This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Matthew Lizzetti
joins us now with Deutsche Banking. Away from your Arch recession call, you let on that among I think all of market economics, your call for interest rates is like Richard Claared is the former vice chair writing in The Economists, No, we're not going to get back to two percent, not back to one. But what does our world look like with an inflation that gets back to two point six three point two that kind of level the clarita level.
Yeah, so I think that's closer to where we expect to be by the end of this year. We have corpse around three and a half percent. You know, that is a lot of progress from where we are today. I would agree with Governor Waller's comments recently that over the past year you've basically seen very little progress, and we can point to different components that have moved back and forth, but the reality is we haven't seen much
progress over the past year. I think getting back down to three and a half percent for the FED that matters.
In the context of what the labor market looks like.
So if you still have a four percent or below unemployment rate, you have a FED where the FED funds rate is probably higher, certainly not as cutting rates, but if that's occurring within the context of a recession where the unoplunt rate has ers into four and a half for five percent, which is the context that we expect, is that that'll be what triggers the FED to be cutting rates there.
And then to add that into your GDP call, do you have a diminished inflation a disinflation into a slowing real GDP level or quarter to quarter movement that gets us down to a new diminished nominal GDP?
We do, you know, we have modestly positive growth in Q three, we have negative growth beginning in Q four into this the first half of next year.
Sub four percent nominal GDP.
It is when you add in where inflation is we only ape point six percent growth for this year, so it is sub four percent nominal GDP. But I think really for the Fed, it's, you know, the context of what is happening with the labor market.
I think that's been the key area of debate.
We've seen slowing there, but I think across most of the metrics, still four million more job openings and unplayed individuals. The private quits rate actually ticked up recently. The Atlanta Fed wage growth tracker hasn't shown any progress in coming down.
I think that's really the crux for the Fed.
A lot of people lean on the projections coming from the Federal Reserve, the Cordly SCP, the Summary of Economic projections. There's not much daylight between your rates call and their rates call for this year. In fact, there's no daylight at all. Where is the some daylight between you and the Federal Reserve when you look at that outlook, Yeah.
I would note I think they've come a little bit closer to us over time, Yeah, and that too, but at the moment, there is, you know, for this year, very little daylight.
There is greater daylight.
Into twenty twenty four, and they have their path, which I think is this gradual cutting path under something that looks somewhat like a soft landing, even with the unployment rate rising by one percentage points, and they're just kind of gliding back towards neutral. Our expectations that they have to cut more aggressively that you get a recession the unployment rate rises. We have two hundred and twenty five basis points of cuts between Q one and Q three
of next year. There is, you know, no doubt, a gap between us and where the FED is in the market at the moment by the end of the year, but that gap has been diminished. You know, we're at a four point six percent or so FED funds rate at the end of this year, and that seems quite reasonable to me within the context of, you know, you might have a recession beginning in Q four.
Can you dove tell that idea of more aggressive rate cuts in twenty twenty four with what we've heard from the banks just now, which was supposed to be really telling from an economic perspective, we would finally know how bad this credit crunch or credit kurf, fufflow or whatever you want to call it was. Now we're living in this sort of like, man, what did we learn We're not sure. I mean, how much have you learned from this?
Yeah, I think not much yet.
You know, we're hearing from a lot of the larger banks, which were anticipated to be a beneficiary of some of the stress in the smaller and medium sized banks. In terms of of you know, the fed's H four and H eight data. We've seen decreasing stress in the Fed's balance sheet, which I think has been a positive. It's giving us some sense that we're beyond, hopefully beyond the acute phase of what's been hanging happening in the banking sector.
But I think everybody's anticipating that we're still going to have this tightening of lending conditions, tightening of credit conditions that takes place.
That reduces growth.
That is part of our baseline expectation, but at the moment it's mostly scenario analysis. We really can't have a great idea of how much things are going to titan. We'll get the FED Senior Loan Officer Survey in early May. I expect that's going to be quite negative, just given when that was occurring, kind of around the peak stress that we were seeing going back.
To twenty twenty four. In your belief that the Fed's going to cut much more aggressively. What's the threshold, what's the bar going to be for them to be more aggressive with rate cuts?
Yeah, I think it's you know, are we seeing a recession take place? You know, their forecast for the unemployment rate is that it rises up to four point six percent and stays there. You don't ever really see that in a recession. You know, these things are nonlinear. If a rise fifty basis points, you get a recesion, it
rises by at least two percentage points. And so I think if you have something that looks more like a typical recession, which is basically our forecast, you get a two percentage point rise in the unemployment rate, then I think we should expect that they will be cutting rates.
I think they've been very clear they're not going to repeat the mistakes of the nineteen seventies the way that I would kind of view the mistakes of the nineteen seventies, where that they cut the real rate from very positive territory to very negative real territory very quickly. We don't expect them to do that this time around. They can cut rates pretty materially and still have a positive real FAED funds.
Right, It's so unfair of me to ask this, But is that forecast a political forecast? Do you think there's a political element to it to say four point five year round four six four six, next two years? How much I'll phrase it differently because I know you've don't want answer this. How much political heat would they get if they were forecasting anything higher than four and a half percent and described exactly what you think is going to play out?
Yeah, I don't know if it's as much politics as there's a confidence channel from how the Fed is forecasting things, and so they have a different role to play than I do. They can impact sentiment in the economy, They can impact I think overall confidence and therefore can impact what the actual outcome for the economy is. And so I think you know that should be viewed within that. You know, both their inflation forecast, but also what they're
showing with the unemployment rate. It's notable, I think, nonetheless, that they're showing the unemployment rising as much as it has. It's notable that in the minutes the Fed staff you know, very clearly has a baseline mild recession. You know, these things don't happen very often from the Fed's perspective. So I think it is a commitment in showing that they are willing to take the necessary actions to get inflation down.
So it's almost soros poper esque that you can shape the events you anticipate. It's almost something sol fulfilling about unemployment forecasts at a feder reserve.
One of the best conversations I ever had was the younger George Soros talking about Carl Popper in the early nineteen fifties at LSE. This is economic epistol, homology, religion, I say at UCLA, and the ideas you get out front and then can you reframe things as you go along? That's the narratives reframing if you will.
And Matt, this was smart, always says thought you. I thought we'd get there on a full cost. Here we are at the Federal Reserve. Matt, thank you.
Right now.
Gerard Cassidy joins us. He's been such a friend of the show to give us perspective across these many different types of banks, not all pooled together and gered. I want to start with a sentence buried in their very clear press release, which is all about Morgan Stanley all about what you and I have witnessed over decades. In all this turmoil, down down, down, down down, wealth Management moved from a five point nine billion revenue stream to
six point six billion. Boy, Gerard, is that talk about why everybody wants to copy Morgan's Stanley?
Tom, You're absolutely right. You know, the wealth management business is a more predictable, steady, any type of business versus the more volatile institutional business that you guys have been talking about. Tom, you mentioned about how amongst the investment banking revenues have declined, not just for Morgan Standing but
for the group, but wealth management. You're right that differentiates well Morgan Standing from his peers, and under Gorman's leadership, he's the one that drove this over the last ten years.
Jeff, we've had all the big banks report. Now who won the quarter?
I would say that, you know, the JP Morgan numbers probably stand out out, John as winning the quarter. They certainly drove those numbers through that net interest revenue line. Certainly they also had you know, relatively decent capital markets businesses, but it was all against expectations. The numbers, as you guys have pointed out, relative to a year ago, is still very weak, especially in investment banking. But I'm going to put Jack Morgan at the top of the list.
We've been focusing very closely on total deposits some of the regional banks here in Morgan Stanley reports first quotal total deposits been low. The estimate three hundred and forty seven point five billion versus the estimate of three hundred and fifty two point two billion. Does that matter or is this basically not a question? It's a rounding error that we don't have to pay attention to Gerrard, I think.
It's I don't want to say we don't pay attention don't pay attention to it, since we pay attention to everything. But I think you're going down the right path least that it's not a material issue of deposits. We have to remember that, you know, the Feederal Reserve is implementing quantitative tightening with the intention of reducing deposits out of the banking system after they created over three trillion under QE. So the entire banking system is going to see their
deposit shrink. And the real question is the mix of your deposits and the regional banks, and the big money center banks as well as Morgan's have good core consumer deposits, which are critical.
What's going to be the profit driver at a firm like Morgan Stanley if investment banking doesn't pick back up, if you are seeing transactions in the capital markets atrophy.
Yeah, Lisa, it's really the critical question for these investment banks. You know, it's out of their control, of course, in dictating how the market's going to behave in investment banking. So hopefully the first checkpoint will be monetary policy. The FED has to stop raising rates. So if we get to that terminal rate in the second quarter, hopefully the second half of the year, you'll see a pick up in the investment banking activity because it's a more stabled landscape.
Ji Ed.
I look at the twenty thirteen letter of Morgan Stanley written by mister Gorman, and there's a subtitle investing in our businesses, How's he advanced doing, How's he trade doing? And all the other things he pieced together to win wealth management in managing people's money.
Tom.
It's a very good point because they have not only grown organically, but inorganically through the acquisitions that you just identified and as we know in the asset management business, which is of course EAT, advanced economies of scale are critical. And so as they built their economies of scale, including their organic growth as well as other acquisitions in the asset management business, that has obviously helped them on the E trade. It's also given them a diversity of customers.
As you know, E trade is more of a self directed product line versus the traditional Morgan Stanley wealth management business, so it diversifies their revenues and you have to give Gorman credit from doing those acquisitions.
Just to wrap things up, just one question to you. We've asked this to investors, I'd love it from a bank countless just to answer it. Do you see the banking events of the last month as a one event that we can leave behind or the beginning of a process that leads to time of financial conditions? How does a bank can list answer that question?
I you know, from the get go, John I was saying to myself it was a one off event, and the reason being is that those business models that Silicon Valley Signature had were so different. Now that doesn't mean we're not going to see somewhat tighter lending conditions, Not so much because of what happened in March, as it might be called March madness. It really has to do with what the outlook is for the economy. And as Jamie Diamond said on his call, you know it's not
a credit crunch. Yes, maybe there's a thumb on the scale. But banks are into business to lend money at risk adjusted rates of return, and if they see good risk adjusted rates of return, they're going to lend money. So that's the real critical question, what is the outlook, Not necessarily what happened in March.
Jared, thanks for bamb but it's so much through much match and ascent through aankful as well to break down somebody's earnings. JERRH. Cassidy of MBC Capital Market.
Lizanne Saunders joins us now with Charles schraub Lizen. The clear and present for you is factor analysis. My problem is maybe I've got five ideas or ten ideas. Torsten Slock over to Apollo says, maybe there's twenty ideas. How do you find the twenty first security to own? I mean, it's just really difficult out there to do stock selection towards quality and positive free cash flow.
Well, interestingly, the last couple of weeks you have seen a more definitive bias from a factor perspective toward and this may seem obvious, but it's finally working its way into factors. Is interest coverage? So and by the way, second to that would be strength of profit margins. So I think this is really a story of who can maintain profit margins in a declining nominal inflation environment, which
had been a real support for pricing power. Now we're going to have to see who's actually got the pricing power and who can come cover that interest. But as we've always said, you can apply factor based screening across the spectrum of markets. Too many people think you have to start with a sector or two and then apply screening within You can find value characteristics or factors within stocks and areas that might be perceived as just in the growth area.
What you just heard their folks bottle This is off of Tuo share Schande of the Massachusetts Institute of Technology a million years ago. I can't say enough about the need to go cross sector in analysis as within sector. This is gospel for me in Lizan. Okay, Lizanne, I've gone cross sectors. Let's go type two negative. What do I want to avoid?
I think you want to avoid to some degree the opposite. You want to avoid the companies that are not self funding, the zombie companies that don't have the EBITDAH to cover interest expense, that can only fund their operations on the back of additional leverage. We had I think close to thirty percent of the Russell two thousand at one point last year could be classified as zombie. Are pretty close to zombie companies, So I would certainly avoid those, and you do get a lift like we saw in January
down the quality spectrum in the nonprofitable area. But I think this is decidedly a place where you want to focus on what's deer, you know, positive earning to revisions, the interests covered, strength of balance sheet, high cash, low debt. The opposite represents where you want to avoid right now.
Is the pain trade just higher even among some of these zombies at a time where a lot of people point to stimulus that hasn't been fully worked out of the system yet.
I think the pain trade probably is still a bit higher. If you look at institutional speculators recently, they did hit a pretty extreme short position in the S and P five hundred that, by the way, hasn't always been a contraring indicator. Sometimes they're sort of dead on, as was
the case in September of two thousand and seven. But I do think some of the short term rallies that we've seen in this market, particularly concentrated in January, did represent a lot of short covering and the pain associated with that. So there is still a decent amount of bearish positioning and that could provide some support for the market.
But I also think the market has recently gotten a little bit overbought, not to mention the fact that we've reverted back short term anyway to a negative correlation between bond yields and stock prices. So this recent move up in bond yields has been met, certainly on a day like today with a little bit more weakness in the equity market, and I think that negative correlation is likely to persist, maybe even in a secular way.
Wait, this is important lis in because a lot of people are wondering, okay, can we go back to sixty forty. Black Rock Investment Institute said please don't not yet, it isn't time, And what you just pointed to what you just said in terms of a secular change, would suggest you agree.
So from the sixties to nineties, kind of mid to late sixties to the mid to late nineties, you almost the entire period, on a rolling one hundred and twenty day basis, had a negative correlation between bond yields and stock prices because that was an era of more inflation volatility, so often when yields were going up, it was reflecting inflation having been let out of the bag. Again negative
for the equity market. Then fast forward to the Great Moderation era as coined by Larry Summers, basically the twenty plus years heading into the pandemic, almost an entire period, save for a brief period in two thousand and eight, you had a positive correlation because even during that era, when yields were going up, it was typically not reflecting an inflation problem but stronger growth, positive for the equity market.
I think we're going back to that environment life the thirty years prior to the Great Moderation, which is more inflation volatility. That is not the same thing as saying inflation is going to stay high in a secular way, but just more volatility and inflation. And for the newbies out there who haven't been around as long as I have, it's just a different investing backdrop. It's not necessarily significantly worse, it's just different relative to the air of the Great moderation.
The era we're in. Leazan and Schwab is a guilty victim of this is selling us on index funds and we're all indexed up to our eyeballs, and we're particularly indexed up to broad indexes. Are we over indexed and we have to go more specific narrow index or dare I say, even individual stock selection.
So we've alwaysous the benefit of having both passive strategies within a portfolio and active strategies. And as you all know, last year was a year where active had its best year relative to benchmarks since two thousand and five. And I do think in general that the playing field is getting more level, that active has the ability to operate relative to passive in a beneficial way on like what
we have seen in the recent decade or two. And I think in part that has to do with the return of the risk free rate, the fact that when you had rates at zero and negative in other parts of the world. It kind of mucked with price discovery and capital misallocation, and I think we are reconnecting fundamentals
to prices. And I think that that price discovery that is allowed by the return of the risk free rate, I think is to the benefit of active That does not mean sell all your passive funds and you know, become a stock picker. I think there's still a home for both. But I think active managers are just operating on a a better field right now in terms of being able to outperform benchmarks.
Listen a clinic from you as a whites Thanks for bamitis this morning. Lassan sounds a child swab on this secuity market.
Right now. And this is a joy because Lisa and I have no idea what we're talking about. It is the guy who changed the airline business. Yes, it came over to the United States, but more than anything, Michael O'Leary is someone that the United Kingdom and all of continental Europe knows. I learned this from my daughter the first time she said, Dad, Dublin this weekend. For John Pharaoh, it's simple. The flight he takes us from London is it Luton? John?
How do you pronounce it, Lieutenant.
Luton Airport, Luten to Naples sixty eight dollars.
I can't remember visit Lutenant Stanstead. I think with Stansted to Bari that's what we used to do.
Okay, there it is. Why don't you bring in mister O'Leary since you've thrown five thousand times on ryanair.
Mach a, good morning, So let's talk about how business is going, because in the United States we look at some of the airlines here and things are booming. Is it the same thing, Michael over in Europe?
Good morning guys, Yes, it is. It's booming and getting boom. Your easy Jet to release quite an up, quite an uptempo pre result statement yesterday. I'm afraid we have our full year results at the end of May, so I'm in a closed period. Can't comment other than what we previously said. Is as we emerge out of COVID, demand for air travel across Europe this year is very strong.
Pricing is rising. We're seeing the benefit of people going back traveling all summer long, and there's an invasion of Europe being I'm pleased tosable report being taken place by Americans coming over here to play our golf courses, visit our beaches, joining our cultural experiences. And I'm very pleased to welcome the Bloomberg New Economy Gateway Conference here to
the Garden of Ireland in Wicklow this morning. Although I'm suffering from hay fever, it's not a good day to be in the Garden of Ireland.
Well, Michael, I'm sorry to miss you over in Ireland. Let's pick up europe capacity. There is a frustration with travelers in the United States. When's the capacity coming back on so that we can get better airline fares and we can be a little bit more comfortable my call. How disciplined are you being about that?
We're not. We're taking as many aircraft as we can from Boeing this summer. We're going to be operating. We've planned to cary about one hundred and eighty five million passengers this year, which is up about thirty percent on our pre COVID numbers. So as soon as we can get the aircraft from Boeing, we're flying them. But overall, short old capacity in Europe will still be down around
five or ten percent on pre COVID capacity. Some of the European airlines have gone bus that Thomas Cookes flyve Alatalia Tap have only returned at half the size they previously were.
Aircraft capacity in.
Germany, where Lufthanse is doubling prices, is only operated eighty percent of pre COVID. So capacity is a challenge, and I think over the medium term, you know, the inability of Airbus and Boeing to deliver any meaningful increase in production means I think capacity is going to continue to be challenging for the next two three five years.
Look where we are and amaze sitting on the runways. It's about a limitation of airports, whether it's continental Europe or the United States, maybe even Asia, but there just this doesn't seem to be enough airports and enough gates. Are you waking up every morning saying to yourself, we've got to get the underlying infrastructure rebuilt for two thousand and thirty.
No, I think it's a differential tom between the US market and in Europe. In Europe there's many more airports available. There is a focus on three the big hub airports he throwed Paris and Frankfurt, Maine, which have never really worked that efficiently.
Those hub and spoke.
Airports they're challenging, but there's lots of other airports, second city airports and secondary airports at main cities, which essentially where Ryanair flies to. The big challenge for US in Europe is air traffic control, which continues to be a mess. The French air traffic controllers going on their recreational striking two three times a week. The French, who's been on service legislation to protect the French dimentiic flights and they
cancel the overflights. Okay, We've been calling repeatedly on the European Commission or Sula vonder Lane to get do something to protect overflights. So we don't have any issue with the French going on strike, but if they're going to go on strike in France, cancel the French flights and leave the Spanish, the German and the Italian flights alone.
As recreational striking takes up around Europe and frankly, probably globally, I'm curious how much that JACKSCEP salaries and allows people to observe some of the price increases that you've put out there for Ryanair tickets, and we've seen pretty much across the board. It is getting more expensive and people are paying it without even thinking when does it become too much? Have you sort of tested the barriers of when people start pushing back.
I don't think, Lisa, we've tested the barriers. But I mean it's a very unusual. I find myself in a very unusual situation here in Europe. Everybody's talking all way too long about energy crisis, consumer prices, rising interest rates, Yet fundamentally we're dealing with an economy across you over there's full employment. People are receiving their wages at the
end of every month, and they're spending money. I mean, I think that it feels almost like I know what the nineteen twenties were like after the Spanish Flu or the First World War, but it's almost like people are determined to spend and spend on travel in particular. I think they're being locked up for two years with COVID has driven people back to the beaches of Europe. People
have money and they are spending it. It is very difficult to get a restaurant, reservation, a hotel or a flight in Europe, and now Ryan Air is still offering the lowest fares in every market in which we operate, which is right across Europe. But even we're seeing our fares. Last year we saw fares rise by fourteen fifteen percent. We think this summer and I'm on record and say, you know, I think it'll be maybe we might get to double digit again, maybe ten percent increase in airfares.
But that's two years in a row of double digit airfare increases. So people are spending. I think we're nowhere near American level of airfars. You know, Southwest average fair last year was about one hundred and ten bucks. Our average fair last year was forty four euros. So it's still much cheaper to fly in Europe, but there's no doubt that it is getting a little bit more expensive, particularly as we moved through the summer of twenty twenty three.
But remember this is the air industry, and when things are going well, it means the next crisis is probably about four days.
Away, Michael, or another strike. Michael, thank you for being with us today, Michael Alarid Ryan as CEO.
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