UBS, China, Markets, and the Fed

Opinion Calms. Paul Davies also joining us here for a little roundtable here. Paul, what's the feeling here about bringing back mister Emodi to UBS. I guess the market likes it. It's kind of seen as a good thing. What do you think, Yeah, no, I think it's it seems it's definitely a good thing. I mean, you know, UBS now presents a very different leadership challenge than it did. You

know three weeks ago. Three weeks ago, it was still a very well run, self contained wealth manager with some good sort of growth prospects, you know, churning out good profits and buying backstock, and lots of people quite liked it. Then it was you know, sort of shoehorned into this incredibly large and complicated takeover deal to sort of rescue its long time you know, crosstown rival credit Swiss, and there is a very difficult you know, cultural and financial

integration to do. And there's also Swiss taxpayer money, you know, on the line here if things don't go well. So I think for shareholders, for the Swiss government, for the Swiss people who don't necessarily like this deal either. You know, they need somebody with the experience and the background of Sergio or Matty and someone who has his kind of you know, statesmanlike presence as well, and they need someone who has his kind of citizenship as well. It's a

kind of a dirty little secret. Nobody likes to talk about this, but I remember when Joseph Ackermanz, who is Swiss, was put in charge of Deutsche Bank, which is German, and guess what, it did not go down well with the German I know, I know, I'm not saying that there's xenophobic, but the Swiss do not like when foreigners come in and run their big institutions. That that's an issue with a lot of countries, right, Paul, how much of this is about ermodi not being Dutch, Ralph Hammers.

I mean, eighty percent of the people in that country in a recent poll were against this force takeover. Is this a little bit of a throwing them a bone? You know, here's a Swiss guy. Don't worry, the old dude that you know and love is coming back, and he's from our own country. So how much is that?

How much of that is playing into this? I mean, I think, you know, the swissness sort of helps in the sense of, you know, you've got to win the trust of the people of Switzerland and like I say, the politicians and regulators whose own careers and reputations are on the line as well after this, after this kind

of shotgun marriage. So I mean, it definitely helps. And there is you know, everybody kind of you know, says there's this unwritten rule that at least one of the two top top jobs sorry chairman or CEO, needs to be held by a Swiss person, right, you know, it hasn't always been true, um, and I don't think Switzerland is you know, quite as um, you know, blinkered in that way as as as you might as some people

might think. But I mean it's it is a conservative country and right now they need a leader who can sell this deal to the Swiss people exactly. So, Alison, from your perspective as a research channels looking at the fundamentals to financials here, what are mister Emodi's kind of top two or three tasks do you believe to ensure that this is a success? Wow? Top two or three?

So um so, First, you know, they have to right size the units in terms of um, you know, deciding what they're what they're going to keep and what they're going to leave behind. I think you know, in particular hell guide Chard do you have the investment bank, but hopefully there are people with expertise evaluating those assets and client risks and you know, making sure that there's no

doubling down on risks they don't want. Um you know, I think that that the second so so first is sort of making those decisions which we've seen broad strokes, but I think Urmanti has to sort of confirm those and implement that. Second, I would say is culture and so maybe this is actually the this is even more important than picking the businesses, right, So think about the culture of ubs in terms of especially under the range of Armani pulling back of risk and really strong controls

of the business. One of the charts we like to show is, you know, if you look at overall trading and revenue for the global trading and investment banking business, uh, you know, UBS is at the lower end of variability on that scale, and Credit SUITEZES is at the high end. And so taking on those businesses and instill in culture, I think it's probably the most important task and the most difficult tasks. And then you know, finally, um, the

restructuring cost cutting program is going to be significant. Managing the risk, especially within the Command Swiss unit where they have a significant share, a share that I think would have prevented it a deal if not for the troubles that the government was trying to avoid. Um. You know, that's a key challenge. And so Armadi obviously brings the Swiss expertise. As you said, he's also undergone a significant

de risking and restructuring program under his reign in prior years. Hey, Paul, you know I've seen reporting that the this deal, this combination is extremely unpopular with the Swiss people. Why is that? I mean, I think there's there's a couple of things. I mean, there was some of the some of the surveys I saw were about the credibility of the regulator FINNMA and the government. Do they have credibility? Well, I don't know that the overseeing Credit Swiss, which has like

a global scandal every six months. I mean, there are plenty of people who thinks that, who think that Finnmer, the financial regulator, could have and should have intervened in stronger ways, you know, much sooner. I think there's you know that you could even find people at Credit Suis who who would have hoped that the regulator might have

rescued them from themselves much quicker. Um. But but then the other, I mean, the other key thing about the unpopularity of this deal is just you know, the dominant bank at home that it will create. And again that's a kind of I think that's another reason why the presentation of this and the effort that you know, Sergio Mutty will have to make to win over people and win over win back trust is going to be so important. You know, they waived competition rules to let this deal happen.

Colin Keller her the chairman, you know, when they were announcing this deal the other week said you know, we were going to do everything we can to kind of hold onto this enlarged Swiss Bank. You know, we've not heard the last of this at all. So I think, you know, there's a real public public relations charm offensive, whatever you want to call it, effort to be made to try and keep this together, you know, on the part of UBS. I mean, they had to do something right.

Credit Swiss had they were spying on their employees, remember that they had bet big on Green Silly. They were willing to give as much credit to Archagos as he wanted exactly, you know, I mean the reality is, I mean, this has been going on for now, getting tax issues. I mean, is there anything they didn't do wrong? What would the Swiss people have preferred? You know, I mean I don't know, Alison, what just from the investment banking perspective, do you put one and one together and get two plus?

How do you think they're going to play the investment banking business? So unfortunately, we think it's actually the opposite. You put one and one together and the combined edity is probably going to come in below. You know, sort of what would be ProForma estimates at least for the near term. For for two key reasons. One is, you know, as I mentioned, they're going to want to mitigate combined risk to clients in terms of UM exposures to clients

and what they're providing them. They're not going to double down from the client side. They're also not going to want to double down as well clients like two UM, you know, sort of diversify the people that they're working with in their exposures. And then secondly, you know, when you look at UM, you know, in particular the fixed income trading business of credit swees, a lot of this are types of businesses that UBS has shied away from and moved away from a long time ago. UBS is

fixed income trading unit is very currencies rates focused. UM so really focused on flow based businesses if you will, that don't use the balance sheet as much. UM. Credit sweet was the opposite. We know that they've already been moving away and reducing that and we think that well UBS has said they're going to do it, and we expect that that happens on an accelerated time from that they cut those assets more. All right, guys, great having

you both together on this. It's a big, big day for UBS as it tries to navigate its acquisition of Credit Swiss really over. It's going to be a multi year issue, is kind of how it appears at this point. We had Paul Davies, Bloomberg Opinion columnists joining us from London, and Alison William's, senior Global Banks annalyst fro Bloomberg Intelligence, joining us from the phone from Princeton, New Jersey, kind of rounding it all out. Yeah, I just think it's

not the end. We're gonna hear more. I think your story exactly right. There's probably a lot of issues that UBS is gonna find over the coming weeks, months, and maybe years. This is Bloomberg. You're listening to the Team Cancer Live program, Bloomberg Markets weekdays at ten am, easting on Bloomberg dot Com, the I Heard Radio app, and the Bloomberg Business App. We're listening on demand wherever you get your podcast. David Bonson, cio of the Bonson Group.

Before that, you spend a bunch of time at Morgan Stanley and then at UBS running money here so under Sergio Armudi exactly now. Interesting, mister Monti's back. David, thanks so much for joining us. Here. What are you telling your clients these days? You know it just January was great, February not so much, March just kind of hanging out here. And now we've started quarter two. What are you telling

your clients? Well, essentially, I'm telling them exactly what markets are telling us, which is that there's a lot of uncertainty in the equity market and that volatility is likely to continue. I'm struck by Bullard's comment about the equity volatility can mean certain things at different times for financial conditions, and it's just not really their job to look at it, because I very much agree with them. It is not

their job to look at that. Financial conditions are going to move for any number of different reasons, and their job is to not to be taking their signals that way. Rather, it is quite evident that the disinflation is upon us. They have overtightened, and they seem hell bent on exacerbating the mistakes they make on both ends, staying too low too long and then staying too tight too long. Well don't they. I mean, it seems what they really want

to do is avoid the fate of Arthur Burns. They don't want to uh, you know, shoot before they see the whites of the eyes of I guess disinflation, right, Well, I would love to believe that they cared about that. I don't. I definitely understand rhetorically the pal has talked

much more that way, more volkerlike than Burns like. But Arthur Burns never had the luxury of dealing with M two dropping three percent in one quarter and the CPI lag essentially representing over half the shelter lag, rather in CPI representing over half of what we see in CPI. Burns was not coming off of a shutdown of the economy that then led to a supply side really a debacle in the production of goods and services, labor shortages,

other things like that. And so there were a lot of differences in the inflation of the seventies and the inflation we've had in the last eighteen months. But what do you what do you think then, David? It's been suggested to us by I think daniel D. Martineau Booth that part of what Powell wants to do is just break the FED put for now and forever. What do

you think his endgame is? Yeah? And I love Danielle and I think that Danielle's an assessment of what Pale did back in eighteen and nineteen was some of the best out there, But I don't agree with her that that is the case. I don't think any said chair can break the FED put. I think that it is not merely a matter that Wall Street or Main Street has gotten dependent on it, both of which is true,

but the US economy has gotten dependent on it. The pension funds, the unfunded liabilities of pensioners all around the country to totally break the put. If we really thought that was happening, credit spreads would be five hundred basis points wider than they are. We had a year last year where everyone was talking about recession and yet duration underperformed credit. I mean it was It's surreal that we're having a banking moment right now and there isn't a

single lick of credit impairment. It's entirely interest great risk. So I don't think that the FED put is going anywhere. But again, even if Daniel's right, we wouldn't know it until they really get tested. I mean, the SMPS down twenty the NAVSDAC was from last year. The NAVSDAC had already gone up fifty before it came down thirty. Credit spreads are still really really tame. Nothing has broken yet.

Now we have the banking system, you know, I certainly think the FED can control housing price, inflation of the interest rate, and that bubble was out of control. So that's one element where I believe they can control inflation. And I just don't believe they have any control with the sad funds rate over normal goods and services. All right, Dave, let's get to brass tax here. Where do we go with our money? A lot of folks are telling me

to go to quality. I'm not really sure what that means, but it feels like I should be buying companies that sell toothpaste and I mean cash shampoo and have high dividends. I mean, how do you think about quality in today's market? What does that mean to you? Yeah, so I can only assume that you're seeing me up accidentally. I certainly am talking to my book here, but the differences. I'm not making a tactical call for quality. It's all we do,

it's all we ever believe in. We never want to be buying high priced, high multiple What do you mean, David, when you say quality? We mean balance sheet strength and free cash flow, and that's all anyone should mean. I mean, I would add to that, although I think it's sort of implied a business model that is sensible and defensible and so forth. But out of that business model that is not quite so cyclical and not quite so speculative.

Quality is a financial condition. It refers to balance sheet strength, lower debt ratios, and more predictable and growing free cash flow. And how do we know if a company has dependable dividend growth? It's from the free cash flow growth. You

can't pay a dividend from money that doesn't exist. And so, as dividend growth managers, a little over two and a half a billion of the over four billion that I manage is in dividend growth equity and it is doing extremely well right now, and we believe it's the right place to be going forward. But again, we believe that even when Fang is rallying. But hey, while you're talking your book, you want to give us some names. Yeah, by the way, I think the name I Blackstone and Apollo.

If you're a couple of asset managers, they get lumped in with financials. And we know the banks of at a hard time. But these are just unbelievable dividend growers that simply don't have a bank business model at all. They don't take balance sheet risk. They're using investor money from which they get really good fees, really good promotes, and they are mostly a non traditional asset class is private equity, hedge funds, real estate, credit and their asset

gathering machines. And so Blackstone and Apollo are two robust dividend growing names. Blackstone we've owned for a decade and believe that they will continue growing the dividend in high single digits per year. You're going to get about a five percent dividend annualized, and you're going to get we think that much or more in price grows. How about energy, I'm thinking, David, I might have missed that whole train there,

that whole boat. What happened with energies or anything left there? Yeah, there certainly is, although we are a little bit more bullish than now a midstream than upstream. But you know, when you say missed the boat, if you mean the forty five percent move and in the sixty percent move last year, but you know what, it's trading at nine point two times earnings. Okay, it's trading at half of

its annualized evaluation. Meanwhile, Tech, which was pummelo last year, is still trading at twenty four times versus in eighteen times historical. So I would still argue that energy is undervalued relative and tech is overvalued relative. But a better place to be from a quality standpoint is midstream. Really robust free cash flow growth, heavy dividend coverage, and they

really delevered. What is midstream is that refineries. No refineries would be more downstream, and midstream would be the pipelines and storage transportation. It's a very environmentally friendly play as well. You don't want oil and gas being transported by truck and by rail, and so we like the pipeline space. And then of course the LNG exports story is a midstream story too, and we think there's huge growth potential there. If I wanted to build a new pipeline today, I

couldn't get it done, could not in this administration. Why did we all hate that big pipeline down from Canada. I don't know, something the ELK migration or something, so, but I mean, I mean, that's also kind of a bullish part of the midstream called they're not going to be adding more pipelines. Yeah. I do hope that that will change. I believe it is without getting overly political and incredibly foolish decision by the current administration. But the

fact that matter is you're right. It boosts up the value of incumbent assets when you artificially constrain new supply. All right, we'll have to see how that place out. David Bonson always a pleasure to chat with, get some good ideas. David Bonson, CIO of the Bonson Group. He's been managing private wealth money for a long Time's got a lot of perspective. He's out there in the West Coast, to which we late out there in Newport Beach, California. That's got to be tough going to tennis every day.

You're listening to the tape kens Are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in 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. The news coming out of China, I guess most recently is company specific. Ali Baba one of the leading conglomerate telecom,

cloud companies, e commerce companies. One of the real success stories of China is going to be breaking itself up into six smaller pieces. And I don't want to necessarily talk about that per se, but what does it mean for the economy, for the tech sector, for just the government's involvement in the economy of China. And to do that we check in with Bloomberg Economics chief economists Tom Orlick. Tom, you lived and worked in China and Beijing for many,

many years. You've got a fantastic perspective here. You see the Ali Baba news And is this entirely in response or primarily in response to the government saying you guys got too big? I mean, we want to see you get smaller. So I think what Ali Baba has done here, Paul, is potentially rather ingenious. They've got a plan which could

satisfy their two key constituencies. On the one hand, you've got investors who are frustrated that they see Ali Baba, the big company, not being valued as it should be and see potential for much higher valuations if some of the fast growing components of the business, from e commerce

to cloud to logistics, can be split off. And on the other hand, you've got Beijing Jijinping, who were worried about the power of tech monopolies, worried perhaps that very powerful entrepreneurs could one day pose a challenge to Communist party rule. And so this plan to split the company up into six different smaller companies potentially satisfies both groups. All right, So you hit on something there that I

was wondering about. Since these Ali Baba headlines came out, really, since the photos of Jack Mass surfaced reportedly back in China, how much does Ali Baba really get to decide for itself? I mean, when we say Ali Baba made a genius decision, isn't it? Aren't they just kind of told what to do? You know? I mean, that is a really good question. And I do not have a crystal ball into the

Ali Baba boardroom. Certainly, China's Common Prosperity Agenda, which has included a sweeping crackdown on the big tech company's Ali Baba, ten Cent, ma Chuan and others, will have exerted a bunch of pressure on company leadership at the same time, are the regulators kind of in the weeds of this kind of calling the shots on what happens. I don't know the answer to that, but my suspicion is that

China's government aren't that silly. They know what they want, They want to clamp down on monopolistic power, but they also know the limits of their own understanding, and they know that at its heart, Ali Baba is a very competitive, very dynamic, aentual, the world beating company, and they don't want to stop that. They don't want to they don't want to kill it. But the direction comes from the government,

but the decisions come from the corporate board. Let me ask you a question that I started thinking about when I guess fifteen years ago when Yukos goot Um find like twenty billion from Russia and then um, you know, their their boss ended up in a Siberian gulag China.

I wonder the same thing about do they do they risk driving away international investors who are scared about the lack of a you know, real justice system, the lack of the rule of law, when they start disappearing leaders and investment bankers, do they do they care about that?

So I mean, firstly, whilst there are obviously some commonalities between Russia and China, um, I think that what happens to the Russian entrepreneurs following Putin assuming power and what's happened to Chinese entrepreneurs over the last couple of years are really two different things. Right, China's entrepreneurs have been hit with fines. Rushes entrepreneurs, Well, if they've just been hit with fines, they'd be doing a lot better than

they are actually doing now. But Jack Mah disappeared for a couple of years, right. There was an investment banker about a month ago who hasn't been heard from since. They throw reporters in some place that they don't tell us about and we don't hear from them. I mean, these people just get taken off the streets and they're gone. Yeah, And I think to your point, this is clearly something which is very concerning for international investors. So markets have

cheered this plan for an Ali Baba restructuring. There's been I think a sixteen percent pop in the Ali Baba share price in the last day. But if you look at what's happened to Ali Baba's share price and the share price of ten Cent and the other big tech companies over the last two or three years, it's fallen a lot, right, It's fallen a lot, and a big reason for that is precisely because investors and I worried, well, am I investing in a company which can make his

own decisions? Or am I investing in a company which is always going to be at the mercy of the kind of capricious policy choices of the Communist Party. You're you're you're the chief economist at Bloomberg Economics. So this is a completely unfair question. Do we have any idea where jackma is what he's doing because his mat was saying he's been hasn't been seenially for a couple of years. Um,

you know that is completely unfair question. So, um so I'm not going to speculate on it, but I will tell you that entrepreneurs in China have a more difficult job in general than entrepreneurs in the West, and entrepreneurs in China for the last couple of years have had an even more or difficult job than normal. So if they're keeping a low profile and messaging alignments with communist

policy priorities, that's really not a huge surprise. All right, Tom, I will I'll apologize for both of us, Tom for putting in an uncomfortable position on a number. You're one of the smartest economists out there, and we're so happy to have you with us that we don't want to I want to get you fired for saying the wrong thing. Throw you under the bus. All right, Tom, thanks so much for joining us. Tom or like he's a chief economist for Bloomberg Economics. You're listening to the team Cancer

a live program Bloomberg Markets weekdays at ten. AMI's Daring on Bloomberg dot Com, the I Heart Radio app, and the Bloomberg Business app. We're listening on demand wherever you get your podcast. Barry Roodholts, founder Riholts Wealth Management, he's gonna help us guide us through the next segment or two, and we'll let him get it. I got so many questions that I gotta ask Barry. I know, but let's

get to wear next guests. Let's get the Anaka Tree on Chief Economists International four, then long Shot Kemp and Anica. We've got a US Federal Reserve here that most market participants here feel like. All right, maybe one more twenty five basis point rate increase, and maybe that's kind of going to be it, but boy, Christine Leguard a couple of weeks ago, it is pretty adamant that along with that fifty basis point increase, there's likely more to come.

What's the feeling in Europe about how the European Central Banking and the Bank of Eglim for that matter, is going to proceed over the next several months in quarters? Hi, good morning. Well, there's certainly a difference, and I think it's classic Europe being a lagger versus the US, and we see it again. So obviously, you know, all central

banks started off with this transitory dialogue. The US as the first to kind of realize, well, let's move away from that and let's actually start taking action, and the ECB followed suit, but took longer and acted later. And therefore it's no surprise that they have to be persistently more hawkish than the SAID in order to solve the

inflationary problem. So what does that mean, Anica? I mean, first of all, everyone's been watching the euro gain strength against the dollar, right, is that is that part of this? I think so absolutely? And I mean, let's just be very tangible. You know, the market is talking about the twenty five basis points for the FED and a fifty basis points for the for the ECB, and it's simply this mechanism working through. Sorry, we got it. Barry has a question, but we get to have as Mike turned on,

there we go, there we go. Hey, Anica. So here in the States, it looks like goods based inflation peaked sometime last year around June, but we still have very persistent services based inflation, primarily wages, a shortage of workers, and apartment rentals where there's just not enough housing. How does that goods versus services dynamic look in Europe? Yeah, so we're seeing exactly the same phenomena, and it's also

visible in the p M. I's right. If you look at the plies services, it's still it's still very strong, whereas pmies and manufacturing obviously getting much much weaker. And in Europe it's exactly the same as what you see

in the US. And obviously it's no surprise that the reopening it's still playing its hand in the fact that the services side is strong, and like the US, the labor market is extremely strong, extremely tight, and don't forget what we have more in Europe than you have in the US for these labor unions, which also tend to increase the stickiness around the wage inflation Arnica. We know in Europe there's so many of those big European industrial

companies that do a lot of business with China. Give us a sense of how the China reopening is factoring into your economic outlook. Yeah, so, I mean we're all very excited about, you know, one of the world's largest demand drivers finally being able to participate into the economy and actually, you know, help global growth. I think the issue is obviously, like we saw in the other opening stories,

it tends to be more services driven. It tends to be it's probably likely to be more domestic driven at least in the beginning, and obviously all sorts of protectionist political policies going on over there means it's less straightforward then Hey, China is back in the game. So I don't think on one hand, it's on one hand, we were all sort of excited about, Hey, the reopening in China is finally happening and actually faster than we expected. On the other hand, there are these factors to sort

of work through. So it's not that straightforward, right. We look at the past three decades, clearly China was an exporter of deflation. Now, after spending all this time locked down, how big of an inflation exporter might they be over the next year. Yeah. I mean, I think what you're seeing in general and it's a little bit more fundamental in terms of what's two parts. I think one is more fundamental, fundamental and longer term, which is like a

rewiring of global supply chains. And obviously, you know a lot of companies in Europe. Everybody talks about Europe, but actually are these European companies or are they just companies that happen to be listed in Europe? And a lot of the industrial ones are in that camp, right, And that's why people sometimes look at European equities, especially now versus the US, and say, Wow, what's an opportunity to buy these great industrial businesses cheap because that happened to

be listed in Europe. There's that part of it. But I think what you're seeing is a lot of international industrial companies listed in Europe are forced to kind of reassure look for alternatives supply sources outside of China, for example, which is actually naturally quite inflationary because obviously they were enjoying a much lower cost by using China as a key part in the supply chain. All right, I want

to get to the banks conversation. So I'm just gonna don't I don't have any kind of We're just gonna go straight there, because Anaka, I noticed you've been watching I think you've been watching the hearings. What is this bailout of SVB and signature bank depositors? And that's really what it is, right, a depositor bailout. What does that mean for you know? Moral hazard? Yeah, it's a major one. Right, So I think there's two points that we have to talk about here. I think one point is the fact

that it's schizophrenic behavior. So on one hand, central banks say, okay, guys, stop talking about the FED puts, stop saying. You know, we're always going to put a flaw under everything. We're going to tackle inflation. Don't count on us anymore. We're restricting money supplied, blah blah blah. However, if a bank fails, suddenly our hands appear again, and we're putting a flaw under the marketplace. And that's exactly what guaranteeing all deposits

is signaling to the markets. So it's a bit schizophrenic. Schizophrenic and a bit confusing. The moral hazard points if again a bit more of a philosophical conversation, which is what is the role that banks play in society? We obviously know that it's crucial because that's how the whole credit cycle works, et cetera, amplification, economic growth, et cetera.

And is the role of a bank more of a utility, in which case it is a kind of more hazard situation, but it should be run differently knowing that governments are always there to bail out for Puss. I mean, this is what this is the point I'm getting to. Yeah, because Paul is normally the most conservative guy in the room, and ever since he realized that the FED, the FDIC, and the US governor there to bail us out no matter what happens, he's wanted to take on more risks.

So so let me push back a little bit. I'm going to push back a little bit, and I'm literally talking my book, which Bailout Nation came out No. Nine, but Nation, I think we really need to make a distinction between rescuing people from the folly of their own behavior and making them whole, like all of the Wall Street banks that bought subprime junk and depositors that have half in in cash. A small business operating that's using

a local bank. I don't think there's anything reckless or requiring a bailout when someone says, oh, I'm going to go to this top twenty bank and run my business out of it. The alternative is we're only going to

put our money in the four largest banks. And so there's a difference between rescuing equity holders were made whole or bondholders who really were made whole, and people who are just collateral damages like depositors, to say nothing of trying to arrest the contagion and allowing it to spiral out of control. All right, Monica, let's go closer to home for you credit Swiss ubs. How important is that

for European economies? You know, we sense it over here in the States, but I'm guessing it's just much more profound for not only just the Swiss, but European investors in general. Well, I think that you know, credit suis is old news, so you know, We've read for months and months and months around all the issues of Credit Sweets, and that's why I don't think it was as much of a blow to sort of domestic European readers as it might be across the continent, simply because they're so

used to the issues over there. So I think that's not such a big thing. I think the bigger thing is that and I think that's also the point that you're making earlier. It's very confident now I'm talking. You can talk about depositors, and you can talk about investors in market participants, but let's talk about real people, because it's all about fear and real people and they influence

the markets. Obviously. The point is, as a depositor, how on earth are you supposed to gauge whether depositing your money at a certain bank, also a household name bank, by the way, is safe based on the balance sheet situation of the bank. If even Credit Sweets, which was so well under certain anticipated ended up surprised by having

gone through what it went through. What I'm trying to say is if you analyze a lot of the banks, and I mean if you're just a regular depositor and you see even if you're a larger one, even if you're a corporate that's depositing serious sums of at all. If you just reads the balet sheet at stays value, you might think, oh, that's totally fine, and then you've got unrealized losses, et cetera. And it's just the accident

sort of victims of the accident from raising weights too fast. Yep. Interesting. Yeah, it's a very difficult issue that most investors are trying to get their handles handle around, and we got regulators in Washington in DC trying to do the same. Anakatreon, Chief Economist International van Launchot Kevin joining us. We appreciate

her time. You're listening to the tape cancer our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in 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, Matt Miller and Lee in the Bloomberg Interactive Broker Studios. Barry Ridholtz, head of Ridholts Wealth Management, He's got a podcast out there he writes books, he

does all that stuff. But we grabbed him for a few minutes and he's gonna stick around with us. We will talk fixing. And when you want to talk fixed and you need to go to some serious people, and that includes good folks at TCW. Brian Well and Cocio and General's portfolio manager joins us at TCW with throughout in LA. That sounds cool, but it's really not. Folks. They got to get into the office like four or

five in the morning. It's a disaster. They say, Oh, but we get out early, we can go play golf. I'd never buy that argument. But Brian, thanks so much for joining us here. I want to start by talking, you know, volatility in the treasury market. I don't remember seeing one hundred basis points moves in the two year in the tread treasury and the ten ten year kind of on a daily basis, it seems, what are you guys doing out there? What's going on? Where's the liquidity? Yeah? Incredible.

Not only have to get up early, but it's raining today, so everybody's playing today, Paul, unbelievable. Right, it was just a few weeks ago, you know, we saw I think we hit about five h seven on the two year, then you blink your eyes and you're trading at three eighty on the two year. We've kind of seemed to

settle into a range right around here, about around four percent. So, um, you know, we came into this, uh you know, this period long duration long a steepener, meaning we had a lot of our duration in the front of the curve, expecting things to normalize, and things have moved in that direction, although we still got you know, quite an inverted curve about minus fifty basis points on two's ten. So we kind of we kind of liked being long duration here

and in the meantime, we're gonna trade this range. We're gonna trade the volatility and hopefully can as a malpha for our clients as we kind of move up and down twenty five fifty basis points. So we looked at the ten year a couple of months ago, almost as high as the two year was the and yup of fours, and here we are back around three and a half percent. Are we going to see a four handle on the tenure or anytime soon? I don't think so. I'm fat well,

I doubt it. I'd say, actually have more conviction saying we won't see five again on the two year. I think we've seen the on the two year. I think we've seen the red line, you know, with regards to

what the what the financial markets can handle. We got up toward about you know, two percent on excuse me, five percent on twos, and you know, things started to break and you know, we've got this kind of a little bit of a in illusion up stability, you know, for the last couple of days, just because we haven't seen a regional bank going too receivership you know for about what seventy two hours plus or minus weekends coming up,

you know, we're not buying it. What's that the weekend's coming up, that's when we find out which bank doesn't didn't make it till Monday. Yeah, that's right, that's right. And it's not just banks too. I mean, like you know that that's grabbed the headlines for the last couple weeks, and that's primarily with the you know, behind this this rate rally and this rate volatility. But you know, there's other shoes to drop. You know, we saw we saw

LBI in the UK back in the fall. Now we've had our little you know, our regional situation, and we've actually had ADJIECI you know, get merged you know, ubs and credit Swiss. But you know, just look at look at read stocks, Look at read stocks, look at re read bonds, both in Europe as well in the US under a tremendous amount of pressure. Um So, like I said, we've seen the red line, there were gonna be other things to to you know, to go to go bang. Uh,

it's just gonna be a matter of time. You know, it doesn't all happen, you know, and can decad of days. Brian, do you watch the flows of money in terms of like out of bank deposits and into broker dealer into fixed income assets, because it seems like, yeah, there are a lot more uninsured deposits out there than I would have thought previously. That's institutional money plus a lot of

retail money. Um. You know, mom and pop are asking the questions, should I take my money out of the bank and instead put it into a you know, short duration treasuries fund or buy an ETF or something like that. Yeah. I think Look, I think a lot of people, not just people, I think companies have let their guard down you know, with regards to how much uninsured money they kept at a lot of these smaller and regional banks. I don't think we've seen the end of this flow.

I think, you know, people are catching their breath. I think they now have the opportunity to move their money. But I don't think it's over. And yeah, we see it directly. In fact, the way we see it, you know, in the fixed income market. We see it with regards to short end you know bills, treasury bills, you know, one month, two month, three months bills. They're trading in bably rich. Why are they trading rich meaning very expensive?

Because money float out of deposited banks, they went into money market funds, and those money market funds had to buy something, you know, and right now, this all this volatility, those fund managers are not sure how long that money is going to stick around for, so they just buy the shortest instrument. And we're seeing that right now. We have not seen the you know, this this richness of these high prices and short te bills alleviate at all

in the last few days. What do you make of these regional banks offering CDs FDIC insured up to a quarter million dollars around the five percent yield level. Is this just to attract some depositors that seems like a pretty decent return over the course of twelve months. It's an excellent return, im It's what they have to do. I mean, right now, you've got to you've got to hold on to his money of your deposits as you can.

You know, if you're some of these small regional banks and you're trying to basically instill confidence because banking is a confidence game, and so they're going to have to do and sometimes maybe even you lose a little bit money, but there that's the most important thing, to keep that liquidity, uh, and to be able to kind of live on, you know through it's probably gonna be, you know, pretty eventful

a few months here, Brian. I don't know if you look at WORP or how often you look at the world instant Probably do I do so just thinking you can. You can find the nerds at a party if you yell at work and people look at you, you know where the bond geeks are. Yeah, exactly, Um, we'll listen. Maybe I'm not as much of a nerd because I don't really get it. Is this really the market pricing in cuts. I mean, is that really what this means when I look at this screen? Um? Or is it

like hedging? Going on? What question? What did it? Because you know, Powell has come out and said over and over again, guys, I'm not gonna cut rates this year, and if he does, it would be terrifying, right because I feel like something huge would have to break. So what does WORP really mean? So, so for for for for my mom who might be listening, WORP is the market's projection of the FED funds rate. So where's it

going to go over the next twelve months? And what WORP is saying right now is that there's a coin flip that the Fed's gonna hike next month, and then by the end of the year, it's saying the Fed's gonna cut about three times, so about seventy five basis points. Because the way I would encourage everyone to think about that is, you know, we we think about it like

to talk about it as a single number. Think about it more is maybe maybe a fifty fifty kind of probability of two scenarios, the first one meaning the FED hikes, and we get to about you know, five and a quarter on the upper part of the band of the FED funds rate, and it stays there for the end of the year, and that's where we end. There's a

fifty percent shot of that. However, there's a fifty percent shot they got to cut one hundred and fifty basis points, meaning that something even more nasty than we've seen breaks in the financial markets. There's you know, that's kind of systemic type of risk, and you know, financial conditions tighten so much that the Fed has to get incredibly aggressive really soon to kind of alleviate that pressure on the

on the economy and on the market. So it's you know, it's it's a it's a very um extreme two scenarios. That's the way I would encourage people think about it. Hey, Brian thinks so much good to gets good to get a little insight there. I know people talk about it as if it's actually mister market saying this is likely to happen, you know, and it doesn't. It doesn't convince me, all right. Brian Well and co cio and general's PM at TCW Fixed Income. Before that, he started his career

at Donaldson, Loupkin and Yield. Jarette and Your Kids can go out and look that up. Fantastic firm until me and my friends a credit Swiss came along and acquired them, and then most of the talent walked out like fifteen minutes after the closing. So that's how that works. But the Brian landed just fine at the Trust Company of the West Run and the Gobs of Casher, so we

appreciate getting a few minutes of this time. This is where you're listening to the tape cancer our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, tune in 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, let's play Bloomberg eleven, Dirty Mandy Seeing Senior Technology. Anels Perflummer Intelligence joins us

here in the studio and Poonam. Let's beginning with you with we've been talking about Lulu Lemon, but love to broaden it out a little bit more. What's your call here on the consumer on retail? Are they just buying stretchy pants or are they buying other stuff too? I think shoppers are buying what they want to buy. So it's one of those things where if you have the

right product, you're getting the shopper to come in. There's been mixed reviews, and you know, the consumer spending and where the consumer is slowing boot Paul, you know when I look at it, if you're traveling and you're spending money, right, you just have to find what you want and lu Lemon is a place where people find what they want.

And that's why you continue to see strengths. They're despite macro indicators that would say, you know, inflation is high rates, they're going up, unemployment is kicking up, a little, saving they're dropping. But the consumer are spending because the consumer is spending where they want to spend. So we were talking about this earlier. I noticed the retail world seems to have lost its middle. There's there's the budget value minded brands and the luxury brands. Am I miss reading this?

Is this just my bias perspective? Or have we hollowed out what used to be the JC Penny's, Macy's, Lord and tailor sort of middle end of the retail market. So there's clearly a bifurcation between the low and the high end that exist the middle was losing ground, so they're starting to evolve. So when you talk about these department stores, you know they've been around forever, but the customer kind of went away from them because they were

too vague, too overathorted. And what we're seeing happening with the middle, they're starting to become more catering to clients that they want. So they're evolving. They're shrinking their store sides, they are developing brands that will resonate more of a shoppers. They're changing the experience and the stores and and that's where the middle is shifting right now. A man deep, let's switch from retail a little bit. Micron semiconductor company.

That's some pretty good numbers, but I think people like the guidance a little bit. Talks just real briefly about what you learn from Micron and what it means for the Yeah, the glut, the glut. I don't know if their numbers were good because they had negative thirty one percent gross margins. So when how do you do that? You do that when you've got a lot of inventory

that you have to write off. And look, these businesses require a lot of capex because they're running their own fabs and they're running at a much lower utilization right now because the end market demand isn't there on the PC and smartphone side. That's when you see negative gross margins. The last time it happened wasn't two thousand and eight oh nine, and we know that lasted about eight quarters.

So everyone right now is thinking this is a four to five quarter decline and next year it's going to be, you know, back to fifty percent growth. Now. Look, I think there are certain end markets and semis that are strong autos data centers. We know that. But in the case of Micron, over half of their revenue comes from PCs and smartphones, and which is why they had to write down a lot of the inventory. Who's buying PCs? Now?

Does anybody buy PCs anymore? Well? Yeah, still so, I mean, I guess for work right for the office laptops, but it's still a saturated market. So when you think about, you know, the demand drivers and how these end markets are growing, they're not growing north of you know, low single digit and that's where a refresh cycle really matters.

So what happened during the COVID phases we probably pulled forward a lot of the refreshes, and right now we're going through that lave where there is nobody who is actually interested in refreshing their PC and we have to wait a couple of years. Same thing with smartphones. And look, Micron doesn't supply directly to customer. It's a B to B business. So the companies that buy from Micron, they probably had an over capacity to begin with because we

are coming from a shortage phase. We're talking about supply chain shortages for the last few years, and so Micron actually expanded their capacity over the last three years. So now that extra capacity is hurting them. So let me

ask you the question before Matt does. When do we start to see sufficient semiconductor production to allow new cars to be produced at levels that will meet demand and perhaps get rid of some of these UH dealer search charge adms right, additional dealer markup Berry And I don't care about the PCs, but I ordered my Challenger a

couple months ago and I'm willing for it. Right because autos is still you know, ten to fifteen percent of their overall revenue, whereas PCs and smartphones are much bigger. So even though you may think it's because of you know, bottlenecks and chip supply. But that's not how these companies

make money. If what you're supplying to the autos is a small sp chip, whereas when it comes to PCs and data centers, it's much bigger sps for these companies ever, so they're just not a priority to the manufacturers that's satisfying their bigger clients. Wow, that's see. I mean almost the last time GM and Ford weren't like a major client. All right, put let's go back to you because I mean the inventory issue that we're talking about in Semis, it's the similar type thing in your retail space of

yoga pants. Inventory to sales ratio has the industry kind of gottenance inventory situation in shape. I think they're working towards it, so it's definitely better than where it was mid last year and even through the holidays, but it's

still a work in progress. There's still more inventory that needs to be cut, and they really need to realign their inventories with demand because if the consumer does flow in the back half, then inventories could once again pile up very quickly if they don't begin to put a model in where they can chase inventory rather than half too much. I mean many have just real quick thirty seconds. Are we on the other side of this ups and downs with chips? Are we? Are we not? Kind of

on an upswing. We're gonna it'll be a good business again, probably viewing that late inventory correction phase for PCs and smartphones. Okay, well, we haven't seen us slowdown on the autos and data center side, so we can't even talk about a trough because there hasn't been any deceleration. So end market exposure really matters right now, all right, end market exposure really matters.

All right? Good stuff, And that's Matt and Barried buying all these silly cars that they do, all right, so we got put them, Goyle, thank you so much for joining us. Put them covers all the motorcycle because Ducati has more chips in the multi Strata V four than they've ever had. Now you've got a motorcycle that can

do adaptive cruise control, that has blind spot detection. But the problem with that is, I order one last year in twenty twenty two, I'm not going to get until next year ordering things left and run he is I mean left and right recession? Exactly what recession. All right, mendep seen covering all of the tech stuff here for Bloomberg Intelligence. A nice round table there bringing retail and tech together. Who else can do with the Bloomberg Intelligence

More coming up? You're listening to the table cancer our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, tune in 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. We focus on earnings. We focus on big macro issues, like what's going on in the

banking system. But boy, at the end of the day, it seems like these markets continue to be driven by this federal reserve. We need to get a sense kind of where we are. Hugh Henry, he's a founding partner of Eclectica Asset Management. I founded that back in two and two. Hugh, thanks so much for joining us here. How is this FED performing here? Is this FED still behind the curve? Are they just nowhere near the curve or are they finally gotten back on board there? What's

your call of this FED here? As we wait some more inflation data later this week. Oh, he is, I feared you would gona. I don't know if it's because it's raining and I find myself in Los Angeles and it's raining. You go all the way to LA and it's raining. I know, and I don't want to. I don't I am the rain. I'm full of the state,

the Fed's notions, their potions. Whereas the game might might I think the best retort to your question is it a retort, but is tell me when the FED tell me when we last gave them like five stars, Tell me when they actually order it, when they actually they brought something to the table which actually empowered and made our lives better. And I don't one eighty two when when when finally rates peaked. Now, let's let's look at that rates peaked to FED rates peaked to twenty percent. Yeah,

and that seems an extraordinary level. But let's put a filter on that because debt and I'm going to round these debts to GDP ratios, you know, the quantum of debt versus the income of the American economy. I'm going to We're not going to do decimal points. I'm going to tell you that in the semicies we had dle average. We finally completed the deal leverage from the travesty, you know, the bank crisis so many decades before in the nineteen thirty s, which is to say, DEAD was one times

the size of the American economy. And if you fast forward forty fifty years from that point, of course, we releveraged. We became very boulish on ourselves, and I think, and I fear the process, we created a lot of fictitious wealth in the asset markets. But dead is now four times national income. And so what I want to say if you had twenty and you compare the twenty percent FED funds to the dead of one times GDP, well

you know, twenty times one is twenty. And then fast forward to today and we're at five pretty much, and we've got four of four x of debt. So I want to say to you that today feels a lot like nineteen eighty two, that we're kind of at twenty percent reds. And when you're at those levels, things break, and you don't need me to tell you they've been breaking. So here's the question I think a lot of people

are wrestling with, because when you look at rates objectively. Today, when you look at them in absolute terms, they're historically low. So is it the level of rates or how rapidly they rose over the past twelve months. It so the rates, to use the vernacular of the financial markets, it's the carry, you know, it's the servicing of the debt. So, yes, you're correct, I mean comparing five to twenty then of course an absolute terms, one is way below the other.

But again, when the debt is four times greater, then you equalize. So don't fall into that trap. Five percent rates are very potently destructive to our economy today, I think, So I want to keep me I suggest to you that we almost have the worst of all wor roads,

and let me try and explain why. Because the real economy, you know, for the real folk out there going to work and trying to make a dollar, they're under the heel of this very profound and sharp tightening of money try conditions, and then we have asset prices, and asset prices are really prone to inflation, and it's an inflation coming from kind of the system of trade that we have with the rest of the world that you know, as we know America consumes and the rest of the

world produces almost so one is a deficit nation and one is a surplus nation. Now, economics, it was conceived that that could happen from time to time, but actually it's become the norm. I mean, all of my adult life, America has been the deficit nation. And we've had we call them mercantileus, but we've had trade orientated economies like Germany and these oil producers and of course over in Asia,

and they create surpluses. And the great problem that the real folk have is that these suplus nations around the world, they don't want to buy physical goods or services from the real folk. They want to buy they want to

buy financial asses from the wall street folk. And so again we've got this kind of division where one part of the community, very small part of the community, is wearing sunglasses because the future seems so bright, and the other part of the community has the disdain of the rain, the deflationary rain. But how does that work out you? I mean, this all sounds very kind of sky is falling Thomas Woods. We heard this after the Great Financial Crisis.

It reminds me of that you know rap video that was what was that it was Cane's versus High right, right, and but that you how terrible reckoning never came to pass. Maybe we put it off for a decade and a half. But how does this all work out? Because that sounds like a really bad setup. No, okay, Okay, propaganda, my friend, you've been swallowing the propaganda from Wall Street. Let's let's let's unveil a few things. Okay. If you look at

the per capita GDP expansion, what does that mean? It means the average income from for the average Joe in this country, okay, And letting you base it to one hundred, and you compare the plight of the average real person, okay, since two thousand and nine, since the last financial great financial crisis. Okay, And as a reference point, let's take nineteen thirty okay. And so let's consider two communities of the real four, one starting in nineteen thirteen going fifteen

years out. One starting in two thousand and nine and going fifteen years is slightly less. Yeah, the folk back in the in the Great Depression, their income has gone from one hundred to one hundred and eighty. Okay. So there's our reference point, okay, where where is the corresponding expansion and income for the When we start that that journey at two thousand and nine, you find that the average per capital US GDP statistic has gone from one

hundred to just shy of one hundred and twenty. Actually, for the real folk, we've been living in a depression where the financial press are unwilling for some reason to call it that. And why is it a depression? Because of the last the last fourteen years or so, the Federal Reserve and indeed financial markets on at least three occasions have sought to tighten monetary policy, and that that's

proven itself to be futile damaging. That's really interesting. You You raise some some fascinating points, one of which is looking at both wealth inequality and what's been taking place in terms of the US deficits. What you're really saying is that if the United States cut less taxes on corporations and the wealthy, the average working stiff would have more cash and we'd have less deficits. Am I hearing you correctly? I would like to take it a step forward.

I'd like to say that actually the US has been and this will kind of cause people to shark, but has been a benevolent hegemone that has actually been willing to run them. Going on in the modern financial world, which is that all of the suckplus savings from all over the world are being channeled and funneled into the United States economy. Why is that funny? It's funny because the US economy has no need for those savings. Sure, there's a need for investment in the US economy, but

neat is more than met by domestic sources of savings. Okay, so and and and the orthodoxy of economics is the savings should be going to the other nations, which you know, which need financing, which which had lots of investment demands. That's not happening. And so again, what happens the surplus capital flows, They flow into US prices and then they make they make it very uncomfortable for the real foot because your house is just too expensive, like young professional

kids can't live in major cities. And because that's a great point, I had a boss, an X boss now, who said he couldn't believe the audacity of the new hires that felt they should be able to live near the office, to afford to live in the city where they work, all right, because Hugh, I hope we get to have you on for for a lot longer next time, for like a half hour instead of just ten minutes, because it's really fascinating stuff, all right, Hugh Henry, founding

Pardoner of Eclectic Asset Management. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and into the interviews of 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 fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio