Surveillance: Citi's Fed Funds Forecast

In a time of incredibly anivated uncertainty. We once against see markets as underpricing the level of policy rates this year and have maintained our base case for policy rates. Here's the number way for this, five fifty to five seventy five, despite an undeniably dovish March f WEMC meeting,

even with a twenty five basis point hike. Andrew Hollandhurst, the man behind the note a City, joins us here in New York Morning, Andrew, Good morning, Okay, makes sense to that five seventy five on FED funds In the face of this, I think it's not hard to make sense of if you follow the inflation data. The big question is are we going to have a FED that's focused on financial stability issues or price stability issues. I think that's what we were talking about in the node.

In terms of the incredible uncertainty is it looks quite uncertain relative to whether we're going to get this focus on financial stability, which would be more dubish, or this focus on price stability, which would be more harkish. The last few days it looks like things are stabilizing a bit. We're going to get some inflation data later this week, maybe we start to move the narrative a little bit

back towards price stability. Let's talk about duration mismatches and not in the bond market and not at banks, just in terms of data and when we're going to find things out. We'll get inflation data on April twelfth. I just wonder how long it's going to take to find out the financial stability issues we're on the calendar and the mismatch this fed's got to grapple with because the timeline is going to be all over the place, and if they choose financial instability, they might have to wait

and wait and wait and wait. And you think it might have to wait until twenty twenty four before they see the slowdown bike. It could really take some time before you see the slowdown coming in and affecting growth

data and especially inflation data. If you think about the inflation data over the next three months, the next six months, it's probably going to come in essentially where it was going to come in before we had the issues in the banking sector, So they could really be waiting to see how this is going to trickle through and flow through the economy. If you go back to where we were just a couple of months ago, remember we'd had some months of softer core inflation prints, the FED was

sounding a bit more dovish. Well, then you basically had one month of data, you had a strong January, and you had some revisions to the prior inflation data, and all of a sudden, you had a more hawkish FED.

So we're trying to keep that in mind when we think about the FED here that the volatility that we saw in two year yields over the last couple of weeks, it makes some sense if you think that they were really moving between these two extremes where could be financial stability that would be more dovish or it could be price stability, and I think that really does mean that policy rates still need to get above five and a half percent. I love getting notes over the past two weeks.

I've loved it even more because I feel this exasperation as people basically say rate cuts, everything is over, and you're just like, stop it, guys, please stop it. Things, how are still hot? We still have an inflation problem. What kind of feedback do you get every time we point of these out? Yeah, so it's interesting. I think we actually get a lot of resonance on this idea that inflation is still strong and underlying inflation is still strong.

And where there's more of a question from clients is does the FED have the ability to respond to that strong inflation and do they have the willingness to do it, which which is a really important question for the FED, and I think a question that the FED should be aware people are asking, because one of the key things you want to do as a central bank is to provide that confidence that you have resolved to fight against

higher inflation. I think the market really got there a month ago or so we had two yar yields above five percent. Now there are new questions about whether the Fed is going to essentially have to give a little bit on the price stability mandate to focus on the financial stability mandate. That could be problematic if we start to view central banks is unwilling to move against inflation.

How high could ten year yields go if the Fed does pause despite hotter than expected CPI, PC all of the data indicators that we had been watching before the financial stability questions. Yeah, it's really interesting. We've been thinking about interest rates rising because policy rates are rising, but there's this other scenario where policy rates could actually stay lower and you could start to get longer term rates rising.

I think FED officials are feeling pretty confident about that right now because if you look at longer term expectations of inflation in the market five year forward, five year inflation break events, well those have stayed relatively stable, relatively consistent with mandate consistent policy levels. But I think that's what they'll be watching. If that starts gliding up. If you start saying higher tenure yields because the Fed is being dovish, that would be a real concern for Fed officials.

We've said a few times they're in the risk management business might say, they may decide are they going to have enough information to make the code to hike by the time I get to my third I think it's going to be a difficult meeting. I think they will have enough information to continue hiking at that meeting. The question is what guidance are they're giving beyond that. And we saw what happened with the dots at the last meeting a week ago, those dots that indicate where policy

rates should be at the end of the year. I think there's no question they were going to move up at that meeting until you had the issue in the banking sector. So now the question we're asking about May's, well, they don't have to update those dots, but they have to give us some indication of will there be further rate hikes or will there not be further rate hikes. I don't know that you can do again what Central

banks did a week or two weeks ago. If you remember the ECB hiking by fifty basis points and basically saying we can't tell you where we go from here. I think in May, at that time there'll be enough time to view the data, understand what's going on with financial stability, give some guidance will there be further rate hikes or will there not be further rate hikes. They'll have to make a decision. Well, the new line, I think is additional policy, firming additional policy from whatever whatever

that means. I'm sure they spent a long time coming up with that. Clearly they believe that what's developed in the banking system is a substitute for rate hikes. And to your point about the dot plot, I think we can probably agree around the table that if we got the dot plot three weeks ago, that was going from five point one to five to sixty. So let's say they believe the development to the last couple of weeks

are worth about fifty basis points. I've got no idea how much conviction they've got behind that view, or whether that really is their view, But I think we can read between the lines. Andrew, how on earth do you make an estimate as to how much the tightening of lending standards may develop off the back of the story the last couple of weeks and have had equates with

a level in FED funds. Yeah, I think it's really really difficult, and I worry a little bit about these statements that the tightening and credit conditions it's going to substitute for exactly twenty five or exactly fifty basiness point of rate hikes, because you're making an assumption first about how policy rates transmit through the financial conditions broadly, and then how financial conditions broadly transmit through to the real economy,

and think about what's happened here. There's all this talk about substituting for rate hikes. Well, we were pricing policy rates to go above five and a half percent. We had two year yields above five percent. Now we have two year yields around four percent, one hundred bases points lower. So do we think the tightening of credit conditions substitutes for one hundred bases point lower two year treasury yield

because that's what's happened in the market. If we don't, then essentially what markets are pricing is the FED to fully offset or more than offset the tightening that we've had in credit conditions. And that's really an issue for the FED if they thought that they had to get policy rates above five and a half percent, and financial conditions are now loosening, so we have credit conditions tightening,

We have financial conditions loosening. If you saw the housing data yesterday and over the last month, every indicator is turning up now, so we have a bottom in the housing market. It's rising from a bottom. I think that should be another concern where you say we were trying to slow down this economy. Now the sector that's most

responsive to interest rates is starting to re accelerate. To your point, given where market pricing is now, how vulnerable is the infrastructure of a market that's been whipside again and again and has a lot of fragilities baked in through leverage. How vulnerable is this market to a FED surprise, a massive FED surprise that disrupts where things are now. I think that's the other real issue for FED officials now,

especially given the new emphasis on financial stability risks. As a central bank, you're always trying to smoothly and incrementally guide policy rates, guide market pricing to what you think is the right level to be consistent with mandate consistent inflation. And the issue for the FED now is we have this huge disconnect between where the dots are and where the market is. Like we were just talking about, if anything, FED officials maybe wanted to go a bit higher than that.

If we start seeing the inflation to come and strong again, and we think we will over the next few months, all of a sudden we could be back in this world with FEDE officials think the policy raising needs to be much higher. And then can you get there in an incremental and smooth way or does this become a more violent adjustment? And again, I mean, look look at

the volatility we signed to your yields. I mean, in some ways that's reflecting the fact that we could very quickly replace what the FED is going to do if they're in a massive bind right now. I think once you get in the business of acknowledging that you think the developments of the last couple of weeks or a

substitute for rate hikes if they get worse. I just wonder how you can keep saying that we're going to get no rate cuts this year, because if you believe they're a substitute and we're very close to what you've indicated as terminal, then ultimately you should be pulling back if things get worse with us now in place to say is Peter Ship they head a Mactrice strategy at Academy Securities. Let's talk about this equity market. The Nastack rip it from a descemberow what more than twenty percent?

Whiley of black Rock said earlier on this week that this market believes we're going back to the old playbook, right cuts get along the Nastack, she says, we're not going back to the old playbook. Pete, what do you say? I would agree with that. I think the NASDAC rally is a bit overdone. People are expecting the same sort of performance we saw post COVID, and I think the conditions are just very different. It's not a supporter for that as a whole, though. I think we wanted to

range trade this equity market. Right as things start getting good, the fat comes more into play, and as things deteriorate, the fat comes into play the other direction. So, Pete, that range at the moment, at least since November has been thirty eight hundred to forty two hundred on the SMP. Is that the range of sticks? Yeah? I think so.

I'm certainly now fading this rally in the SMP. I'm fading it more through the NASTAC just because I think the old performance there has been greater, and I don't like the narrative that we return to twenty twenty two.

The one thing that remains outstanding for me on the banks, and I think this is one thing that's different than the US versus Europe is people here have alternatives to earning more than zero point two percent or whatever bank deposit is paying because we've had this gap in rates, and I think people are just becoming aware of that.

So that's what I'm watching to see. If we see ongoing deposits leaving the banking system, nothing to do with credit concerns and everything to do with what is a better yield alternative, And that's not the case in Europe yet because they just started their hiking cycle. Do you think that this concept of the natural disinflation, the immaculate disinflation hasn't gone away and it's almost embedded right now.

And what we're seeing, which is that the FED has an excuse not to hike rates further into cut rates and that everything will be just fine and inflation will naturally go away. I've been in the camp that we are generally headed towards deflation, especially in the goods camp, and we had four or five solid months right from September of last year till January this year, where you saw nothing but deflation. We saw the data bounce a little bit. Right now, you look at inventories, they're creeping

higher again. You start looking at shipments and free they're going lower. So I think, on the good side of the we're still in an overall deflationary environment. So I think that pulls down. I think housing is pulling down. Healthcare is something to watch. But yes, I think we have overreacted. We have to give this more time, and as these companies are pulling back on their jobs, I think that just filters through. What we've lost sight of. I think is that there is this long and lag

effect and we're not giving it time. The problem is, as market participants, we don't have that time. We're moving so quickly. Now you have to be right ahead of the time. At what point does the four percent implied FED funds rate by January of next year, these things enough to reinflate some of those prices that have started

to come down, you know right now. That's why the one thing I'm betting on is that either they can't hike as much as people are pricing in but I also do not think that we see massive cuts by the FAT. I think they're going to try and balance this. I think they're going to be very reluctant. I think we had a huge unlined of positions, especially in the two years, so some of those data, that data and how we're looking at what's going on further is just misprice.

So I would not bet against the bed cutting a lot. Well, Pete, as you know, spreads this large aren't resolved by a speech, That resolved by incoming information. So can we keep returning back to something Lisha and I've been talking about over the last couple of weeks, what is the incoming information that will resolve that spread? Is it CPI, payrolls, is

it lending standards? What is it? You know, I think it's going to be payrolls in particular, that's the one area that we had seen wage inflation take up, it was coming back down. Jobs have been probably the single strongest thing when for the last six months, at any given time, there are two or three things that you point to that were weak, and one thing that was constantly strong was jobs. So watch out what's happening in jobs.

A lot of people are still scratching their head. How can we get these layouts and they're not showing up in the jobs number, So that'd be the one area I think if jobs continue, the Fed's going to have to hike. If they come back, maybe a little bit of reality reflect some of the anecdotal evidence. Maybe that's

what lets the Fed pause. Do you think the market in the maintime for the next month or so, Pete, is desensitize somewhat to that data point, because the focus overwhelmingly is on bank stocks and what's happening in that sector. You know, I think hopefully we can move away a

little bit from bank stocks. I think that's calming. It's all about do they keep deposits given us youel differential, and now it's time to start thinking about, Okay, where is the economy and what reads do we get as we start earnings And again, it's not going to be about this sport's earnings. It's going to be what the future outlook is, and I think that's very questionable, Pete, this was great as always, Peter, chair that of Academy Securities. Peter,

thank you. Let's get back to the banking system. Joining us now after two days of testament on Capitol Hill from US regulators. Mara Rodrie gets Valladata's the principal at MRV Associates. Mora, let's start here. What did you learn over the last couple of days. Well, I think we really learned that history matters, and this is what happens when we have such a significant decline in history majors

because people forget things. They forget that basic interest rate, risk management, and liquidity measures are at the heart of being a bank. So there's certainly going to be some changes in terms of supervisory and on site examination processes, but there's still a lot we don't know. Where is Where is Greg Becker? He needs to be there, he is at the end of the day, where the box stops. Where were the board members? We haven't heard from any

of them. They're the ones that are supposed to provide oversight. It's not the FED or the California regulators that run the bank. So we still are missing from the whole range of cast of characters who were really responsible here. In the meantime, the bill we've heard is twenty three billion dollars at the FDIC incurred and is not taxpayer funded. Bailout.

It is JP Morgan funded bailout. How much is there going to be some sort of consequence to the major banks having a special assessment that leaves the FDIC hall right? And I can't imagine that JP Morgan City Bank, all of the globally systemically important banks in this country are happy about this. They are not the problem. They're very very liquid, they're very well capitalized, and they certainly don't

have concentrations of deposits the way that SVB did. And then the other regional banks are certainly going to take a hit. I don't believe the community banks will. I think there's absolutely no political will on either side of the aisle to hit the community banks. But at the end of the day, it's going to be the American consumer who is going to take a hit, because eventually, when premier rise for banks, eventually it gets passed on

to depositors. So this is not going to be any kind of free launch for the regular, ordinary American who had nothing to do with svb's horrible mismanagement. You talked about history and sort of a lack of history. Majors.

Greg ip in the Wall Street Journal wrote this column about how perhaps This isn't the same kind of two thousand and eight financial crisis where it happens all at once, and rather it's a slow moving crisis of smaller and medium sized banks losing relevance and losing some of their pre eminence in markets. Does that resonate with you? Unfortunately

it does. I think what we're seeing here is that you're going to have a wide range of investors, journalists, pundits who are now looking, Okay, where's the next trouble spot. We have banks that have incredibly large portfolios of souring real estate loans. You also have leveraged companies that have very little in protection for the lenders. So there are some trouble spots there. They've been there all along. But

with stock prices going up, investors were happy. The minute that you have a lot of volatility or you have stock prices going down, investors rediscover the religion of good due diligence in terms of credit. So I think we're going to have a lot of dribs and drabs of these kinds of issues. People are now talking about so called odd accounting rules or unusual accounting rules. No, those have been there all along, So you can move bonds around. You can also make all kinds of changes with non

performing loans and loan loss reserves. So I think every time that investors nitpick a bit more or journalists nitpick a bit more, they're going to find that there are some serious problems that still have not been resolved in the world of bank regulation, supervision and accounting. Mario know how this works. One week later, an equity market roundy later, and the questions, the urgency just kind of dissipates. We've seen that over the last week. I mentioned this with

least a few times. Last week, the big question was do we need legistive to change right now? What do we need to change? What do you need to do, like in the next twenty four hours, what do we need to change? I think what we need to change is to make sure that regulators, both statewide at at a federal level are empowered to do their job. You need to remove heads of banks from being at the district bank, so try to remove those conflicts of interest. And you really need to take this. You need to

change the structure. You need to empower are both offsite and onsite examiners to do their job. The problem is that when any one of them steps up and tries to tell the truth, right, there's no incentive to do that. And you do need to make sure that those banks that are one hundred billion and more are properly regulated

and supervised. You do need to do away with a Trump rule e gr RCPA that d designated, or change the definition as to what is a systemically important bank, because those regional banks, by definition, are very concentrated and they are very important in those regions. And hopefully this time around, politicians on both sides of the aisle have

learned the importance of not watering down those regulations. That's implied by the very fact that a couple of weekends ago they had to use these systemic risk exception for these banks. Maria, thank you for joining us. As always.

Mario Rodriquez Valadaris of MFI Associates pleased to say that joining us around the table here in New York is Steve Paliucer, senior advisor, a bank capital founder and CEO of PAGs Group Capital Partners and co owner of the Boston South Tis and Steve, it doesn't end there, but we haven't got a time, all right. It's good to see brackets. Can we start there? Steve Brackets for a cause, it's a great tradition here at Bloomberg as well. To

put this together. March Madness happens every year. I can't follow it, but it's college basketball and everyone gets very excited. And you've done pretty well this year. Yeah, I'm excited. Uh, it's a it's a great group and this has probably be in the medus March. Ever, so, how many teams have you got left? Because the last time I tried to do this, I think I was out after the first couple of days. It was like, bracket done. I can't even fill in all the boxes. Who have you

got left? I think I got one team left? One team left? You can't? And if you come top three? What's your charity? Charity is the Reform Alliance? Okay? What do they do? State? There are organizations set up by Bob Craft and Michael Ruben to basically help help prisoners get out get jobs when they get out of prison. We have a huge prison reform situation in this country. We've got to we've got to really help people get

out of that cycle. And that's an organization nationally. It's been set up to do there, and uh, I have a double bonus this year, and that my son actually left his job and he works for the Reform Alliance, you know, try to help them, so they should get some money off the back of this. I hope, So, I hope. So gonna finish we have you have to go home tonight and say go Yukon Go. If Yukon wins, Reform Alliance gets the money. So go Yukon one, go

sound another one and go at Atalanta, Fort Atalanta? When does this end? Are you done? Now? You've got enough sports teams? You never know. I'm really enjoying the ones that we have right now and they're winning, and I'm actually gonna go to Milwaukee tonight and see see the big game self explaining Milwaukee the number one verse number two in the East. So that'd be a lot of fun. You have a life that a lot of people would envy.

I'm wondering there has been a lot of interest in getting into the professional sports game for quite a while. We talked about that during some of the heydays of low interest rates. Have you found that change as it becomes more difficult to access capital for a number of individuals, Perhaps not yourself. Well, it really has changed, you know.

I think when when we did the Celtics purchase, it was something like three hundred and sixty million, and the average NBA club is worth three or four billion now, so it's been it's been a huge increase. But actually the markets have responded their firms that invest in sports franchises specifically, and people put together consortiums to get liquidity.

But you feel like there is less interest, that people now are sort of focused more on the nuts and bolts of existence rather than you know, just the sport of it, because there is perhaps other opportunity, but also because they are constrained. No, I think it's remained the same. It's it's a highly competitive, fun environment and in Boston,

you know, number one sports town in the country. Uh, it's just it's just a pleasure and sports has kind of transcended society, and the teams are really doing a lot of good in the community. NBA Cares, for example, Boston Celtics United for Social Justice. They're fantastic organizations that go out and help the community. So it's really become intertwined.

Can we discuss exits you're clearly a fan. How do you think about a potential exit when you have a stake in a sporting organization and you see the appreciation in the overall league. I'm thinking about the Glazers and Man United. I'm thinking about John Henry over it over Liverpool. They're clearly looking at these levels and thinking that maybe now is the time to exit. How do you think about that? Well, our philosophy is a family office is just a long term hold. It's a great asset for

a long term hold. Um. So you know, I would hope to go to the grave own owning these assets myself, hopefully hopefully quite a while from now, but but really long term hold. I think they're long term hold opportunities. And now the appreciations and so much people that got in earlier that want to get cashed. There's there's a big market out there of individuals want to get involved in sports teams and so they'll be successful doing that.

We're seeing very high evaluations right now because of the interest in it and because of the growing television revenues and the whole television landscape changing now as as we go from bundling to unbundling back to bundling again, um and and and sports programming is the one solid thing in there. People still will tune in and watch that live. So it's become very valuable to all these digital properties and the networks and news as well, state not just sport.

Just thrown that out those Sports Center news sports first, thank you st thanks for that. Now that's sport, that's sporting organizations across basketball, football, take your pick. Let's talk about the border of economy right now. If you've got money to put to work at the moment, how easy is it to transact? There's still plenty of opportunity out there. Um, there's a growing biotech sector in the United States, in Boston, San Francisco, m still technology companies that are that are

doing well. And this this period reminds me of coming off of the kind of tech crash in ninety nine. We had a very overvalued situation in tech and then and then I remember in those days, I would fly out to California and someone would give me a term sheet, say you have two days to decide. You know, this company's worth one hundred one hundred million. It has no sales, but it's a great idea to put on the internet.

And I was incredulous I mean I literally had seventeen or eighteen of these meetings, and I I was disoriented, and we actually I think I think the only year Bank Capital didn't make a major investment was nineteen ninety nine, thank goodness, and then that all crashed down in April.

But do you feel like we've gotten the washout that eventually you got in nineteen ninety nine heading into two thousand, or do you feel like this still is a tenuous moment where evaluations haven't found their floor in any way? I would say it's still tenuous, and people are going back to the basics, back to fundamentals, looking at cash flow,

looking at can the company be profitable. You can't have a thousand year timeframe anymore when interest rates or have gone from you know, next to zero to five and a half percent for a T bill. And you know, most of my career, I think three quarters of my career T bills were at four to five percent the vast majority of the time. So we really got trapped in this easy money period for the last ten or

twelve years, and now the reckoning has come. One thing that you're so wonderful about is you've got an incredible view into so many smaller companies and how they're accessing credit. We've been talking a lot about the potential for a restriction and credit really weakening the profile of these companies. Have you seen any evidence of that accelerating, especially over

the past couple of months. It's definitely an issue that we've invested in about forty or fifty venture companies in my family office, and many of them need more capital because the banks are with the Silicon Valley situation, they're reining in and making sure these companies have more capital to pay back those loans. So the market's reacting and

there is capital out there. But I think that's something to watch for sure, Steve, we've talked about what to watch, the tradition only eight indicators, CPI, payrolls and whether it's lending standard up for the next couple of months. What do you watch every single day? How do how do you gauge things at the moment? Well, I actually travel

around so much. I try to get out there in the real economy and see what's happening and talked to talk to lots and lots of people, and you know, we've had this this kind of savings build up through COVID, which is which is a good thing. And when you go in New York, restaurants are crowded. Every every flight I'm on is crowded. So I haven't seen, personally, I've seen a huge economic slowdown. There's still there's still money out there, there's lots of jobs, there's jobs, there's job offerings.

Many of these tech cuts are because the tech companies overspent or with cheap money, just went into areas they should have never gone into. So I don't believe those are fundamental, you know, cutting to the core of the tech companies. That's just a restructuring to get back to the basics and get back to where they're really adding value and making money rather than trying to send a man to the moon. The Year of Efficiency at METSA. Yeah, yeah,

seventy gain. Still plenty of guys trying to send people to the moon. Yeah, exactly, there's still are a lot of Yes, we talked about that. Hey, this is great. Soon you guys will be to be doing interviews in the moon in ten years. I'm looking for and maybe I'll look forwards to going up that with you. Yeah, I was about to say, perhaps, Yeah, first a little sorry Bristle, no doubt. Steve found your crypt bank Cappo, Steve, thank you, sir. Let's bring in Doug cast to talk

about this se Seabreez Partners President. I think it's safe to say a friend of the show, Doug. I listened to this show typically when Tom and Paul are anchoring, so I hear you on here. I love listening to your take, and you've got one out in your most recent note on UM on the banking situation. What do you think about the turmoil some would say crisis that we've experienced. Is it behind us? Sure? Um? First of all, good morning, and hey Pramo, first time, long time, Hey,

good morning. There's an English expression, you know, I always try to come out, Matt, you know, provide some differentiated viewpoints, not the regular bullet memorized bullet points, the permits and bulls and the permit bears. Anyway, there is an English expression that has claimed to be a translation of a traditional Chinese curse. May you live in interesting times? And I think it's an apt description of the market and the current business events over the last couple of weeks.

I guess based upon the news over the last month, we have to relearn some old lessons from all this. What are the lessons good? Question? First, when a government official says a problem has been contained, pay no attention. Second, government and policymakers are the ultimate short term oriented players. They simply can't withstand much pain in the economy or in the financial markets, so bailouts and rescues always follow. And I think, finally, almost no one will accept responsibilit

for his or her role in precipitating a crisis. Not de leverage speculators, not the willfully blind leaders of our banks and financial institutions, and certainly not our regulators, our government officials, members of the FED rating agencies, or politicians.

And I think, if we look, getting back to Max's question, the banking crisis was seemingly the outgrowth of poor and aggressive individual bank managements, banking supervisory failures, coupled with monetary policy that was pitted against the industry, at first taking rates too low, which had a painful impact on the net interest income in margins, and then on a time with unprecedented climb and interest rates, rates were arose to

levels that disintermediated and exposed banks with large wholesale deposit basis so I think that this crisis will exaggerate disinflationary impulses and as probably single and end to the tight cycle by slowing in the expansion and transmission of credit. But the SMP to US is now trading at the higher end of our projected trading range, and markets are

likely poised to again give Burne for not believing the Fed. Well, I don't think sustained rate cuts so highly likely until at least twenty twenty four, And I agree with your assessment of the economy primo. Well good, I'm glad to hear it, but I was more of the gloo exactly. Well, hold on a second, it's it's not gloom as much as trying to be nuanced and understanding the dissonances in

the market. And right now, one of the dissonances that you highlighted, Dug, was that people are pricing in significant rate cuts by the end of the year. They've retraced a bunch of that, and I think that we should reflect that this morning. We have seen a repricing back upward in terms of FED funds rates later this year and even earlier next mild but still, how much will

that really be? Not the death knell, but but really a spike in the heart of this rally of equities when there is a realization the yes, perhaps there will be a pause from the FED, but not wholesale rate cuts. That's an important factor, but there are two. I think what contributed to this rally in part was what you describe the decline in rates, but also a rare thing. Mostly market positioning doesn't matter, Lisa, but to us it

has mattered a lot recently. As an example, if you look at the American Association of Individual Investors, the bullish reading is in the bottom two percentile, and without exception, my hedge fund friends are are of a saturnine temperament

and are defensively positioned. And the second thing I wanted to mention is I think that we all have a lot of respect from my old pal Bob Farrell, and his famous quote is that the breath of market is important, that broad based rallies have the potential to continue, while narrowing rallies are prone to failure. And I was reading

some interesting research from Susquehanna yesterday. As of yesterday, the combination of Apple, Navidia, Microsoft, Meta Tesla, Amazon, Google, and Salesforce have contributed to over one hundred and sixty percent of the SMP gains for the year, So that means that the SMP would be negative without these stocks. That's

a really important factoid. And if you look at just Microsoft, Amazon, Apple, Meta and Google, they're up nineteen percent year to date, the SMP is up four percent, which means that the remainder of the four hundred ninety five SMP companies are down on the year. And by the dip has been a very successful strategy this year. Do you buy those? Do you feel like the baby has been thrown out at the bathwater? At least when you look at banks

and financials, we have been buying the dip. I had a non consensus view that we'd have a good first half when the consensus or groups was looking for a down first half if you remember as the year started, and but the second half would be challenging, and that we'd end up basically with the flat year. And I continue to see basically the market in a chop bucket from thirty seven hundred to forty one hundred or around

forty fifty five right now. So obviously the fifty I don't mean to be precise but this fifty to one hundred SMP points of upside but probably three hundred twenty five to three hundred and fifty a downside. We moved to a market neutral position this morning, and if the market continues to expand higher, will likely move into a

net short position. We've been talking about a divergence that seems to be growing between the smaller the regional banks and the larger banks for profitability, not just it with respect to the potential for collapsing. Do you believe in that? Do you think that there needs to be a greater differential and a greater risk premium place to on some of the regional banks just by virtue of the deposit

data and the concerns that will end up being higher costs. Yeah, I think it's it's quite obvious that the small to medium sized banks are disadvantaged right now and will be for an extended period of time. Oddly enough, I think the large money center banks in this banking crisis, which we have been accumulating aggressively, may even represent a generational opportunity.

And I know that's a very differentiated view, but if you're thinking about it, you look at JP Morgan Welles Bank of America, the industry, the large cap banks have reduced their leverage by half from the Great Financial Crisis. The liquidity is more than doubled. There's no subprime credit books have been generally de risked, notwithstanding the CRI issue, Dave.

And what is never mentioned is the humongous technology investments a JP Morgan has spent upwards of ten billion dollars a year behind them, and that that again advantages back to your point, to large money center banks from their competition, especially the smaller ones, but also the non bank entities. And then they will pass the quite extreme stress tests.

I mean assuming those those stress tests assumed the third lower value of commercial real estate, of having of the stock market, etc. And I'll have to or the small Also ironic, no one has ever mentioned that the bank stress tests never tested an increase or spike in interest rate, proving once again they're a bunch of effectless scoundrels. It's hey, by the way, nothing to do or not directly related to trading intelligence, but maybe more political or even social.

I want to get your take on the twenty eighteen rollback of the Dodd Frank Bill, because a lot of people have said that has been part of the problem here in terms of you know, less regulation. On the other hand, Barney Frank himself co author of the bill and board member at Signature, came on the show and said he doesn't think that had anything to do with it. He doesn't think that regulation needs to be um beefed up at all. What's your take? I couldn't. I couldn't

disagree with him more um, but what's the deal? He wrote, Dodd Frank, and then he goes out and says, we don't need regulation. The funniest thing is, um, um I talked. I was I don't even know if you guys remember what a nat A raider was, but anyway, I was a NATI raider with Ralph Nader and I wrote a book called City Bank while I was the second year student getting my MBA award. And then we talked about, um, the regulatory issues facing and mismatching of of assets and

liabilities that would end up with a crisis. We were only about forty five years too early. UM. But the regular the regulatory pullbacks, I think it was in twenty eighteen by the four president. We're profoundly important and influential in creating the crisis that we have today. But I do think, Matt, that it was the supervisory functions that really failed. Yeah, and that's gonna be one big question as we examine the potential report that I think is

coming out next month. Nobody dropped the hammer. Yeah, well, as exactly one senator put it, It's just the rules were there. They were everyone was talking about it, and no one did anything about it. An enforcement issue perhaps, rather than an oversight issue. Dodcast, thank you so much for being with us, Seabreep Partners President joining us on the phone. Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify,

and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg