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Coatraining it down to join this now port filio manager at Franklin Mitchell Seriestina. Can we start that the difference in the inflation that the eurosone is experiencing right now and that we are home in the United States. Is there a big difference from your perspective.
We need to think about what's generating the inflation in the Eurozone region and what has been generating it. And the war in Ukraine has really not come to light for such a long period of time, but that's really what is reflected in those European inflation numbers. It's the fact that someone cut off the gas supply and we need to replace that gas, and that is the inflation that people are dealing with. But we keep talking about it,
and I think it's so important. It's the reaction of the governments that we have been very very positive upon in terms of that incremental help that they're providing to their citizens. And I think that that is where there's that disconnect, is that the population is actually quite happy because they're getting support and they're getting help, so they're not protesting in the streets.
What's fascinating to me, and this came up at the meetings of the IMF, and we have Reguard John When is Leguard like in an hour? Thankfully five, it's going to be here in she's speaking a different language to
a different culture and fabric. And I wonder, within all your study by university, all the work you've done in equities, are we at a point where we can say they've gone beyond eurosclerosis and that they have a financial structure more like us, more Anglo Saxon, if you will, than what we knew when we were studying this.
It's trying to pansitioning. I think that the bond market in the Eurozone is still not as robust as the bond market that we see in the United States. And what does that mean is that your companies don't go into bankruptcy that is driven by the bondholders and the breaching of those covenants because the debt is held in the banks, and the banks tend to be wanting to work with their customers on a longer period of time. So even though you've had that transition, it's not being
a really noticeable one. But look, they're data dependent. I mean, who does not want to hear the fact that the people running the ECB are looking at the data and they're being informed by the data, and they're saying that, you know, the core inflation number is still high. It's at five point six percent on a core basis. That's significantly above two. We're not talking the difference between two
and three. We're talking you're multiple points higher. And they need to I think forcefully was the word, but they need to really push that number down.
So we haven't seen it it yet. Data dependency is a key phrase on the show where you're going to have an alarm go off and then we'll say, well, what exactly do you mean by that?
Right?
And it means something different for everybody. For right now, the Federal Reserve, it means a Senior Loan Officer survey and perhaps what happens with respect to two regional banks in Europe? Is it just core inflation? Is that the pre eminent data dependency that we're looking at.
I think that they're looking at multiple of factors. They're looking at what's happening in spreads in the periphery and we saw that about a year ago where you saw that blowout and spreads in Italy and the ECB reacted, So that's one area of data they're looking at. They
are looking at inflation. They're also looking at Eurozone in your employment metrics because one of the mechanisms for your inflation it needs to be wager dross adjustment because people need to get that to be able to cope with it. And so they're looking at whether or not those higher wages are causing employees to be laid off. So there's a lot of different factors they're looking at.
Katrina, thank you, thank you, jumping on into the studio and catching up with a thank t. Don't think that Franklin Mitchell on the l likes to say CP decision.
Right now.
Stephen Raschudo joins is Steve Rashudo's chief economis at Mizuo, and yes it is on the American economy. But Steven, I got to start with the EU here and the challenges that Madame Leguard faces. The idea here is the animal spirit of the United States, our technical superiority.
Say Apple earnings this afternoon is one.
Example, gives us a certain as Ned Phelps of Columbia would say, dynamism. Does Europe have the dynamism to have a higher interest rate regime? Well, part of the problem that they face is is all the conditions that you just laid out. But in addition, there is a demographic issue, and there is a wage subsidy issue, which certainly adds to the whole concept of the whole eurosclerosis discussion that
we had been having for years about Europe. And I think Europe is aging rapidly and they're finding a way not to keep their best educated people on the sidelines in a very comfortable lifestyle.
At least.
I want to note the eual craters here. I mean, this is widely anticipated by John Ferrell, the ear craters.
As I would say on a radio, do a one.
Ten twenty one, yeah to one one exactly here this is what I'm watching. Actually, it's exactly the chart that I have up, not just because I'm waiting for it to break out of the one ten range, but.
Steve to be proven correct.
I'm curious. I don't know what correct would mean for me at this point, but I will I'm curious about whether, Steve, you think people have overplayed the Europe's strength story, the ability to withstand both higher rates and consistent growth. That was sort of the consensus heading into this meeting, and then all of a sudden they took the lesser of the two options with the ECB today, and then in the US you see that the data is still strong. Does this underscore something that is important?
Well, I think there is that measure, and I think when you're looking at the oil numbers, just I know people are talking about a fat finger mistake in terms of the client in oil, but I think what you're seeing is globally around the world, you're not seeing the kind of resilience. You're not seeing it coming out of the Chinese opening, You're not seeing it coming out of Europe, and I think, yeah, there's a greater potential for Europe
to run into resistance. Especially I heard one of your commentators talking earlier today about the fact that Europe has a much closer connection in terms of its mortgage environment relative to the interest rate environment than we do in the United States because we have fixed rate mortgages. They have adjustable rate mortgage and that result is they have a bigger economic impact from what's going on.
Well, let's build on that, because I was wondering whether their mortgage situation is akin to the regional banking situation in the US. You need the nodes of stress that are emerging are distinct depending on what kind of capital markets each region has. Do you think that the mortgage issue in Europe could become the new regional banking crisis in terms of people unable to pay for their monthly bills.
Yeah.
Without getting into the specifics of it, I think at this particular juncture, I think you're probably okay. And one of the reasons for it is because of the social
safety net that's created in Europe. But I think in addition to that, you're in an environment where you know, people in Europe are quicker to adjust their spending as a result of this, So I think you know you're looking at a potential downturn in the economy relative to the strength everyone was looking for am I going to say it's going to be a deeper, significant downturn at this particular juncture.
I can't make that.
Call, but I do think it adds to the growth to the recession call forecast, as the regional bank problem adds to the recession forecast here. And if you look at all the data we've gotten out this week, you know, get much of its March data, some of it is April data.
It's all strong.
Even when you look at the claims number this morning, two forty two, between two fifty and between two hundred and two fifty, you're not in a recession that's residual. You've got to get into that two fifty to three are to start saying, okay, it's a really shallow recession. And then you keep on going up from there. And then you look at claim continuing claims they dropped again. So you know, we don't have that labor market issue that I think a lot of people are concerned about.
Yet, if you just joining us on radio on television, Stephen Shooto of MISSOI where this we could go for three hours with them with the experience of the American economy. Let's turn to America right now, I want you to dovetail in with your colleague dominant Constum's idea of a FED with monetary policy but with other stuff, including the banking crisis, becoming a constanm states super restrictive. How close are we to reshoot out super restrictive?
You know?
I mean, I think the Federal Reserve has a way out of this that would be very, very simple, and I think one of the things that they should do immediately is end quantitative tightening. Part of the problem in the overall scenario for the outlook for the US economy is the fact that the Federal Reserve is taking down its balance sheet. And the Fed seems to believe taking down its balance sheet will not lead douart or dollar to taking down reserves. It is taking down reserves, and
the net result is that's amplifying the problems. So the Federal Reserve, you know, this is the second time they've attempted to do both an interest rate increase and a quantitative tightening, and they've blown it both times.
Okay, but is this like a British austerity? The United Kingdom buried itself with some philosophical twentieth century austerity a number of years ago. Do we have an austere Jerome Powell.
Well, I think the Federal Reserve is overplaying its hand by using both quantitative tightening and interest rate policy at the same time. They should separate the two. They should use one at a time, and they should recognize that largely when you go into a quantitative easing standpoint, you do it and you assume it is permanent because you've done it because you're afraid of deflation. Okay, this concept that it's equivalent to an interest rate in reduction is wrong.
We're in a free reserve environment.
Building on that. Just over in Europe, when we are about six minutes from the press conference with Christine Legard, who heads the ECB, one person saying and Maria today, I'll bringing us this that the most key point for the press conference will be that they are ending reinvestment of the APP basically one of their main bond purchasing
acid per programs. And this was sort of a nod to the Hawks to basically say, Okay, we are going to get rid of this program more quickly, even though we're not going to raise rates by fifty basis points. What are you looking for in terms of what Christine Legard has to say about this.
Again, I think they're going to go down the same path that we've gone down. There is this misconception that what you put in you can take out. When you're looking at the reserves in the system, the bank's balance sheet expands to the level of reserves that are provided, and it's harder to shrink the balance sheet than it is to expand the balance sheet. And this is why the FED thinks, well, if we put it on all the automatic pilot, we read it, let it run in
the background, everything's fine. Okay, that's fine to some extent, but you're also raising interest rates. So the reality is separate the two. Leave them as separate policies because they are distinctly separate policies guided for very distinctly different things. So I think what the FED should do and I think what the ECB should do is leave one alone, do one and then come back to the other. The ECB so far has only focused on one. The FED
was doing both at the same time. We've gotten into a problem with less taking out of the system now than we did in twenty eighteen. In twenty nineteen.
Don't be a stranger Stephen Raushudo where US was MISSOI just a terrific team between Steve Rushudo and Dominique.
Constant joining us.
Now our reporter Matthew Monks after removed markets and truly moved all of banking markets last night. Matthew, congratulations on your reporting as simple as I can. In the April twenty fifth statement by the leadership of pac West, they say that credit dynamics are steady. I found that really, really, really important. What are the credit metrics they have? Is it real estate on Rodeo Drive? What do they actually own away from the deposits.
They have a lot of commercial real estate, so that's like multifamily apartment loans. They have a lot of business loans like sover bawling credit lines to business is they have a venture capital lending business.
The important thing to understand here this is not a credit.
Quality issue, uh not yet at least it's it's it's an interest rate issue, which means that these loans are no longer you know, worth what they were when they wrote them. They're you know, their market value is below par, but you know they're they're they're assuming that they all get paid back. You know they will be worth whole eventually, but it's really about the interest rate and the credit quality.
Is it's holding steady, which is different than the last crisis.
So Matt, let's talk about these strategic options, go through them one by one. What is on the table here and where you think the priority lies for leadership of this bank.
So the ideal solution here would be some kind of UH rescue merger with another larger institution. It's it's it's a great franchise in California. There's a lot of people that be interested in expanding California. But the issue, like I said, it goes back to this kind of interest rate risk and those loans. Since they're not worth what they used to be, any potential buyer is going to have to take a substantial hit right out the gate
marking down those loans, which would create a loss. So it makes it really really hard for someone to buy them. So obviously that would be the first priority for them, is to find a merger parting.
But just getting someone to take that it would be an issue.
Bet, we just saw the playbook with this, right, I mean, we just saw the idea that basically you just wait for the for the FDIC to come in and give you some sort of loan loss agreement and then all of a sudden it's a feasible purchase. Why is this not just going to end up in the same place.
I don't know yet. If you can, I don't know. I'm trying to get a head wrapt around of this.
Well.
Now there is one possible reason. Now, this is a much smaller institution than First Republic. It's much smaller than a Silicon Valley bank. So potentially, you know, a bank could kind of step up in and eat a loss and make it worth their while.
But it's kind of hard.
To argue with, you know, getting a sweetheart deal from the FDIC.
I guess, but it's all still to be determined. Matt.
I don't want you to tip your hand, but I know that you speak with a lot of people in the world dealmaking. How much chatter is there about additional m and a about additional kinds of tie ups in the banking sector, perhaps under less distressed kinds of circumstances, to get ahead of this type of thing.
I think everything's dead right now for the reason that I mentioned.
I think long term, you're going to see a lot of consolidation, but right now everything is just kind of off the table, especially when you see that TD deal graveling this morning. If you're a large institution, how are you going to take that risk that it's going to get shot down? These deals take nine months close to begin with. Now you're going to do a deal and
it's just going to be open ended. So no, I mean, I hate to say it, but unless it's kind of forced or distressed bank, m and A right now is dead.
I mean, I don't want you to play sell side analysts here. That's not the Bloomberg way, Matthew Monks. But in your reporting, even if you have deposit stability from thirty five billion down to twenty eight billion, is the other side of the ledgers so diminished mark the market that they're at a net capital negative right now?
I mean, is back west. I don't think zero capital.
No, I don't think so. I don't think they're in solving.
And then everybody that I was talking to last night, you know, wasn't indicating that they're solving. I mean, it's it's it's it's about investors in shorts selling down these banks and just being merciless Uh, all the institutional investors have led. You're not really seeing bargain investors kind of get into the stock. It's really it's just it's just
investors sentiment that's just hammering these banks. I mean, the three larger banks that failed before these were really incredibly problematic banks with the one hundred billion of troubled assets on their balance sheets.
It's it's not the case here.
This is really it's actually it's a it's actually really nice franchise in pretty decent shape.
It's just getting pummeled humbled bank investors.
The deposit profile is so different compared to sleep and we can put some numbers on that with these. We did that a little bit earlier from a reporter's perspective for you, Are you focused on that? Are we focused on the right thing when we sit here and say depositive stabilized, which is something that bank the communicy?
And yeah, absolutely, And I'm going back to the point that so I think eighty percent or so of their deposits are ensured that that that liquidity is not just going to run off in a heartbeat. And these you know, and these are these are insured kind of retail and commercial deposits. Uh, I don't think that we're seeing a run on them.
So yeah, I'm absolutely focused on that.
That's why I keep putting this message out here that it's it's a different situation than some of these other institutions.
One of the listeners of the program had an amazing question, which is, essentially, what is what you're saying that the Fed has to cut rates to get bank consolidation to take place? Is that kind of what people are waiting for, that opportunity for perhaps a balance sheet that makes a little bit more sense.
Yeah, well, I mean people are waiting for maybe the government to raise the deposit insurance cap. That's one thing that can kind of just stabilize thing and then maybe create stability for m and a federal reserve, you know, sluming its role when it comes into your straights. Yeah, at this point, the private market is definitely waiting for some kind of guidance from the government to stable life things, to foster consolidation one way or the other.
Hey, matt one for the catch up with this tremendous reporting. Matt let's talk against so before the week is out, Thank you, sir. Matthew Monkster on the latest story with pack Web. Do you want to get to around the table right now? Whaley, Global Chief investment Strategist A black Rock Whaley, Let's talk about what Tom's discussing and build on it. We've had the rate shock, are you looking for some kind of credit shock to follow?
We are expecting a version of credit tightening and crunch to come through to do some of the output destruction work for the fact, which is why we have now entered the beginning of the pause face. They signaled pause yesterday. We're expecting we're getting close to pick, if not at peak.
But more importantly from the meeting yesterday is that they continue to consistently reiterate no for this year and markets upricing in three cards for this year, and that this connect is going to be a source of further market volatility.
If I look at three months ten spread out one hundred and ninety three basis points, I can state I've never seen in a textbook. I've never thought about it. It never was back thirty years. It's a three standard deviation move, totally unprecedented. In your note, you talk about short term government paper. What will short term government paper do when in some form the three month ten year differential cracks.
Well, we expect a short term government paper to give you income which we haven't had in fixed income for a very very long time. And that is notwithstanding the debt ceiling uncertainty. And that is notwithstanding this dispersion, this huge, huge kind of discrepancy in terms of yields that you get in three months versus ten years if you hold it out for maturity, some of that uncertainty also kind
of washes away. The curve extremely inverted, is so inverted that we think the next movie is for ten year yields to do to come back up and curve to steepen from those extremely inverted inverted levels, which is why we long the front end, but we are less constructive on the long end of the curve.
Well, DIDJ.
Powell give you confidence that they had under control a sense of how deep some of the banking fissures go?
Can he give anyone confidence that is at its juncture? Seeing that it's still early days, One thing I would say the all in terms of what's playing out in the banking sector is that we don't think this is a banking specific, systematic, systemic type of crisis. We think that this is just another expression of financial cracks appearing in response to the fastest ray high cycle since the eighties.
Arguably what happened in the UK last September with the LDI guilt yield spike volatility episode was another expression of this financial cracks appearing. We know that as we fight inflation in a word shaped by supply cost of fighting inflation is higher and cracks would appear and it would carry economic cost. And that's starting to come.
What's the next progression in this cascade of cracks that you see, and it's the only policy response that can really address this rate cuts or.
Provision of liquidity. They have been very swift with that to start with, but now the boundary is getting blurred a little bit through the transmission channel of credit tidening. So which is why we're we think that we're basically at peak rate unless inflation surprises on the upside because of this huge uncertainty in terms of how big the credit crunch is likely going to be, and it's still early days to quantify precisely.
Can we turn to Tom's big focus. At the moment, we thought we'd all be bailed out on the growth side by Chinese reopening. We've had a couple of segnals manufacturing PMI in the last week. Some company earnings indicate that maybe the reopening and this boom we might get this year is a little bit of a head fake. Where do you come down on that?
Now, Well, the Chinese restart, the reopening has been is likely going to be very domestic focused. You see consumers spending more and travels during the past bank holiday week has been a very strong, So consumer is going to play a big role in this restart, which potentially limits the magnitude to which actually can come to the rescue
of developed market economy and the recession. FOTOLED. We're still of the view that Chinese growth can clog above six percent for this year, but we're also still of the view that in the US we're likely heading into recession second half of the year, especially as consumers starts to kind of rundown on their savings offer and their spending appetite is starting to store.
You're one of the most important Chinese voices in the Western world right now with black Rock, with your prodigious abilities in mathematics and the zeitgeist I see among corporate officers is to expand off the Pacific rim Western China, to not be in two cities or three cities, including Beijing, but to move into five, six, seven cities. John mentioned
LVMH the other day. It's an example of this. Do you perceive that there can be a three year, five year, ten year expansion by Western companies into other China cities? Are we always wedded to Hong Kong, Shanghai and Beijing.
I think when it comes to managing geopolitical risks and diversifying geopolitical risks, I think it's really important to recognize that the word today is more intertwined. It's more intertwined, and the trade linkages are stronger as well. So no
longer can we just face dull political risk premier. We have to kind of think about persistent risk premier as we construct portfolios, and when it comes to China risks and spreading that out both for investors and corporations, I think there is a certain direction of travel.
Certainly, welly, this is wonderful. It's got to say it. It always says here in New York City, Well leave blank Rolt, thank you very much.
Let's switch to Apple here.
Twenty eight percent per year return over the last ten years is different than the banks. Thomas fourteen knows us his senior research analyst Da Davidson's on this afternoon's festivities. Tom, I know there's lots of strategic ideas out there as well.
I went back on the Bloomberg folks.
So FA's screen on the Bloomberg is just absolutely stunning and the shares taken in their Intel like except Apple.
Is minting money.
I'm like fifteen years ago when Intel wasn't and the share buybacks over the last number of years have been absolutely extraordinary.
Are they going to drop a bombshell.
Today on use of cash on dividend and further new share buybacks?
I think it's going to be a reminder that Apple generates a ton of free cash flow and if you're not going to buy the stock and Warren Buck it's not going to buy the stock.
Apple's going to buy the stock. So I expect.
Another increase in their share repurchase plan. When you couple that with their dividend, the dividend yields still quite modest. Are they returning a lot of that free cash alow to generate back to shareholders? And I think that's contributing to the strong performance for the stock.
What's your glide path on revenue.
I know they had a couple of years ago a big pandemic boom, everybody had to buy a computer at home.
Maybe they were giving them out.
At First Republic Bank, But what is a single digit revenue glide path of Apple forward?
So if you think about Apple on a near term basis, they should benefit from the reopening of China, the end of the Chinese government COVID zero policy to the extent that ten percent of their sales are to Chinese consumers. They have seen some softness in some of their economically sensitive revenue, including advertising, think of it as advertising for
app downloads, especially in mobile gaming. But there's recent to expect that as the economy improves and on the strength continue strength of the iPhone on the five G network upgrade, that Apple may be able to sustain double digit top line growth.
The good news is that there's.
Easing of a very significant headwind in FX to the extent of the dollar weekend materially versus pound the year on the Japanese yen in the March quarter versus December reporter, So there's reasonably optimistic that revenue growth can improve.
Going from here, Tom, We've written some stories that talk about the stealth move away from China, away from production in China, and away from just in general, how big the Apple footprint is there. Are you expecting to hear anything about costs incurred on that transition away from the second largest economy in the world.
The answer is yes. And Tim Cook is an amazing CEO. I refer to him as CEO by day and diplomat by night. But he has a challenge here to the extent that he has to broaden his supply chain and move out of China to some degree. The good news is that as he expands into India, he kind of has the footprint of what he did in China, or sorry, the game plan of what he did in China and
mirror that for India. But yes, I think they have to more than stealthily diversify their supply chain so they're less dependent on China.
And I think that's going to be a challenge, especially at a time when companies seem to be rewarded for saying chat, GPT or artificial intelligence, and it's very difficult to talk about these high high fallutant ideas when it's just nuts and bolts moving things around the world and
trying to put things together. Is there anything in the latest hot trend that Apple can hang on to for future growth or are they kind of tied to an old economy kind of reality that's very much tied in the physical world.
Yeah.
So Tim Cook last quarter talked about AI as being a.
Horizontal technology, not a vertical one.
So when you think about Apple and AI, they're using AI on many levels.
I think of Siri as an example, and I think that what you're going.
To see is that I'm of the belief that longer term they could totally create a car versus just having kind of the consumer facing operating system in the car with CarPlay. That would be leveraging a lot of our artificial intelligence. Depending on your view of you know, the metaverse and I'm in a reality and virtuality, there's opportunities there as well. I think Apple is quietly using artificial intelligence on many levels. Microsoft's better at pr Apple, I would arguse better at technology.
Some that them there. That is not the first time I've heard that. Are you suggesting pretty obviously the youth think that the company that we're all looking at for some kind of AI revolution. It's just the one that's doing a better p on job right now.
I absolutely feel that way.
Although it is hard to debate who's better at PR Apple versus anybody.
I mean, Apple is amazing at PR.
Yes, I love the belief that when it comes to AI, when you compare Microsoft and Apple and Google, Microsoft's doing the best job in PR.
I didn't think we were going to have this conversation. That's brilliant, John, Thanks for bringing that up. Tom Forte. What's the glide path and the chip? I always go back to the A series of chips. Is there room for improvement to evermore amaze us with their chip development over the next two or three generations?
The answer is yes.
The beauty of Apple is the next device is always the fastest and the best. And I think that when you saw them take some of their chip production and chip design in house, that enables them going back to PR to promote how this product's better and to get us up grade.
So yes, I think the glide path is a good one.
There.
I tell Gret to catch out, thank you, sir. Some forty that if the idivisinc.
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