Banks, Supply Chain, Real Estate, and Pets

a making fun man, First Citizens five ticker. We have five letter ticker we have if you're a good company, right, if you're like a blue chip, then usually you get like one letter like t no. But this is why you know this is a good company because Bloomberg Intelligence covers the stock. Herman Chen is the analyst here. He actually covers the stock good because a lot of questions. We got him here. He's in studio. He covers the regional banks. Alison Williams joins us on the phone. She

covers all the big global banks as well. A swaying a little bit of a financial roundtable here, Herman, let's start with you tell Matt what he needs to know about First Citizens and why First Citizen stock is up a ga jillion percent here on this news. Sure, so First Citizens. It's a regional bank based in Raleigh, North Carolina. It has grown tremendously with the deal with C I T,

which also has offices of New Jersey. So you should know c You should know, ye run wasn't it run at one point by the former governor of New Jersey John Cosign that had Manuchin owned. They own One West, which was part of Indiemac, so that that banking operation is part of the First Citizens, as well as the specially landing operations and the CRI lending that they do in the southeast. So it's a over one hundred billion

dollars bank prior to the SBB deal. It basically doubles the size of the of the institution and the deal is very lucrative. Hard to say what the tangion book value accreciation accretion is, but it's probably around fifty percent. So that's why the stock pops into PA. So I was thinking about m Global, Yes you were, yeah, but C I T was mister Cushner ran that right. In any case, this is a bank that I guess has made a number of First Citizens, has made a number

of distressed purchases. Basically still it's only an eight billion dollar market cap, Right, how does it work out a deal? Like, Yeah, it got a huge pop obviously because it's getting this asset at such a big discount. Right. It was It has traditionally been a distressed acquirer, and this is part of the game plan for for the management team that has been at the bank for decades. It's very unique, family operated. The grandfather of the CEO was the founder,

so it's it's a unique operating success story. Yeah, and it's very much insider owned. So it's a different type of animal that we're used to. Go Alison, I want to bring you in here, Alison Williams. She covers the big global banks. How come I mean First Citizens Matt and I are just learning about First Citizens bank shares. This is not JP Morgan Chase. We didn't see much interest from the big banks for any of these troubled regional banks, did we. Well. I think first of all,

they're they're limited, Um, you know. JP Morgan by definition is limited in terms of what it can acquire. And I think that, um, you know, the presumption is that the regulators would allow um something if needed. Um. But clearly there was interest and clearly this is this is a result that I think the government would much rather see in terms of um, you know, a smaller bank taking on this this deal and creating a competitor at

the at the at this end of the scale. I mean, they were allowed to buy Barrastarns, right, So, but that was the U regulation relates to deposits, and so bank in the US cannot acquire if they're beyond a ten percent market share of deposits, and they kind of grow organically, but they can't do acquisitions. And at the time, so Washington Mutual was the one that was sort of on

the edge for them. You know, there was also the Wacovia and Wells Fargo deal, but I think that first of all, there was the Wammoo had different righte glads, so that's like a little bit getting into the weeds of things, and the other deal is sort of add ten percent. But I think the presumption is, you know, if if needed, they would do it. And I think you know, also Embarrasserns that was also a government supported deal. So I think in times of crisis, obviously the government

gets involved. We've seen that globally and can sort of change the rules. Herman, are we still in is this still a time of crisis or you know, was there was there a problem structurally or was this just a couple of idiosyncratic issues that led to one bank run or two bank runs and everything's okay Now. It definitely feels like it's lowered to temperature a bit. And we've written about how there's only a handful of banks that seemed to be stressed, Pacquest, First Republic and the banks

that have already been folded SVB signature. If you look at the discount window usage that the numbers that came out last week, and the usage of the new bank term liquidity program, things seem pretty stable. So it suggested to us that you're not seeing some of the liquidity risks that that felled some of these other institutions spread

to the broader regional bank space. So again you mentioned pac West, It's up four and a half percent, First Republics up seventeen percent here, So do you expect to see some more deals happening to kind of, you know, see more combinations occur for some of these other stress banks. Yeah, I think that remains to be seen. I think the regulators would ideally like a bank like First Republic to continue operating as as first Republic without needing any any acquirer.

That remains to be seen if that can be feasible. But but the hope is that the deposits have stabilized and eventually, once there's more confidence in the system, they can regain some of the deposits that they lost to other institutions. Alison, what's the feeling just out there? I mean, you talk to these institutional investors for all kinds of you know, the financials, the asset managers, the big money

center banks, regionals, you kind of see it all. What's your feeling about kind of just the banking system in general? Do we need any more concern Do you think we need any more regulatory review here? Where were are we today?

I mean, I think that the regulatory view and those concerns are certainly being raised by politicians, I say, for banks, for bank investors, they sort of recognize that there was there was some mismanagement at a few institutions that um, you know, sort of exacerbated some of the industry wide issues in terms of the setup with Kewey and now QTUM.

But I think broadly in terms of investors, you know, now the focus is turning towards the credit aspects, that's turning towards recession, and we're starting to hear a lot more about the concerns of related to commercial real estate. M Herman actually has at out this morning in terms of the regional banks on that. I'd love to get that Alison and Herman. I keep hearing real estate, real estate, real estate, that's the next bogey for banks. Alison. So wait,

it was hold to maturity portfolios. Yep, And and now what a bunch of banks hold big commercial real estate portfolios? Right? So yeah, I mean that that shouldn't be h So that shouldn't be a surprise. I mean, I think that the health to maturity portfolios were a surprise just because we haven't seen that being an issue for banks in

many decades. I think that, you know, commercial real estate is something that the you know, everyone's been focused on since the beginning of the pandemic, especially office because there

were so many questions around that. And now you know, as we think about getting closer to recession, that is gaining focus, you know, not just for the banks, but you know broadly from what we're seeing in the CMBs market and regional banks do tend to have significant portfolios in that area, and they'll turn it over to Herman to talk a little bit about some of the work here.

So I mean Herman. The problem with the Hold to Maturity's portfolios wasn't that they had them or that they were you know, not marked to market, but that when investors want to pull their money out, these banks had to sell that stuff in, take huge losses and then didn't have enough money. That's that's the that was the worry, right, correct. So should we have the same concerns about commercial real estate? Have they not marked those portfolios to market? Had they

not tried to unload them? As you know, everybody, even Paul Sweeney, has gotten used to the idea that workers are no longer coming to the office. Right, So let's take a step back. The original issue with SBB was the Health to Maturity portfolio, which was not marked to market. The issue with First Republic is they have a big chunk of residential mortgage loans that are not marked to market.

So now the focus has shifted a bit to other areas within bank balance sheets that may you know, the fair value of that asset may be less than the carrying value So that's what we're looking at now in terms of focus on commercial real estate, specifically office exposure where people are working from home and the cash flows are are down from where they were pre pandemic and interest rates are rising. So how the bar or refinanced that loan? When? When? When that loan comes due? You know,

this year, next year, in a few years. So it's a longer term turn in the maturity profile of these loans, but it's something that a lot of folks are looking into more. And have you identified a number of banks that are going to have the biggest problems? Sure? So, I guess if you look at the banks that we cover on the regional side, there are a few banks that stand out in terms of their commercial real estate exposure. Bank oz K is the one that stands out with

higher CRI concentration. OZK likes ozarks correct, So yeah, nice pick up there, man. So it's it's a bank that historically has been great in terms of managing their credit quality, but they do screen high in terms of office content. You know, in my town where I live, they're putting up this big mixed use um, you know, office building, and I don't know what's going to be in there. I don't know where the traffic is going. I don't think they thought about that at all, um, But it's

financed proudly, big sign by local bank. And I remember thinking, boy, that's that's the way it works. That's what makes America great. You got a local lender financing growth in a local market. But now I'm thinking about, oh boy, if they can't fill this thing, you know, you know, you think about that, and you think about that, you'd drive around any town USA. The office buildings, I don't know, are they have full?

Are they two thirds full? I don't know where I would I would say that most of the cre and office stress is really in San Francisco and New York. Right, So if you're in a suburban market, you're probably going to the office more than the folks in Silicon Valley, where they're working from home in majority of their time. So our view is that the regional banks probably have headline risks because of the office exposure, but the actual

credit losses should be definitely manageable. All right, good stuff. Alison Williams, she covers the big global banks. We're gonna be talking to her a lot because we have a couple of weeks time, we're gonna have the banks, the big investment banks and the big money center banks reporting numbers. We'll be talking to Alison a lot. She covers the

big global banks. Herman Chen senior analyst for Bloomberg Intelligence covering the regional banks, and he has been the man in the hot seat for the last few weeks because nobody cares about regional banks until they have to, and then it's you know, where's Herman Chan? Get him up here? We need to know what's going on. But I'll tell you what. At the very beginning of this, Herman taught us Tom Matt and I how to look at a bank balance sheet and to look at those hell to

maturity things versus the deposits. And after five minutes we figured out that SVB was in trouble. How did the regulators miss it? That's that's that's the question that I think are not going to be delving into. In fact, I think the Senate looks into that starting tomorrow, and then Congress looks into it on Wednesday. This is Bloombergen. You're listening to the Team Cancer Line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the

I Heard radio app and the Bloomberg Business app. We're listening on to mand wherever you get your podcast. All right, we were just talking real estate and maybe the risk that may you know, point for some of the regional lenders out there. Let's just talk about it right from the primary perspective. Let'stuck real estate. We can do that with Lisa n She does all that stuff. She's a real estate lead at Eisener Amper. Joins us here in our Bloomberg and Advisory Group. I know it is Is

it that is courage? Sorry I will say that and thank you for having me this. But they got the big, the big building on. She was at Burden and she was at Eisener Amper. Now she is at Eisener Advisory Group. Is that right? Okay, very good, I think. But the most important thing is she's here in a Bloomberg Interactor Broker studio, so she gets a gold star. She's also a lawyer and a CPA. All right, that's enough enough education, enough education, Let's get back to it, all right. I

walk through mid ten Manhattan. I see empty building after empty building after empty building. What do you real estate. People say about commercial real estate these days, I think it's a disaster. Am I overreacting? So we're cautiously optimistic. That is the mood, So people are that's my favorite phrase, but that is the mood for where we are this year and where we are in the cycle. And so

we know what's going on with the interest rates. Feds increase the seven times in twenty twenty two, and they're expected, you know, to continue. But are we at the peak? And we're hoping that we are at the peak? And so the problem with commercial real estate right now is pricing. Because there isn't a lot of transaction volume. People don't know where the pricing is and so that's really where we're hoping that this year we can get a pricing stability.

Is the lack of transaction volume, like what we hear about in residential where sellers don't want to let go of their holdings at a low price, so buyers can't pick up bargains or has everyone who wants to sell already let go of what they've got now. I think

it's a combination. And when you look at interest rates, that's going to change your cash flow and what your yield is in your return right, So whether it's personal real estate, investing your own home or commercial real estate, that interest rate is going to change your bottom line and cash flow. And so when interest rates go up

and valuations go up, your returns go down essentially. And so that's really where that combination is, and it's making more difficult for people to find out where that happy median is. I was just wondering if there are any distressed bargains out there. You know, if there's some commercial real estate holder that has buildings on Third Avenue and

they've decided, okay, we can't do anything with this. No one wants to have an office on Third Avenue because it's kind of gross, and nobody wants to live there because they can't, you know, they can't renovate the commercial space into a residential space, so they get rid of it for fire sale prices or are you seeing any of that? So there's two key points in what you said. There is just stress opportunity, and where that's coming in

is on the lending side. So if you're a little bit of a riskier investor or you want to get in on a preferred or mezzotine lending that's where your opportunities are going to come in because people have to come in to make those As we've said before, those cash flows work, and so you're going to get a higher yield and a higher return if you're willing to be a riskier investor, right, And so that's going to be very helpful for that. Paul, you were just talking

about you want to take some risk risks. I just went along some New Jersey, Jersey shore real estate, but I got a mortgage that is brutal um. Can I refinance my mortgage in like twelve to eighteen months and maybe get a four handle on it? What do I wish I could be able to different business? Different business? Maybe real estate? Is it just New York and San Francisco where it's really challenged in other parts of the country are better or we just kind of warped kind

of given where what market we live in. So when you look at the gateway, everyone always focuses on these

gateway cities. But when you look at the US and you look at global real estate, a report came out where Florida the transaction value is high right now, and people are looking still at those Sunshine States or the smile states where you want to do it an opportunity, but you also I hate to throw this in there, but when you look at climate change, there could be a demigration, migration back up north depending on what's going on in climate and insurance costs and overhead down in

some of these more states that are more affected by climate. Right, and so when you're looking at it, it's hard to sort of say, right now is where we are with New York and San Francisco. People want to still live, work and play here. It's still New York. I'm with you, so we're still optimistic. Shaking his head. No, it's shaking his head. No, that's good thing. It's well, I just

don't know. I just don't know. The commercial I honestly, honestly don't know what's going to happen with these commercial real estate, office real estate in New York City. I really don't know. If I'm Billy Ruden, what am I doing with my port? Not just office real estate? Dude? Look downstairs, right, we used to have like an H and M container store. There was a Victoria's Secret across the street, like a Jay Crew or Banana Republic or

something like that. Though those are all gone. The only thing we have is like some high end chocolate tier, which I'm sure is a front for something else. No, it was awesome. It was packed, even though in a pandemic they had people in there. But again, what's the what is the smart money saying about New York office

real estate and San Francisco for that matter. Right, So when you're looking at the smart money that those A buildings, right, the ones that are beautiful fifteen percent, that makes up fifteen percent of the real estate they're they're occupied, Yes, that fifteen percent. So the yards is Hudson Yards occupied. I wouldn't go into on their vacancy, and I wouldn't

dare to do that on the radio. But any class A building that's going to have the prime amenities is going to have an easier time of being able to lease it up. That middle sector, which is sixty percent of real estate for office and for retail, that's going to need some capital. Those those buildings are going to need to have either the rescue capital coming in there or somebody really doing an infusion. It's the bottom twenty five percent that's really what you need to worry about.

And this is USY not just New York, not just San Francisco. So it's that twenty five percent of the bottom of the that's going to have to be reconfigured and how do you put that in and what do you do with that? And that's the real challenge. So the top seventy five percent is going to be able to be usable, but you think that's sixty percent in the middle. I wouldn't put money into that thing. I wouldn't put it like a gym or a coffee machine,

thinking that's going to workers back. But dude, your risk tolerance doesn't go on Muni's that's true. That's true. So that's where your opportunity is. And when I said to you before, a real opportunistic investor or somebody who's willing to you're gonna get a higher yield. By the way, if you're willing to put that money up, that's the higher yield. And that's where the you can make a lot of money in that exact space. What are you hearing about people actually going back to the office. I mean,

for a while it was forget about it. The kids were telling potential employers, no way, Jose. But as we get closer to a recession, I would imagine that resolve breaks a little bit, right. I mean, if you need to find a job, you're probably going to be willing to go in like at least three days a week.

I think it's the same thing everyone's been saying. It's that teamwork, camaraderie, and when people are in offices and they're able to be around each other, you're gonna be able to create a career for yourself versus sitting at home in front of your computer or watching TV. This is really where you're going to create your life. And I think you mentioned you just mentioned it that when we head into a little bit more challenging time, the

job market's going to change. And so what really makes a difference is how you've created a work life balance for yourself and how you're going to start working with your employers. Also, what we're demanding as employers. You know, we're allowing for that work life balance in that three days a week, and so you know at some point, where where's that going to break and where are we going to say, come back to work. It's much more fun. We miss you. So at Eisner Advisory Group, I'm guessing

you guys like transactions. You like the fees associate or transactions. What's your outlook for the next twelve months. I mean we're going to get some more transactions or is these higher interest rates just kind of keeping everybody on the sideline. So when you think of transactions, you can also look at there's going to be a lot of refinancings that have to come up. Where we are in the cycle, some of the data is due and so we're going to have to go in there and talk to lenders

make sure we do some workouts. That's where mes lending comes in. A preferred equity position can come in. So any of the times that you're at some point in the cycle, you're going to have to do some conversation in speaking to the banks and figuring out where you are and making sure that the cash flow is still

the right yield for your investors. So in times of good and bad in real estate, transaction markets can still be very We're still excited to see what could happen because as we say that, you know, real estate is still a nice investment for a part of a portfolio. Any tax changes coming into view, or is there any possibility of that, I'm not asking about all things I'm asking about salt because all I care about a salt, right, But I know that you're kind the commercial side that

doesn't matter. However, I would imagine that legislatures, you know, local and state, are looking at making changes that they can to attract investors. So there's two different things. I think people saw Biden put some real estate proposals that he had that we're in the last bill that didn't go through. He brought them back in things with ten

thirty one exchanges that we're a little nervous about. Aggressive. Yes, and we do care about salt because we do care about those state taxes and wanting to make sure which are supposed to sunset out. So there's a lot of things that we're keeping our eye on, but not to it's depending on where we are in the political cycle. So what's going to go through not going political here by sunset Paul in twenty five, I know, so the big sun shotting provision. We need to all right, be

mindful of good stuff. Lisa Knee, thank you so much for joining us. Thank you for coming into our Bloomberg in Actor Broker Studio. Really good stuff. We'll have you back. Lisa, Ni's a partner, National tax leader for real Estate practice at Eisner Advisory Group. Thank you very much. We got that so good stuff on the commercial real estate side. Need some deals to happen here, get some big prints

on the tape. You're listening to the tape cancer our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. We have four seats in this beautiful Bloomberg Inactor Brooker studio, but they are full right here. We got Matt and Eye and then we're

joined by Anne Hunter. Van Kirk, bi senior industry analyst, was a bio Pharmaceuticals and Diana were set open bi industry analysts covering the consumer staples. Why are they in here? Why are they talking to us? Because apparently during the pandemic amount a lot of people got a lot of pets, and apparently that's like a big business. How big is it will? These two analysts project that it will be a five hundred billion dollar business by twenty thirty. I

just don't get it. I'll tell you. I'll tell you a quick anecdote. Right, My wife, as you know, is from Spain. They were not allowed out, they were not allowed out of their homes unless they had to walk a dog. Really, so a lot of people who didn't have dogs would start renting dogs from their neighbors. That's not a joke. They were renting dogs so that they could go out on a walk with their dogs. And I'm sure they were exhausted. The dogs were dogs. They

were hiding the hiding the leash. All right, Diana, let's start with you on the consumer side here, five hundred billion dollars. That's a lot of cash. That gets my attention at least. What's driving that. It's basically the humanization of pets, um boy, Yes, we are starting to treat our pets the same as we would treat children, you know,

part of our family. And also on the food side, there is the you know, you have to put more attention to the ingredients that going food, and that allows the premunization of food that includes um, you know, the premunization of pet food as well. I mean for a long time, so I've had three dogs. The first couple I just fed normal food. But for Steve he got organically grown goat meat or I would even get you know,

organic cage free chicken and make it for him. No, no, no, no, no no, you have to if you care about the pet like you do about a family member, which is I think it's your point, then you want that pet as healthy as possible. Well, the big I think, the big ticket item, so I hear from a lot of people is healthcare. So Anne Hunter van Kurt jump in here, talk to us about like what are people spending healthcare

wise for their pets? Absolutely, Paul, and actually to pull it back, it's actually from that increased spending on goat goat products for your pets that's driving the higher healthcare needs because pets are living longer. But the we are now seeing monoclonal antibodies for pain, for dermatitis. People are making healthcare decisions as they would for a human because they are humanizing their pets. So rather than perhaps putting a pet down, you're you're going to get that cancer

therapy for them now. So orget like Steve, I had his knees done twice, right, And I know somebody else. His dog had a knee problem and he just put the dog to sleep because he was like, I'm not going to spend five grand was seeing his knees done. But that's what I had to do at at at at a vet in Tuckahoe. They were very good. They redid the whole thing with like pig ligaments, and more people are making that. Yeah. But is there insurance? I mean,

there is absolutely insurance. The insurance market is a small penetration right now, we think only about two percent, but it is definitely growing. You have it from a lot of the traditional insurers out there, you know, your your state farm or whatever else. But you are also seeing it from a lot of the pharmaceutical companies are getting involved in it. So let us now has pumpkin insurance. It's not something that we think will go to the

government level. It's like a pumpkin insurance Pumpkin is there is there insurance brand? Oh? I see, So not insuring a squad, not insuring a squash, now insuring a dog or a cat called pumpkin. So Diana talking about like companies like Chewy, Like in my building, we have a very maladjusted, very angry pitbull by the name of Harry, and he and I don't we're not on the same page or I need to work on that a little bit. But he gets his Chewy delivery like every couple of weeks.

I mean talk to us about like just the food the toy. Does Chewy dominate? I mean, is Chewy? That is there any number two after Chewi? Well, actually, Chewie has thirty six percent of the pet e commerce market in the United States. The second one is Amazon, which thirty four percent, and then you have your retail store such as Petco, pet Smart, Walmart that each have less than ten percent. All right, well they're doing that poorly. Yes,

that's pretty amazing that they're doing so badly. Well, I mean, look at Chewie. I mean it's a fourteen point five billion dollar market out of nothing, right, I mean this has started I think long after petc and it's just completely dominated this market. It seems to me that there would be room for someone else to come in because Amazon.

I get people everyone orders everything from Amazon, but when you really care about your pet, you want to order something from a brand that's specifically four And also another thing that Chewie has is pretty much. It gives you this specialty or experience at the comfort of your home. We estimate that pet Ecommers has about twenty two the pet industry market in the United States, and they will double. The industry will double to fifty eight billion, or thirty

percent of the market by twenty thirty. So there's a lot of growth in that part of the market, and Chewi has a big percentage of that. What about medical care? I noticed when I moved back to New York from Berlin that there are a lot of highly priced, but well staffed and fast service vets all over the place. I think Bond Street is one of the veterinarian chains that we have around here. But every couple of blocks on the Upper east Side you see these vets springing up.

How is that? How is that working? How is that structured? The vet channel is huge, and it's actually right now facing pressures for staffing just because they can't get enough people in to keep up with the demand to meet with the pets. We cover IDx, which is a diagnostic company, and we're seeing increasing rates of diagnostic usage for pets, So that's doing fecal tests, urine tests, blood tests, and again older pets need need more tests, and they need

more follow up from those tests. Um, and that's really driving a lot of the of the healthcare usage. What's the average age of it? I know a dog depends on depends on the breed, right because yeah, I mean if you smaller dogs live longer. Yeah, exactly. So if you have a little mutt, it could live to twenty years old. If you have a big cane corso that's a pure bread you know, from a line of probably inbread, pure bread cane corsos, he's going to live to eight

or nine. What was Steve? Steve was a rottweiler. Uh, he comes from a line of champions and uh, yeah, he lived till he was eleven. Unfortunately not longer, right, but those lifespans are increasing as an average, and it's still like a dog years like seven years to a human. I think that's that's still still commonly held, right, Yeah,

I believe so do Diana real quick. Just on the consumer side, what's the what's the growth story there, Like, what's the big growth area within like for pets, Well, definitely we estimate that pood that food will remain the biggest expenditure for pet owners um in terms of what is driving that, Like I just said, the humanization of pets is driving the premiumization of food. You want, like Steve, you want to give Steve or like the Steeves of the world, you want to give them the best of

what you can afford. Um On a subsegment of that you have we have fresh frozen, which is pretty much you know, a cooked meal that is distributed frozen. So we estimate that the growth of that market will be exponential. And actually fresh pet has ninety percent of that right, gazing stuff. And you guys have a great report out on this whole industry. Uh go check it out a

bi go on the Bloomberg terminal. Diana or set up equity research channels and Anne Hunter van Kirk also senior annols there at Bloomberg Intelligence talking about the pet food biz. You're listening to the Team Cancer Line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the r Heard Radio app and the Bloomberg Business App. We're listening on demand wherever you get your podcast. Let's start

bonds here. We want to talk fix it income. We talk to R. J. Gallows, Senior portfolio manager with Federator Hermes m r J. Give us a kind of the lay of the land here we are coming to the end of the first quarter in twenty twenty three. Give us a lay of the land. What we've seen in the bond market this year versus twenty twenty two, which is just there was just no place to hide. Last year, well there was there was no place to hide. You know.

The bond market instead of being a flatliner, was a downward sloping line and a very sharp one last year. That was a reference to the movie you guys were mentioned. I didn't miss it. I did not miss that. But the spirit in the bond market it's pretty much the opposite of what we saw last year. So, you know, the Treasury index was down. I think it was twelve and a half percent if I recall last year. The US Treasury index right now as of Friday's closes up

three point five seven percent. Much of the rally has been just in the month of March. It's been in a very turbulent March month. You mentioned the move index has massively surged. You know, the confluence of prior bond losses and deposit instability in the sort of second tier size of banks was not something that was I think, on the market's radar until SDB came along pretty much on March ninth. You know, on the month two, five and ten year treasury yields are lowered by eighty seven,

sixty two and forty three basis points. Now interesting, the long end is thirty years only down eighteen And the reason for that greater voltility the short end of the curve is because the nexus of banking stress and FED policy has been fundamental. As the banking stresses have emerged, the expectations of FED tightening have completely reversed, and the FED has sort of blessed that in their own words. So it's been a very eventful month in bonds, which

we said to start the year. Our back are posting nice mid single digits total returns in a more uncertain world as inflation still high. But the banks are rickety. So r J, what has the FED base? I was, I was down in Mexico on the beach last week, paying zero attention. I saw something from Bullard and then I saw cash Car yesterday on TV. But what have they kind of implicitly told us about the path this year that that they're done, or that you know they're

almost done. They're certainly not going to cut right. I think to the first question, I think they've told us that when banking stresses emerge, I think the phrase the Sharon pale U's the literature, namely the economics research literature, is abundantly clear that when when the bank channel of monetary transmission starts to feel pain, then that transmission becomes more intense. Credit creations should slow. Banks will probably pull

back on making loans. The cost of deposits is going to go up, bank profits go down, which is why, in part why some of these banking stocks have struggled. So when banks are feeling the strain of monetary policy, the bank transmission channel starts to bite, and that will intensify the real economic effects and the anti inflationary effects of the monetary policy moves that are already in place. We've been waiting for a long time for the lags to sort of you know, you know, be worked through.

Well they got worked through rather rapidly with this banking stress. So I think what the FED says, uncertainties high chair power comment that the banking stress is like one tightening, maybe more you know, alluding to that literature. I was just mentioning, and I think that the Feds signaled that they're close to The dot plot is not a promise, but it is a projection. It's the summary of economic projections,

and those projections move because they're inherently uncertain. But they projected that they will that they will still be easing in twenty twenty four. I don't think they'll be easing this year. They projected that the FED funds rate on a median dot will be five and eighth, you know, which is basically maybe one more tightening. But if you go out a year from now, the median dot is now four and a quarter. It was four and eighth

at the last meeting. So they they I think, had the banking stresses not shown up on our doorstep, might have flattened mount the dots trajectory, raising them all closer to five for this year and next. Instead, the twenty twenty four dot is still in the low four range, and even easier in twenty twenty five. I think the Fed feels like we're getting closer to a recessionary like outcome. They're getting closer to being done. That's friendly for high

quality bond returns. So done is almost stubbish in itself. But it's a cut seems like something that they would only do if we saw real stresses. What would happen, What would have to happen for them to cut? Um? I think? So how also is clear that he doesn't see a cut this year, that's not in the cards, but uncertainties high, So we'll see how things unfold. Um. I think that the FED has gone and the ECP

has under same. They've tried to separate their UH, their financial stability, their macropudential controls and and and tools from monetary policy. But there's I think there was a great article on Bloomberg about how that's it's hard to do that forever. When the financial crisis hit, Ben Bernanke was was making loans. That's you know, financial stability, using the balance sheet in that way, and then cutting rates and ultimately doing QWE and that's monetary policy. So these two

tools do compliment each other at times. The Fed right now is trying to separate them. Why because we still have a high inflation problem. If inflation was low, I don't they'd be sweating this out very much. Maybe they would have eased a little bit, but inflation is still way too high. They are making loans, but they aren't

making loans. The balance sheet has grown rapidly because the banks are availing themselves of these support mechanisms that the FED has has expanded and motivated people to do because they need to help. But I do think that the FED still faces an inflation problem. That's why they're sort of between a rock and a hard place. And at the last week's meeting they were They did the rational things.

Twenty five basis points is a nod to the inflation that is still too high, but all the language that it came with, and the dot plot that's still downward sloping sort of softens the blow that the FED is telling the markets. The FED is not toned death. They get it. There are banking stresses in the system, and you know they're going to come under some scrutiny as to how these banking stresses emerged. The FED doesn't manage

the banks. They supervise them. There's a difference. So the managers should be the ones in trouble for the bank's problems, but the supervisors also get called to task about what did you see how come you weren't contemplating this your stress test, for example. So the Fed's going to get some heat from this too. So they're interested in trying to balance these objectives of ease the bank stress but

still allow inflation to hopefully renew its downward path. That's the uncertainty event the markets all phase now, J just thirty seconds quick, what is your recession call? So from a firm wide basis, sederated Hermy's, we've been arguing that the recession risk was getting higher and higher as the FED got tighter and tighter. Pretty much. If you are our macro committee, of which I remember, we have a recession emerging in the second half of the year. Our

view is it will be a somewhat mild recession. It's not, you know, not every recession has to be two thousand and eight or the onset of COVID. This might might be a recession that looks a lot more like the early two thousands, for example, And so you have a modest diminished, diminished economic activity and it helps to the disinflation that the FED needs to take hold. All right, great stuff, Thank you very much. R. J. Gallo, Senior portfolio manager at Federated Hermes giving us his call on

all things fixed income. We'll have more coming up. This is Bloomberg. You're listening to the tape cancerre Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. I mean telling Matt, I'm ready to take some risk there in my investment portfolio. But everybody's saying,

you know, the fund manager strategists gotta stay defensive. What's the fun in that? Though? Boring? Boring? I agree, but let's see what why why do you want to take risk? Now? Just a lot of house At the stage of my life, I'm ready to let a couple of show live once. Yeah, you know, go on the table here. Uh. Katteriita Simon Eddie. She's a professional, she does this for a living. She's a senior vice president Private Wealth Management of work and Stanley. So, Katerina,

I'm your client. I call you up, I say, hey, I want to go out on the risk profile. Here. What would you tell me, Paul, I'll tell you there's absolutely nothing wrong with boring, and sometimes sometimes it's good to be strategic. Let's replace the work worring web strategic. And this is where you know, we kind of just you know, see where the market is at and the staid and inflation story is still unraveling. We're not quite

done with that yet. But now this whole regional bank situation added another data point, and you know, we're now looking at the credit availability and how that is going to affect the market. And so while we're waiting for the market to normalize, we have to see what's ahead of us. And the part that is troubling us the most is the fact that earnings still remain below the current market values and we're still seeing the earnings revisions,

you know, which might negatively affect the market. You know, as we go on throughout this year, and we are our longer term outlook is positive, but we believe that we still remain in the bear market. And usually if we look back at history with bear markets before the end, things sometimes get worse before they get better. As the market goes to this normalization process, which absolutely presents buying opportunities, but we might want to stay defensive and not quite

you know, go in, go in on the risk. I'll tell you what if a drop in earnings and a hawk ish FED is all we have to deal with, that makes me feel a lot better. Are we passed? Are we are we passed? The bank turmoil? Are we passed? Concerns of a systemic failure? Well, in our review, systemic failure was not really in the in the mix, but we think that, you know, this is definitely a very serious situation. But you know, in our review it wasn't

affecting our entire banking system. With that, there are definitely concerns, and this is another thame for FED to focus on, you know, while they're really trying to get this this inflation numbered down to two percent, you know. But the exciting part of this market is that this remains to be a stock pickers market. And while we're seeing if we're going to get recession and dealing with that slowing earnings growth, the question is which sectors are going to

hold up. And this is where, of course, some people are looking already at cyclicals and our review this just just a little bit too premature. And we're looking at consumer staples, at utilities, and specifically for companies with strong earnings growth, with strong balance sheets, with competitive positioning at every sector of the market. You know, there are a lot of buys out there. We're just not too enthusiastic

about the index investing at the moment. So what's it We've heard a lot about, you know, this being the decade of the dividend, you really want to start paying attention to good quality dividend paying stocks as opposed to maybe, you know, just great growth or how do you think about that? Well, dividend always plays the role in the

overlast allocation. And you know, I generally tell our clients is, let's say you wake up on January first, and you absolutely have no idea what the market is going to do. But if you look at the estimated dividend payments of your high dividend stocks, that's your starting point. At that moment. You know that at the very least your portfolio is going to earn something. So this takes an element of

risk out of it. And of course for the clients that are using their investment portfolios for income, that's a really important fact as well. So when we look at dividend paying stocks. We look at the sectors that are defensive. You know, we are not positioning them as the sectors

that we want to own right now. We view this weakness in the market and we view the volatility as the opportunity to rebalance, as the opportunity to improve the quality of the holdings, but also to increase the dividend yield because it's a very important overall component over the long term positive investment results. So do you use the term sell the rip? I mean, are you selling on rallies?

We use a different term. The terms that we use is profit taking, because when you have an investment that did very well, there's absolutely nothing wrong with taking some profits to off the table. But this is not to be confused with market timing, where we're absolutely abandoning the sector.

We might like. Certain market sectors like consumer staples right now, of financials present a lot of interesting buying opportunities right now, So we would be strategic and pivot from one sector to another, but more so as an overweight and underweight element versus abandoning a sector like you know, there's a lot of conversation right now of technology, and we think while we have to be extremely selective in our security selection.

Technology still presents a lot of interesting buying opportunities. Katarina's what's the view of kind of you know, the Morgan Stanley Private Wealth Management about crypto because I'm guessing you get some inbound calls from clients saying, Hey, do I need to have exposure here? Um? If so, how do

I do it? What's what's kind of the Morgan Stanley call. Well, it's very hard to comment on something like this because we still don't know what we don't know, but we absolutely are aware that the volatility exposure in that space is significantly higher than the broad equity markets, and so we we tell our clients to proceed cautiously. And while we can our advice that we can operate, they're limited

in this space. We just tell them to, you know, just just just manage the risk there and not to be exposed more than they're willing to to risk, because the risk factor is significantly higher than anywhere else in the market. Understood in terms of what you're watching for, um, you know, for the end of this rate hike cycle and for uh, you know, the end of the earnings downturn.

What are the signs. I know people don't want to go and catch falling knives, love that phrase, but at some point you do want to be ahead of the pack in terms of buying right well, of course, and so what we tell clients is that instead of thinking two months out or six months out, which seems to be the latest strength, we should go back to thinking a couple of years out and focus on good quality stocks and understand that what makes this market difference from

let's say last year, is that we have attractive yields. We have attractive interest rate that we can earn on everything across the board, from our cash to high quality fixed income. And this is where the strategy really comes into place because recoveries, they are not always all the same, and the last bear market will not the last bloemarket. I meant to say, it's not necessarily going to be as the same as the bloom market ahead of us.

So positioning the portfolio insectors that have that competitive advantage, that have the benefit of stable earnings in this post COVID economy, defining the new normal, what is going to be earning s going for and the profect margins are squeezed but not every area you know is experiencing the same type of effect. Katerina, thanks so much for joining us. Really appreciate getting your thoughts there. Katarina Simonetti, Senior vice president,

Private Wealth Advisor at Morgan Stanley. You're listening to the Team Cancer Line program Bloomberg Markets weekdays at ten am easting on Bloomberg dot com, the I Heard Radio app and the Bloomberg Business app. We're listening on demand wherever you get your podcast. Over the last three years, supply chain is a topic that we probably didn't know a whole lot about, but we've all gotten a lot smarter about it. As you know, we hear company after company

talk about supply chain challenges. Can't get the products, can't get the raw materials, lots of cogs in the machine, and we've all gotten a lot smarter about how the global supply chain works. Nobody is more on the front lines of the global supply chain than Gene Siroca. He's the executive director of the Port of Los Angeles, which is the busiest container support in North America. Joints is from our DC studio. Gene, thanks so much for joining

us again. You've been just so helpful to us as we try to figure out what is the global supply chain, how does it work, and where are the bugs in this system? So it feels like, you know, we're on the back end of this in a big way. I'm not sure if we're back to normal, but give us an update from your perspective of kind of what you're seeing at the Port of Los Angeles and kind of where you're seeing it just in a supply chain in general. Paul, Good afternoon. Great to be here from DC talking to

you guys again. Global supply chain is witnessing a slowdown in demand worldwide, not just us in Los Angeles, but across the country and across the globe. We've seen that over the past three years, the global supply chain's weaknesses have been spotlighted. And that's why I'm here in DC this week talking about infrastructure, a ground truth update and what's happening operationally, and a little bit about our labor

contract negotiations. Talk to us about those labor contract contract negotiations. You have gone through it or you're going through it now, and I think the East Coast goes through it a little bit later on. Yeah, we're in about our tenth months, which is usually the outer edge of how long it takes for the bargaining to really culminate in a contract. But we're not quite there yet. The Pacific Maritime Association, the Employers Group, and the International Longshore and Warehouse Union.

The dock workers remain at the table. They're talking on a regular basis, and equally is important the rank and file dock worker is out on the job everyday moving cargo. The productivity numbers are elite there where they're at. There's just not a lot of cargo moving right now, So would you say the cargo volume is gene versus perhaps a normalized time A couple of pieces here. For the month of February, with a longer than normal lunar New Year break in Asia, we're at about fifty percent capacity

five zero. It looks like the month of March will be a little bit better, an uptick of about twenty percentage points in cargo volume for that month, but still much lighter than we witnessed in recent years. In fact, by the end of the first quarter will be down by about a third compared to an all time record Q one of twenty twenty two. So in terms of the kinks in the system. Are the backups? Where are

they right now? The backup on ships in Los Angeles and Long Beach, the Southern California twin ports was effectively gone last August. We set records in five of the first seven months last year, while bringing the number of ships at anchor from one hundred and nine down to single digits by the first week in August. Then there was a purposeful shift and cargo to the East and Gulf Coast importers exporters weary of these contract negotiations and

possible work stoppages. Even though both sides have publicly stated through the media and other channels that they're not going to lock out labor and labor guys are not going to go on strike. President met with both sides along with then Secretary Marty Walsh of Labor on June tenth, first sitting president to my knowledge in history, to meet with both sides during an active negotiation. Still not enough to convince importers and exporters to keep their cargo in LA.

So how do you think this plays out? Gene? I'm not sure how many of these work issues you've been through doing in your career. I'm guessing this isn't your first but how do you think this kind of plays out? I think we probably need a little more time. As I've shared with you guys before, it's not only a coastal framework that needs to get done within the collective bargaining agreement itself, but there are twenty nine ports on the West Coast, each with its own local agreement. Those

are being sure it up. We probably need just a little bit more time to get this done. Again, I don't see anything disrupting the supply chain based on the workforce, and we'll let these experts continue to chip away at this. Unfortunately, last Friday, the White House got a letter signed by two hundred and thirty eight organizations imploring the President to

get involved and bring these negotiations to closure. So we'll be talking with folks at the White House again this afternoon to give them a lay of the land of what's happening on the ground and try to ease anyone's fears. There's not going to be disruption from the workforce. Hey, you're out there on the West Coast and I know significantly south of Sandhill Road. But the collapse of SVB, does that have any effect on your organization. Are you just too darn big to notice that kind of that

kind of ripple. Well, as an amateur economist that I've talked with you guys about before, this economic equation is just so complex. From a jobs market that is still towards the employee ten point seven million jobs open, lowest unemployment rate since the late nineteen sixties, and even in the phase of inflation, although it's come down eight consecutive of months, the American consumer still buys SVB. Because we've been talking all along a great concern. Some companies couldn't

even make payroll because that's where their money was. So anything that hits the banking system is a shock. We all remember what happened in O eight and O nine, But to see the administration jump forward so quickly, Treasury Secretary yelling backstopping those bank accounts and that of signature in New York here we are. Hopefully it's no more widespread than what we've seen here the credit Swiss European transaction coming over that weekend. Hopefully these are isolated cases.

But watching this very closely, like every other variable in the economic equation. Yeah, the root of that problem I guess was specific to SVB and very bad risk management. But driven by rates that rose four fifty now five hundred basis points in a year and a half. Does that have any effect to these high rates have any effect on your ports business? Sure it does. And I think what folks look at is what are their inventory

carrying costs most close to home? Right Purchase orders are at a low EBB right now for a couple of reasons. Obviously the inflation, the concern over the strength of the consumer in the intermediate term, although proven to be pretty resilient. The interest rates on the cost of those goods that

importers purchase and exporters finance, that weighs heavily. Folks trying to get inventories right sized because the inventory sales ratio is still elevated here in the United States, and while we're getting emails and text messages on deep discounts from our retailers to get older inventory out, the new products won't start coming in until there's a bleed down of that warehousing inventory across the nation. Again, not just in

Los Angeles but nationally. Gee. Another global issue that I know you have a lot of familiarity with it is China given your port and your customers in the trade. China reopening maybe a little bit faster than people thought. How are you seeing that in your business? What are you hearing from your shippers? It's been interesting, and having lived in China during Stars, I had a view of what a global pandemic might have looked like. This was

a ten thousand times greater. Obviously now with the benefit of hindsight, but with the reopening, we're starting to see some stabilization, whether it's land transport, barge traffic, factories and their subassembly suppliers getting really back to one hundred percent capacity.

We never really lost a lot of steam because the central government in Beijing and the ports, especially the Shanghai Young Shan Deep Seaport, kept us in focus and made that long haul traffic, that long haul container shipping business a priority. So even while some a pine that shutdowns, we're going to hurt international transportation for this container business between mainland China in La it stayed strong. We'll see

a little more steady cadence as we go forward. But it all comes down now to the purchase orders that are going in from American manufacturers and retailers that usually have a window of ninety to one hundred and twenty days before ship sailing, so we're seeing all that activity right now. It's my belief we'll get on a more

normal calendar after the fourth of July holiday. You'll start seeing seasonal products, year end holidays, and those specialty items start coming through as they used to based on the timing factors. So you'll see the summer goods, fall fashion, Halloween, back to school, and then the year end holiday products lining up a little bit more distinctively than they have in the recent past. All Right, Jane, thanks so much

for joining us. Really appreciate getting your perspective. You're insight there. Jean Siroka, Executive director of the Port of Los Angeles, Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three and on fall swee I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.