December Meeting Likely Taper Announcement: Piegza

Lindsay Piaza. Now she's chief economist for STI Full Financial and we'll start off, Lindsay with your reaction to the FED discussion and and and the and the release that we had yesterday. I want to kick it off of the dots because clearly that's what the market paid the most attention to. But um, Jerome Palace had take this with a grain of salt. This isn't it's not not like a plan. We haven't discussed this and we're moving in that direction. Um, what do you think about the

dot plot? Well, I thought it was pretty interesting. We saw actually a number of revisions to the Fed's forecast. Not only did they x but I to the potential pathway for higher rates, but they also increase their expectation for inflation and growth and at the same time, they left their view of the labor market pretty much unchanged.

So their expectation for being able to raise rates faster is really predicated not on fears of inflation, but the fact that the recovery is picking up momentum, that it's it's recovering it a faster than expected pace. So I thought this was a pretty positive projection from the Fed. And you know, on the jobs front, on the labor front, Lindsay, you know, the data over the last couple of months has been a little bit disappointing in terms of the folks getting back to work. How do you view that?

How do you think the Fed's viewing that is just kind of a little bit of an aberration that things will pick up. That seems to be what they're suggesting. Well, I think the FED was very clear and acknowledging the recent improvements that we've seen in the economy. But at the same time, I think the chairman was tempering the market's expectations to say, wait a minute, we're not entirely

out of the woods quite yet. Yes, we've taken big steps in the right direction, but we still have millions of Americans that have yet to return to the labor market. So there's further progress that needs to be achieved before we can talk about reaching that pre crisis vitality. So I think the Fed was very careful to walk this delicate line of yes, applauding the improvements, but also justifying

the need for further accommodation going forward. What do you think the ten year yield means that real yielded I think negative seven basis points. Does that change significantly through

your end? I think this says that the market is buying into the FEDS inflation dismissal rhetoric, that the market is really buying into the notion that these these recent price pressures will prove temporary and going into the end of the year, in early we'll start to see inflation come back down in line with the FEDS two percent targets.

So I think from here the market is signaling that ape Can inflation has already been priced in, and in fact, we could continue to see some downward pressure on the longer end of the curve as we do start to see that reduced price pressures come to fruition or translate into the data. So, lindsay, what's your sense of timing here, as we think about tapering, is going to be the first, you know, act that we will get from this Federal Reserve.

How are you thinking about that and from a timing perspective, Well, I think the FED has been pretty clear that they're going to give the market ample notice in terms of that discussion, and once the discussion begins, they're going to again give the market ample notice before a formal announcement

is made. So if we anticipate that the discussion really begins around that August September time frame, it's likely that by the end of the year, at that December meeting, the FED initiates a formal announcement that taper will begin, making the actual process of drawing down those purchases two event and I do think this is going to be a very deliberate, very slow, very transparent process over six twelve, maybe even eighteen months period, pushing out to that first

rate increase well into which again lines up with what we saw in terms of the latest dot plot with the vast majority of FETE officials anticipating at least one rate hike by the end of What do you think about the housing market, Lindsay David Rosenberg. Obviously he's a bear um, but he says we're in a bubble and it's not hard to understand why. Well, I do think that the housing market strength is very different from what we saw going into the oh seven o eight recession.

This time around, it's not being driven by speculative demand or purchases of vacation homes or second homes. This is a shift, a structural shift in demand for homes, particularly outside of the urban centers. Now some of the variable some of the factors are COVID related, but some are not. We see an entire generation of millennials finally deciding to jump into the housing market, and so there is some structural demand that I do think will continue to support

this type of growth going forward. So I think it's a little bit premature to say that this is a bubble um. I do think this is more of a long standing structural support that we'll see in terms of the housing market. All right, Lindsay, thanks so much for joining us. We always appreciate getting your perspective here. Lindsay PEEGSA chief economists for Stephi Financial, joining us on the phone from Chicago, and I guess if you're in the market for buying a home, Matt, it might be higher

prices for longer. That hurts. That hurts to hear. But the good news is if you're in the market for selling a home, you're gonna probably get a higher price. And I see that Porscha is now putting out the new nine eleven nine nine two in GT three form. Sure, so I would say, anyone who's selling a home right now, seriously consider buying this nine eleven that you heard it here. First, skin over now to Ian Billina. He is the founder

and CEO at Token Metrics. He's been involved in the crypto space for uh three four human years, which is like twenty crypto years. He can speak to us on what he's seen in terms of well, let's talk about bitcoin to to start with, Ian, Um, I know there are five thousand, four hundred and sixty eight other coins out there, but you think bitcoin is widely considered still the most important and um expected to be still the

most important cryptocurrency in the next decade. Oh wow. First of all, thanks for heaving me to be on So bitcoin right now is the most impromative piturency in the market. UM, it's basically a proxy for the whole market. But we actually take a contragrant viewpoint on this. We believe in the future in the next ten years belong to a crypt Well, we're not over bitcoin. Bitcoin we had the

person of our advantage. However, if you see all the growth happening in the space, it's happening in other block chains, for example in DeFi. Right now, Defy has over one billion dollars in total value and over so many type percent of that is happening on Etheria. So well, bitkoin was first and it's definitely the champion of the space.

There's lots of innovation happening all over the space. Ian, I'd love to get your view on this one of the issues or one of the I guess the selling points if you will, or when the attributes a bitcoin was it's uh anonymity that can't be traced. But yet we've seen in some of the ransomware nymity. Yes, bitcoin is never was never thought to be anonymous. We we've always known that it is on a public ledger and

can be traced by everyone in the world. Well, that was see, that was news to me at least, I guess, and you know, so talk to us about what happened with some of those ransomware and the ability of authorities to kind of trace it and get it back. Yeah. Well, I mean that's one of the miscommunications when it comes

to crypto and bitcoin. People think bitcoin is completely anonymous. Now, early on, in the early days, yes, there was dark there was the dark web, so code and all those the farious actors were using bigmoin for crypto in general. For that means, however, the blockchain has been one of the best innovations in the last twenty years. So now regulators and that the police and FBI are able to

work and transact and track transactions on the blockchain. The companies out there like chain analysis that helps regulators do just that. Right, So the people think they can hide from bitcoin and blocking blatchin transactions, that's completely false. If anything, it makes it easier to catch somebody. Yeah. I always, uh, whenever I'm talking to a money launderer or a drug dealer, I always say stick to cash, buddy, because everyone in the world can see the blockchain. It's all laid out

in the open for you on the web. And I guess some people have strategies of breaking up their payments into tiny little pieces and sending it out to a million different wallists to try and confuse the Feds. But look, anybody with a little time on his or her hands or their hands can can go out there and and

chase everything. I want to talk a little bit more about Defy, you know, because blockchain has become so ubiquitous, and I guess the community has now accepted that it needs more stringent regulation or at least clarification on regulation. Is Defy different in that it's more kind of libertarian still in its heart, I would say yes, right, I

mean not all the way, but definitely yes. So Defy essentially is taking services that were typically done by the backing industry and Wall Street, and it's letting people now be able to participate in that globally, not having any mod aman, not having to ask for permission from anybody. So take different services such as lending, savings, investing. Now anybody globally can participate in this new economy, in this in this new world of open finance. So to me,

this is breaking down barriers. This is breaking down borders, and it's it's becoming more inclusive. Is there a sense um in that in the crypto space broadly defined that regulation. Government regulation is coming and it's something that this industry needs to be ready for. Yes, I believe. So I think for crypto assets to go mainstream, they definitely do need more regulation. For example, today, Uh, the then e

t F was perspected by the SEC. And for example, if the et F does get approved, that will be huge for both retail and institutional adoption. So if crypto ever hopes to go mainstream, uh, in a way, it kind of already is. But to fully go mainstream and gave global adoption, it doesn't need to have regulation and compliance were all all regular. It will be happy with it.

And you went from um IBM as a technical sales engineer and open source UM Analytics sales executive into UM dealing with cloud essay software is a service UM and then into and then you and then you started token matrix and you have uh apparently kind of a moneyball approach to the way you invest in crypto. Yeah, what about analysis? Could you give us a price target for example on bitcoin year end? Oh? Wow, Well, I mean so we're talking with twecks. We use machine learning and

data analytics to help the customers make money. Crypto or rather also prevented from losing money. Um prediction wise, our predictions only go out for about a month or so. But we are pretty optimistic in bitcoin and crypto this year. I'm optimistic all the way into about QUO three and then QUO four to Pree. Historically has not been a good except for maybe in December during Christmas to see them cycle back in right now, forty k. We're kind of in Limbor territory next month, and so we do

expect summer somewhere between July and August and September. But bitcoin and it didom to go up because the room is going to have an upgrade, but the bitcoin, I wouldn't be surprised that bitcoin want to do my k okay here, all right, and thanks so much for joining us to really appreciate a fascinating im Bilina, founder and

CEO of Token Metric. Alright, So yesterday we had the FED coming in and you know, a little bit of a hawkish view here as it relates to interest rates, and we want to get a sense of what that means for the banks because the banks have had such a good trade here recently and it's been such a good place. So if you want to talk banks, Matt, there's only one person to chat with, and that's Mike Mayo,

senior banking analysts for Wells Fargo Securities. Mike, what was your takeaway for the banks that you cover as it relates to what looks to be You know, we're gonna have some ingust rates going up by you three. What does that mean for your call on the banks? Well, Matt, we have several nineteen seventies classics. We had disco, leisure suits, mood rings, and inflation, and I thought those were all gone. But right up front in the four page FED press release,

they had the three key words inflation has risen. And then as you said, now now the FED is saying to interest rate increases sooner than people had expected. Um. And you know, inflation can be either heaven or hell for the banks, and it was hell for the banks in the nineteen seventies, and frankly, in UM that was pretty hellish. Uh. Banks had all sorts of losses on securities and derivatives and mismatches between their assets and liabilities. But I think in this scenario, I think it's in

the direction of heaven. Banks have really paid a big price for the unusual low level of interest rates. UH. The our net interest margin over the past year showed the biggest decline in a century. And that's because while banks has spent a lot of money gathering deposits with branches and technology and service and everything else, they haven't earned much on those deposits. Are now they can finally redeploy those deposits and the potentially higher yielding securities and

and hopefully loans. Let's talk about the big investment banks for a moment, because we had I mean we were we weren't expecting trading to keep up with the same um at the same pace as last year this time, but we've had a number of CEO s um Jamie Diamond, I think Gorman also saying that you know it's time to come back to earth already trading Credit Suite is dismantling their trading business kind of unrelated reasons. But UM, they have said that M and A may make up

for some of the loss there. What's your view on on the big investment banks. Well, look from the trading side, UM, nobody expected the levels to be sustained at two pieces. In fact, going into the year everybody said we expect and the way it's playing out is it's going to be somewhere between based on our forecast. So there's just

no big surprises there. Um And frankly, corporations frontloaded a lot of their financing earlier in the pandemic and that's a good thing, and trading plays off of that, so less issue was less trading. On the other hand, Wow, mergers, This might have been missed by the market, but Jamie Diamond just said investment banking this quarter could be one

of the best quarters they've ever seen. Um So, you know the likes of Goldman, Sachs and JP Morgan And if you think about it, take a step back, every company and every industry globally is in some way rethinking their business model post pandemic, given the acceleration or the second wave of digitization. Um So you have Murders are strong, that's likely to have legs trading its subsiding some but that shouldn't be a big surprise. Mike, what's your top

conviction bet right here? I know you've been focusing a lot on technology for these global banks, but what's the what's the bet You're what's the bank you're talking to most of your clients. Well, I don't like using the word debt. It's it's it's a new because we've been a lot of ours dissecting the financial statements and dissecting what management has to say, and on both fronts, Bank America really is surprising. I thought that the CEO Bank America should have been fired um a little less than

a decade ago. I went to the shareholder meetings, I spoke up. They weren't always happy about that, but you know, that's what the facts said to me at the time. That never stopped you before, But now, as a fact change so to our conclusions. And now I think the CEO Bank America, Brian Monahan, is really one of the best um and it's really remarkable how he's grown into that position. And there you know, they start off saying

responsible growth. Everybody at the company knows responsible growth, and at first I thought it was an empty platitude that didn't mean much at the beginning, but now it means a great deal. Not just to have earnings growth sustainably by not being in the most risky segments. Remember they bought countrywide and how all the mortgage problems, but also means responsible to you know, their their customers and their employees and their communities, and you know they're out front

and center saying we're gonna pay a dollar minimum. Ways by the Brian Morning and on the Sunday talk shows talk about cyber security. So what you have here is both UM strategically positioned much better than before. Financially they benefit from higher interest rates three times more than the average bank, and then just from a you know, tone of society, they're they're right on top of it. So Bank America is the name that we've been going with, and they're also one of the best fintech players in

the world. By the way, I was talking to UH David Rosenberg this morning, and Rosie said something along the lines of when the housing bubble bursts now, there will be people arguing that we're seeing that we're wait seeing a housing bubble right now, but you've got to admit it's red hot this market. How important is that UM and and how dangerous is that to the big banks? Well, I think what's interesting here is just the degree of

collateral that banks have. So you know, when banks have a big crisis, they don't normally repeat the same problem in the next grace, it's right. So the type of underwriting for homes, the type of people who get those loans, the collateral behind that. I mean, you you know, you know, I've lived through the global financial graces and saw how crazy it was. I mean, everyone from you know, kids to dogs to deceive people got application that that's real, right,

Florida strippers with five condos exactly. And the crazy thing is, you know, people were like getting credit without everyone else knowing what kind of credit they were getting. It was the best. The banking industry is cleaned up, by the way, if there's if there's risk, it's remember banks provide less than one third of all loans in our economy, so if there's risk of some of these non banked players out there. So when it comes to housing, I think

that's fine. I think, you know, areas to watch continue to be commercial real estate offices. That's not a new phenomena, but it's still something worth noting. And look, I do go back to interest rates though, I mean it could be you know, a heaven or hell, and you know hell comes in two forms if you have deflation like Japan, and that's what you know, the bed and everybody was worried about for a number of years. But there is still tail risk for hell, if rates get out of control.

And this is something we had a bank conference last month, and this is something that investors we're talking about more than I had heard in like maybe over a decade or two it and um, so that's a sort of chail risk. And if rates went up too much too quickly, then you could have credit issues because then the interest cost for borrows would go higher. So, Mike, you've been covering these banks for decades. Can they earned the returns they earned before the financial crisis? Or is the where

is the industry just fundamentally changed on a secular basis? Well, yes and no, Um, we don't have their traditional banking revenues, their traditional banking margins getting back to where they were pre pandemic for a few more years. And that's just the nature of low rates. And frankly, you could say banks benefited from some of the government programs, but they also got hurt a lot by the low level rate.

In the other hand, we think banks for making up the difference by improving efficiency, by lowering unit costs, by you know, embracing the tech revolution. And you know what, I went to a tech conference as a bank analyst. What was I doing there? I didn't I didn't understand of what I heard, the jargon it was, it was kind of crazy. But the one percent that I did

take away with my aha moment. My aha moment was look at all these other industries that have implemented tech, you know, whether it's retail or healthcare or pick your industry, They've already had their transformation. And so now banks are in the cusp of doing what's already been done elsewhere. So you're not it's not like you're reinventing the wheel. You're just applying what's already been tried and true elsewhere.

So when you know the CEO of Microsoft, as Satia talks about the second wave of the digital transformation, well, banks are about to jump on board on that. Mike, thanks so much for joining us. Always a pleasure talking to you. Um, I wish we could spend more time. We could talk to you for an hour. Maybe someday we'll do that, Mike Mayo. UM, they're talking to us about the banks, and as we've said, he's probably one of the most well known banking analysts in in the US,

if not the world. Um. There he is the US large cat bank research director, managing director at Wells Fargo Securities. Now I'm gonna bring in David Deeds right now. He is managing principal and senior portfolio strategies at Pepack Private Wealth Management. They have just under ten billion dollars in assets under management. And i'll at first, David, ask your take on j Pal's performance yesterday. How how do you think he handled well, no real moves, but kind of uh,

a little bit of a more hawkish tone. Yeah, I think he did a good job. Obviously, it did catch the market a little bit by surprising. You never want to catch the market by surprise. You always want to ease into things. I think they were just a little bit more hawkish than they were just several months ago, by um, you know, pulling forward the potential data, the first rate hike, at least it's reflected in that dot plot.

And of course you know talking about that, the next conversation is going to be on the tapering, and I think that caught people by surprise. I think, from my perspective, what was most interesting is the big reason for going slow on normalizing monetary policy is trying to figure out whether inflation is transitory or permanent. We don't have enough information. The Fed doesn't have enough information to make that decision now, So why are they getting a little bit more hawkish?

I think the real reason is always goes back to the pandemic. The pandemic is receiving. This economy is on track, and ultimately, if the economy gets to be normalized and interstrates have to get normal realize and that's what they're looking at. Um. But it did catch people by surprise. All right, Dave, given that background, here, did your view of the market, where do you want to be allocated

within these markets that changed much yesterday? You know? No, Um, you know, we look at the economy and the data and what history tells us is the most likely pass forward. Not We're not going to base anything based on one meeting by the Federal Reserve. Obviously, this meeting was different than the meeting back in March, so that can change. Um. I think it's clear that the most important factor out there is that pandemic is receding. Obviously, they are concerns

about variants and so forth. Overseas not doing quite as well, but I think the direction is very, very positive. We're seeing UM. The only thing that's lagging here a little bit is the labor market. But there are good reasons, have nothing to do with the economy really as to why that's lagging. Obviously, there's some incentives to keep collecting benefits. There's like a childcare. There's some fear of COVID into work.

I think all that will get resolved positively. So I think we've got a strong economy going forward, and I want to position UH portfolios to take advantage of that. How do you best position them to do so well? If the economy is getting better, I think you want UH your portfolio to be filled with investments that will respond to that, In other words, a slight cyclical tilt, unless everyone else has done so already. David, right, because you don't want to do that if the prices are

too high. Yeah. I think people who own material stocks, who own financial services stocks, who own energy stocks, who are most cyclical stocks, don't feel we're at the peak UM. So I think there is more to go UH in the economy, and UH, for example, of financial institutions are are trading at evaluation trials of the book value and relative to earnings, it's much lower than historically has been

the case. So that kind of goes to the question I've had, David, and and given your experience and perspective, I suspect you can have an opinion here. But as we think about these cyclical stocks which have traded so well really since uh last September, that cyclical trade has really been a great rotation trade for a lot of investors. How long do you think that can go on? Like how much legs does that type of trade have on as opposed to just buying Amazon and Apple and you know,

looking at it maybe ten years from now. Yeah, you know it's a great question. You know one answer as well, how long did the tech roth stock trade trump the value trade? Um? Almost a decade probably, but if you look back for a hundred years, they're kind of neckonnect maybe a slight actual edge to value. Second, of course, is I think you want to look at the interest rates to explain what's going on today and where things

may lie. You know, what's interesting today is the industration coming back down is one five one where we expect the ten your treasury to be when the dust settles and we have a normal economy. I think that is highly unlikely. In two thousand nineteen, we saw the ten year at two point nine, so by many metrics, businesses are saying even more business and they saw pre pandemic in two thousand nineteen, So why wouldn't that Why wouldn't that tenure treasury go back up to two point nine?

If that's the case, what are going to be the aspects of the economy that are going to respond. Well, you've got to start with financials. Their most important products as loans, and if the interest rate is going to go up one to one and a half percent more from here, I think that positions them quite well. Do you expect dollar strength now against for example, the year

on the pound? Um, I'm just I'm just asking David, because a lot of people have been investing in European equities saying, look, they're they're reopening is to come, so they are going to get that growth pushed that the US got a couple of months ago. So I think that the dollar is not going to strengthen dramatically. Here's why. I think overseas are lagging relative to what we've done,

and as they ultimately get the pandemic as well. Under controls we have, I think their economies have respond their currencies will get better ultimately. Of course, I think that although we should normalize the interest race, and they talked a good game yesterday, there's gonna be just trendous pressure. Even though they're independent. There's gonna be political pressure to let things grow, to keep the party going, to keep

the punch bowl out longer. That's not gonna be a boon to the dollar until therefore, Um, I think the dollar will we can ultimately. All right, David, thanks so much for joining us. As always, we love getting your perspective. David Dead's managing principal and senior portfolio manager at p PACK Private Wealth Management, located in beautiful downtown Summit, New Jersey, which, by the way, Matt has a hopping outdoor dining scene, particularly on Thursday nights. We're gonna have more coming up.

This is bloom Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three, and I'm fall Sweeney. I'm on Twitter at pt Sweeney Before the podcast, you can always catch us worldwide at Bloomberg Radio