Silicon Valley Bank, Treasuries, and CPI

gotta continue to fight inflation. But I got a market that's spooked at there about the whole banking system. What do I do next week? Yeah, it winds up becoming a massive communication challenge. So I think that the feder Reserve will hike twenty five basis points and then UM say that, you know, we're ready to step in to provide be the lender of last resort, as is our mandate, and we do care about financial stability, so I think.

But but like you said, you know, with inflation still running at you know, four tenths a month on headline inflation, there's very little reason to think that the Fed's actually going to cut. You know, I know that there's at least one or two banks out there saying that maybe the Fed's going to cut interest rates because of the

financial stability issues. That's not going to happen. They're not going to cut much more likely to pause and then say we might restart hiking later than they would be to actually lower interest rates, because I think I've told you before, Paul, you know, I think we saw have a FED put, but that FED put is very far out of the money because inflation still is their key mandate. Yeah, we should remind our listeners that inflation did come in

hotter than expected. If you're looking at the core number for CPI, so CPI X food and Energy month over month was up zero point five percent. We were looking for a gain of zero point four percent, and it's also higher than the zero point four percent gain that we saw in the previous month. So it's still a problem by the time we get to the FED meeting.

So you think they're going to hike another twenty five basis points, that puts some at the upper range five percent, so four seventy five to five and markets still pricing and just a smidge more than that or it was a second ago in May. Do you think we're going to get another hike after that? Do they need to go to higher than five in terms of the target rate or is that going to be the ceiling? Well, man, I've been I've been talking to you about the fact

that I think that now they're in calibration mode. So I think it really depends on the data and also at now you have to think the financial stability situation going forward. Right, So if if in the environment where they hike to five percent and then they um, they get a string of okay, maybe we get point threes for example on CPI UM and then we get additional volatility in the banking sector, then then that's the situation

where the Fed may actually pause. But but I think that you know, cumulatively, they've obviously increased interest rates, you know, nearly nearly five percent UM, and you know that's quite a bit. And so I think at this point taking a pause and then saying, look, we're not going to be cutting anytime soon. And I think that's the important point that that J. Powell has to make is look, we're still fighting inflation even if we stop hiking interest rates.

That doesn't mean that we're immediately going to be cutting. There was at one point yesterday we were pricing for seventy five bases points of interest rate cuts this year, and so so first get those out of the market, and if you can get those out of the market, then I think that that, you know, policy might be calibrated appropriately. Right if we have to think about this, Matt point four percent annualize that it's four point eight percent.

That's exactly where basically where the Fed funds rate is going to be after they hike one more time, so they can say, hey, we're at you know, we're basically at a neutral Fed funds rate. Now we have to convince everyone that hey, we're not going to be cutting until that goes much lower. Is financial stability really still a problem? I mean, you know, SVB had an unbelievable rations mismatch, plus an incredibly uniform depositor base, and plus

now you know there's no limit to deposit insurance. It's whatever you have in any financial institution that's regulated. So is there any reason to think we have a financial stability problem? M Well, you do in so far as if people don't have um their own Uh, if they're not confident in their financial institution, they might still pull their deposits out right, and that's that's your typical bank run and that's basically what happened to SVB. But now

they can right, Fed's got your back. Well yeah so, but but keep in mind, like even during the financial crisis, the depositors rarely lose money in bank workouts, and I think that it's showing that the regulatory environment is working.

And the reason is is because now you have all these other capital layers below depositors, where you know, equity holders and bondholders and equity holders, all of those people you know will potentially lose a lot of money, if not all of their money in their investments in those institutions. But but to make the depositors whole, um, So you know, you go back and look at watching the mutual or INDIMAC.

You know, those are kind of some of the earlier banks that failed during the financial crisis, and even their depositors, um, even there's some of their large depositors, they were mostly made whole. So so keep in mind that when we talk about the deposit insurance being up there, it's not so much deposit insurance. The regulators and bank workouts always

try to make the depositors whole as much as they can. Um. It's that you're only guaranteed to do that up to the FDIC limit, right, so, um so you have to keep that in mind. But but I think that there is still a risk that people are you know, get nervous, and they want to pull their money out of some certain banks that maybe they're not so sure about that they'll be able to get their money in a timely fashion. I think that that's that still remains at risk today.

All Right, it's March madness. So I don't know how much free time I'm going to have here, But if I catch one soccer match over the next several days, which one is it? Uh? Yeah, you know, I hate to say this. I have not looked at the fixture list for this weekend. Um so that's resolutely horrible of me. Well, all right, we'll give us the third, give us the tense. Was something else going on? Yes, exactly, Rayal Central, New Jersey. Do I come down and catch a game? Yeah? Yeah,

we we have a we have a match. We're playing Philadelphia Soccer Club this weekend, and if we win we'll we'll move up the third place. We we had a cup game this weekend the unfortunately we lost one nil to a very good team from the Jersey Shore. But if yeah, if we win this game, we'll jump up into third place and have a shot at second. So we're trying to move up the table here Rayal Central, New Jersey. How about that? Kids, You can check that

out if you're in the area. IRA Jersey soccer club magnet as well as a interest rate strategist for Bloomberg Intelligence. He brings it all. We're gonna have more coming up. This is Bloomberg. There's still a little tech round table here. There's a lot of news there of course SVB. Then this morning we had the layoffs coming out of Meta, so lots to talk about. So we got a couple of our smart tech geeks joining us here in the

Bloomberg Inactive broker studio. Dan, I've senior equity annals at web Bush Securities, Mandeep saying, senior tech annals for Bloomberg Intelligence, both here in our studio here. Hey, Dan, let's start with just SVB, the fallout for the valley. Some of the tech companies I know you cover I know you're tight with all the folks in the valley and the venture capital stuff. What's how are you getting business done

day today? Look, they were the godfather of Silicon Valley banking, and I think that the impact here is going to be for I think many years to come in terms of the startups and for the tech world. So even though this has been ring fence in terms of the actual SVP the situation, I think it's really going to be a big change from a financing perspective. What's happened in the startup community. Well, do you think someone eventually

comes in and takes that role. I mean, one bank, you know, reclaims the mantle of Silicon Valley godfather in terms of you know, the Sandhill customers. I think in theory, but I just don't see that it's going to happen because right now, the risk, especially with so many of these companies burning cash, spending money is like nineteen eighties rock stars as VP has obviously been a sup a

black guy. And now what's going to happen is you're gonna see vcs that are gonna, of course be much more reliant in terms of from a funding perspective, and then a lot of the venture funding that they did, a lot of the venture financing that as Ab did. No big center money bank is going to do that a regional and that's going to be the issue now going forward. I think it's going to catalyze m Anda. I think Big Tax is going to accelerate that. And

clearly there's many on the outside looking in. I think that Hubris is now going to start to be over in terms of valuation haircuts. Talking about Hubris maybe coming out of the Valley Meta laying off ten thousand employees, Man Deep just will simply what does this mean for the investment and the pivot towards the metaverse for our good friends at Facebook. So so far, what they have said is they're focused on efficiencies in the core business.

They're not curtailing their ambitions on the metaverse side, although I think you can see how they are reducing their hiring for this year and they talked about you know, the open roles going away, So clearly there is focus on efficiencies. But my point over there is more around their R and D expense. They spend about thirty five billion dollars a year. Compare that to Apple and Microsoft's

R and D expense it's around twenty five billion. So why is Facebook or Meta spending more when their revenue base is like half or even you know, one fourth of Apple size. And I think that's where all the tech companies are looking at their fixed costs and saying, do we really need to spend that much? And I think Meta is clearly leading that. So Dan, what do

you think about that move? And it seems to me that Mark Zuckerberg at least is squaring himself up with investors who are worried about an interest rate regime that is here to stay, you know, higher rates for longer, and that name change came too soon because they might go back to Facebook because realistically, I think, you know, as Mandeep talked about, I mean, this is just a new world. And that's why Zuckerberg finally read the room.

That's why the stocks you know, more than doubled from bomb because they need to cut significant cause double down on social media. And you look at the metaverse strategy. When you look what they're investing, it's good money after bad and I think this is really it's a pivotable time for Zuckerberg. But clearly you see a new Zuckerberg in terms of how he's acting, especially on the cost side,

and that's why the stock wall streets rewarded. Yeah, and interesting, all right, I want to pivot to Uber and Lyft because there was an interesting story that I really found interesting. California says that these drivers are in fact gig workers an appeals court right back in Prop twenty two. Yeah, and to me, that's kind of existential to the entire business model. If you don't have that ruling, you don't have a company. A business MENTEEP talkers about kind of

what you learn there and what it means for these companies. Yeah. So look, if you are operating in the US as a gig economy company, this is huge because it's setting up a precedent where all these companies can operate with the current business model. They don't have to do anything in terms of changing their cost structure, and we've seen

with Uber they are clearly showing operating leverage. So to me, this is a positive sign that the scale players in this business, your Uber and door Dash will likely benefit more simply because they have that organic driver supply growth, which is what you need for driving top line. And if the cost structure isn't changing. I think the incremental margin will be much higher than it was before. What do you think about those companies, Dan, Look, I think

Uber it's a winner. Take Off, I mean, right now, Lift, I go back, that was probably the worst common it's called top three that I've heard in twenty two years. They're the little brother Uber and right now, I mean they just have an ever psych uphill battle competing in an environment where it's no more free money. So I'm looking at just the A and R page Dan, under your bio for your recommendations, you've got a neutral on Lift and outperform on Uber. So you're not just saying

to buy this rat ride sharing thing. You're saying you need to be selective. Oh yeah, I think Uber is the way to play it. I mean Lift right now, I mean that feels like sort of jump in front of a train relative to what's happening in that business.

And it feels like the management team doggate the homework next time as the weather, maybe they could blame you know, traffic, and then that's been the problem in terms of just no comfort in terms of this management team, the way they navigate, and you mentioned the rates environment, right, man, Deep, this rates environment seems to be something that texeos are waking up to. Mark Zuckerberg says, I think we should

this is a direct quote. I think we should prepare ourselves for the possibility that this new economic reality will continue for many years. Hello. Yeah, Well look, I think all these are long duration of stocks. So when you think about, you know, the terminal value of these businesses, you have to discount them at the rate where VR right now. And that's where you will never see software or an internet company trading at forty fifty times sales anymore.

And I think that's the realization everyone is having that there is a cap in terms of the multiple these companies can trade at all. Right, let's pivot to digital advertising. I'm thinking meta, you know, all that kind of stuff Google, Where are we in that trend? Man, Deep? Because I mean, you know, when I was covering these stocks, they were going nothing but up. So I don't know what you

guys are doing. And that's because I had this secular twenty percent growth story in digital ad spending and I don't know where it was coming from, radio, TV, wherever? Where what's the story there? Now? Look, there will always be a secular kind of transition from linear TV to the digital app platforms, and that trend is intact. I think with connected TV you're probably going to see some

more tailwinds. The problem with digital ad businesses it's discretion or even you compare it to a software business where you still have to, you know, keep your business running and you require that software. On the other hand, ads can be shut on and off. And right now we're in an environment where businesses are focused on costs and

the easiest thing to cut is your ad spend. So I do think this is going to last a while, but we will rebound and the cyclical aspect will come into play, you know, once we are in a lower rate and a better economic growth environment. How concerned are you Dan about that? I mean, look, I think you're seeing just the digital advertising headwinds, the Appleios privacy issues. If continue to sort of be there slow an economy, I do think a lot of bad news been baked in.

That's where a lot of these stocks are bouncing, you know, And I think now you're starting to see the cut, so we's now you're preserved in the bottom line in this environment. That's why tech stocks are rallying, and even now the SVP, you know, Fed's basically handcuffed. That feels like that's gonna be positive in terms of what we're seeing on hikes four attack and that's sort of this dynamic that's pointing out with this sort of tago war

Fed's handcuffed. Yeah, I mean, this is exactly what I was thinking on Sunday after the bailout, really on Friday after the bank was taken it seemed like this is this is something that's something that broke that we were waiting for, and now they're done. But the question is does that continue, especially if we keep getting you know, half percent month over month core inflation increases. Yeah, I

don't know, I'm i'm supplies. We haven't seen just smart experience back in a great financial crisis that we didn't go to bed Sunday night with announcement that x y Z Bank had bought SVB, and we haven't seen a huge surprise. And we heard a member of Congress tell Joe Matthew on sound On that there was an offer, but the regulators rejected it. Have you heard that too, Dan, Yean look, And I think that was just something where the last thing warned was the contague and they need

to ring fence. And yep, all right, guys, good stuff. Thanks so much for coming in to the studio here today talking all things tech. We love doing that. Dan, I've senior equity annalys at web Bush Securities and Man Deep Seeing he's a senior technology annals at Bloomberg in intelligence. Both in our study here talking all things tech, SVB seems to have been as Dan was just suggesting, perhaps ring fence a little bit in terms of that risk.

That's what the market's kind of telling you here. The SMP up one point eight percent, and I said yesterday, Matt, I thought we'd have a two percent to move up in the market yesterday. But I guess people didn't want to get in front of that CPI print today. But they're certainly coming in with both feet right now. You know, you pick a look at today's CPI print and you could say you can make the argument that Fen's got

some more work to do there. But if you're the you gotta recognize we've got some bank instability in the system here. What are you supposed to do? Let's check in with a real expert on some of these issues that can maybe give us some headway here. Chevine Yeltakindane at the University of Rochester Business School joins us. Cheven,

thank you, Chevine, thank you so much for joining us here. Again, what do you think our Federal Reserve does because they have a balancing act visa v inflation and what's happening in the banking system. Oh? Absolutely, Hi. Their job just got a lot harder over the last week, for sure, when we were just waiting for the kind of the unemployment report and the inflation numbers this week and last week, SVBS collapsed along with its signature bank. This has now

become a lot harder. And because we see some of the repercussions of banks or certain types of institutions not taking into account interest rate risk, they're gonna have to ounce is very very tightly. It's a tight rope. So, uh should mean Matt Miller here? Um, I wonder if you think the Fed made the right move along with the other regulators involved and the Treasury in terms of bailing out the depositors of this bank. It wasn't like, you know, uh, mom and pop. This wasn't Joe Plummer

in the Midwest. These were you know, the wealthiest people from from Sandhill Road and tech startups. You know, kids who are going to work at places with ping pong tables in the cafeteria. So you know, was it necessary and does it create moral hazard? Oh? It absolutely creates moral hazard because you know, every time you come exposed after the damage in Bindom to create more insurances than you know, not bailing out the bank, but bailing out

the depositors, it certainly creates moral hazard. But what's interesting about this are two things that one of which you've mentioned. One of them is that this is not your regular kind of retail deposit bank very much. So we have these very very large deposits in this bank from a very concentrated industry base, mostly the tech sectors, some of

which is encrypto as we so uc DC. And at the same time, you know, this was whereas it was the sixteenth largest bank in the United States, it certainly wasn't large enough to also get the scrutiny it needs in terms of naging its risk. So did they do

the right policy? I would have liked to have had heard from the FED and FDIC that they will be guaranteeing the deposits of not just these two banks, but all banking, you know, throughout the banking sector, because what is now going to still be on the minds of any depositor within higher than two hundred and fifty k deposit is well, is my bank safe? I mean I've just received any emails from my own bank saying we're safe,

you know, don't take out your deposits. I mean, not exactly those words, but but well, you don't have to worry now, I mean, didn't the FED implicitly say we got your back, don't worry about the insurance level. I mean, that's a joke. Carson Block from Muddy Waters said, you know, corporate depositors should be expected to manage their counterparty risk, but bailing out uninsured depositors SVB, which are mostly corporates, further infantilizes markets by sending the message that such risk

management is anachronistic. Wow. Yes, I don't disagree with you. I mean I do think that you know, this wasn't something completely unexpected. Yes, we've seen an increased, uh you know, quick increase and interest rates over the last year. But for anybody who's who who is in risk management in terms of understanding the maturity structure. This is not a liquidity issue. You can think about the FED coming in

and providing some liquid This is an insolvent bank. They manage their assets very badly compared to especially the kind of deposits that they were getting very short termed very large deposit. And we still don't know what else is on their books. You know, we know about the Treasury bonds and we know that they sold those that are lost, but we have no idea about the other loans and investments that they have made. Huge, huge issue for the FED going forward, and the amount of FED backup that's

being provided as well. I mean that's very small compared to the amount of uninsured deposits in the economy. So you know, whether it's a joke or not, it doesn't feel a little bit like cheap talk. I agree. Hey, Chevin, the last time we spoke to you, you it was in our studios here in New York City and you were, I believe, on your way to your native Turkey for a visit. And there's a country and there's a people that have had such incredible challenges thrown their way, most

recently in terms of the earthquakes. What did you find what was your beings over there? Oh, it's it's even more devastating on the ground. I didn't go exactly to the area where where the earthquake happened, but I was in Istanbul in the northwest part of the country. But um, you know, it's in the news all day long, and the devastation. We have an election coming up in May, that's of course, you know, combined with the devastation, and it's just completely rattled all the markets. I mean, the

Turkish vera continues to lose its um. You know, it's a value there isn't you know. There's a scrambling of kind of the government trying to provide some sort of aid both in kind as well as in monetary aid to those affected by the by the earthquake. But this is going to also of course provide you know, give up huge burden, just just deliver a huge burden on the government and on the taxpayers. At the end of

the day, it's a very devastating situation. It's going to take a very long time to get from underneath it. To be honest, what is the expectation when this as this election comes up, because again, as you mentioned, it'll be a referendum on maybe how the government dealt with all these challenges and maybe who's best prepared to deal with them going forward. What's the expectations or what did you experience when you were into in Turkey. Well, that

was the interesting thing when I was there. You know, there's an there isn't really a single opposition party that's strong enough to be able to provide an alternative single handedly, individual alternative to the AKP, the reigning party, but there had been a coalition of six parties coming together to unite and to provide an alternative at the ballot box.

That coalition actually fell apart while I was there, so I was staying up really late listening to all the news and listening to all the political commentary that was happening. They tried to sort of reinstitute it a little bit as I was leaving the country, but it's very very fragile, and unfortunately, I think that has strengthened the position of AKAP despite their mishandling of the of the all right, vine,

thank you so much. I really appreciate getting your thoughts on obviously the economic issues that we love discussing with you, the business issues, but also just kind of getting your experiences from your recent trip to your native Turkey. We've all seen the devastated devastation there. Chevin Yeltikin. She is the dean at the University of Rochester, a business school. Just an extraordinary background, undergrad at Wellesley, PhD in economics

from Stanford. So she knows herself, and that's why we like to talk to smart people like that. Yeah, absolutely, I mean she, I'm sure knows a lot of the people who were involved in SVB because that's where they banked. You know, Stanford grads get out of school if they're fortunate enough, if that, the US lets them stay and work here. They start businesses that hire people, but they get their banking or they got it at SVB. All right,

we're gonna have more coming up. This is Bloomberg, Chris Whaling. He's a chairman of the Whaling Global Advisors. He joins us here. Hey, Chris, we don't see a bank run very often. What did she take from the news on Friday with SBB. It was a disaster of bad risk management by the bank. They were loading up on mortgage backed securities in anticipation of a FED pivot that they were early and they had been doing this three years. They had an outsized position and needs securities, and then

they fed, you know, added to the problem. The real issue I think we have to deal with. And you know, the crisis is not over, guys. There's stuff going on in the background. I can't even talk about that is really mind numbing. But you know, the FED created securities in twenty twenty and twenty one that you cannot hedge. The hedge is twice the coupon or more. So tell me again, and why do we want to own these securities?

The FED should have bought them all. I swear the FED should have bought every single security from that period and just hold on to it because it is unfair. Well, they will lend you know against them now you can get for collateral. Does that make any sense to you, Chris, because I kind of want to buy SVP and then load up on a whole bunch of crappy bonds that are only training at seventy five cents on the dollar and then use them as collateral for sweet loans. No,

but remember these aren't crappy bonds. These are triple A rated securities with a zero risk way under Bonsle. But the market risk because the coupons are so low is astronomical. You can't even measure it. So if I finance collateral like this today, I'm going to hair cut it the market value I have to. So, Chris, do you feel like this SVB issue, I'll even go out The signature bank as well, is kind of ring fenced, if you will. Or do you think there's no more risk out there

in the banking system. Well, it was nice to see First Republic rally. I think all their clients and advisers came in about the stock this morning. I'm not really worried about the bank. You notice Jamie came in and supported them too, Dat Morgan. Yeah, because First Republic is a big issuer of non QM mortgages. Guess who's the leader in that space, Chase. Guess who's the biggest work warehouse lender in that space, Chase. So you know, everything

has a reason. But I'm very worried about smaller banks, and by small I mean triple digits, okay, I mean large regionals, because they are being forced to do things to hold on to uninsured deposits that I think are untenable. I think within a matter of days, if not a week or so, we're gonna have another bank in big troubles. Are there still uninsured deposits? I thought the implicit message from the regulators was so there, you are covered, and they had to make a systemic risk exception when they

passed Odd Frank the tactic did Sheila Bear use. Remember she extended coverage to all of the transaction accounts. Because when Treasury guaranteed the money market funds, the banks are losing their money. They're all going into the guaranteed assets. So we have the same problem today. I think it's a matter of prudence. We should extend the blanket. They should go to Congress ask them to act now, or maybe we'll have a systemic risk exception for everybody. But

you know, we still have a problem. I think the Fed should drop rates fifty bits, and I think they should open the discount window, very similar to what they did with the collateral, and say, if you want to sell us that bond back, we'll take it at car and we'll hold it until you want it back. But okay,

but they're they're unlikely to do that right now. Chris, what does that mean in terms of those other regional banks with triple digit deposit bases, triple digit billions and deposits are they Are we going to see more bank runs you think in the next couple weeks. Yes, because look at what happened with Signature. Signature is different than Silicon Valley. Silicon Valley was just a management mistake, Frankly, and the regulators took their eye off the ball. Why

do you think Janet Yellen was on TV Sunday. She didn't have a plan, but she was worried about the blowback on the FED and her former colleagues at San Francisco, and they dropped the ball. They didn't even look at the data. It was right there. So what's going to happen is that small, mid sized banks are going to be under attack, especially if they're public. The shorts are going to come after them. They have the list, right, and I think that the bankers are going to try

and hold on to their deposits. But if they start going down as we saw the Signature right, they lost twenty percent of deposits in three quarters. A bank can't do that, you know. We spoke Christie, We spoke at Barney Frank yesterday which I thought it was a very interesting conversation. He said a number of things that I found fascinating. Number One, he said Dignature was not insolvent, they were singled out because of their work with crypto.

Number two, he said he didn't have any problem with the twenty eighteen amendments that died Frank, there's no reason that they need extra scrutiny. And number three, he didn't think that we needed really any more bank regulation. I know, well, he's right about regulation. If we're not going to enforce the rules and review the numbers that thanks provide us, then why do we need more regulation? Right? I mean, seriously, guys,

it's right in the data. You can see forty percent of total assets mortgage backed securities, and you know that

they can't hedge those securities. But the problem is the folks at the Board of Governors who took over bank supervision after two thousand and eight, they basically took it away from the reserve banks, so they have no connection with the markets, and they're sitting there looking at their data and they don't realize that this whole class of securities for really two years during COVID are toxic waste. It might as well be subprime mortgages. You know what

I'm saying. Even though it has a triple A rating and the people have a hard time with it. They say, Chris, this is a treasury bond, but why shouldn't I buy it? So Chris is the next bank to go. You know, if I screen on the Bloomberg and look for other banks that have such a huge hold to maturity portfolio, I don't see anything that looks like as bad a mismatches. Look at the funding match, look for banks that have large blocks of uninsured deposits tied to commercial customers. You see,

let me give you some context here. You guys always helved this sim bloom book less ten years of FED benevolence at low interest rates allow of a lot of business models to flourish. Business models that might not have done well in a less hospitable environment. Sill a convalidate signature, because remember, these guys compete with big banks. The big banks are right there, and so they were able to

carve out niches for themselves. But I think we're going into a much less friendly environment now, and I think you're going to see big time consolidation. I expect to see a number of banks get bought to avoid being taken down by the fdi C. So I'm still unclear why the regulators or how the regulators missed this. That seems to be the most immediate issue. You know, we're

all human, we're all conflicted agents. It's like my friends in the ratings world, you know, S ANDP acted today they downgraded the banks across the board and said, hey, we have a problem. But the whole industry should have downgraded every rating they had after quantitative easing was over. You know, when you move five hundred basis points, think about what that means in terms of ratings. Okay, five hundred basis points is barely investment grade. So if you

subject that you know stress tests. Remember the FED does dress tests, but they don't understand bonds. And you said, Bloomberg do You're the best shop in the world of media, So think about stressing a portfolio of Jinny May security six hundred basis points. Guys, let's see answer. The answer is you're insolvent. Okay, right, yeah, any first year bank you associate notices Barney Frank would know that he's a smart guy. All right, safe, but you know we have

to do the work. Yep, I got it. Hey, Chris, we gotta go for time. But thanks so much for joining us. We really appreciate getting your thoughts clearly non consensus from my I hope we can get you back on again soon as well. Absolutely, Chris Whalend, chairman of the Whale and Global Advices, let's dive in here because we got a better reserve meeting February twenty second. That he's gonna be very interesting. And I'm glad I'm not fed Chairman j Pal because he's kind of got, you know,

a balancing act here. So let's check you with Jeff Cleveland Jeffrey Cleveland as a director in chief econdoms of paid in Regal. So, Jeff, Jeffrey, I'm gonna put you in the hot seat. You're fed Chairman j Pal next week on the twenty second. What do you do and why I don't want the job? You can keep the job where I am. That's a tough that's a tough call. I guess I think given the current situation, it'd be prudent to pause here, just let the dust settle. I mean,

I think you could. One of the reasons we have. The financial instability is due to the last twelve months and the rate hikes that have been put into the system, so maybe it would be prudent just to take a

step back. The problem with that is inflation. So when I you know, I looked at that report this morning, point five percent month to month for the core CPI, and you know, I'd love to look at this median CPI that the Cleveland Fed tabulates later in the morning, and that thing for the month of February came in even hotter. Right, That thing is point six percent month to month after a point seven percent month a month rating the prior month on a year on year basis.

I think that's a record high for the series seven point two percent year on year for the median price change. So that tells me there is a lot of underlying inflation. It's just way too hot, So I think the Fed has to address that as well. So maybe he's doing the best he can here. He's going to use the battle sheet to address the financial stability, and he's going to use the policy rate to keep badding away at inflation and try to get inflation back under control. But

it's a tricky situation. Well, when we're talking about bringing inflation back to control. I feels like one of the arguments here is that in the here and now, financial stability matters more than price stability for kind of the average consumer. And I wonder that for those folks who are saying that's the trade off you kind of have to make for this FED decision, to what extent does that imply that at the next meeting they have to

be even more hawkish? I think that's it's tricky. I mean, I still get friends and family and colleagues and clients even that say to me, you know, um, that the bigger problem is inflation. You know that that's what they're really feeling in terms of what's eating into their their income with they're facing you know, in terms of energy costs or at the at the gas pumps. So I don't know, I think there could be a healthy debate over, um, what's the what is the primary concern? I do think though,

at the end of the day, a central bank. What is the job of a central bank? I mean, first and foremost, it's it's the banker's bank, right, It's to keep the financial system healthy. So they do have to take to take that into account. But these I think these two are at odds is I guess what I'm trying to express, Um, if you want to rein in inflation, then you need to continue to bike and that will continue to send us down this road work. There will

probably be other institutions that get into trouble. Maybe this is just the beginning of that phase here. This is a sort of August of two thousand and seven m type period, and then there will be more, There'll be more volatility. Ed Jeff, Well, we don't hear much about, I guess recently. Maybe it's just because we're dealing with a good old fashioned bank run. Is the economy in just terms of recession, where are you right now? And

kind of your recession call for the US economy? Well, all the day that we saw, you know, up until the middle of last week, was pointing towards the no landing scenario. So you know, you had very pretty strong GDP tracking for the first quarter. It's drawn consumer spending the last couple of months. You have inflation that's still elevated. You have the unemployment rate that's you know, flirting with a fifty year low. And we saw that jobs report

on Friday more than three hundred thousand jobs. So as far as the data that we have to date, it's it's holding up really well. And for us, the probability of a recession in twenty twenty three was had fallen. We thought we would get through the year without one. Once you start to see financial concerns, when financial conditions start to tighten, um, then we get a bit more concerned. But as you've seen, you know this Morchine, this can

change day by day. So actually financial conditions have eased to today, so well, I think we're just we're just have to sit back and wait here. There's you know, seven more days and eight more days until the FED meetings build black and transpire. Yeah, five training sessions exactly. And I have to ask in the next five training sessions, what could be the game changer for the FED? Or is everything in the bare view mirror here? I think the key thing is that it is the containing contained um.

Do we get do we get improvement? Um? On that front? So you've seen that. I think with bank stocks that gives you a little sign of where the market is thinking about the risks around financial stability. So you need to we need to see some more signs that maybe this is contained. It's a it's a one off, it's an isolated type event. It's not going to be as a systemic issue. We'll see. I got to push back

on that. Are they contained though? Are they stable? Given that around all, we're looking at rallies of say forty fifty percent in one stock. That's not normal even for a regional bank. Yeah. You made a great point earlier though about and we highlighted this in our quarterly for the fourth quarter that came out, just the liquidity issues in the financial system, at least with regard to treasuries

liquidity and the bond market in general. I do think you're libel or you're vulnerable to some pretty sharp air pockets, if you will. There a sharp movements and security prices just given the structure of the marketplace. I think you're quoting Ira Jersey, just looking at the size of the bond market relative to the dealer system that has to intermediate all those transactions, you get big movements and prices.

I think you know that could that could continue? Jeff, what's your GDPU call going out like this year and next year? You know, maybe there is a little recession in there. But what's the call for you guys? Right now we have point six percent real GDP Q four to Q four for twenty twenty three, and we do think it's prudent to think about a recession. So a contraction in GDP in twenty twenty four, what does that look like right now? Somewhere around half percent maybe to

a percentage point. So uh, that's more of a garden variety downturn that you might have seen in the post war era. But that's our that's our current thinking. Like I said, though, the first the data out to start the first order, it was tracking much better than that. So, um, you know, we were we were off to a good start and we hit we stumbled here and we'll have to see how, you know, the next few weeks transpire. Jeff, and I know you're you're based in the LA area.

Have you heard from any of the regional banks in the southern California area about their position, their condition, their concern because it seems like, you know, some of the West Coast banks with some exposure obviously the Silicon Valley in the VC community were the ones that were both at risk. You know, I was in La over the weekend and then I flew to DC on Sunday, and

it was interesting the contrast between the two coasts. So, you know, contacts on the West Coast were very concerned about the banking system, but also about the prospects for a pretty severe downturn. As you know, many startups fail and layoffs pick up on the West Coast and then the unemployment rate rises, so much more concern about the you know, the health of the economy and the banking system on the West Coast. Then when I got to to DC on Sunday and now I'm in London, so

I don't know. I guess I'll find out tomorrow what the view is here. Actually there's an interesting comparison here. I think that's worth thinking about. The Bank of England face some financial stability issues in the guilt market last fall, as you well know, and they dealt they chose a delt deal with that with a temporary program and they kept they maintain the pressure on the overnight rate to

deal with the inflation problem here. So similar path maybe will be pursued by the Fed where they will you know, they're very attentive. They don't want to financial crisis They don't mind if the unemployment rate rises because I think the inflation will come down, but they don't want to financial crisis, so they can deal with that with the balance sheet and then try to conduct their inflation control campaign with the overnight rate. So all right, Well, enjoy London,

have a good time there. Jeffrey Cleveland, director and chief Economists Payton, and Regaled Elam, President and CEO of the National Bankers Association, joins us. Nicole. Thanks so much for taking the time here help us put into perspective what we've seen with some of these regional banks over the last several days. How concerned are you that this is systemic for some regional banks or it's really kind of ring fenced to a handful of names. Yeah, so, so

thank you for having me today. We are seeing three big ways that it's impacting us and that I imagine will continue. The first is impacting customers. There is certainly a deposit flight as customers are moving their deposits and really their banking relationships to big Wall Street banks that are now being perceived as too big to fail post two thousand and eight. We're also paying attention to its impact on regulators We certainly applaud this administration and regulators

for being swift in their response. But one thing that we know is that this facility is going to need to be paid for, and is it going to be paid off of the back of small community banks, particularly those banks who have asset sizes under three billion dollars? Are they going to be the ones that are now having to bail it out. We also know that the Hill and regulators are responding with new regulations and new

and new legislation. And typically when you have something like this that happens, there's this one size fits all approach that can be really burdensome on minority and community banks. And so I think you're going to continue to see deposit flight to Wall Street banks that are too big to fail. You're going to continue to see regulators maybe take as well as policymakers on the Hill continue you to maybe think about a one size fits all approach

and how they address this. Well put this into some perspective for us, because my understanding was to your point of who's going to pay for this, is that the fund already exists with the FED slash the FDIC, a fund that banks large and small contribute to based upon the amount of risk taking they do. So aren't the funds already allocated for that? The funds are there, but when something like this happens, there is you do have

the right to have what's called a special assessment. And I think how exactly that special assessments is going to be done is going to be is going to be a challenge. That's something that is still being talked about and discussed. So, Nicole, do you believe or in the National Bankers Association believe that Dodd Franks should be kind of applied to not just the large banks, the too

big to fail, but to regional banks as well. You know that this idea of keeping the a banking system safe is something that is important regardless of your asset size, whether you're a small bank or a Wall Street bank, that sentiment of keeping the financial system safe is something that is important. I think, whether it's Dot Frank or just in general, regulations that tend to be responsive to

something like as cosmic as this. What tends to happen is that you don't have regulations that take into considerations the uniqueness of these small banks, right, so you have regulations that may have capital requirements that don't fit the capital requirement needs of a small bank. And so what tends to happen is that while increased regulations may be needed for all, you cannot have a one size fits

all approach. And I think oftentimes that's what you tend to see as a one size fits all approach that can be unfairly burdensome on small banks and Nichole some critics are some observers of the banking industry say, hey, it just needs to have better enforcement of what's already there. I mean, I could have looked at svb's balance sheet and noted the mismatch between their deposits and the duration

of their investments. What happened? Do you think it's very interesting because it is, Uh, they did have a rapid growth non traditional model that you know, you would not have thought that that would have it would have it would have passed the stress tests. And so I do think it causes you to wonder, Um, were they not paying attention? Was this for the sake of we want

to be innovative? Um? What was going on here? But one would one would have seen if you're growing three fifteen percent in the last two years how are you passing these stress tests? Um, and that's a that's a problem because it's not the creation of something new, it's,

as you noted, there was already something there. Well in terms of those stress tests, I have to ask a lot of people are saying, look, a lot of these kind of investment Uh see, sweet folks had said, had not properly hedged the duration risks that they were taking on. Is there a market angle to this were these Was there a way that this could have been prevented from

the folks who are making these investment decisions. Yeah. So I think what it really goes to show is that Silicon Valley and Signature Bank have a model that is

not reflective of most banks in the country. It is very much a rapid growth, non traditional model that has unstable deposit basis and so the challenges they had high concentrations of VC tech startups and crypto and when you have all of those things happening at the same time, and including uninsured deposits, which ninety eight percent of my banks have MBI deposit accounts that are that are ensured. So when you have all of those things happening at

the same time, it's a challenge. I think part of the issue is is that there are only but a handful of crypto banks, right. Crypto is something that there's lots of debate about, but most could say that it not regulated. And so when you have something like crypto, it's also reminiscent to me of marijuana banking. Right. When you have these types of industries where they're not as regulated and so it ends up being consolidated into a

couple of banks, it becomes very, very risky. Nicole. Do you expect, or a National Bankers Association expect more failures from regional banks in the coming weeks and months. I don't know that I would expect more failures. I think we made it through the pandemic where you didn't see a decline that you saw post two thousand and eight crisis, where you saw a decline in regional banks and particularly community banks. Not so much regional banks, but you saw

a decline in these community banks. You did not see this post the pandemic. I think this was the exception and not the rule. Again, given the fact that these were banks that are not reflective of most banks in the country, that's what led to their failure and so I don't think that you'll continue to see that, all right, Nicole, thank you so much for joining us. Really appreciate getting your perspective here during this time of uncertainty around the

regional bank business. Nicole Elam, President and CEO of the National Bankers Association, joining the SERACS based down in Washington, d C. 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 I'm Faull Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio