Credit Suisse, Inflation, and the latest on SVB

weight to this tape all throughout the day. One of the reasons is some concern about the banking sector, and the news today was our good friends over in Zurich, Credit Swiss, the story that just keeps giving and not in a good way. So we want to get the latest on what's happening at Credit Swiss. How concerned should we be about the European banking sector in general, and what is the spill of our effect, if any, for some of the larger US global banks. To do that,

we welcome Alison Williams. She's a senior banks analyst for Bloomberg Intelligence. She is also a leader of the Bloomberg Intelligence business in the US, So we appreciate getting some time here, Alison. You know, give us the latest on Credit Swiss. I guess the latest news is their big Arab Investor Inc. Coming back for more? Is that kind

of the story? So I think, you know, the issue with credit tweets that I think has in common with the SF The situation is just it's it's sort of a market sentiment and it's hard to make fundamental arguments against market sentiment, especially when we saw in four q that investors got so concerned they pulled over one hundred billion from the bank and you know, they said on Monday they've seen inflows. Um. You know that provided sort

of a moment of confidence. But I think what's difficult now is investors are trying to get a sense of, um, you know what can turn this around. Because we had their their newest biggest shareholder saying that that that they're not going to increase their positions, partly because of regulatory statutory reasons, but then they cited also other reasons, which um, they were vague about. And you know that they have another long time shareholder, um having sold off their position

in the past couple of quarters. So it does seem like we need to hear from thisis regulators. Um, there's a story that just uh that came out a little bit ago. UM. Again, I have no idea the validia of the story. But saying that, UM, they are asking for a public show of report from the regulators, Alison,

what does their balance sheet look like? So that the the their balance sheet is very different from uh, you know the two banks that we saw UM fail in the US in the sense that they do not have the issue of you know, this this huge bond portfolio with unrealized losses. UM. You know that that was sort of a thing that was out there that when deposits outflow from those banks, UM, you know, they couldn't UM.

You know, that really caused illiquidity and those issues. So UM, you know, for credit suites, they do have a fair amount of deposits, they do have some wholesale funding, they just raised capital, They have a fourteen point one percent CET one ratio, They had tons of excess liquidity at least at the end of the fourth quarter. You know that The concern is just that you know, that can shift very quickly UM. And so I think that's why investors are looking for, UM, you know, some sign of

stability or some disclosure to provide some comfort. Unfortunately, when when when people reference their CET one ratio as I just did, or banks come out and say they don't need to raise capital. There's obviously a little bit of skepticism because of things that we saw in the past. But but I will I will chime into you know, Paul saying earlier that this feels very different than two

thousand and eight. And I think, you know, one key difference is in two thousand and eight, we did have a lot of you know, we had broad issues in the system, broad issues, and in this case, we have some mismanagement at a few banks that some names that

people are worried about. The deposit the deposit mismatch and the and the bond investments are brought across the US banks, but but certainly not to the you know, the couple of banks had had very unique um their their deposit bases were very weak, if you will, and so that that was what was sort of unique about them. And some are with credit sweets, and I think that's what we saw with credit speees over the last couple of years, is that a lot of their business has gone away

to some of the stronger repetitors. That's that's what's led to the pressure. And and I'll just say, I'll just say one thing that I know Paul remembers. But you know, when Lehman failed, there was a significant period of time between bear Stearns and Lehman, and I think where banks were reducing risk, managing their counterparty risk, and so you know, when we had that moment with Lehman, it was a big money market fund. It was something that people didn't anticipate.

But again with Credit Suis, this is not an overnight situation like it was with Silicon Valley bank shares. This is something that's been happening over a couple of years. They don't have the prime broberge business anymore, and so I think there's a lot of the systemic risk that we would normally worry about have been reduced. So, Alice,

that's kind of where I wanted to go. I think one of the things I learned as a newbie to the kind of the bank, you know, the bank and bank accounting and how it all works is void confidence is so key, and when you lose the confidence of your counterparties, basically it's game over. And that's kind of what we saw for during two thousand and eight for a number of players. Does Credit Swiss have that risks

today credit suis. It is a crisis of confidence happening right out and they do need and I think that is why they're asking regulators to come out and show some kind of support. There needs to be there needs to be something that provides a floor under the market and gives some kind of confidence. Um. And again, you know, over the last year or so, they did have a one big shareholder that was sticking by them, Um, they raised a capital Those were both kind of signs that

things were studying. They said that flows had sort of studied. And then you know there's now some questions around those disclosures and how accurate they were, and so that that makes it tough for the bank to come out and make comments. And I think that's why they do need a third party to um, you know, come in and

stab wise things and give some confidence. That's that's what the FED did when with the banks, right, so they not only did they take over the banks, they said that the deposits are going to be insured, and they provided a facility to you know, cut the worries across a broader banking system and so UM, I think that's that's sort of what we need at this moment from from the good place. Could somebody buy them take over what's happening on that front of anything, So that you know,

and I think we've talked about before. You know, people have long speculated about m and A with kret suite. See in the past, didn't think that was a possibility because they are are globally systemic important bank with a very complex balance sheet um and you know, there's all the regulatory aspects, especially if you're considering cross border. However, if you look at their operations today, having sold off a lot of their trading, they're not in prime brokerage,

they're cutting a lot of risk assets. They're really going to a more focused wealth manager. It does seem like that that could be more of a possibility. There's you know, there's still a systemically important bank based on you know, some of the historical metrics, but you know, the way that the business looks going forward, is there an opportunity?

You know that. But then the other side of that is UBS has been gaining massive flows while kred Swiss has been having outflows, and neither one is going to point to or confirm or deny what's happening on the

competitive front, but it seems pretty clear. But the flows are going to UBS anyway, So that the question is, you know, is someone going to step in and buy buy this bank or will they just try to continue to win share in other ways Swiss National Bank, Allison, are you surprised that the Swiss National Swiss National Bank hasn't either made a forceful statement of support or maybe even done something more like take some actions amount But you know, I don't know what that action would be.

But are you surprised we haven't seen that yet from them? I think that, you know, we in the US find it surprising. I think because it is a very different regulator right than the FED. And I think that, um, you know, from everything that we know and hear about it, they just tend to operate a little bit differently, um Whereas I think the FED is much more known for coming out and having a voice in the market and

addressing things on so um. And there is a difference between, you know, if you look at sort of the universe, UM that that they're overseeing the issue with the credit suite and UBS. I think versus some of the US banks is that if you look at historically their assets and their businesses as a multiple of the SPIS economy, they're much more important to the Spis economy just these

two banks. Um, so one would one would think that something would be coming again, since no one really knows what that might be, and you know, we we don't know what's going on between behind the scenes and the conversations and um, you know, if there's if if they're you know, what the conversations are between them and the credit suite and anything else. Yeah, because when I think Switzerland, I think cheese. I think I mean, yeah, yeah, chocolate

and banking. So I don't know where the Swiss National Bank is, all right, Alison, thanks so much for joining us. Alison Williams, Senior Global Banks analyst at Bloomberg Intelligence. Just trying to get the latest on this credit Swiss thing. I mean, I used to work there. Man. When I was there, we were killing it, you know. But the institution before my time and since has always always had just a real blind spot for controls, you know, and bad things happen more so more frequently there than in

other places. It seems. We want to break down how can those retail sales numbers looked? And how the consumers looking and how just retailers in general are looking. And when you want to do that, there's only one place to go, and that's Dana Telsea, chief Research Officer and CEO of Telsey Advisory Group. Dana, let's start with those retail sales numbers this morning. What were your takeaways I think overall? And first of all, thank you for having me.

I think the takeaways overall for retail sales been mind you had January revised upward, and most of the retailers I'm talking about talking to talked about the surprise and the strength in January as frankly, goods and markdown cleared out the beginning of February. I mean, definitely a little bit wishywashy, so not totally surprised. February is not a

very significant month. You had a lot of strengths in department stores in the month of January, part of that coming from the increase in social Security payments that the baby boomers were seeing to like the shop at some of the department stores. And my takeaway is that we are seeing consumers slowed down in goods. We had been seeing it. We're going to continue to see it inventory levels have gotten clean, and the uncertainty in the environment

feeds through to overall consumer spending. Dana, when we talk about what twenty twenty three was supposed to kind of hail. I think it was still a couple of months of markdowns and clearances, and we weren't quite done with that era. Now that we perhaps are looking at the macroeconomic environment where easing is on the table, is that still the case. I think overall we're still going to see a challenge first u first quarter, and second quarter maybe like that too.

I think overall, whether it's the level of traffic, whether it's product returns, even the normalization of increases that luxury goods is occurring right now. So overall, the guidance for particularly the first quarter is coming in below consensus. But you know what, I think whatever that consensus was, I think the whisper expectations out there was for it to

be lower. If you can manage your expenses, keep your inventories levels lean in order to take advantage of whenever the consumer feels a little bit more certain that some leverage to the bottom line is the focus, and we're definitely seeing it. Cosmetics is one of the areas that that's working. It seems like there's a pickup and experiential with restaurants. The apparel part is a bit more challenge. Now, Dana, what are you the companies telling you about China reopening

reopening faster than people thought. I believe the US is going to loosen pretty significantly the visa restrictions, the vaccine restrictions for Chinese travelers. On the luxury side, that's going to be a big, big plus. It is. And how did you know that? We just came out with a report on Monday all about the China reopening and who particularly benefits. So your timing, frankly, couldn't be more perfect,

because you're exactly right. It does benefit luxury And if you think of what we've been seeing now, we've been seeing certainly some improvement levels, whether it was companies like Tapestry or LVMH. Who's talking about the rebound and the reopening of China? That who we're hearing about it. Who benefits It's LVMH given the diversification their portfolio, It's Urmez, It's Richmond given the penetration and luxury goods that they

have right now. So I'm excited about how China reopens to the world, But there's two other elements just to note about this China reopening. Let's talk about what the travels look like. In twenty nineteen, China had over one hundred and fifty million outbound travelers who spent two hundred and fifty five billion dollars to two nineteen. The savings of Chinese consumers rose two point six trillion dollars in

twenty twenty two. So exactly like you said, if they begin to travel, even in the second half of the year, they will be a big benefit to retail sales. Tina. When we're talking about the China story, I feel like we also have talked about other regions of the world to what extent. Is the Middle East becoming a more and more important region for some of those luxury names. So when you think about the Middle East overall, it

is becoming more important. But when you think about where sales are coming from, where there's companies like LVMH just that smallest part of the world, the Middle East and some other areas, it's still only seven percent of sales, so it's certainly not as significant when you look at the carryings of the world to who owned Gucci, it's still a relatively small piece of the pious seven percent. Also, there's a ways to go. Europe, Asia, North America are

the areas where is the most beneficial impact. So we touched on luxury. How about on the other end of the retail spectrum. I'm thinking like the you know, the dollar stores and Dollar General and maybe maybe even you know Walmart and Targe. If I'm an investor, do I feel like, if times get tough, if there's a recession, if inflation persists, are we seeing people trading down to those types of stores. It's interesting many of the companies overall have not said that they've fully seen the trade

down yet. But yet when you talk to the off pricers, the tjxes of the world, whose recent camps were up seven percent and we talked about an uptick in apparel and the pickup in traffic, Well they're getting they're getting that share. I think, like Walmart, Target is definitely planning cautiously for twenty twenty three. You'll look at their camp guidance of download single digits to upload single digits. Yet the margin recovery given Target expects operating income to grow

double digits in twenty twenty three. That's encouraging. So yes, I do think you see the benefits of the trade down that way, and you see it in merchandise with the newness. You'll look at beauty ALTA, you have ALTA and target that should be a benefit. You look at loyalty, You look at that target circle. Loyalty member base of one hundred million plus today. There's opportunities for improvement and continued improvement in conversion at discounters. Dana thirty seconds here

talks us a little bit about card spend. Are people still willing to spend on their credit cards or are we kind of looking at people buying from their savings a little bit buying from their savings at the lowered to middle income level. Credit card data has become a little bit more cautious lightly, and we're seeing a little bit of an uptick in some of those dead dats. All right, Danny, thank you so much for joining us. We really appreciate getting your perspective on all things retail.

Danta Telsey, chief Research Officer and CEO of Telsey Advisory Group. Before that, she was a senior managing director at bear Stearns and chief was a former analyst at a firm called c J. Lawrence. And if you're of a certain generation, you know c J. Lawrence. You want to get right over to those regional banks and get back to see what has really been a big, big issue for this market over the last week or so with some of these failures of some of these small regional banks. Herman Chan,

senior analyst US Regional Banks with Bloomberg Intelligence, joins a program. Also, we have Arnold Kakuta. He is credit analysts and we're intelligence focusing on the banks. Arnold, want to start with you because we were just talking to Katie Greifeld and she was talking with the source Anastasia Amarosso over at I Capital, and Anastasia was saying, hey, you gotta take a look at some of these bank bonds. There's some real quality out there and they're trading it very effective

or very attractive yields it there. What are you seeing on the credit side of some of the regional banks out there, Arnold, Yeah, I mean definitely yeah. If if the storm passes and then you know, we got another curveball today with creditsis you know, having some issues and kind of bringing some you know, counterparty risk issues, you know, to to the bigger banks here. But uh, yeah, I think it's still not over though, right, Um you had,

um what is it? I think Moody's h SMP coming in with a downgrade to um FRC you know, uh doubt from AAA minus to junk rating. Right, So, um, you know there's still definitely concerns on the deposit flow out risks, UM, the deposit out outflow risk and uh yeah, you know we might get an update, you know, one of these guys report quarterly earnings and saying, you know, do they have to tap this new you know, bank

funding facility and whatnot. So I think, you know, there's still some risk out there, but you know, if you believe that things may stabilize and some of the bigger players may benefit. I you know, we got the news that b of A got fifteen billion of depolsits. You know probably you know, if that's the case, then JP Morgan probably got a lot more right, But there's still things out there that might be kind of a little

bit dicey. Herman hop on into this conversation because in addition to all of this kind of craziness happening in the bond market, and of course some of these bank bonds spread. First Republic, one of the regional banks we were following getting downgraded today. Why there's a lot of asserts a new with their positive base. Management had an opportunity to discuss that when they've been on media reports

and have been a bit avoiding the matter. So until we some more clarity on where deposits stand, there's going to be some uncertainty with the name. I do think that the liquidity facility that arnoldists articulated does shield them from some issues in terms of managing the balance sheets. But longer term is what happens with deposits and when can they stabilize and move on? So that's the underlying big question that the industry is trying to figure out

right now. So Herman, I'm looking at the SP five hundred regional index here, stock index down thirty two percent year to date, down forty eight percent on a trailing twelve month basis. That's telling me that the market thinks this is more than just a blip. There's something fundamental out there. I know yesterday you did not think it was systemic per se. Right, has anything changed in twenty

four hours. There's just a lot of them start to need in the marketplace, things tend to appear without notice.

You've Arnold mentioned the court squee situation. That doesn't help confidence, and the there's a lot of uncertainty with where deposits are going, what happens with bank balance sheets, and where interest rates are going, and the economic repercussions of the bank fallouts, because if banks aren't going to lend because the posits are flowing out of the system, that has very strong implications for the future growth of the economy because banks are are scared at this point, so there

will be some you know, domino effect of what's going on. So that's that's something that that is adding to the uncertainty. Well Herman, in addition to just some of the uncertaty that you're seeing. I thought it was interesting that Ken Griffin of Citadel bought a steak Western Alliance Bank coort w AL. The stock is down then, even though it was higher, I want to say, by like eight or

nine percent in the pre market. Why that specific bank, Why are they not facing the same scrutiny or same downgrades as First Republic Yeah, I think Western Alliance is a bank that has historically been pretty well managed, low credit risk. It operates in the California, Arizona, Nevada market, so it's sort of tangential to what SPB does. They did buy a bank that does very much the same focus ass would be with startups in venture capital. So

that's why they were initially lumped in. But the manager team has been very strong and they've they've come out with pretty good updates in terms of where they stand from a liquidity standpoint. So i'd point to that, Hey, Arnold, as a credit analyst, Um, what are you really looking at when you analyze a bank security? There? I mean, is it give us a sense of what you're looking

at and how is it kind of look today? Yeah, So you know, traditionally we look at, you know, the loan book, how safe are the loans and you know, um, in terms of from that standpoint, right, the traditional bank credit analysis, UM, credit quality is still pretty resilient, you know, given what has been so far resilient consumer and so you know, people are paying their bills on time, um, and so but you know, slowly and steadily we've seen kind of a normalization the normalization of credit to you

know where net net chargeoffs are rising, but but normalizing not you know, um, going you know anywhere haywire. But again, we're still at the start of a potential recession, right, and so I think things will get worse, But it's just a matter of you know, how much worse. And it's just a lot of this stuff that has happened. Now. This is it's almost like basic liquidity analysis, right where um, all right, you take in deposits and and and you make loans. But for a lot of these banks that

kind of trouble, it's okay. They became bond managers, right, they had big bond portfolios that you know that they and then and then the regulation was more relaxed for them so that um, they didn't have to you know, really the unrealized losses on these available for sales securities. It did not hit their capital levels, so um, you know, it delayed the pain, right Like when the deposits fled and they had to sell these ass securities, that's when

it really hurt. You know, that's when their capital levels will be hit. And so I think that's where the regulation might start changing, right, Uh, where where some of these mids of smaller size banks, UH might need to start accounting for, you know, how their bond portfolios are doing instead of you know, really realizing at the last moment when deposits are flinging out the door. Arnold. When we talk about spreads specifically, I think we're looking a

lot at of course US and their bonds. I think it was like a one thousand basis point move or something something in like distress territory. Correct me if I'm wrong there, But I want to ask how long will it take for that to spread to some of the other banks. We're already seeing in a little bit in the equity price action, but in terms of the bond market, are they a little bit more insulated? Yeah, I mean

we're starting to see you know, spreads. I think um bottom, like you know, from from a wideen in October and November, you know, kind of bottomed, uh tightened a lot until you know, early suburbins. We've been kind of on this widening path and you know, more wider today. But yeah, it's it's because of kind of the interconnectedness of these big banks, right, So that's you know, anytime one of

these bigger institutions is having an issue. Yeah, you know credit Swist is a is a major trading accounting party to you know, the the JP Morgans and the Baas and stuff. So, um, I think there's definitely worry. And you know the banking model, right, it's it's it's you know, it's it's a big surprise because usually you can kind

of see these things when companies are having issues. But with SBB, which um had about four billion of bonds and three three four billion of preferreds, this all happen and like in forty eight hours, right, and this is the definitely great names. So that's the fear. It's like, wow,

this stuff can happen really quickly. Um. You know this competence game where if if you know, people start seeing the stocks move, oh my god, are they going to start moving their money whether it be you know, wealth management assets or deposits and and that that you know, when when when the funding goes away, you know, do you have enough liquid assets to you know, handle that outflow? And you know if if the deposit runner just so great,

you know, any institution yea is almost at risk. All right, Arnold, I really appreciate getting your perspective. Arnold Ccuta, senior financials credit analysts with Bloomberg Intelligence, joining us on the phone in Herman Chan senior analysts for the regional banks, covering it from the equity side, both of them from Bloomberg Intelligence. He joins us here in our studio getting the latest on this regional bank challenge slash crisis. We get a sense of what all this turmoil in the world means

for emerging markets and other parts of the world. Let's check in with Nick stot Miller. He is head of Global product for Medley Advisors. He joins us live in our Bloomberg and an active broker studio. So Nick, we've got Credit Swiss news today. We've had a couple of bank failures, granted, smaller banks in the US, a lot of uncertainty. We just had some bank anilys in here talking about all the uncertainty in the financial sector. How does it spill over to your world, to emerging markets

and things like that. Well, Credit Swiss is obviously quite a large bank and quite active globally. But the banks that failed in the US, there's not really any direct connection, but I think the indirect connection, which is as you have increased in certainty in the financial sector in the US, banks becomes less willing to lend, and so that tightens global credit conditions and it makes a lot harder for these emerging markets to raise funding. So the tighter credit

conditions will spill over into em and crimp growth. And then also you have the broader risk off move and you were talking about the strengthen the dollar, and you have a lot of the higher beats at EM currencies

just getting whacked today on the move. Well, I love that you mentioned kind of the dollar going into this because your background is actually in the Middle East a little bit, and it's fascinating to me because a lot of these European banks that are getting hit have extra exposure to the Middle East that I would argue a lot of day the Silicon Valley banks or the regional banks that created the chaos earlier in the week, don't

so walk us through kind of the connection there. Well, particularly in the Gulf, which is where I spent quite a bit of time, there's plenty of liquidity in terms of the sovereign wealth funds. In fact, you know the thing that really got kretty sweet moving today was the Saudi banking executive saying that they're not willing to put more money into it. So I don't think that this

is blowing back on the Gulf. But if you remember back to the two thousand and eight crisis, it was Katar and some of the other Gulf sovereign wealth funds that provided backstops to some of the global banks. So, if anything, I would look for the Gulf to be a stabilizing force rather than experiencing instability as a result of this. It's amazing, I mean, and they're from your experience, they're still willing to invest in Western financial institutions. It's

just this is a credit Swiss maybe specific issue. Yeah, and also the sovereign wealth funds don't want to be the first ones to pile in. You know. It's you know, as they say, it's sort of like catching a falling knife and you're trying to invest in these markets. So I would expect them to wait for the dust to settle a bit and then try to pick the strongest institutions that they think have, you know, the best prospects.

Where where are you seeing opportunities these days? Because I'll tell you a lot of people are just very nervous across the board. We see that in the moves in the treasury market every day, just whipsawing all around. Where are you guys spending some time these days? Well, I think you know, there are a lot of decent fundamentals out there, particularly in Asia. And it's interesting that you know, the Korean one has actually benefited from a lot of

this turmoil, even though you know their economy. A lot of these export dependent economies are probably going to have a bit of a slump and the second off of the year, assuming that there is a hard landing in the US. But you know, there seems to be some

more fundamental strength there and much less financial instability. I think the key here is really just to wait until the dust settles on this, and if you do start to get some serious easing from the global central banks, there probably would be a rally down the road, but probably stay on the sidelines for now. I'd say, what does it then mean for say a country like in Latin America, for example, It has a lot of commodity exposure.

And the reason I ask this is because if you're looking at the moves in oil for right now, or looking at a sixty seven handle on NIMEX crude, and it feels like ordinarily you wouldn't necessarily see oil react to something like the credit suite move, but it almost feels like it's a ripple effect of FED pricing. How does a em investor focus on Latin America or commodity

exposed economies navigate that. Yeah, it's really tough, and I think you're one hundred percent right that a lot of the moves we're seeing commodities right now are more about financial ripples more so than necessarily the macro ripples. Because, of course, if the US goes into a deep recession as a result of all of this, of course that's

going to pair demand for all of these commodities. But in the first instance, you know, a lot of these investment banks and trading desks are just really derisking, which means they need to dump a lot of the You know, I was just that because you know, having used to be on a trading desk, you know, I used to it's solemn brothers. I'd walk onto the government you know, to the fixed income bond trading floor. It maybe row

after row after row of people trading government bonds. That's liquidity to me, that's not there is what I'm hearing, you know, really since Great Financial Crisis, that's really been winnowed down, and that can be a problem in certain times.

And I'm hearing from a lot of people like you that that liquidity is an issue or lack of liquidity is an issue, absolutely, And when the markets are more volatile, market makers just aren't as aggressive and providing type pricing or that the size that people want, so that exacerbates the move. So volatility almost begets volatility In that case,

what do you expect the FED to do next Thursday? Here, I'm looking at our world interest rate probability function warp warp, and it's showing that we've we're at or near peak rate and the rate check can start going down. I mean, is that way you think our our view is for another twenty five basis point hike coming up in March, and then another twenty five in May and then they're done. Okay, But that of course is caveat said on this not getting worse. If the banking system issues get worse, then

the Fed's probably going to have to do something. And to the point about FED cuts being priced in the second half of the year. If that's what in fact happens, that things get so bad that the FED has to cut from June onwards, I think risk assets are going

to be in a very different place. It's very hard for me to reconcile credit and equity markets, which have sold off but are still relatively resilient to these massive moves we've seen on the front end and just a complete repricing of the FED, and one of them has to be wrong. I don't think they can both be right. Are you going to start to see more than as we kind of see all this chaos shakeout, see more

divergences in the sovereign bond world too. Paul's point, I mean it feels like German boons and treasuries on the same page at the moment, arguably guilt as well. But then you have something like Argentine debt or something. I think I read a story yesterday one hundred percent inflation there a lot of the em bond world. Are they

going to be on the same page? No? And I think you saw this particularly in local currency debt and sort of the first day or two of this big sell off in risk assets that a lot of these local currency bonds were actually rallying because they said, oh, okay, well, if the FED is going to be less aggressive, that's lower global rates, which is good for all these bonds. But then the secondary effect is, you know, how much risk appetite are you going to have from global investors

to be in this stuff? And you know, if the currencies are selling off and the economies are are weakening, it's not a good environment for emerging market bonds. So I think you will see this divergence. Traditional safe haven the biggest global developed markets will actually rally, but I think em is going to be in for some weakness over the next several months. We can't let an emerging markets manager walk out of our studient without talking about China.

We were talking to Dana Telsley earlier. She's the top retail analyst on Wall Street, and she just came out with a big report Monday, really extolling the opportunities for retail, but particularly for luxury from the reopening of China, you know, in terms of the spending opportunities and so on and so forth. From an investment standpoint, where are we today with investing in China is that it people feel like

it's a toxic a little bit, or can you still invest? Well, we've definitely seen over the last six months or so a lot of increased worry about US China trade relations and how that might spill into the wisdom of investing in Chinese assets. But from a fundamental standpoint, our China

analyst is it is quite bullish on China. He thinks that growth will come in close to six percent, well above China's official around five percent forecast, and very much led by pent up demand from consumers, particularly on the services side. So we're actually quite bullish on China at this point. But with the caveat that the geopolitical risk is quite a bit higher than it has been in

previous years. Yeah, because there you think about their pent up demand and they've been lockdown so much longer and harder than everybody else in the world. For travel, for spending, it's just going to be huge. And I walk to Penn Station occasionally and I walked through Time Squared and the European tourists are back in droves. They're back, but

not so much Asia. That's kind of my just you primary research walking through Times Square, But man, that changes, that's just going to be so important to see how that place out across the economy. Nick stop Miller, thank you so much for joining us. Nick is the head of Global product for Medley Advisers. We appreciate him coming into our Bloomberg Interactive Broker Studio. It's always better to get these folks in persons him a gold star, don't we We give him a gold star, gold star from

that whatever, all that kind of good stuff. We've been talking about this SVB Silicon Valley Bank, trying to cover it from every angles. One of the angles is there's a lot of companies that did business with sv being really dependent upon it, and what does that mean from them? And you know, you know, it's just it's really going to be an issue that I'll have a rippling effect through the valley for quite some time. And we want to get a unique angle here from the perspective of

mergers and acquisition. Thomas Smail joins us. He's the CEO of FE International. Thomas nws much for joining us here in our Bloomberg Interactive Broker Studio. Give us just fifteen seconds elevator pitch. What do you guys do at FI International? Yeah,

we're a m and a firm. We work with sellers of businesses in the tech space and we're up to two hundred and fifty million, and we help them ultimately exit that business to a range of acquires public companies, private equity firms, individuals, and strategic All right, so you're tied into the valley big time your clients or I

mean the lifeblood. Here we are several days after the Silicon Valley kind of blow up here, What does it mean day to day for your clients that are out there in the valley in terms of I don't know, making payroll, you know, making investments in their business, paying you know, maybe thinking about strategic acquisitions that maybe they're talking to you about what's going on out there. Yeah.

So interestingly, no real change. We had our team in the office all weekend cooling buyers, cooling sellers getting a field for their current appetite. No one we spoke to it change their strategy. Buyers are still buying, Sellers are still selling. Of the buyers we spoke to, less than one percent of them had exposure to SVB as as clients. So from what we've seen, it's going to be business as usual, particularly since the News on Monday, it seems

like most things are beginning to pick up again. So I mean, is that simply in the context of the government is going to backstop SVB because it's I guess my understanding was the big tech players. Once you get to a certain size, yeah, alcrow SVB and you take your banking to the JPMorgan Chase or whatever. So it's really for smaller and mid sized tech companies that really rely upon SVB. So even those companies you're saying, they're

not too concerned. Yeah, I mean, I think obviously there was a lot of noise about SVB, but the reality is it wasn't a large percentage of even tech companies banking with them. So there's definitely an effect, But the vast majority of people, once you get to a certain stage, you have multiple bank accounts, if you have a big enough business, you can easily move that relationship, which I know many people did. Like most companies like ass we

have three banking relationships. So that doesn't really change. So, yes, you're right, FVB definitely tech focused. Definitely a lot of noise, but it doesn't really change things for the majority in the venture community out there. What's the feeling there, like if I have a really cool idea and I found myself on Sandhill Road, will I get my funding today? Yeah? I mean I think there's no real changed from that perspective. I'm not aware of anyone pulling term sheets at the

moment or changing their deals. Like, ultimately, if you bank of SVB at the moment, you have access to your cash. A lot of the venture capital firms would be working with them. But I'm not aware of any changes from that perspective. The thing with the value as well, or just tech in general, word spreads fast. You don't want to get a reputation as a privateacity firm or a VC that's pulling term sheets from founders who are trying to make payroll. That's not good look. And people will

talk how about rising interest rates? What does that mean for I mean, obviously for the publicly traded stocks, it was bad for them. In twenty twenty two, tech stocks underperformed dramatically. A lot of folks think texts may not even be a leader once we do get to the other side of this, as it's led the market for the last decade. You know, in terms of pop trading public stocks, what does it mean rising interest rates for your world out there for kind of mid sized tech

m and A yeah. I think firstly, it's a great time to be a business owner in the tech space if you have a business below two hundred and fifty million invaluation. The majority of the business owners we work with the international have profitable businesses. They focus on generating positive cash flows. They don't necessarily rely on external investors. So interest rates definitely saying you keep an eye on as a small business owner, but if you're profitable ultimately,

it doesn't really affect you. If anything, you're benefited from your bigger, bigger competitors being hindered maybe they have to make layoffs. If you're small and profitable, you're more nimble, you don't have a problem like that. So I think the world we operate in it's a good thing for most people. If you look at my ten fifty year

view of tech, very bullish. How about the We have seen a lot of announcements from big tech companies, you know, publicly traded Microsofts of the world that Metas of the world laying off people. Meta just came out yesterday just above ten percent of their workforce. They're going to be like that, this is getting serious out there? What's the mood? And usually, like even six months ago, when we saw some of those tech laoffs, the assumption was that they

were going to be hired tomorrow by somebody else. What's the mood out in the valley about this is getting serious in terms of layoffs. Yeah, So I think again there's a big difference between the big public companies and the small, nimble, profitable companies. If you're small and profitable. Of all the clients we've worked with, almost none of them are making layoffs at the moment because they don't

need to. I think the larger firms, which are more affected by swings in their own stock price or just the public markets macro and like, they're definitely companies that have to be seen to be making layoffs to get

closer to cash flow profitability. If you're a smaller business, less of a problem, you don't need to make layoffs, and that ultimately helps a lot of these small businesses compete and ultimately means that from an M and A perspective, there's consistent demand for those businesses because they're still making money. So what's a typical client or typical deal for Effie International?

Is it like my company had a really cool idea, I built it, I had a couple of rounds of VC funding, I've grown it and now I'm looking for an exit. And is it to a I mean to do? I want to sell out to a private equity funder. I want to sell out to a strategic what's it a typical deal? Look for you? Yeah? So first thing, we've closed over twelve hundred transactions. But maybe I'll give you an example. We worked with recently a company called Thrive Car. It was in that education technology space. The

founders started the business with nothing. He did not come from a rich background. He did not have a family with money, he had no investors. Started that business from zero about five years ago. Has been in contact with us for many years. We spoke to him two years ago. His business was a low seven figure valuation. A couple of months ago we helped him successfully exit for thirty five million. So there's a And what type of buyer was it? Was it a strategic buyer? Yeah? The buyer

was a private equity firm called LTV Fund. They invest in tech companies generally below two hundred and fifty million invaluation if you mean, if you look at privacity as a whole. Currently there's three trillion dollars in dry powder. So you can look at the public markets and say maybe M and A isn't going to happen, But the reality is privacuity firms need to be deploying their capital. Deals like Thrive Car profitable growing are always going to

be popular. There's a lot of privacty firms out there. They want to deploy their capital and that strategy isn't really going to change interesting all right, So things so maybe not quite as bad out in the Valley as we're some afearing of given on the backs of the SVB failure. Thomas Smail, thanks so much for joining us year. Thomas Smail. He's the CEO of FI International, providing M and A advice in the sas e commerce and content businesses.

You know, we're talking about Silicon Valley Bank for you know, a better part of a week hearing which is starting to really understand the ripple effects across the tech and VC space. You know it's going to be profound for a lot of these companies, a lot of these VC firms. We want to check in with Josh Chapman. He's a managing partner at Convoy Ventures. Convoy Ventures is an early stage venture fund dedicated to video gaming right John Tucker's alley,

the partners with founders at the earliest stages. Josh, give us your perspective on you know, Silicon Valley Bank. What does it mean for the Valley for tech for the VC community. Do we know yet or is it still too early? Absolutely? And thanks for having me back on the show. It's good to be here, Paul and John. These are great questions about the future for the venture

capital market. First and foremost is the fear around where the operating cash for portfolio companies seems to be subsiding at least right now, you know, barring future contagion and new information for us all. So that's the first prior for every VC to work on to curing the cash for their portfolio companies, helping them navigate through this. And

that's first and foremost. The second ripple effect it's happening right now is that with Silicon Valley Bank down, over fifty percent of venture capital firms have their back office banking operations effectively interrupted or at least frozen, and so that is a really interesting operational thing in the venture market right now, which is going to probably create an artificial operational slowdown for the next at least week, two weeks,

four weeks. I mean, however long it would take to move those operations for a banking solution to a different bank, whether it's a Tier one or a group like the First Republic. You know, this is a very live situation. I think that'll be the second ripple effect. I think the third ripple effect here is that venture capitalism market has already been going through a little bit of a

cool down, a little bit more of a correction. The words you know, profitability in ibada becoming a little bit more common, and that's healthy for the market as business models get correctly challenged by investors, and I think that's just accelerated by this current environment. I need a short primer on how the whole process works. Tell a dummy

how it works. The venture capital firm finds a company it has an interest in and raises the capital, and then that capital you stick it in the bank and withdraw the money as you needed or explained to me absolutely so what we do is venture capital venture capitalist is we raise capital from limited partners or LPs. Those LPs then signed documents. Let's say for one hundred million dollar funds, our third fund is one hundred and fifty

and so one hundred million dollar fund. They then sign a document saying that they are committing that capital, but they don't wire that capital immediately. As you find companies that we're excited to invest in, we then called down

that capital through a capital call. Very very witty title there, but a capital call where we called down let's say five million of that That money is then used to, say, then a little bit on salaries, operations, rent, travel, and then the rest is going to be used primarily to make those investments and buy equity in what is hopefully the next Uber or Twitter or LinkedIn. Right, and so

we call this capital down over time. What that means from a banking operations standpoint is that everyone at sub as well as us over at First Republic is we were calling capital into First Republic, and vcs were calling it into Silicon Valley Bank. With Silicon Valley, with Silicon Valley Bank down, where are you calling that capital too? You have to reposition your operations over to a new bank and set up with KYC and documents and everything

to set up a new bank account. The difference is operating companies usually have one bank account they run all cash and all payroll, all expenses. But for us, we have two bank accounts per fund and so we have three funds and so we have over ten bank accounts with First Republic and we're a medium sized firm. Right when you look at Sequoia NA and recent they probably have hundreds of individual bank accounts that they're running. And so that's the complexity of the operational hiccup that's going

on right now. Is that complexity that limits you from spreading it out over any number of different banks. We could spread it out, you couldn't head that risk over different banks. Vcs usually centralize it. I haven't met one that has different banks, but they usually centralize most of their banking operations at one location. I think that is sort of maybe a question mark here as we walk

into what's next. Yeah, hey, Josh. One of the reasons Silicon Valley Bank came into existence decades ago in the first places because banks don't want to bank some of these small startup companies, you know, no profitability, and where do those companies go now. I think they'll probably stay

mostly within the tech banking world. But that said, over the last twenty years, tech has contributed such a meaningful part of GDP growth in not only the world, but of course our country here in the United States, and tech has driven immense investment banking and IPO and M and A revenues for the largest groups like Boldman and JP Morgan, Morgan Stanley. It has been a huge revenue driver.

And so because of that, some of these larger banks has started to come downstream to service startups, usually in the series B C or D range right ones that have you know, twenty to one hundred million in cash balances that raised large rounds, but increasingly soone. You're seeing this from groups like Bank of America, JP Morgan and even Boldman now where they're starting to move even earlier.

This crisis has accelerated that trend and compressed that that trend into what feels like a week not entirely obviously, there's a lot of work to do, but I think you're going to see a lot of the tier one banks continue to open up venture capital, treasury and banking solutions for this market. What's your typical ratio of hits to missus in terms of the companies in which venture capital firm invests, and how has this banking crisis changed that ratio, if at all. The ratio is usually a

high miss to hit ratio. That's kind of sort of the law of large winners. I think it's, you know, less than ten to twenty percent of the portfolio is going to contribute eighty percent plus of your return of capital to investors. And so unlike private equity that you know looks for three to five to ten x return on their investment, venture capital is looking, especially at early stage, at you know, thirty to one hundred x under investment to account for the high risk that you're taking across

the board. So, you know, anywhere from fifty to eighty per cent up a portfolio might not work out, depending on the success as a VC firm. Obviously, my job, you know it, John's fall, is to get that ratios as high as I can aid. But it's a it's a high risk game for sure, all right, Josh, it's a high risk game. It's a young man's game. John

Josh Chapman, managing partner at Convoy Ventures. Joining us really appreciate getting his perspective on the VC market and any impacts that may come from the failure of Silicon Valley Bank. Thanks for listening to the Bloomberg Markets podcast. 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 on ball Sweeney,

I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.