Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Bond the Bloomberg Markets Podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast pack of West it looks like it's trading, that it stopped. Western Alliance is now trading, it's down twenty two percent. We want to bring in another smart voice here, Jay Hatfield, CEO of Infrastructure Capital Management, and Jay, your veteranan of these markets. What do what do you make of this regional bank business these days? How these structure trading?
Well, you know, I was around during the financial crisis and this is sort of the normal, the normal dynamic that you run into. Whereas if you have problem with one bank, then short sellers will naturally talk to the
other banks. And one thing that's important to remember is that the bondholders get white out as well, and it's easy to manipulate or quickly blow out the CBS market and so then that can be a signal to equity traders, but it's a very i liquid market, so that can then breed you know, lost in deposits, and with the Fed being so hawkish, it's horrible to his deposits as we saw from First Republic.
What do you think needs to happen to put an end to this?
I mean, how many people came out yesterday and said JP.
Morgan, Wait, what day is today?
No, how many people came out on Monday and said JP Morgan, you know, has put an end to this by buying First Republic. This seals it off. There's no more problems for regional banks. I mean, out of the Milkan conference, every single big wig was saying the banking system is sound. This was, you know, an idiosyncratic issue and just bad management at First Republic and SBB.
But it's not going to be a problem that spreads. There's no contagion.
Well, I think that they're just trying to generate some stability in the market and really just trying to stick to the party line, which the government wants them to. But until you really fix the posit insurance and or the FED cuts rates, which is extremely unlikely they should have done it last meeting, then.
You're gonna but they're not gonna do it at this meeting.
Or definitely meeting now they might raise again. The best way to predict what the Fed is gonna do is think about what they should have done a year ago. So if it's June of twenty two, then inflation ad and peaked, and they probably We're more bullish about the second half of the year because then it'll be obvious inflation's peaked and then the Federal figured out, But we wouldn't expect them to cut rates because that'll take them a year to figure out that they probably should cut rates.
So, but I mean, the concern here on some of these regional banks has been called out by analysts and economists. Is it really sets in motion a credit crunch or not. Maybe that's your credit crunch, but just you know, it's just tougher to get credit out there, and what credit you do get the fund business and growth is more expensive, and that in and of itself could really either trigger a recession or make it a deeper than maybe people think. Is that a material risk in your mind?
It definitely is, and it's kind of surprising the Feds seems to be ignoring it. But we still are constructive about the economy, maybe not staying out of a technical recession, but not going into a deepercession. And the real dynamic there is that we have a shortage of housing and autos. So unlike the FEDS model where they assume we have to have unemployment, you don't. You just have to have a shrinking money supply dropping commodity prices that will cure inflation.
That's what the history shows. There is eleven hundred and fifty percent increase in oil prices during the seventies, so all the things that Fed learned from the seventies are incorrect. Is really driven mostly by very high energy prices.
So you think that simply a goods and housing shortage will be enough to keep us out of a deeper session deep one.
Yes, But I wouldn't ignore the credit crunch and particularly has been you know, publicized on not so much the mortgages that affect reads because those are gigantic buildings with you know, very liquid like the building we're in right now, But these smaller real estate lending, smaller buildings throughout the country could be pressured.
Yeah.
Well, I mean the big question is and the you know, the biggest names in finance have been warning. I think Charlie Munger was telling this to an Australian newspaper, and then someone much younger from Apollow, Mark Rohan, was telling this is Shinali Bassic that you know the next shoot to drop is commercial real estate.
We should be watching out for.
That, and there's no doubt about that. It just would point out it's not as bad as the financial crisis because you do have strong recoveries, so there's less leverage, it's easy to repossess, which is not true for individual housing, and there is a deep bid at some level for most of these assets, so you really just have to
analyze the portfolios. But I don't think that's going to be catastrophic, just for the reason I mentioned that the loan to values were all pretty reasonable and then so therefore the recoveries are going to be pretty substantial.
Jay, I'm going at WTI crud here. It's off three point seven percent today, just under seventy three dollars a barrel, giving up more than the gains it had when the OPEC plus cut production several weeks ago. What's going on in.
Even though supply is tight, right? I mean every time I see, we see stockpiles coming out. They're lower than it had been anticipated.
Yeah, So one thing that keep in mind about oil is it's not just a commodity, it's also a like a stock, so it has a bit of about point eight to the market. So you know, given the fears, if there are headlines like we're seeing with the banking sector, you can almost be certain, unless Ope's acting that day, that oil be very weak. In fact, this is something
that FED should not ignore. Oil prices now with this drop, are off about ten percent just since the banking crisis occurred, and that's highly deflationary because it does bleed through to core, so that'll take about a half percent out of core. But of course they don't look at these real time indicators. Again, commodity prices mightey supply and the housing market. They're focused on the lagging indicators, which is really the labor market.
So let me ask you a question.
Just got a minute left here, But if we have a recession that's not a horrible recession, short and shallow, what kind of recovery do we have and how do you figure in the FED? Because they don't want to cut rates and they're not going to cut rates. It seems unless inflation gets back to two, terribly unlikely or something horrible happens, which I guess you don't expect.
Well, you could argue that this banking crisis is a horrible thing happening, so maybe that'll actually force them to act, because keep in mind, it's just terrible for the banking business to have inverted O curve because if you lose deposits, then you lose profitability. And there's something called roll down where when you have a three year bond, it becomes a two year bond, becomes a one year bond, and that becomes more valuable. But when you have an inverted
yield curve, that doesn't occur. So it's really terrible for the financial system. So I guess that's the upside. The worst it gets, maybe the federal at least stop raising rates and maybe even cut them later this year.
All right, Jay, I always appreciate getting some of your time, very learned approach to this, and we appreciate getting some of your comments. Ja Haffield he's the CEO, founder and portfolio manager of Infrastructure Capital Management.
What's the website, by the way, with your inflation tracker?
Infracap funds dot Com.
Ww FRA CAT infrastructure infracap funds dot Com.
Yeah, got it.
So that's an inflation tracker you like, right, Mat.
Yeah, I mean we've talked about this with JB four any Essentially what you pull out the rent component?
Yes, we just put in case shell air. It's very simple. You could do it yourself. We put in case shell air instead of the BLS's arcane estimate of rents.
Right, Jay, thanks so much for joining us. We really appreciate it.
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Well, a busy week just got even busier. Of course, we have earnings coming out in mass this week, We've got lots of eco data coming out, and of course the Fed tomorrow and add to that today a renewed run on some of these regional banks really just kind of really throwing a wrench into this market here. Prea Misterjoints is Managing director and Global head of Rate Strategy of TD Securities pre I mean, I guess the bank issue is not done, even though Jamie Diamond and JP
Morgan stepped in for First Republic yesterday. How do you think this banking turmoil impacts the FED and how it thinks of the economy and what it needs to do with its policy.
Sure, thanks for having me on so great question.
I mean, the Fed has a dual mandate, so they're looking at the labor market and inflation, and if you look at the data right now, it would argue for them to hike, and we're looking for them to hike tomorrow as well as hike once more in June. But I think the banking in fact, I'm calling it a crisis. I mean this is this wasn't just a couple of banks mismanagement of portfolios. I think there's something structural here. You know, we're seeing deposit outflows across the banking system.
I think that continues because money market funds are giving you higher rates than banks.
There are unrealized losses on portfolios.
And we're not even talking about the loan book between the commercial real estate or other loans. So I think there's a banking issue among a lot of banks, not just the banks that have failed. And what that's going to do is for some banks, I think the FDIC receivership option. For others, it's going to be some sort of consolidation. But overall, you're asking about the longer term impact. I think it's one of bank deleveraging. Banks have to
either raise capital or shrink their balance sheet. It's very hard to raise capital, if not impossible, for SVB, it was impossible. So I think in that scenario, a bank is going to have to cut back where they can. So I see title lending standards shrinking off the loan book. It's very hard for them to sell securities because they're in the health to maturity portfolio, but the loan book shrinks, and so that's going to have an impact on the
economy long over the next six months or longer. And so our view is that the economy was already heading into a slowdown before March or before the start of the banking crisis. I think the supercharges it, which is why we're thinking the FED is cutting starting later this year December, and then cuts a lot more than what's priced in, so it's you know, I think this is just the accelerant.
Why do you think the FED would cut I mean, here, they are raising rates for more than a year in order to bring this about. Why would you turn around and cut after you've achieve your goal? Or I mean they haven't even gotten close to the inflation level they want. Jay Jay continues to tell us. J Powell continues to tell us he needs to get closer to two percent. We saw a headline number of you know, seven percent.
So yeah, now, I think that's fair. They did want to slow things down, but they have to be careful what they wish for. Right if they get a really sharp slowdown or a disorderly slow down, I would say the tightening and financial conditions in the last two months is disorderly. It's fast, it's creating this risk of sentiment.
It starts to impact other sectors of the economy. Now, right now, I think the data is still strong, but remember the FED is data dependent, and so if the unemployment rate starts to tick up, if you get negative payrolls. We have negative payrolls starting in the fourth quarter in our forecast economy hitting a recession, they're going to have to start cutting.
Now.
I'm not saying they're going to cut to zero because inflation is going to prevent that. But you know, should the economy have five and a half percent FED funds when the unemployment rates rising sharply and you're seeing negative pyros, that's what we think. They start the cutting and then you see the.
Unemployment rate rising sharply. Currently we're at three and a half percent. It's a level that I didn't even know we could get to. You know, I thought that was impossible.
No, Lily more it is tight.
But we have nine and a half billion open jobs.
But you know, there's a structural mismatch between the in the skills mismatch issue. So we see the uneployment rate at five and a half by the end of next year, and that's much higher than the FED once and that's why I think they're going to have to cut more.
But that's a long time from now. That's like a century away the end of next year.
Making it's there.
That's dude, that's that's very difficult to forecast what's going to happen in more than eighteen months.
That's what That's what that's what we pay Pria the big bucks for. So she goes out there.
I mean, but so Pria, you see the FED cutting in December this year. We do?
We do? I mean is there a risk to that?
Yes, I would say risks are later because they've just may not have enough evidence to say that the slowdown is more than they anticipated. And remember the unemployment rate. You're talking about how difficult it is to focus. It's also the most lagging indicator. I mean, the first thing that happens is job openings come off, then the layoff start, and then for the unemployment rate to really rise. We might be already in a recession, so it might be
janned when they start to cut. But yeah, we're actually forecasting December this year first rate cut, and then fifty basis point cuts most of next year.
So what are you going to be listening for tomorrow? Pria in the comments and the Q and A from FED Chairman j Pale. That might either give you greater conviction to that call or maybe cause you some concern.
So I'll be watching for how he talks about bank lending standards. I mean they've had I think they would have seen the slews the Senior Loan Officers Survey, which hasn't yet come out after March, but we're going to get that report next week. How does Cheppael talk about it is that, yes, they are tightening, this is what we expected to your earlier point that this was the intent of tightening, or well, if it's disorderly, if it's too much tightening, we have to reconsider. So how do
they talk about the bank credit channel. I'm sure he's not going to talk about specific banks, but that's one. The other one, you know, is on inflation. How patient can they be on inflation? If inflation is still in public enemy number one, then I think this is really negative for his assets because that means even if the unemployment rate is rising, if inflation is high and sticky, the FED can't respond. So I'll be watching for that.
I hope somebody asks him about QT quantitative tightening, which I think is partly responsible for what's happening because it's draining reserves and deposits from the banking system. But I think the Fed's always talked about that is happening in the background, So we may not get much, but I still hope he's asked.
So, I mean the banks.
You don't expect anything specific on names, right, but will he talk about financial stability?
Does he have to.
It? Doesn't have to. That's not his mandate.
And I think he's going to say, well, you saw Vice share Bars report on it. The FDIC is talking about different things they can do. This is really a Congress if it's a regulation issue that something Congress needs to work on. I think he's going to deflect and
say the FED meeting is about monetary policy. But I do think he's going to reinforce data dependence, right, so if the data suddenly turns, I think the FED is going to say, well, we'll respond and state that even if they do pause, they could hike after that, or they could cut after that. I don't think they'll have the ability to hike, but I think he might say that and sound a little hawkish tomorrow.
All right.
Prea, thank you so much for joining us. Always appreciate getting your perspective there. Prea Misrap. She's a managing director, Global head of rate Strategy at TD Securities. I think with a very interesting call here, expecting the FED to begin cutting rates at the end of next of this year and then continue at maybe an accelerated pace in twenty twenty four.
So and unemployment rising.
I mean, if you look at the unemployment rate right now, it's doing anything but right. On the other hand, Friday, we're going to get a new number.
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We've got like we don't have enough going on. We've got earnings all over the place. We've got Ego data all over the place. We've got the Fed. Now, we've got renewed banks selling. But we also have this issue of paying our bills, our government paying the bills. I mean, you know, I balance a check book every month like a lot of folks. I'm sure, but the government, I'm not sure. They're not so good at that. Dwayne Wright,
senior government analysts with Bloomberg Intelligence, joins us here. So Dwayne, give us a sense of where we are with the debt sealing negotiations and maybe what's kind of the best guess of how this thing plays out.
Well, where we are Republicans pass their gets You bill last week, and we then got news from Secretary Treasury Yellen that the new X state is June first, and so shortly after that we heard the Biden White House invite the leaders of the House and Senate, so the majority and minority leaders in the House and Senate to the White House to essentially kick off negotiations on a path forward. So a very timely move. I think the challenge here is that one, there's not a whole lot
of time. It's May second, June first is right around the corner to the House pass bill is pretty much a non starter for Democrats, who have signaled that they only want a clean debt ceiling raise. So really the question is where do we go from here if the two parties are pretty much far apart from what they're looking for. Yeah, to me, deat ceiling.
Does the do the Democrats get what they want?
I mean, will they hold you know, the economy hostage and unless they get a clean debt ceiling raise or isn't it, you know, in a sense, the responsible thing to try and control spending while you're raising the debt limit.
I think we're heading towards a path where both parties can say that they've won here. First off, I think we're gonna need a short term debt ceiling raise, a kick the can down the road because parties are just too far apart on how much to cut.
Don't we always do that? Dwayne isn't kicking the can what the government?
Wouldn't it be great if they sat down and thought of a long term solution that included lifting the debt limit but also put some kind of cap on our spending.
I think that's where we'll go. I just don't think they can get there in four weeks, So kicking the can down the road to say the fall is probably what's going to happen, and that's going to allow time. I'm for both parties to say, what's the universe of cuts that we're willing to live with, What can we get out of the House, what can we get out
of the Senate. And it sets up a narrative where if they can agree on what that spending package looks like, not just for next year, but also for say, the next five to ten years, they can work on what those specific cuts are and in the meantime pass a clean debt ceiling race. So you have on the one hand, President Biden getting his clean debt ceiling rais and then on the other you have the Republicans getting their fiscal
budgetary cuts which they've put forward. So this whole process needs to play out for a bit longer, especially when keep in mind Republicans just pass their bill, So we need a couple more weeks, probably a couple more months to figure it all out.
If you step back on this, Dwayne and I'm you know, you live in this and Paul and I are just you know, tourists. Has anyone suggested a smart solution that will solve this once and forever, you know, other than just saying no more debt ceiling, you know, something that somehow controls spending but also doesn't push us to the brink every few years.
There have been a lot of ideas put out there in terms of how we get there, whether it's creating a commission, whether it's just spending to the rate of inflation. I think the challenges that both parties will have to do things that they don't want to do, because addressing our fiscal situation involves some level of addressing the tax side of the equation and also some level of addressing
the spending side of the equation. Keeping in mind part of that spending is Medicare social security, and those two issues are off the table as far as these budget discussions are. So, I think that there are a lot of out there, but it just involves a lot of political choices that members past and present have not been willing to make. Republicans don't want to raise taxes. Democrats don't want to touch Medicare.
All right, Barry rid helts wealth Management, he darkens the door here, I know he wants to jump in.
So, Matt, the solution is we moved to a parliamentarian system so that you whoever's in charge, gets to pass their budget, as opposed to going through this circumstance where we've already allocated this money by Congress. We just failed to say, oh, we have to raise that debt ceiling, you know, Congress.
Or you could get I mean, you could get rid of the filibuster, right, and then the party in charge, the party with the majority, automatically gets to do whatever it wants.
One would think. But so instead we have these crazy DC permutations as opposed to focusing on doing the people's business. That has taken a back seat to posture during and teeing up for the next election.
All right, all right, Barr, you're gonna stick around because we've got you h here in our studio here, Dwayne right, thanks so much for joining us, Dwayne Wright as a senior government analyst Bloomberg Intelligence. Really sharp. Guy's got a lot of great experience. Unfortunately he got his undergraduate Chapel Hill at the University of North Carolina at Chapel Hill.
But what a nice place that must be.
Yeah, yeah, so I hear.
It's where's duke again?
What's in Durham? In Durham ten miles down the road, fifteen to five to one.
If you had, just if you had one night to go to either town, would you when you go to Chapel Hill.
Used to be you'd go to Chapel Hill hands down. Now it's the exact opposite. Durham has undergone this tremendous renaissance. It is now the place to be.
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Well, the bad news is Matt Miller just abandoned us. He's out there because he's a you know, he's a TV star, so he's talking to his producer. The good news is we more than make up for with Barry Rudholt's He Joints is here in our studio. He's rod Halt's Wealth Management. He's got a podcast, Masters in Business. We appreciate him coming in. All right, here's we've been talking about the banks, but there's some stuff going on out in Hollywood. The writers are striking and that can't
be good for the media business. I don't know. But Keether Ronganathan Joints is, she's a senior media analyst for Bloomberg Intelligence. KEITHA, let's start off which just tell us why the writers are striking, and then we'll get to what it means for the media companies.
Yeah. Absolutely, Thank you so much Paul for having me. So the writers are striking, of course because of a whole new ecosystem where they're making much less money than they used to. And this is really the first time that they are striking in fifteen years. So the last time we had a major strike of this magnitude was back in two thousand and seven, two thousand and eight, but that was a very different time in the media ecosystem. You know, you had a very thriving model with the
TV networks, but with streaming, everything has changed. It has revolutionized the industry, and it has also changed the way that writers are paid, and that's what they're really unhappy about.
Hey, Githa Barry riddolts here. So one of the things I noticed the Writer's Guild talking about is artificial intelligence as source material using AI generated text. What's going to happen with this? Is Hollywood gonna shift to an all AI based type of scripts or are the writers going to get their way?
Yeah, it's it's a really really important question, and it's a great point that you bring up. What is happening this time around is I think the writers have less leverage, and you know, it's just a very different time in the full media ecosystem. So first of all, you know, streaming, of course is front and center right now, they're not as dependent. So of course, when when writers go on strike, it's the t television shows that you know where the
production is halted. And so I think those are the networks. The networks that are affected the most. Most of the streaming services have enough library of content, they have a stockpiled on on some show, so they're not that badly affected. So I think, you know, if you're kind of looking at broadcast television obviously, so generally I would say that
the disruption is not going to be as dramatic. And then the question of AI is really an important one because yes, I think Hollywood is definitely going to look to AI, and of course the writers want to make sure that their source of livelihood isn't impacted, and they want to make sure so they're not totally against using AI, but they want to make sure that, you know, residual payments are not going to AI or credits are not
being taken away by AI. So it's going to be interesting to see how, you know, the definition of technology kind of gets incorporated into these new negotiations.
I don't know that AI would necessarily do worst job than the kind of writing that I've witnessed over the.
Past few seasons.
I mean, if this is one of those proved me wrongs right on Reddit, has there been a series that has really good writing?
Millions of them like, no, what like what recently? Os are true?
I agree Yellowstone, No, Yellowstone, definitely not Yellowstone.
I'll stick by that's the most popular show on television as well dressed.
But I don't like the ways way it's written.
I feel like I feel like a lot of these programs are just pitched and then have horrible writing.
There are two totally different models. There's the HBO Apple model on one side, which is a handful of concentrated bets, and then there's the Netflix. Let's throw a million things up against the wall and see what sticks. Very different things like Ted Lasso or The Morning Show or or White Lotus is a very different group of writers. Then hey, let's just try a whole mon. I mean, who would have predicted in advance that Formula one Drive to Survive was going to be a mega hit that just took off.
It can't believe it, right, and yet it's endlessly fascinated, fascinating not just for F one fans, but it's become like.
A fascinating to people who aren't F one fans, right, because I don't both I know people who are one sopot graification of F one or Moto GP. I like both of them just find the way they are.
You know, well, a lot of people disagree with you when they're watched the watching that show and droves.
Hey, Githa, what does this mean for the media company's p and L here? I mean, on the one hand, I mean, I know you've got a NOTEUBT saying, hey, it's not that big a deal, but at some point couldn't be a big deal if this goes on for a while and maybe movies and stuff like that and gets halted or delayed.
Yes, I think what's going to happen is so remember we're again, as I just said, we're in a very different place right now. The industry, of course, hasn't suffered workstoppage in a long time. But I think what we've generally seen is is Hollywood studios have kind of predicted this, and so they've gone ahead and they've kind of stockpile script So that's number one. Number two is I think they are looking at the possibility of exploring new genres.
So you know, you don't have access to scripted content, But that's okay because reality content is now really becoming a bigger and bigger part of the programming of a lot of these streaming platforms as well as you know, the television networks. So you know, if you look at even Netflix's recent shows, whether it's you know, Love is Blind or so many of these other reality focused shows, they obviously can pivot to that, which is not only give them a steady stream of programming, but it's also
much more economical for them to produce. And then again, if you look at Netflix's strategy, and this is where I think they have an edgeob over so many of the other streamers, is that they just don't rely on Hollywood, right They have gone global and so so many of their programming titles come from so many different regions in the world, and so we're not necessarily going to see a big stoppage in terms of you know, new programming because they have access to it or they have you know,
source material comes from so many other different places. So I think on the whole, what we're going to see is, you know, if you look at how Wall Street is assessing media companies right now, profitability is front and center, and if you know, in fact we are going to see some stoppage of shows, I think what is going to happen, especially in the second half of this year, if it results in fewer shows being delivered, I think we're actually going to see better profitability metrics and so
ironically it might be better in fact for their bottom lines.
Does Netflix always sell.
It's streaming service alone? Does HBO always sell its streaming service alone? Does Disney always sell at streaming service alone? Or will we get to back to a cable model where you know, I can buy a bundle of everything for eighty dollars a month.
Yeah, I think, you know, we're definitely heading in that direction. I think ultimately what we're going to see is a big tech giant, whether it's an Apple or an Amazon or a Google, kind of come up with that new bundle, and so I think they are going to be the aggregators where we're definitely heading to that, you know, very soon. I don't know exactly when it happens, but but you know, I think in the next couple of years, you know, that is going to be the replacement for the old PATV bundle.
Hey KEITHA. Jerry Smith Bloomberg News had an interesting article yesterday talking about Disney and ESPN and when do they really go all in on ESPN Plus and put the top flight programming on there. When do you think that that happens, Because they've been migrating some more and more program but if you want the NFL, if you want the end, you know, you got to stick with the linear network.
Yeah, that's a really important question, and I think, you know, this is what everybody has been kind of scratching their head. When do they make that big pivot with ESPN And Bob Aiger is back, I think he's he's kind of just waiting it out. So for the very first time in the company's history, they're actually disclosing ESPN Financials as a standalone unit, and so I think, you know, this kind of paves the way for them to maybe separate it out, maybe, you know, make this big, bigger pivot
into ESPN Plus. Obviously they do have all the market programming. We do have NFL content on the TV broadcast networks for at least another five years. But I think they're very slowly going to try and shift the content, especially when we have a new NBA contract coming up in the next two years. So I'm thinking over the next two years, you know, we will see kind of that bigger shift into an ESPN plus mainstream DTC service.
So so githa quick last question from me. You know, when we had the last strike fifteen years ago, a scripted sitcoms and other sorts of shows, we're huge today, it's a much smaller purpose of the world. What do we see the costs of this if it goes on more than a few days or weeks.
I'm gonna put a pin in this right here and make that question a comment because you see the red clock up there right. We only have twenty seconds left until a herd break, so you can't lob any questions in after just run in a minute.
This is pot This is the kettle black right here. But Keitha, we'll get back to that one. You know Ranganathan, she's a media analyst for Bloomberg Intelligence, and it's a nice soft out so we can kind of be a little scoresh here.
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Simona Mukuda joins us. She's the chief economist at State Street. Simona, you know, i'd love to get we're gonna hear from the Fed tomorrow. What do you think they will do?
And what do you think they should do?
Yeah?
I wish those two things were had the same answer. Unfortunately, I think they will hike again, but I do not believe they should. I think, you know, for a few weeks, we may have thought that the stories about SVB and signature were away from the headlines, but those stories are very much in the economy and those effects are playing out. I think the FAT has done enough, but unfortunately I think they will will go again.
So the issue for me is, I mean, you know, the real risk is pushing this economy into a recession. Is that is that in in your wheelhouse? Is that something you guys are looking for?
Uh?
Yeah, I think with any additional incremental tightening right now, you're doing more to worsen the growth outlook than I think you're doing two. In terms of winning the inflation battle, that battle on inflation is being one, and I know that there are many indicators that don't show victory yet, But inflation is a very lagging indicator. And I think right now anybody who's watching the economy is to has
a decision to make. You know, what do you believe is telling you more about the future versus about the past. And from where I see it, everything that I consider to be leading indicators says two things, slow down and this inflation. And it's just a matter of how intense these two forces become.
I mean, the concern I think for this FED is that Arthur Burns thought he had beaten inflation a couple times as well.
Right.
And even if you think that inflation, I don't know, isn't going back up, You probably don't think it's headed to two, do you, Simona, Because yes, it's not ten percent, but we're not. It doesn't look like we're gonna be going down to two. You were three percent anytime soon. It's pretty sticky, at least from the from what we hear the people we talk to.
They use the word sticky quite a lot.
Yeah, I think, well, first of all, I think the question is to be asked in the context of what horizon.
Right.
I think even by the end of this year, we could be looking at three percent headline inflation, and for twenty twenty four, I don't think you you know, we could be very close to two percent, but a little you know, once inflation has gone so high, I make a you know, I think of it a little bit like gaining weight. You gained the weight, when you take it off, It's not going to happen overnight. And if you try to accelerate that process, you can cause a
lot of you know, unnecessary damage in the process. So I think slow, we steady. The inflation fight is actually being one. I don't necessarily think that next month you're going to see a lot of improvement, but I think in June you will, may and Junior will and then continue to see further improvement through the end of the year. So, you know, you talked about the idea that you know, you may think you win, you've won, but perhaps you haven't.
But I think the FED is at five percent, right, I think there is no doubt now in the light of everything that's transparent. That's that's tight.
Right, all right, Hey, Simona, thank you so much for joining us. I really appreciate getting your thoughts. As always, Simona Mokuda, Chief Economists for State streets.
You're listening to the tape cans are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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We have a couple of very smart people in the studio with us right now.
Thankfully, Yep got Herman Chen who covers the banks for Bloomberg Intelligence, as well as Ridka Gupta and Ridka Good.
Are you writing for m every day?
Now? I'm live during for an embed.
Okay, so you can see her work if you type nl ivy go on your Bloomberg trug right. And of course Herman. You know and love Herman already. He's a household name.
So Herman. I've been very careful here up to this point, not calling it a bank crisis but bank turmoil. I just flipped this. I ripped up the script, as Tom Kin would say today after I think I'm flipping today and I'm calling it a crisis. What do you think?
Yeah? With SVB with signature with First Republic you can make the case that these were very idiosyncratic issues where these banks grew too fast during the pandemic period and put on some risk that they really underappreciated. But now with the stocks reacting like they have today across the board, with some other regionals that shouldn't necessarily be painted in the same brush, you can make the case that you could make the case that maybe it is more of a crisis then in an idiosyncratic issue.
All right, so let's talk about the problem.
Was the rates mismatch or the maturities mismatch? Right that at SVB, and it was a similar problem at first Republic Signature may have just been singled out by regulators because they hate crypto, right, but at least if you listen to Barney Frank. But when I look at the big losers today, PacWest is down twenty six percent, Western Alliance is down twenty one percent, Metropolitan is down nineteen percent.
Are these banks that you have looked at in your research and said, WHOA, they have way too big holds maturity portfolios, or well they've been giving out super cheap mortgages to really rich people.
I mean, do they have any of those same problems.
No, the issue with Peck West and with Western Alliances they get painted in the same brush SSVB because they also bank tech companies and startups. With Metropolitan Bank, it's the crypto issue with all signature. So the market saying they had a victory, the shorts had a victory with some of these other banks that already failed, and now they're playing the same playbook again with banks that are tangential to the failed banks.
All Right, Herman Chan, thank you so much. We appreciate it because that boy, I'm looking to P and C Bank talk about a high quality regional down twenty five percent year to date, and even your former bank, Herman M and T Bank down you know, about twenty percent, another high quality bank. So it's really starting to spread there.
Well, if they get hit hard just by shorts that are playing a game, isn't it a great time to go in and then buy them. I mean, do you like PNC down twenty five percent?
Yeah?
P and C is going to be one of the winners out of this entire crisis. They were heading into the weekend, they were they were the horse to jockey on in terms of buying First Republic. They didn't get that deal done. But if we see other failed banks, you would think P and C would be the first call from the regulators to clean up some of the messes that we're seeing.
All right, we'll keep an eye on up, you know, kind kind of selling across the board. Herman Chen, he covers the regional banks for Bloomberg Intelligence Ritka Group that covers all the markets for us. She joins us here in a Bloomberg Interactor broker studio.
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All right, looking at this market here today again, a rough day of trading. The s and P off one and a half percent. We are off the lows, but still trading down on some pretty solid volume. Nastak off one and a quarter percent. You know, a lot of cross currents out there. We have the feder reserve tomorrow
that'll be the big driver. But of course, today we had some renewed weakness in some of the regional banks, and that's kind of where we want to go just talking about this banking sector in the relative health of the US and global banking space. No one better to chat about that than Hugh van steinis vice chair and partner at Oliver Wyman. He has been involved in the global banking business for decades and we appreciate getting some
of his time. He is out in la at the Milken Conference, so I appreciate a few minutes of his time, So love huge. Just to get your thoughts. We had, you know, renewed concern today in the stock market about some of the US regional banks.
What's your take?
Oh well, thanks for having me on. Well, look all the conversations about having here, are you know, is the regional banking turmoil contained or is there another shoe to drop? And then obviously you know, what does it mean from here? I think the big challenges that you know, war buffersically said depositors won't lose money, but bondholders at First Republic did, and so I think the key issue here is nervousness through the capital stack about who else you know, resembles
the banks which have failed. But I think, you know, bottom line, for me, we're in the early innings of a credit cycle and it's the weakest hands who are struggling. And I think it's still you know, I think that the system is struggling to repriced for a very sharp increase in interest rates.
Here, what do you think about yesterday's news And this kind of news is very fluid in this in this industry right now, but the news yesterday at JP Morgan buying First Republic. What was your view of that? Was that the right solution, a reasonable solution, or kind of the only solution you think?
Look, I don't want to get drawn too much into single, single names, but you know, the history of every major financial crisis, you know, seventies, eighties, nineties is large, strong hands take over the weaker. And obviously, because of you know, Frank Dodd and other regulations around the world, the large banks have not really been involved in m and A for the last decade because they haven't been able to
take more share. But I think history suggests it's always the strong banks who take over, and so you've seen that in Europe and the States. So I think, you know, it wouldn't surprise anyone if there's a bit more m and a to come, because that's what the history of banking crisis always suggests.
The obviously we all learned, I mean just all our listeners, all our readers, all our viewers learned a lot about the banking business with a great financial crisis back in two thousand and seven, two thousand and eight. Do you feel do you share the thought that the US and we'll get to the global international market later. Do you think the US market is as strong as a lot of folks keep telling us.
Oh, look, I think the banking business is in much ruder health. I mean, capitalists tripled, the largest banks are stress tested, they've got loads more funding, you know, and also, let's be honest, they're diversified. I mean, you know, what we've really seen here is quite monoligne or narrow businesses struggle through an air pocket. The largest banks are very diversified, and therefore they've got different streams of earnings coming in. So I think the system's much stronger in some ways.
This is you know, you know, for those listening, is it's coming back. This is much more like the early nineteen eighties. It's a very sharp increase in interest rates, which have you know, meant that some people made some rather poor choices on carry trades or in this case, you know, we've got a lot of uninsurance positives, you've
got some weak funding structures. Is much more like eighty one to eighty seven in terms of structure, and obviously that's when you know Volka had to bail out Continental Illinois eighty four. It's much more like that and that that, I mean, what the bottom line for us this market is. It's quite tough because it means financial conditions really tightened very sharply, and there's a lot more volatility for companies and corporates to deal with.
There's obviously, is I guess to be expected some public outcry that there needs to be more regulation perhaps on some of these smaller, mid sized regional banks, not just the big money centers. What's your view there?
Oh, look, I mean I think it's Look, so there's a great line from a book in the nineteen eighty saying that there were three things which led to the banking crisis. It's like deregulation, d supervision, and they're not dealing with that, you know, decriminalization, of fraud. I think this is it's all three have come through the same here as well. Of course for the small for the MidCap banks who got deregulated, a bit more capital would help.
As you can tell, I'm European and europe a systemic bank is from fifty billion of our WA's obviously it's it's been a quarter for a trillion over here since the deregulation, so that will need to be reassessed as the FED proposals are putting through. But it was also a failure of supervision, and I think you know what my read of the FED report from last Friday was that there were many red and Amber flags which were ignored. So this is as much about supervisory practice as as
about the REGs themselves. And then the other point, what's in every crisis is different in flavor. You know, money market funds are being subsidized by the FED, which is very different from the financial crisis. Forty percent of all money market funds are being parked at the FED overnight, and the FED is therefore subsidizing the disintermediation of the banking system. That has to be looked at as well.
There's a real economic concern here and maybe we'll hear from Fred Trriman J Powell comment on this tomorrow. But you know, fed condition, I mean, credit conditions are tightening. Do you do you fear that they were tightened to such a degree that would have a real negative impact on the economy.
I think so. Look, you know, look, if it was just the banking crisis, you know, to have you know, such a it's for me, this is equivalent of a like a one to one and a half point increase in interest rates. It's a very sharp, uh, you know, punching the gut for the MidCap banks in terms of funding structures, and also for the larger banks. They're getting nervous because either they'll have to be acquiring the MidCap banks or they'll also start to fret about their own business.
So it's a very sharp increase. Now, look, there's still savings from the pandemic, there's there's other good reasons why businesses can prosper. But the tightening of funding conturaled conditions means, you know, I do think we slip into recession into you know, whether it's the fourth quarter or someone. So no,
I think I think it's tough. Look, bottom line, we're in the early innings of a credit cycle, and you know, I think that's the challenges where does this go is well, you know, the number one conversation I'm having here at.
MILCNE and I'm sure you're also been asked to your opinion on European banking. We you know, we just had the UBS credit Swiss situation go down. I'd love to get your thoughts on kind of how you view the banking landscape across Europe.
Well, look, there's you know, so look, I think there's two key differences. So the first is we didn't have this wave of deregulation. You know, the every major bank in Europe has got a capital stack, a stress testing and funding so they can withstand you know, a huge panic and therefore, you know, and most of them have got a lot of insured deposits. I mean, you know, one of the banks which failed, like the US banks, had a lot of uninsured deposits, which is quite rare.
But the second, which you know, you you know from from the fact how well the US has done over the last decade. The QI led to huge credit expansion in the States, you know, and some real excesses in Europe. We didn't have those excesses, and so there's you know, we're not really going from boom to bus because we never really had that boom. So I think again, you know, you know what was disappointing for Europe in the last decade is probably a source of strength now at the moment.
Here, we got about thirty seconds left, i'd love to get your thoughts on the need for cross border bank m and A in Europe. A lot of times when we see some stress out there, whether it's Deutsche Bank or Credit Swiss, I kind of hear that discussion pick up some steam.
What do you think, Look, it's it's possible. Look in a crisis, Look, we all turned to home and so it's much more likely it's national champions and domestic solutions if there are any needs to be done. But you know, look, I think we see Europe needs more strong global banks, and so it would be it would be helpful, but I'm not expecting any soon.
All right, Hugh, thank you so much for joining us. Really appreciate you taking a few minutes out of your time. You know you're busy out there at the Milken Conference in Los Angeles. That's Hugh Van Steeney's vice chair and partner in Oliver Wyman, and before that he was a senior advisor to the CEO at UBS, senior advisor to the Governor of the Bank of England. He was on Wall Street and Morgan Stanley and JP Morgan covering all
the banks from a global perspective. So we love what we could get a couple of minutes of his time to talk about, you know what it is the issue certainly of today, but really over the last month. Some of the question is when you think about bank stress, how much will this be an impact on the economy? How much will the Federal Reserve factor that into their calculus when we hear from them tomorrow. So great to check in with you there.
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.
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