The Fed, Markets, And Cybersecurity (Podcast)

Bloomberg News. Steve, I want to start with this balance sheet thing. It's June one. People are telling me this is an important day. The Fed's gonna been shrinking the balance sheet. How did they do that? What does it

mean and what should we be looking out for? So, yes, today is the official start of QT, or quantitative tightening, and UH, the Fed basically since UH, since COVID happened, started increasing the size of the balance sheet by buying treasuries, securities and mortgage backed securities and essentially doubled the size of the balance sheet to nine trillion dollars. And now they've realized that all of this money slashing around in the system. Plus low interest rates has created inflation and

they've got to get that under control. So they're cutting the size of the balance sheet by about a trillion dollars a year. And they're not selling assets, but as the assets mature, as treasury bills or treasury notes uh come do, or mortgage back securities when they mature, they are not reinvesting the money that matures, and by that, by that means they will gradually shrink the balance sheet.

Thank goodness, they were buying mortgage bonds for the past couple of years because I was able to get my house at only twice what it costs the last time it's sold. You know, Yeah, that that's right, super healthful. They may have overdone it a little bit on the housing side, and in fact, that is one of the big debates at the FED right now is what to do with all of the mortgage backed securities because they're not maturing. I mean, these mortgage backed securities are you know,

ten years, thirty years? Uh. You know, people don't when you sell your house, the MBS that's associated with it, well, the mortgage is paid off, but people don't sell their houses that frequently. So getting down getting rid of the MBS on their balance sheet. It's going to take a long time, which is why they're thinking about selling mbs as well. It's crazy that they even thought it was necessary at the time, like when we get into the pandemic that they say, we better make sure that people

can and buy houses. I mean they already had houses. I mean the house market. There was a great deal of fear you had, you know, you had the unemployment rate went up to around that there were predictions that it could go to I mean Jim Bullard was saying, you could have just historically high unemployment. The whole economy

was shutdown, there were problems with the financial system. So I think that you know, they get a pass for their initial response, but where you can criticize them fairly is they were not very fast and in realizing Okay, things have changed now and they need to start and now the White House reality and now the White House wants us to believe that they're solely responsible for inflation. This is fascinating. The last couple of days we've seen President by and really passed the book um a couple

on a couple of occasions. Now he's saying like you fix it right, Well, is the FED really the only body in the US that has anything to do with prices and price stability? I mean, did the influx of trillions of dollars in fiscal spending not have anything to do with it? Clearly the fiscal spending, fiscal and regulatory policy feed into inflation and what's happening. You know, a lot of what has happened was initially out of the

FEDS control. However, the fair point is from the FED standpoint is they accepted, they accept the idea that the central bank is responsible for inflation, maybe not in the very short term, but in the medium and long term. And you know, they think that's right that you know, it's their job to have price stability. You know, it's in the law. They have the tools to bring that about. They are supposed to look at what's happening with fiscal policy and you know, make a judgment of how that's

going to feed into inflation. And they got that wrong. So, I mean, they take responsibility for kind of screwing it up. And it was interesting to hear Janet Yellow. That's why I want to go what she's saying. She was wrong about inflation. Does that mean the FED also believes it was wrong about inflation. What do you take away from the admitted it already, she was just a little bit late to the party. Yeah, Powell has said that in

so many words. He has not said that, perhaps with the clarity of Janet Yell and saying, hey, we just we just blew it, but he has said that in so many words that they totally missed the boat. And you know that's why we're recovering so quickly now to do these fifty basis points hikes which are going to

happen in June and July and maybe in September as well. Yeah, if you if you believe Waller, every single meeting until they get inflation back down to the FEDS two percent level, right well, until they see clear and convincing evidence, is what Powell said, uh, the other day. So you know, the real debate at the FOMC right now is on September. It's pretty well locked in that we're gonna get a

half point increase in June and July. And you know, you've had Waller come out basically endorsing fifty basis points for September. But the flip side is you have like Raffael Bostick, the Atlanta head FED head saying maybe we'll pause. Then that's what the markets liked earlier in the week, all right. Steve Matthews, US economy reporter for Bloomberg News. He is based on in Atlantic. With him, we could do a whole show with him, and he covers everything.

He's been doing it for a long time, and uh, he knows what's going on, so we love getting a few minutes of his time. He got the FED rolling off this balance sheet coming into this year and reading a lot of preview notes for one of the themes was volatility. Get ready and get comfortable with volatility. Employ where they right. And that applies to today because just earlier this morning, that's he was up thirty thirty two

points an hour down twenty eight points. I don't know why I'm looking at my Bloomberg terminal, but maybe Jess Metton, she joins us here in our Bloomberg radio studio, maybe she can tell she's a Bloomberg Markets reporter. Jes, I know things are moving around here. We saw the yields pop up. I mean, what have you seen in the equity trading this morning? And maybe over the last week

or so. A big thing is yields again and having them spike, and a lot of it has to do with investors recalibrating and pricing in potentially more aggressive moves

after the next two Federal Reserve meetings. Jerome Palell FED chair had signaled that there would be two fifty basis point moves at the next two meetings, but investors were hopeful, especially because a number of FED speakers have come out recently suggesting that potentially they could maybe debate whether there could be a pause in reason rates, especially since now

we have the FED balance sheet runoff starting today. But now because a lot of these inflation indicators still very elevated, and even outside of the US looking at what's happening in your up that's causing those concerns that central banks potentially have to be even more aggressive, And now we're seeing them trying to bake in potentially bigger reed hikes coming up after those two meetings. So we also have today's the first day of reducing the balance sheet, and

are we going to feel the effects immediately? I mean, obviously we're seeing a jump in rates right now, but that's unlikely that all of us. It kicked in at like ten nine, right, But are we going to start um hearing about this right away? Our market participants gonna say there's no liquidity and great question. And this has been telegraphed so much, and FEED chair Jerome Palace tried to be careful with his language and FED speakers in

recent months, just signaling that this would be coming. So investors have known for months now and a lot of it potentially has some of it been priced in, But there's not a ton of historical precedents to go on because if you remember did the last time we were going through this, the FED was much more patient and caution is during that time period, even when it first began started trying to raise raids after the financial crisis in the December of fifteen, and then obviously a couple

of years later once we got to that's when the FED eventually started their balance shoot runoff. And as you know, in the fall of that's when there was obviously less liquidity in the system, and there was a big bout of volatility that we saw in with the SMP five hundred teetering on the brink of a correction that December. But the FED did reverse course and stopped hiking rates, and then eventually six months later they began cutting rates.

But it's tough to see if that could even be the case this time around, just given how high inflation is right now, and so that doesn't really give investors conviction that you would see in about phase like that with a central bank. You know, you look at the SMP, the chart of the SMP, We're beginning June right where it started May. Why did we go through all of that rigamarole of the month of May when we're back

to the same place we were before. That's volatility we are, and it's it's if a lot of the seasonality indicators. If you think of, say, for instance, April historically supposed to be a strong month was not for the SMP five hundred. You look at May sell the main go away that did not follow the case, and June historically that June swoon that actually hasn't been the case over

the past decades. So you look at some of these seasonality indicators, it's almost as if they haven't followed the pattern. But one of the key things is when I talk to strategist, they always bring up the midterm election years.

So if you look at that seasonality indicator, we are actually following that and the second quarter is typically the weakest on average, so LPL Financial Crunch the numbers going back to nineteen fifty and on average, the second quarter usually has a drop of about a little over two percent for the SMP five hundred in June is the weakest month in the in the midterm election years and in the presidential cycle. So in that case it could

potentially not vote that well for equity markets. But again, the SMP five hundreds off to its worst start two years since nineteen seventies, so so it's because it's dropped so much that could potentially give it some room to move higher. But it's tricky to see, especially now that we have that balance sheet run off star if that's going to ignite another jolt of volatility and market? Do you use S E A G. The Bloomberg terminal it's called the seasonality chart? Is so cool to use? What

is it that well? Put in any index or any stock? So I have the SMPN and then you type s E A G go and the pro tip is on the toolbar you click heat map instead of line. Okay, got it here right there, you go heat map and then you can see the seasonality. You could bring it out like twenty years and it just tells you like historically this is a good month or a bad month. Long have you been in Bloomberg two years? Just the I mean you are the function I well two years.

I love this machine. Um no, So I just think it's a fascinating tool. Now in terms of um, you know,

bottoms up analysis. We thought that there was gonna be that that that profits we're gonna continue, that margins were gonna stay wide, that things were gonna still be awesome this year, and um now it looks like analysts are bringing down their expectations of awesomeness due to inflation, right they are, so Bloomberg Intelligence crunch these numbers and the Ford earnings per share forecast revisions for the SMP five hundred are trending lower for each quarter until three now.

And especially that has a lot to do with what's happening with margin pressures and really tied to inflation. And and Gina Martin Adams her team at Bloomberg Intelligence, they crunched the inflation discussions in earnings calls for the first quarter in those discussions for on inflation. They continue to rise in those calls more than five mentions on average, and they increased more than from the fourth quarter and over twenty three times from their loan the first three

months of one optimistic sign. Supply chain concerns did ease for a second quarter, however, they still remained ninety percent higher from a year ago. So those are two issues that companies are still battling, and especially depending on the types of companies that we've had, when you're looking at retailers, not necessarily all equal. Right now, you had Target Walmart in ending up lowering their profit forecast for the year, But then you had Macy's come in and raised their

sales guidance. And then you had on the discount retailers General A Dollar General and Dollar Tree also doing much better than expected. And then you have Williams Sonoma that ended up doing much better than expected. So depending on where you are in the retail space and in looking at that discretionary companies, it's it hasn't necessarily been equal, and some of the higher end has held up a bit better than on the lower end. All right, So before you got to Bloomberg News, you were at USA

Today Wall Street Journal. Before that, she was an Aggie and M now Texas A and M is in College Station, Texas. I've never been, and there's a reasonable likelihood that I will never get the College Station. In thirty seconds, tell me abou college Station, Texas. So it's a great place. It's in College Station, Texas, obviously, and it's a school that has more than fifty students, so you're in a small town, but there's more than fifty thou And I mean,

it's been a while since I graduated. I was a class of two thousand tents, so I've been out for a while though. But it's one of those definitely tradition based type schools. Football was your ten year reunion ruined by the pandemic. Did not go to Unfortunately, no ten year reunion for me because of the pandemic that happened. But you know, I will make it back down there.

You go to football games. Football, Football's religion down there, and especially even high school football is Friday night exactly. That's the worst thing ever when I moved to Westchester, as I realized they played football on Saturday afternoons. What a stupid yea Friday night games. Good stuff. Jess Jess Met, an equities reporter for Bloomberg News and a proud Texas A and m Aggie getting the latest on College Station Texas. Let's check in David Kat's, president and CEO of Matrix

Asset Advisors. David, you just heard Tim Fury from I M talking about some pretty good manufacturing numbers. How does that dovetail in with kind of how you guys are thinking about this economy as you think about your portfolio. Well, we think that this is going to be a difficult year for the FED too slow inflation yet keep the economy going, but we think they likely will be able to pull it off. And the data that you were just giving in the conversation you just had sort of

supports that, Um, the economy is still strong. You just had a few banks speaking the last week or two that talked about consumers being good and business is being good and loans being up. So we think the economy is hanging in. Uh. Psychologically, it's a tough environment with the FED talking about raising rates as much as they are, but we're hopeful that will be able to walk across that type ro So even if the Fed raises rates another fifty fifty, fifty and fifty is it gonna be okay?

But we think the FED is talking a very hawkish game, so it's set the expectation for a fifty and a fifty UM. We think that we're going to start to get some inflation relief by the late summer early fall, and as that takes hold, we think that by the year end, the FED might be able to be a little bit less aggressive than currently feared. Uh. It's easier for them to talk a hawkish game than to actually execute a hawk is game. So we're hoping that that's

what's going on right now. The market originally thought the FED was behind the curve. You don't hear them talking about that too much. Right now. People understand that the FED is going to break the inflation psychology and the inflation cycle. It's just a question can they keep the economy going in the meantime, And from where we sit, we definitely think that's going to be the case in two, but we also think that three still can be a

reasonably good year in terms of the economy. All right, So if I do have that kind of you know, twelve month plus horizon, what sectors or what names are you guys looking at these days? So, so that's a great question. We think the best way to navigate this market is to have that twelve month time arising. There are a lot of stocks that have a lot of short term uncertainty, but on twelve months they should be

a lot higher. So sectors that we like, uh, first and foremost, we think that the financials are going to be a very good place to be over the next year. We think you can get involved right now with a lot of beaten down technology. So we went into two a little bit wary about technology. Uh, they've got beaten down enough that there are many opportunities right there. Um, you know, with the megacap tech we think is a

good place to be. And then sort of one off type of stocks like we like Starbucks here, we like air products here. Uh. Paramount Um is a solid business at a very attractive valuation. The CEO just brought fifteen million dollars worth at the stock or twenty million dollars worth at the stock. Excuse me, Starbucks. The CEO bought

fifteen million dollars rot the stock. Five sir. If you had some fairly significant insider buying, so we would take our queue from companies that are buying backstock from insiders that are buying stock. UM, and if you can buy a great company like Google at sixteen seventeen times earnings, we think you're gonna do real well. All right, David, good stuff. Appreciate yes, sharing some of the names you guys are working on. David Kat's president and chief investment

officer of Matrix Asset Advisers. I guess you know what we've all probably experienced over the last couple of years during this pandemic is we're doing more and more stuff from home. We're working from home, we're going to school at home. Thankfully those days are over for most of us. But it just kind of goes to the issue of identity security, data security, all that stuff. It just really comes down and puts it really front and center for a lot of folks. Fran Rosh, he's the CEO Forge Rock.

They are a company that focuses on identity security. So it's a good person to check in with. Fran. Thanks so much for Joe warning us. UM. Please tell me you've got a better mouse trap for identity security. I mean, I've got a million user names and passwords out there. I've got thumb prints, I got facial recognition. Where do you think we're going here? Great? Thanks for having me, and I think we do have a better mouse trap. And I think what we've seen is this industry evolved.

I think people used to think about identities of security solution, how do I block the bad guys from getting access to account data or company information? And we've seen an evolution where our c I O and CCO customers are increasing demand from the business line. The guy's gall's responsive for revenue to create better experiences because identities with the front door of the business, whether it's banking, healthcare, e commerce,

digital streaming, everything is really going digital. So at Board Drock we really kind of uh been a revolution revolutionizing in a couple of different areas. Helping our customers create identity experiences are frictional, it's and easy, well out compromising on security and that's our objective. But how how does it work? I mean, much like Paul said, you know, I have a million different passwords for things. I'm constantly clicking to forgot your password button because I have no

idea what I entered last time? Is there away across all accounts and all devices to figure this out in a simple with a simple solution, I think there is a better way. And and you know, usually and passwords have been around for like fifty or sixty years, and we look at them as like a lose lose situation to both the bad experience and they're bad security because everybody uses the same one. So we're working on a better way to identify who you are than that static approach.

And a lot of that comes down to bringing AI capability into the identity solution. We can look at your user behavior, device behavior. We partner with companies like Apple and Google and Microsoft who can serve up certain information from your device to find a much more kind of behind the scenes, frictionalists and more secure way to recognize you and eventually eliminate the user name and password. And this is a great application for AI. So how do

we get there? I mean, what we're sold, right, Paul, So what do we do so that Ford Drock can get rid of user names and passwords across all of our things. A lot of it is change management. So many of the organizations that you create those user names and passwords with have been around for decades. They've got a let of legacy systems and applications and infrastructure, and this requires change change on their behalf to kind of make that replacement of legacy technology with something modern like

Ford Drock. And it also means change for the consumer. And a lot of consumers we say we want to get rid of us name, password, but it's still we were comfortable with it. So it's a lot about change management, which is why we're getting out there and engaging with enterprises, banks, healthcare, e commerce to tell them there is something better and to get out and let to know that consumer that changes. Okay, you can ditch that old approach, get better experiences and

better security. How about fingerprint UH and facial recognition? How do those kind of rank? They're really important. UM Biometrics is a great way to authenticate you in place of you used name and password. And this is where there

was an announcement a couple of weeks ago. There's been some standards bodies called the phyto Web Up Web off end standards that created a way that companies like Microsoft, like Google, like Apple can take the work that they do around biometrics and authenticating you securely to their devices and then transmit that security to the website you're authenticating too, So it really becomes a way to do those secure biometrics for your fingerprint, your facial recognition stays on the

device so you don't have to worry about it showing up on the Internet, but also leverage it as a better authentication device than you use the name and password. So it's it's a big driver. But it also means bringing the idea of consumer privacy and saying we're going to leverage that biometric for one thing and one thing only. That's to authenticate you to our website. We're never going to share that information or use it for any other purpose. I gave up my privacy years ago, so I'm not

worried about that. Fran, thanks so much for joining us. Fran Rosch there. Uh. He's the CEO of fourge Rock Trades on the n Y s C under the ticker f O r G, and they're hoping to make our um. I guess I was going to say Internet experience, but I guess it's everyone's all experience for the future, right because everything is online now. So yeah, I mean the Bloomberg system. You know, we use the fingerprint, and that seems among and the user name and and the password.

I mean, yeah, we take it seriously. A lot of my you know, my bank, you know they used his facial recognition. A lot of places using facial recognition, so lots of issues everything. 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. Put on fall Sweeney. I'm on Twitter at p T Sweeney

before the podcast. You can always catch us worldwide at Bloomberg Radio