effect. The real question is what is that tightening effect? And every time a FED at representative as an asked that question,

they said, we don't know. So how in the face of lower inflation data do you continue to high rates blindly without knowing how the Fed's balance sheet shrinking is going to tighten rates because they will tighten financial conditions. I find that just uncontrocal. They always say it's a blunt instrument, right, but it is still shocking to hear that the FED knows so little about the effects of

it's know and that's that's actually not correct. The fact that it's a blunt instrument is because they're in the in the belly of the curve, not in the short end of the curve. We grew up with um repurchase agreements and reverse repurchase agreements, which is what the FED did New York set did almost on a weekly basis to try to control money supply, or realistically, the the the base monetary base, the fat doesn't really control the money supply, and they would do that almost on a

weekly basis and set funds. Traders always took that as an indication of whether the said was leaning a little barish or leading or leaning leading. Dubbish, Um, it's not a blunt instrument. Raising the Fed funds rate is to blunt instrument. It's shocking to me the policy they're using to try to control us. So, Vince, what do you think, given the economic data we've seen recently, what do you think the Reserve should do? I think they should be

continuing to reduce the balance sheet. I think a really good for them would be to do a reverse operation twist and bring their purchases into the short end of the curve where they belong, not into the belly of the curve. And then they have two choices. If they think things are should should be tightened, they can let

those short end maturities just roll off very comfortably. If they think the economy needs help, they can repurchase them very easily in the short end of the curve and get the heck out in the middle of the market where they don't belong. Let the market set rates where medium term rates should be so, and why don't they? I mean, I have no clue, to be honest, I really don't. I don't see how they keep coming things that.

You know, they keep talking about inflation and we need to see multiple prints with the last print was zero, no inflation. So keep hiking rates in the face of rolling over inflation. You know they have daily saying it's structural. How did it become structural in six months? We've had zero inflation to fifteen years, six months and six months

of inflation. Now it's structural. It makes no sense, I mean to make all right, This is my suggestion to you call Tom Keane, book a seat on the surveillance golf stream going out to Jackson Hole and see if you can talk some sense into these folks. What do you think you know, if they would let me, I would, but I think they would probably want to just bury me somewhere in the background. They wan't want me getting

somewhere out in the desert. Is there? And if you put your trader hat on, is there a way for investors to make money in this market if they, like you, think the FED is completely off base? Yeah, I think there's a great opportunity. I think there's a couple of things we're gonna say. I think we're seeing producer prices fall faster than the prices that are being passed along. We're seeing a real nice movement this morning that no one's talking about, how import prices and export prices are

dropping considerably. That's profitable for companies on both sides of the coin, especially the large caps, because as the market continues to gain, the dollar is gonna fall and that's going to give them some more leverage because those fellows just don't hedge, and whenever the dollars goes up, they lose money. So reversal of that trend going into the fourth quarter, I think it's going to be positive earnings.

I think it's gonna be positive for stocks. And the folks who are watching this rally and continue to call it a bear market rally, I think they're gonna be chasing this all the way through December, trying to get their their books looking a little bit more like SMP returns because they're gonna miss this book. So, so you're a bold despite the fact that the FED um continues on its hiking path, or you think that the FED is gonna at some point um turn tail and run

back down. I think I think after September they're going to realize they've made another policy mistake and just stop. UM. There's really no reason to RaSE seventy five basis points September.

I believe they will, and I believe the best trade on the street after September is going to be to buy the short end because when the Fed realizes they've pushed it too far, UM, the short end of the curve is going to rally because they don't need to be this aggressively oversold, expecting the Fed to continue to raise raise rates. So the two year right now, let's call that three to five. Where do you think that goes by the end of the year. I think, for

sure back below three percent. It needs to be closer to two point seven five. I think you'll actually see something of an inversion between the FED funds rate and the two year yield when as the marketers tries to tell the Fed and insist to the Fed that it's too tight, that you could very well push this economy into a recession, and if they do so, they will start to reverse and there's no way that the two

year you'll stay at these levels longer in May. I mean, there's there's no real rush to lower, to be going out into ten years and buying at at you know, two point two point seven, um. But to have a two year at three and a quarter inverted with Hen's it doesn't make sense to me. But has the FED always been um this political? Has there ever been? Um? I know there's been, like high level economists at the FED obviously, um, even in recent memory. But what about traders?

I mean, has anybody in there ever said done? No? No, With all due respect to the Federal Reserve, they glorified academics, I mean their college professors. They start out that way, they've become an economist, and then they end up back in college teaching or unless you're lucky like Bernanke or Clarada,

you joined the one percent and go work for Pimco. Well, or I mean Powell also wasn't a professor, right, No, No, he's probably the only one on the board, but you know, I think he's I think they're so petrified they're going to be tattooed with the with the burns a FED situation of the seventies which really let inflation get out of control, and you have to remember the difference females

two times is significant because Burns was very political. Every time something in cp I started to rise, he instructed the economists that defended to take it out of the equation. Alright, Vince, awesome stuff as always. I mean that is a strong bullish call. They're very clear. By the short end. Uh, he's saying he's gonna see some good fourth quarter earnings as well. We'll see here Vincegnarella, global macro strategist for Bloomberg News, with his hot take on these markets. It's

gonna run next, guess Hugh Johnson. He's chairman of Hugh Johnson Economics. Hugh, I was just mentioning you for the last seven days, starting with the jobs data and then inflation data and today with the mission sentiment. If I'm the economy, I'm feeling pretty good here. What's what's your takeaway? Well, it's pretty important. And it's important obviously because one of the big focuses has been on obviously what the federal Reserve is going to do in the future, most importantly

probably September. The focus is on September, and the question is seventy five basis points are fifty basis points, and then of course what happens after that, particularly when we get to two thousand twenty three, that's really going to determine the outcome for the economy. And and candidly that the numbers that we're getting not so much. The employment numbers, which were very good, are very strong, and I think they've got a soften up and they will soften up.

But obviously the inflation numbers were well below expectations. No matter which inflation number you look at, consumer prices and producer prices, uh, the export and import prices today softer than expected, and the question is will the Federal Reserve respond to those softer numbers. Keep in mind those were softer numbers for the month in July. We're going to

see the August numbers in September before that meeting. And I might add importantly that taking a look at some of the more recent sort of data and commodity prices and particularly food prices, agriculture prices, and non agriculture prices, you might get some more numbers inflation numbers for the month of August in the middle of September, just before the September twenty one meeting that are also very good or very soft soft consumer price index numbers not only

the month, but also on a year over year basis So the Fed, the Fed is going to have to grapple with some really really a tough decision. September is going to be a tough decision. Well, we were just talking Vince Ignarella. He says he still expects the FED to go seventy five. Even if they go fifty, um, they're still on a pretty steep rate rise, rate hiking path.

Can they hold that up if these numbers continue this often, especially if the um G d P numbers get softer into or will they have to cut Let's not say cut yet, let's just say reduce the number of increases. The real question is I think, first of all, I think seventy five basis points is too much in September, and when we get there, it'll end up being fifty. But it's a tough call. Obviously, I think fifty. And the question is, and I think we'll see in November

and December. Really, I think the question is is when we get into two thousand twenty three, and right now, the consensus expectation or guests is that they're going to start to reduce rates when we get to the second quarter, maybe the third order, and I think that's probably a good call, because I think we're going to see more better inflation numbers, or inflation numbers that get more towards their target. Forget the two percent target, but just inflation

numbers that are better. And most importantly, you're gonna get employment numbers, which is the best measure of the economy. You're gonna get employment numbers. They're gonna soften and soften quite a bit as we move through two thousand twenty

two and two thousand twenty three. They're gonna it's certainly in the in the room of public opinion, they're necessarily going to be left with, I think no option except to either put a whole on rates or probably start to reduce in the second quarter of two thousand twenty three. Things are slowing down. The economy is slowing down, inflation is going to be coming down, and they all headed in the right direction. But this is gonna be this is gonna be a really tough economy for the remainder

of two thousand twenty two and twenty three. It's gonna be kind of an on again, off again one soft landing after another soft landing, maybe a hard landing in there somewhere in some of the quarters. All right, Hugh, great, great stuff. As always, you've been doing us a long time. You've got great perspective, um and we always appreciate you taking some time and sharing that with us. Hugh Johnson, Chairman of Hugh Johnson Economics. All let's talk a little healthcare,

maybe a little biotech. Some smart people there, and boy, they really delivered. I'm saying they they being the healthcare industry, the farming industry, the biotech industry. Man on this COVID nineteen vaccines. I mean, how good were those folks there? So yeah, gotta gotta give them props, as we do. Daphne Zohar, founder and CEO of pure Tech Health, joins us. Daphnie, thanks for taking the time to check in with us, talk to us about what pure tech Health is. What

are you guys doing over there? Hi? Following that, thanks so much for having me on so up youre Tech is a biofarma company that's dedicated to changing the treatment paradigm for patients by bringing forward new classes of medicines that address devastating diseases. So like what I mean when I think of the worst cancer, obviously is there, but Alzheimer's and Parkinson's are close behind. Yes, So we've been working on some really serious diseases, like for example, oncology.

UM we have been working on schizophrenia. For example, one of the programs that we invented UH and which we advanced through a company called Kiruna, just had really stellar results this week, which we believe could be game changing

for patients living with schizophrenia. There's twenty one million people in the world who have schizophrenia, and many of the existing drugs have significant issues that UM and and this new treatment actually offers both UH potentially improved efficacy, but also UM really doesn't have the debilitating side effect that

those other treatments have. The side effects are they just sort of turned into zombies when they take the medicine, right, Yeah, and also really significant weaken and you know, for UM, if you think about it, a lot of time schizophrenia gets diagn in early adulthood, and you know, people can gain thirty to fifty pounds on some of the existing medication. So UH, this is you know, we believe and many

others believe potentially a big breakthrough. And it all started out pure tech and when we were looking at schizophrenia and UM and this is something that we've done multiple times, is that we'll look at an area, work with some of the leading experts and and really think of where we can build on validated biology but have an invented

stepth that really unlocks the new class of medicine. And what I'm proud to say is in terms of our track record of clinical development, our record of clinical success is now you know, five times in the industry average, and we've now taken twenty seven new therapeutics and therapeutic candidates forward, of which UM sixteen or in the clinic, and two have been granted FDA new regulatory approvals. I'd love to to say more about pure tech, but also

happy to talk about the industry. It's just such an

exciting area. And as you mentioned, UH, the industry was able to really change people's lives in areas like vaccines, but we're also there are many other major needs including you know, for example, oncology, all times disease as you mentioned Parkinson's, rare diseases, childhood pediatric diseases, so it's an industry that is one that's really cool to work in because we get to work on these big problems with smart people, as you said, UM, and it's created huge

value for patients, but I think also poised to outperform for investors generally. So are we going to see cures in our lifetime for these big diseases? I mean it's something like schizophrenia or cancer curable? Yeah, well, and I think what we've seen as a tremendous improvement in UH moving for example, many forms of cancer from what we're previously fatal to now you know, chronic conditions, so people, you know, are a to live with these conditions longer.

And you know, we've seen, for example, companies like Vertex secure cystic fibrosis in the case of UM schizophrenia. I think this is what we saw this week, which I think also really will impact the sector. UH is something that could really change the lives of the one million people who are living with schizophrenia. So I think definitely

making a change in people's lives. He definite. One of the things I noticed, at least with this whole COVID in the vaccines and was the speed with which they were able to get to market, and does this mark a change perhaps and how the FDA will approve treatments, therapeutics, vaccines, i e. Make it faster for some of these products to get the market, to get the testing and all that kind of stuff. I think what we've seen is that FDA can move really quickly when it's necessary, and

they're able to prioritize areas of importance. And recently, for example, we saw that FDA scent really positive regulatory signal to key areas of our sector. For example that inherto breast cancer drug was approved in two weeks UH, and part of that was thanks to the cancer moon shot. So we see FDA able to move quickly when necessary. But I also think what we saw with COVID is the industry collaborating, people sharing data. Everything was happening in real time,

sort of for the good of humanity. And I believe that the industry has learned from that and UH is able to move things forward, potentially, you know, in a more accelerated fashion. All right, Daphne Great Stuff really appreciated Daphne's Zohark, founder and CEO pure Tech Health Trades on the London docket change pr TC, but they are based in Boston, Massachusett. That seems to be where a lot of the really good biotech companies come from. Thanks for

listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of 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 Fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio