Fed Day, Jay Powell, Banks, and Crypto

to these banks. That is clearly a big issue. We've got a nice little round table here because if I'm the feeder reserve, I got to deal with the banks. So let's talk to Alison Williams and Bloomberg Intelligence. Plus I got to, you know, talk interest rates. So now I gotta talk to Ira Jersey. He's actually in the Bloomberg studio, which is a rarity, John Tucker, I mean, and pretty a shot, so we'll take it. He's all, guest Blazer, did you see this? He's all, he's looking

all right. So we've got Alison Williams covers the banks joining us. Phone Ira Jersey in studio. Allison, you know, we framed this discussion today with FED chairman j pal that he has to address not only interest rates, which is why we have ire here, but he's also got to talk about the banking sector and the Fed's role in monitoring and regulating it. What do you think he

should say about the banks and the role of the FED. Well, I think it is I think it is tricky, and I think that you know, a lot of the questions uh, percolating and that I've kind of led to this, um do relate to market sentiment, and so you are seeing regulators sort of more pulling back and just pointing to, you know, the strong capital of the banks and sort

of that as a broad picture. Um general, I think that and I'll let I'll let I always speak to what the FED does today, but you know, in general, I think for what the banks are really waiting for is an answer on deposit insurance and what can be done there. We're hearing a lot of politicians throwing around around a lot of different ideas, but I think we do need something sort of broad, perhaps temporary, to help

stabilise sentiment, which is really the issue at this point. Well, Ira, come on in here and talk to us about that stabilizing sentiment piece. Alison, just reference twenty five basis points priced into the market. What does the pause look like in the bontod market. Well, if I think if the FED worred to pause, or as I suspect that they'll do, they'll hike twenty five basis points and hint that they may pause at the main meeting. Is I think as long as they're dovish enough, I think that for risk

assets probably things are okay. But I agree with Alison, you know, the issue here is things like how do

you quell deposit flight? Right, and raising interest rates actually doesn't hurt that one way or the other, except in so far as the way the financial system has been developed over the last couple of decades is that if banks don't offer a competitive interest rate on their deposits, on their CDs or whatever, people then do what happened over the last week and a half and they move their money into money market mutual funds which have market

based yields. And now so with the so the FED actually hiking could actually, you know, enhance some of this deposit flight unless banks figure out a way to keep depositors in their in their firms. So I think it's a balancing act that the FED has to do today. And I think the J. Powell has to be dovish, and that the statement will probably take out a line that talks about that continued great hikes, like they won't

promise basically that they're going to continue hiking. They could, right, but I think they have to take that out and give themselves more optionality. Alison, you know, the reality is for me, at least, it seems like in the past couple of weekends, I haven't come into work on Monday like we did back in two thousand and eight with another bank or handful of banks failing. The argument can certainly be made that this is kind of look, it is syncratic to a couple of institutions here, and that

if others broadly had problems, we'd hear about it. By now, How are you thinking about a day to day as we kind of figure out that this may or may not be systemic? So I think, um, I mean, I think it's not systemic in the sense that, uh, you know, it's more it's more a clause. It's more sort of having things in common versus um, you know, one bank's

downfall causing another bank's downfall. So credit tweets, for example, the issues there could have been systema because there are a lot of inter relationships, even though we we expect that the US banks manage those down significantly over time. UM, certainly there are inter relationships, especially to the other banks with the US banks. You know. The issue is just that, um, you know, this this setup could cause an issue if

we continue to have this negative sentiment. And that's why I think you need more of a broad statement, right because you had uh, you know, we've had a few banks now, um that event that have failed. Everyone's watching a couple of more banks. But and those banks find their answers. You know, investors will continue, I think, to go onto the next and the next until there is some kind of stability, some kind of broad answer that that quells those fears. Well, Alison, I want to get

your quick read on the PacWest story. This morning, they access that fed facility from US sixteen billion. They got about one point four billion financing from Atlas as well. A lot of people will worry that PacWest was the next shoe to drop. Are we in the clear now from that? I mean, you know, the thing that I think investors will focus on is that is the deposit flight.

And so again I think we have a situation where one particular bank is coming out and talking about, you know that they've stabilized things, but people are focusing on the deposits, the past of those deposits, and again worried about what's happening at other banks, and there's not a lot of transparency. So I think that I think, again, you need something that that can kind of broadly stabilize that we're not going to continue to go you know, bank,

my bank, right, my story? Right? Iver, what's the key thing that I'm not a FED watcher, thank goodness, But what's the one thing a non Fed watcher should be listening for today at two thirty? Yeah, I think well, so at two thirty, I think it's the um you know, how the tone of j Powell's comments around the banking crisis, right, So, how concerned is the FED that it could become systemic? Because, like Allison mentioned, you know, Credit Suite was potentially a

systemic institution, right. The problem with two thousand and seven, two thousand and eight was that you had large financial institutions that were very interconnected. So far, at least, we haven't had you know, a lot of a big bank outside of Credit Suite that was very interconnected to the rest of the system, that could make the whole system collapse. But of course you get enough smaller institute that do

that and suddenly become systemic. So I think it's how concerned is he and the more concerned he sounds, the more dovish that should be. And you should note then that maybe the FED is going to be done after

today's hike. All right, great stuff. Really appreciate getting two of the smartest minds we've got in the building together at one time, Alison Williams, Senior Global Banks annalyst for Bloomberg Intelligence, and Ira Jersey, chief US interest rates strategists with Bloomberg Intelligence getting them together, And you know right we did that is because the FED is thinking they've got two mandates today, that's to deal with the banking

issues and then obviously deal with the interest rates and inflation. And that's how we want to approach it. Right here, you're listening to the Team Cancer Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the I Heart Radio app, and the Bloomberg Business app, or listen on demand wherever you get your podcast. Consensus seems

to be the Federal raised twenty five basis points. My question is, if it weren't for the bank in challenges out there in a market marketplace, the turmoil in some of these regional banks, would that change the Fed's behavior. Lets check in with one of our favorite FED watchers, Danielle d Martino Booth. She's a CEO and chief strategist for Quill Intelligence. She's also a former advisor at the Federserve Bank at Dallas, so she knows how they make

the sauces down there at the FED. So, Danielle, do you think if it were not for the banking turmoil that the FED would maybe go fifty basis points here? No, I think that I think that the CPI report, I think that the inflation data had been a little bit hotter than what was expected. But on the flip side of that, I think that there's more evidence. Now we've got what eighty four percent of the US population is

living in states with rising initial jobless claims. Uh, you know, that's that's a pretty that's it's it's a huge chunk of America. There's more a recognition among average working men and women that the labor cycle has turned. So I think that that in conjunction with inflation not being you know, super red hot, would have kept the FED at twenty five basis points. I actually think they're going as much

as they wanted to go to day. Danielle, again, we got to talk about this kind of minority view in the markets, which is there may at the end of the day be a pause. Would a pause, although perhaps creating panic, be justified from an economic point of view. From an economic point of view, I think that a pause would be justified. I just said that, you know, eighty four percent of Americans live in states with rising jobless claims. But I think that at this point it

would it would upset the markets. You've got a ninety percent probability going in of this twenty five basis points, and I think that it wouldn't supprise me to have Powell echo to a certain extent Christine Lagarde last week and say, you know, four guidances, bye bye, We're we're just going to try and take this on a day by day basis. Obviously, if systemic risk comes on glued, uh, you know, he will he will pause. But I think Powell's trying to fight a war on two fronts. I

think he's trying to maintain tight monetary policy. I don't think it necessarily keeps him up at night that the credit cycles um underway, that bankruptcies are happening, that the risk is operators with the worst business models are are having to restructure. I think he's okay with that. I think he's okay with that being an outgrowth of his policy. The flip side of that is credit standards are tightening

real quick here. So that's that that could be something that that that that should be staying his hand today because try and get try and get a cash out refinancing, try and get a car loan, try and get a commercial real estate loan. Good luck. So, Danielle, I just typed into my terminal d ots dots go. This is a FED meeting where we do get the dot thing right? Is that still a thing I need to pay attention to.

I think that I think that the dots right now are more like you know, playing darts in the sense that given the magnitude I mean, we just watched one of the world's thirty largest banks go bye bye. Given the magnitude of the backdrop, I think the dots mean less. What I think people will be paying attention to, though, is when said leaders anticipate the first rate cut. If they all stand their ground, remember Leo Brainer's gone, She's

not there in the room these last two days. If they all stand their ground, that we're not going to be that the Fed is not going to be lowering interest rates until twenty twenty four. I think that that will definitely raise an eyebrow or two. Danielle. You talked about the dots a little bit, but let's talk then about when it comes to kind of economic forecast, the GDP picture as well. I had an interview last week with the CEO of DHL and he said, look, the

economy is still expanding. They're still hiring, they're still seeing volumes grow on a quarter by quarter basis. From a kind of GDP growth point of view, Danielle, the economy is still growing. Why is that such a bad thing. It's not a bad thing that the economy is still growing. The economy is about to have a full blown heart attack and stop growing, but it's not a bad thing that we still had economic output going into where we are today. But whether you're talking to people in logistics

or trucking or industrial packaging. They have seen unlike the gentleman from DHL, they've seen a sudden stop in the economy. The New York said put out you guys had it on the terminal. Yesterday, the New York FD put out a new survey. People are getting rejected for credit left and right, whether it's trying to do a cash out refinancing, or get or get a car loan. So prior to even the banking crisis setting in, there were definitely signs in the economy of slowing or if nothing else, slowing

to come. What is your call here on the labor market, because that's been one of the issues, Danielle, that a lot of folks are put pushing back on a recession scenario, saying you can't have a recession with this level of unemployment. What's your view there, Look, I think that I think that the labor market is is pushing out unequivocal evidence of how bad things are getting. A Walmart closes about once a week. They're clearly passed there. It's just usual

business type of model. We have four hundred foot lockers announced that they were closing just a few days ago. So retail mcgeddon is picking up stream about steam and we're you know, we've just seen Amazon dot Com go through it's with its third round of layoffs one two three, So I mean, it's it's good to say, look look at the unemployment rate, it's still so low. Or look at unemployment claims, there's still still on a level basis, that's the case, But sixty seven percent of states have

rising claims. Again, eighty four percent of the population lives in a state with rising claims on a year over year basis, So that's tangible. So you're talking about the labor market here. Should we be worried about the housing market? I still don't feel like a lot of people are raising the alarm bells when it comes to housing. You know how things a funny thing, right, because we had

this dip in mortgage rates. Everybody rushed in in these months that are typically seasonally very weak December, January, February, and yet if you don't have an income, it's really

hard to get a mortgage. And that is why I think it was critical to pay attention to the Federal Reserve's most recent Senior Loan Officer survey that said even for residential mortgages that lending standards were tightening, and you see that in the fact that the ten year treasury yield has come down but the thirty year fixed mortgage

rate has gone up in the last ten days. That's telling you something about lender's willingness to extend credit into a housing market when they foresee trouble down the pipe, which is that's what you get when you have a labor cycle right, It's going to lead into intrastrate sensitive sectors and sectors where you have to have an income to get the financing to buy it. Danielle again, the release of the statement at two pm Wall Street time,

and then the press commerce at two thirty. Is there a mistake that Chairman Pal could make today that's in the back of your mind that you're saying, boy, I hope he doesn't do this because that could be really bad for the markets. I think he needs to be unscripted today. I think he needs to not be so nervous at the podium that he's reading his answers. He has to come out and exude confidence at a time of a lot of people being really freaked out. He

has to stand up and be a leader. And I think that that could be challenging for him because this is probably the hardest podium time he'll ever have in his entire life. But the last few meetings he's been very perfunctory reading his answers. I think he needs to be ready for what's going to be asked of him and be confident in his reply and say, we've got macroprudential solutions that we can attach to this financial banking type of crisis. It's burgeoning. We think we can handle this.

At the same time, we think we can also run monetary policy on a separate track. We can wage a war, we can wage more, you know, on two fronts. Daniel, lastly, just about thirty seconds, based upon what we know today, is the banking turmoil systemic or not? Do we know? I don't think we know if the banking turmoil is systemic. I suspect that is, it is potentially systemic, because quietly First Republic, like Silicon Valley, has not been able to

raise capital. So when we cross these rubicons, Uh, there's definitely something along with the system when banks cannot raise capital. All right, we'll have to see a busy, busy day today. We appreciate getting a few minutes of your time. You know you're busy. Danielle Danielle di Martino Booth CEO and chief strategists at Quill Intelligence. Some great stuff there. Follow her work. She's got a great Twitter game as well. I follow her on Twitter. Lots of good discussion there

with Danielle and some of her colleagues. She was a former advisor at the Federal Reserve Bank of Dallas. So again we love talking to her about the FED critty because she knows kind of how inner workings go. Yeah, and when you have a FED meeting like today, it's good to check in with those folks. Yeah, It's nice to hear kind of how they go about thinking about this because I gotta say, Paul, you could not Paey to be an a condist at the Federal Reserve right now.

This feels like quite literally being stuck between a rock and hard place. Yeah. So we'll have to see what we hear from the Federal Reserve later today, and of course we'll have full coverage of it. You're listening to the Tape cats a our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, in APT, Bloomberg dot Com and the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station,

jo Say Alexa play Bloomberg eleven thirty. One of our favorite topics to discuss is ETF exchange traded funds, so much so that we ask Katie Greifeld from Bloomberg News to join us here because she is the ETF boss here for Bloomberg News. She joins us here in a Bloomberg Interactive broker studio because we have a great guest to check out. Joanna Gayego's co founder of Bond Blocks, joins us here in our studio. Joanna, can you remind us again what you guys at Bondblocks do. What we

do Bonblocks is fixed income ets. Yes, we're the only fixed income issuer that's one hundred percent focus on fixed income, and so we build out precision fixed income tools for investors. And let's talk about the year that fixed income ETFs are having, because my terminal is just booting up. But if you look at the flows year to date into the ETF universe, over all fixed income and equity ETFs

are like neck and Neck. I think fixed income might have surpassed the flows into equities in the past day or so. Have to check. I can't remember the last time that happened when overall for the year more money was going into bonds. I mean, just speak to the appetite that we're seeing in the wrapper right now for fixed income. Yeah, it's very simple. It's because of what happened in twenty twenty two and yields being back. So

people say bonds are back, and it makes sense. But what people need to consider is that total return is more important than ever in your portfolio. And so with yields having moved over four hundred and fifty bases points in twenty twenty two and you know will continue to rise, is what expectations call bonds are really important tool for twenty twenty three because it's probably the most simplest way

to see return in your portfolio. And where is that return though, when you look across the curve, obviously we're seeing biblical volatility in the front end. But still I hear lot of calls that basically you just want to sit in cash. You want to sit in short of the shorter end of the yield curve. When you think

about duration the curve and its totality. What's your thoughts. So, yes, in duration, which is a measure of interest rate risks, you are seeing a lot of flows in the short end because that there's less duration, there's less interest rate risk in something like a six month treasury or one year a treasury. That's just intuitive cash management use. You should be on the short end with zero risk, easy

easy decision. But what we see and what we've done in fixed income is we've cut up parts of the credit and part of the risk spectrum of fixed income, so you can see different opportunities amongst those areas. And so what's really compelling is that if you look at things in high yield or even across IG you're not seeing spreads from that risk free rate that are different or very much or very much away from their non

recession levels. So I think people have been waiting for like this massive bottom in fixed income before they come in.

But with the yields increasing and doubling over the last year, you're seeing fourteen percent in triple c's, which is sort of the highest credit rating, highest credit risk you could have in high yield, all the way down to something like five hundred in something in a in a double B or a B. Those are normal levels, and so it's kind of one of those confounding things we're seeing in economic data where you're seeing a lot of demand, you're seeing low job, low unemployment, but you're also not

seeing a lot of distress and high yield, and so we think there's a lot of interesting areas of risk to think about in fixed income. So I think it's yes, everyone is in on the short end, but we really don't think people are taking enough action and looking at the risk assets in fixed income, which are pretty straightforward given those yields for twenty twenty to be pretty brave though I don't know, to go into high yield right

now doesn't say high risk, high reward. Yeah, it sounds like it's let the entire argument on those at one bonds, it's like, well they're super risky, but they could yield and juicy returns. That's sort of what bond box is about. We're about making sure that people can see those individual

opportunities across the risk spectrum. So yeah, you don't have to take the full risk of triple c's, but it's there for you to compare and break out of what you're seeing in broad bet based thoughts about high yield like that, Yes, high yield is an exchange of risk and in return, but there are opportunities amongst them. We want people to see those in individual products. You know.

With this banking turmoil, which is a term I'm most comfortable with as opposed to a crisis, what we are seeing as a lot of deposits come out of a lot of banks and the expectations to going to money market funds are going to maybe some bigger banks. Are you seeing that in your business and the fund flows, yes, okay, talking about that. So the short as Katie mentioned, the short end of the curve and products and ETFs are

seeing a lot of flow. ETFs are interesting is that it allows an investor in and not have to reinvest their their short term cash or their strategy to cash. So um like a like a money market fund, you're going to be getting a yield that continues with you within the market. So ETFs are an alternative to deposits, but they are not locked up up. There's something you can withdraw on any day of the week and their yield is going to grow or contract with the market.

So it's a very simple, convenient way to get access to treasury yields or short term risk. If I think about the past two weeks, one of the I don't know, I don't know how I want to describe it. One of the more interesting facts to me is that when you think about what happened at Silicon Valley Bank, at the end of the day, it was just duration risk. They were holding long dated treasuries, you know, government bonds. It's not like it was anything that's supposed to be risky,

but it was duration risk. In the end. What are your clients thinking about when it comes to longer dated debt? Yeah, so if you want to take on duration, we actually wanted to solve this problem for investors. We wanted to put it on the label exactly how much interest rate risk you're taking in a treasury product, and so we created products that are duration targeted. So what we see

the clients are generally in fixing portfolios. When you want to take on more risk, you're adding duration because of

interest rate risk that's coming up. So what we see is obviously most of the flows are going into the shorter side on the interest rate side, because there's been expectations all year that there'd be increasing interest rate hikes, but with sort of the back and forth we've seen in the last few weeks, there is a view that interest rates may be coming down as soon as the end of the year or even very early in twenty twenty four, and so we are seeing people taking longer

duration five to seven, even ten and twenty. I think having that precision to be able to see which your interest rate risk is is critical right now, and we actually launched those products so that people could more precisely put duration into their portfolio, even in the treasury space. Well, I like think you said more precisely, because I want to talk to specifically about not the bond market, but the vehicle through which you're investing in the bond market.

Essentially ETFs as a product themselves. Given this kind of environment where liquidity in treasuries is a concern, perhaps not immediately, but it was a couple of months ago and might be again, our et then considered more attractive as kind of a tool to get your hands on them. They democratize access to our financial markets. They always have. They have been really important vehicles to source. I call it

the first port of liquidity. It's like the first call it's where you can go to see where a market is trading, and in treasuries it's no different. And so the way that those markets function, they're very easy to access for all investors. It's not something that's exclusive to someone that's in an institution or doesn't know how, doesn't have a you know, a way to access the bonds directly. Anybody with a brokerage account and trade in ETF So

they're a really important tool for liquidity for all investors. Joan, just real quick here, what do you expect from the Fed today? Well, the consensus, as you guys have been talking about the last few minutes, is that they are

going to raise another another quarter point. I think what we really need to expect from the Fed is sort of what they say and how they're sort of responding to the stability and this line they're trying to balance between financial stability the economic data that has come in in this quarter, which is sort of our portfolio manager Elias Schwartz like to say, has been flashing red lights and green lights to the bond market. You don't know which which is going to happen on any given day.

So what they say is going to be really important for us to understand next steps. But we need more trends, we need more data, and we'll have to see what the great stuff. Johanna, thank you so much for coming into our Bloomberg Get Interactive Broker Studio. Really appreciate that. Joanna Gayego's co founder of bond Blocks. She co found

at Bondblocks in twenty twenty one. You're listening to the team Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the r Heard radio app and the Bloomberg Business app. We're listening on demand wherever you get your podcast. You know what's doing well here? John just called it out. Bitcoin. It's up another one point nine percent today. It's you know, pushing twenty nine thousand on bitcoin. Where's Tom Keane with his bitdog right?

You need it getting closer to that third leash thousand level. Also, Paul, if you look back and in a sense function over the past ten days, it's up close to thirty four percent. Admit of this big sella. Obviously we've seen banks rebound, but during this heightened volatility over the past few weeks, seeing bitcoin, what are the winners here? Exactly. So when I want to talk anything crypto, I want to talk with Mike McLoone senior macro strategist with Bloomberg in Intelligence.

You know, Mike, what is going on with bitcoin here and does it relate at all to what we've been experienced our last couple of weeks with some of these regional banks born hey, Paul, Born of the last financial crisis. This financial crisis seems to be defining bitcoin, and it's quite impressive. I mean, I've been looking for an inflection point to bitcoin to be trading more like gold and

long bonds, and it's happening. So one good example is Je mentioned bitcoins up about seventy three percent in the year. But part of this is what's been happening with that Great Scale Bitcoin Trust and GBTC. It just hit one hundred percent mark on the year today, and that's the litigation that might allow ETFs on the lane. But the macro is significant. People are seeing this as Okay, well, this is no one's project, no one's liability, no one's risk.

Banks aren't involved, and we're seeing it as a bit of a flight to quality, flight to safety. It is a digital reserve asset and actually some of this is coming from this the crypto dollars, the stable coins which aren't being somewhat looked at it and so okay, so they have full reserves. That's quite impressive. So, Mike, has Bitcoin reached its inflection point versus stocks yet? And if not, what are you watching to gauge when that could potentially happen.

I think it's happening right now, Jessin. That's you know, and we're seeing it in real time. But the key thing to think about is I'm worried about what Gina Martin Adams says. She's our equity stratis and she's been spot on. And when she says that the FED hiking is bad for equities and five percent tea bills is

bad for equities, I expect that. So I fully expect after we yet today and the FED hikes into what's turning out to me a significant deflationary periody of look at banking and housing and commodities that we get that downturn inequities. Bitcoin will fall, but it is showing divergence trick. It's quite impressive, and it's doing it more than most of the other cryptos it's you know, it's that single thing like gold and like and T bonds where people

are saying, okay, well, what's my risk here? There's no one to bail this out, which might be better, And so I think we're at that now. Also Bitcoin outperforming commodities as well. Right, Yes, I've enjoyed writing about that for quite a while. When people are talking about commoditis supercycle last year, Paul's I hear Paul giggling because I just pointed out the key facts about bitcoin is it's low and early days for adoption in his definable diminishing supply.

Now you look what's happening to crude oil since last year when people were calling from one fifty, we're learning that crude oil is the world's none those one, world's most significant in commodity, but it's the world's most autoco correlated acid. It goes down because it goes up, and that's because it crushes that demand and brings on more supply. And to me, that's what's happening. People are realizing, well, this supercycle might be happening in bitcoin. So oil here

I'm looking at wtat crude oil. At seventy we were below seventy today? Is this just you know, the marketplace saying I think we got to demand problem looking forward here it's all the above pots. I love how people making excuses those of us who really got you know, I was initially wrong last year and I said crudel is going back to fifty. I think it's getting there. And the key thing is it always does that. It looks very similar to what it did in nineteen ninety.

I was in a trading pitst initially got all signs, but it went to forty, back to twenty, and then it took about fourteen years agave above that high. The difference is now the US is a net energy exporter. This has never happened, and we're seeing what normally happens in crude oil. It's the world's most autocorrelated acid when it goes up and makes it go down. But the key is the key thing at this similar stage in two thousand and eight, when we had that pump and

the FED was aggressively easy. Now they're still tightening. And one thing I need to point out is back in two thousand and nine was the last time we had the worst than the most negative PPI Producer Price Index ever really driven by commodities. We are going towards that too when we get to July. July thirteenth says, when we're going to get June PPI, it's very likely going to be negative on a year over year basis because

of plunging commodities in crudel. And that's not profound, that's just the way the math is going at the moment. And something I'm curious about because I've had sources talk about when they're specifically looking at equities, they don't want to see oil treading around fifty dollars. Again, when it comes to crypto, if you're seeing that happening in the crude markets, what do you think that means potentially for bitcoin if that would happen. Yeah, So I'm glad you

mentioned that. This is part of been my premise to be bullish gold because I see what's happening in crudel and commodities is what is crudels an enduring bear market that bounced last year and it's tilting back towards that bear market, which means deflation. And you look at things like gold and bitcoin, they're enduring bull markets. They have dipped and probably tipping back towards bull markets. And for that tilt, you need the deflation to come back, and

it's clearly going there. So let's look at one example for crudel is the benchmark for heat, electricity, and fertilizer in this country's natural gas. It's down eighty percent from last year's high. It's returned to his cost of production around two and I fully expect the same thing in crude oil, which is around forty to fifty dollars a barrel. Forty dollars or fifty dollars a barrel is the cost of production and the world's largest producer of crude oil

and liquid fuels, and that's the US. And by the way, for our listeners, Mike made that call like when oil was at one hundred and twenty five dollars a barrel. So if you listen to Mike, you made some dough Ray me. Mike, you cover everything from crypto to pork bellies.

What are you looking at now? What's getting your tension here? Well, obviously to be the macro is overwhelming, Paul, and I think that's what people are missing, the fact that the FED and DCB are still tightened versus all the forward looking measures. Aren't just plunging. Commodities aren't just falling, they're collapsing. The bloomer combany in next is down over twenty percent over the year of basis, and it's been we've had the history of since nineteen sixty. The FED is never

tightened in that environment, Yet they still are. We see a housing market pinking, and now we have a banking crisis, and they're still pointing out lagging inflation. And I pointed out with PPI in July and the year of year is probably gonna be negative. So to me, that's a ten on a scale of everything one to ten and

everything else is a five or lower. Just the fact that today we're talking about tightening when a year from now, I sally expect when we speak and we're gonna be talking about and during inflation partly sparked by the FED who just was a little bit too late on the inflation and then way too aggressive fighting it. And now it's way past I mean, the ship is turning and they're still tainting. Wow, all right, folks, what you just heard is an analyst on the top of his or

her game for a couple of reasons. One, he knows his stuff, he does the work, he does the math. Second, he provides his opinions and his analysis with conviction. I mean what you just heard there was analysis, got conviction in his call. Yet conviction oil going forty to fifty one, twenty five, and we get conviction again whether we're talking pork bellies or crypto. So we're fortunate to have Mike

McLoone with us. He's a sconce down in Miami, holding down the Bloomberg Intelligence, a Southern tier down there in Miami. You're listening to the take Ken's a our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tun In half, Bloomberg dot Com, and the Bloomberg Business alf. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play

Bloomberg eleven thirty. I want to get to right to our next guest, Lisian Sanders, chief investment strategist at Charles Schwab Lizards a million ways a week ago here, and we'll certainly get to the fed. But I'd love to ask a veteran strategists such as yourself what do you make of the last two weeks with Silicon Valley Banks, Signature Bank, and some of these other California banks. What's your take? So my take is maybe broader than what's

been the focus in the past couple of weeks. Yes, there is a crisis going on here in the banking system, but I think it's part parcel of a broader story about the end of the end of the era of easy money coming off the zero bound, the capital misallocation that occurred during that era, just ample liquidity and zero rates, and now I think we're sort of paying the piper. And there's just been so much concentration on the banking

part of this. But I think this is a broader story of of you know, who's swimming naked when the liquidity tide goes out? Liz, I have to ask, how frustrating is it when the narratives keep changing in market pricing and also trying to position specifically around that. Well, yeah, it is frustrating. It's unique in terms of how rapidly not just information is changing, but the reaction function. But I'm not a trader, and I don't I don't advise short term traders, so we're not trying to kind of

play every wiggle in here. That the lead into the FED meeting is extraordinary in terms of how dramatic the change in expectations have been from as recently as March eighth, an assumption of fifty by the FED or hikes between now and year end, you know, five to seven on the terminal rate, and now we're sub five. Still a bias toward twenty five. But even thinking that, maybe they pause. Yeah, So if you're if you're trying to trade around this stuff,

good luck. But so liszt intantly having God, No, I was just gonna ask, you know, we've got the FED coming up later today, and this is a unique meeting for FED Chairman j Pals. He does have this kind of simmering banking turmoil out there in addition to his remit on inflation and everything. What would you like, What do you think he should do today? What do you think the message should be today? I think they should pause, but certainly the market is saying that they're not going to.

It's eighty six percent chance of twenty five. My guests, though, is that if they hike, it'll be a a hike, or if they pause, it'll be a hawkish pause, and that just means I think if they if they hike, it's consistent with market expectations. They tend to go along with market expectations, but they will talk a lot about what their facilities are, that we have the tools that

you know, we're probably closer to the end. Conversely, if they opt to pause, which would be against market expectations, I think the messaging might be more about our inflation fight may not be done. If things settle down in the financial system, hikes could be back on the table. So that's my best guests heading into what is a

very tricky meeting. And Liz, everybody obviously has been talking about the dot plots that are quarterly we're going to get another update on those and the meeting plot back at that December meeting was five point one percent for twenty twenty three. But are you expecting, I mean, how are you expecting markets to respond to that, because obviously we won't just get them for this year, we'll get

them for the next coming years as well. But what are you expecting to see there and how do you think market Frankly, markets shouldn't respond dramatically to the Summary of Economic Projections or the dots plot. There's not been a lot of accuracy in those, but it does represent a bit of a signal for me. The issue will be is there consistency in terms of the message within

the Summary of Economic Projections. What might be odd to see and I think would be disconcerting is if the dots and suggests that rate cuts are very much on the table before year end, but it's not reflected in a deterioration in the economic projections. That I think would be a troubling message, which is, hey, we think we're going to be cutting rates, not because the economy is going to suffer, but you would infer that it meant

we think the financial system problem is larger. If the economic growth expectations are weaker and inflation expectations are lower, and the FED suggests rate cuts might be on the table, I think that's a better broader message. So I think it's sort of the combination of what the SEP and the dots show, and I think that dissecting is going

to be more important this time. What are you thinking in terms of any potential descents when it comes to the FED and whether or not they could raise questions as far as potentially, what do they see that maybe we aren't seeing right now? Yeah, that's you know, normally, particularly when it's you, it was unanimous that nobody pays much attention, and at times there might be a dissent

or two and it doesn't tend to capture headlines. But clearly, in this environment, if it's say more than one off descent, I think that will garner attention. I would be surprised if if Powell gets asked about that, but to see that wouldn't surprise me. There's got to be uncertainty that leads to voting members having different perspectives on things. In fact,

I'd be a bit more surprised if there was unanimity. Liz, how do you think Chairman Powell should respond to questions about banking turmoil out there, whether it's how it impacted the defense decision over the past couple of days, or how well or not well the bank did in terms of dealing with some of these banks are preventing some of these issues. How do you think he should respond? Well, I think he should stick with the facts and the data and not speculate too much. If it's on the

basis of just his perspective on what happens. So I think he should talk about the take up at the discount window and maybe a sense of what that's going to look like when it's released on Thursday this week. I think that's become sort of the hot piece of news now that comes out. We were all obsessed with inflation data points. Now I think it's that weekly Thursday release of of how much borrowing is happening at the

discount window. So I I you know, I'm sure he's going to try to offer suthing words that has the tools and the resources, but I would assume he's not going to provide over its speculation without a backed up by the data we all are in possession of and maybe a bit more from what the FED as all Right, So putting all this together, you know the FED, what we're dealing with in the banking system, where we are with economic growth. What is your call to Schwab investors

these days about how they should be investing. Well, one of my lines that I've always used in Tupper times, a panic is not an investment strategy, and I think great times that that applies. I think we're actually seeing some perhaps rational action in the market. You know, there's been a lot of concern why haven't the equity market

reflected this with more downside? But when you look at where leadership shifts have occurred, kind of up the cap spectrum, out the quality spectrum, the equity market may be sending a message that all right, the FED may stop tightening, but now banks are going to probably tighten. So small and regional bank take off take up where the Fed left off, and that has different implications depending on whether you have higher interest costs, do you have the cash flow?

So I think that there's a sort of a factor story that we're trying to emphasize. What types of characteristics do you want to look for in companies within the equity market for this very unique period of time, as opposed to making a you know, all in, all out broad equities call. I think this is where you have to add a lot of specificity in terms of what you're screening for. For lack of a better term, All right, Lizianne,

thank you so much for joining us. I know this is a busy, busy day for you, like it is for many folks in the marketplace. Lizian Saunders, she's a chief investment strategist for Charles Schwab. Just I think one of the very highly respected voices in the marketplace, and certainly Schwab has, you know, so many accounts out there, so many clients out there, that she has a big impact on a big part of the market. So we

appreciate getting some of Lizze's time there. You're listening to the tape cans are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, tuning app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. Let's bring on our next guests we're talking about we get some great guests hour. How about this this guy, Cam Harvey, professor of finance

at the Duke University Fuqual School of Business. Disclosure, he was my professor. I took a couple of his classes, and there's lots of math in his classes, and I think that you got his khd from Chicago that might have something to do with it. But I'm just not that matthy of a guy. So there was a challenge

for me, but I did make it through cam. There's a million things we could talk about here, the FED, the yield curve, but I want to start off with Silicon Valley Bank and some of these other banks on the West Coast. It's not every day we get bank runs. What do you make of it? So I make of it. There's a lot of blame to go around here. And Number one, this is a gross failure of regulatory supervision. So this is obviously a regulated bank, the state chartered bank,

but regulated by the FED. But it's less than two hundred and fifty billion dollars, so they're not held to the same regulatory standard, for example, the stress test. But even if they had to do the stress test, they would have passed. So what's going on. It turns out that the regulator put together the stress test not realizing what is going to happen to the FED funds rate. So the extreme scenario that the FED gives the bank

to stress test is not extreme enough. And it's it's the regulator, the FED, that actually creates this scenario outside of their own extreme scenario. So that is a failure. Now it's not just a regulatory failure. This is a regional bank, and it's also a bank that caters to a particular industry, and that means that your loan book is not and your clients are not diversified, both geographically and across industry. So that means that you need to

be held to a higher risk standard. And the other thing is that it's kind of remarkable, and we can talk about this more that these banks, and Silicon Valley Bank in particular, doesn't seem to understand one of the most basic risk concepts. And Paul, I think this was Lecture three of Finance one oh one, and that's duration risk. So just because you buy a long dated tric rate doesn't mean it doesn't have any risk. It doesn't have a default risk, but it's got interest rate risk. So

they didn't do any hedging. So banks can hedge, and it turns out that SVB in the past had hedged, but then they let the hedges expire they're too expensive. How systemic, if at all, do you think this is CAM or do you think this is more specific to SVB or maybe even just a handful of banks that

that catered to that customer base. So the last time I was on we talked about the Eel curve, and the Oel curve is relevant for this particular situation because you think the usual banking model, you gather deposits and you're paying your depositors a short term interest rate savings rate, and then you lend some money out to companies and things like that, or you buy long dated treasuries. So what you're getting is, in terms of revenue, is a longer term rate and what you're paying is a shorter

term rate. And that works great if the yield curve has got a positive slope, which meaning the long term rates are higher than short term rates. But when the yield curve inverts, that puts stress on the banking system because all of a sudden, what they have to pay out in savings deposits is high, and it could also be the case that the value of the liabilities changes. So this is the reason to actually do some hedging,

but not all banks do the hedging. And because the Yeld curve inverse stresses the banks, it kind of makes sense that the FED should take that into account. So I'm very interested in reading the minutes of the FOM at C five years from now when they actually come out to see if they actually did their homework and say, oh, well, we're thinking of inverting theeal curve even more. How many

banks does that put at risk? Okay, so I was going to ask you, because you're specifically bringing up the yield curve when you're looking at that, is it telling us or we headed into a big event? Or did the big event already happen? So, so think of it this way. The yeld curve's got information has been very accurate in terms of forecasting processions. It is something that precedes economic bad times. And you can the yeal curve has been inverted for quite a while now, and you

can see some of the damage that is doing. So we went in like a year ago, our financial system was very robust, in very good shape, leverage less than it was, for example, before the global financial crisis. But once you start to engineer a yield curve inversion, it puts at risk the basic banking model and for those banks that are not sufficiently hedged, that puts them at risk. So, and this is exactly what's happened. So the FED, in

taking these actions, has weakened the banking system. And again this is not just a regulatory problem. It's also a problem of moral hazard because these banks, well, why should we hedge. The Fed's going to bail us out. Yeah, that's kind of what it seems like at this point. But so now now you're the Federal Reserve, your j

pal today at two o'clock, Cam, what do you do here? Okay, So the last time I was on your show was just before the previous announcement, where I said that they should stand down and pause and collect more data, and they did not do that. I considered that a mistake, and indeed that could have been the tipping point that hike to invert the OL curve just a little bit more, that that could have been the pivot point to push

us into a potential serious banking crisis. So what I would like to do today if I was at the FED would be the cut twenty five base of points. I know that's not going to happen because it would be a sign of a panic of desperate measures. But the right thing to do, and I agree with Lisian who's on previously, is to stand down, to pause and

say we need to collect more data. And really what this means is we need to collect the data that we should have collected last time and the time before to do the analysis of the banks to figure out what their risk actually is and how it was induced with the yeal curve inversion, and and is it the case that the equity in these banks, if we look at their assets and mark them to market, has taken

a hit, potentially a two trillion dollars hit. There's an academic paper that suggests that there's hundreds of banks that could be underwater right now, and the FED needs to do that work. And that work includes not just looking at the balance sheet, but also looking at off balance sheet. So we need to know if for these companies are hedging and how they're hedging, so they should be hedging their interest rate risk, but we don't know. That's very

opaque right now. The Fed, it's got four hundred PhD economists. They should give this high priority. All right, KEM, thank you so much. We appreciate it. Clear and concise as always, Cam Harvey. He's a professor of finance at the Duke University's Fuqua School of Business. I survived his classes. No walk in the park. You had to bring your a game, but the better for it, I think. Thanks for listening.

To the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three and on ball Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio