Surveillance: Fed's Next Move with Dudley

Dundley might know it. Johns us Now, the former New York Fed President and Bloomberg opinion columnist Bill Let's go there, Goldman says, pause, pause, because of stress in the banking system. Bill, your best guess right now? What would it be here depends on where we are on Wednesday. I think we know they're not going to raise fifty we think I think we know they're not going to cut rates. The real questions zero or twenty five. The case for zero

is do no harm. We know that banking systems under stress. So while you continue to raise rates when the banking systems under stress. The case for twenty five basis points is to say, look, we still have an inflation problem. We can do both. We can use our liquidity facilities to show up the confidence in the banking system, and we use monetary policy to bring down inflation. You know, if I had if I was sitting there, I guess

I would probably recommend just taking a pause. But you have to do it in a way that doesn't alarm people. One of the problems of pausing is people are going to say, geez, why is the FED pausing? Things must be worse in the banking system than we think. I think this is a very different situation than the Great Financial Crisis in the sense that the banks. This is a question of confidence in banks due to uninsured deposits and mark to market losses. It's not about the economy

that's collapsing. In the last recession. During a great financial crisis, we were in recession beginning in December two thousand and seven. We're not in recession now. The economy is actually doing pretty well, and the banks that we're talking about that are underspressed in the United States very small share of the total banking system. So I think it's important to recognize that this isn't the Great Financial Crisis all over again.

It's a lack of confidence in banks, because especially those banks with the high proportion of unsured depositors and marketo market losses on their portfolios. All that said, Bill, do you still think that this FED should bring a monetary policy, should bring their terminal rate to six percent or possibly above that based on the inflationary pressures? If there is this ongoing tightening that people expect from smaller and mid sized banks, that's really the sixty four thousand dollars question.

How much is this stress that we're seeing today going to result in tighter credit conditions. They're going to change the trajectory of economic growth. I don't think the problem is the credit conditions right now. I think the problem is market market losses in the portfolio and unsured deposits.

It's very different than the Great Financial Crisis, when we had this housing boom and bust, and it was the bust that really took down fundamental values in the banking book and also damage households enormously because households had used the rise at home prices to pull money out to support their spending. The US economy is fundamental in better shape today. Household and business balance sheets are strong, so this is I think more about confidence in the banking system.

One reason why we're having more problems this time though last time there were big banks that we're willing to ride to the rescue and by the banks that were under distressed. They're much less willing to do that this time because last time when they did this, they assumed

a huge legal liabilities that they hadn't anticipated. A second reason why big banks don't want to ride to the rescue of this time is if I buy a bank and get bigger, I could be pushed into a higher what's called the Siffy search arge bucket, you know, with the higher caper requartment based on my size and complexity, which would which would apply to my entire book of business, not just the new book part that I just just acquired.

So you don't have the you know, people that come in to buy the banks are under stressed like you did last time. Given that you don't see this as a two thousand and eight reducts, maybe you don't get the White Knights coming in to bail out these banks with an equi acquisition, as you point out. But other people are writing in demand saying you live under a rock of bearishness, and you don't understand the momentum that you're seeing throughout the world and throughout a lot of

communities in the United States. Given that there is this sort of momentum, do you think that it's folly for people to be pricing in significant rate cuts, more than one hundred basis points of rate cuts from now until the end of next year or until the end of January next year. I should say, yeah, that seems very premature to me. I mean that means that the FED is basically sail in terms of providing a credible liquirity backstop. And I think the FED can succeed in providing a

credible lilquarery backside. In fact, the stuff they've already taken it, I think go a long way towards that. I think the FED if I were sitting at the federes or right now, I'd be asking myself the question, how can I do more on the liquidity front so I can free up more flexibility on the montery policy side, because if we can restore confidence in the banking system, then the FAT can use montery policy to bring down inflation. Do you live under a rock of parishness. Is that

what someone sets you? People we have any more? They say other things like you're a pessimistic, horrible human who doesn't ever think positive things. But I do. It's just that I worry a lot of people, you know. They it's love you. Well, that's sweet, but it's okay. I can deal with it because I'm prepared, because I'm duly perished. But I'm not. It's just realistic. It's trying to understand the unknown looking around. Thank you, But a couple more

questions if I can. I got this one over the Bloomberg moment ago and someone watching wants to know whether you think the gap between FED funds and bank deposit rates Matt to hair, has that contributed to the problem. I think banks have been slow to raise their deposit rates because they've been a wash with deposits. I mean, what happened when the FED was doing quantitative easing was a buying securities and US and that cash from those

securities purchases was actually flowing into the banking system. So banks have actually been pretty slow to raise their deposit rates. You know, when people look at the mark and mark delosses on their securities portfoil on their loan book. That is to be all set by the fact that banks are actually doing quite well in terms of the deposit base. The value of a retail bank network today, a branch network today is much greater than it was when interest

rates were at zero. So when you're looking at the banking you know, as a liability mix, you also have to count the value of those deposits, which is rarely really quite so high right now. For most banks, net interest margins have actually been expanding. Silicon Valley Bank was a very important exception. But I just want to weigh in as well on the balance sheet. I'd love your thoughts on that. As we know there's been a rush

to use the discount window. The new facility that was opened by the Federal Reserve just last weekend will encourage perhaps more or the same. Can you tell me whether just because the balance sheet is expanded again, whether that means it's the end of QT. How do you think about these things? I think this is about exceptional liquidity, lender of last resort provision to support the banking system.

I think quantitative tightening, the runoff of the Treasury portfolio and the agency mortgage bank Security PORTFOILO is going to continue unabated. I see these tools is very separate and different. So I expect that the quantity of plating will conto you, but one for to get your thoughts, as always, both down to there A former New York Fed president and Bloomberg opinion columnist John Gasnais Max can the chief multi assets strategist over at HSBC. Max have asked this question

a few times in the last twenty four hours. It's your turn. You're feeling more or less confident after that tie up yesterday? I feel probably more confident. I feel also more confident after what's happened last week. I would feel much much more concerned if, indeed, when if we had perhaps sentiment and positioning much much less really down beat.

Now you know we've been I've been listening to your show for the last eight eight minutes and there's not been a lot of positives yet, right, And I think that's a fair under statement if I say that, And that's the good thing. The good thing is when we

look at sovey based sentiment, that's pretty depressed already. If we look at technicals, right, so like relative strength across risk assets already very depressed big term structure sort of down to load the ten percentel already, right when we look at equity beaters of multi asset funds down right, when we look at pot care rats not only in equities but across the asset classes, spending clear clear bearish

risk sentiment signals. So the good thing is right with all what's been happening, not only in the last twenty four hours but really over the last last week, is that sentiment has gone and it's de rated sufficiently really to bearish levels that I'd be very very careful to throw in the towel on constructive views now, right, So we've just put out an one and said, look, we're still holding onto that constructive view because in deeper sentiment

positioning really across the board looks much much more negative now, which is a contrarian positive signal. Max. Let's put a bit more specifics around this. Are you saying right now you're going out there and buying European banks to move counter to the zeit guys that we see out there, Yeah, I think so. I think banks are more and more looking actually attractive if we look at you know, if we look at the rilative performance perhaps of banks over

the broader market. Look at the performance of banks over tech for example, that is back to the COVID highest, right, that's back to where we were at sort of the dizzy heights in twenty twenty, when you know, real rates

went down to almost record record negative levels. Where we look at the broader banks performance not only in Europe but also in the US, when we look at that against you know, US treasure yields, if we look at that against financial conditions, and particularly it's priced right now for the second biggest, second sharpest deterioration in financial conditions already, right, So there is an awful lot in the price, particularly

from a from a relative perspective already. Right, So I wouldn't say, oh, nothing's happened yet, and you know there's much much more deeper pain to come. We're getting pretty close to pretty attractive entry levels. I think let's talk monastry policy. But Michael sat in that chair yesterday evening from JP Morgan. He said, first comes in September. Andrew Holland host a city published this morning. He said, you

get a hike at that meeting. In a couple of days, he said, in the SCP the projections they offer for the dot plot the medium dot for twenty three He thinks five twenty five to five fifty max. What are you looking for this Wednesday? I think you know what, John. I think there's one rule right now. Don't overdo things right, don't talk too much, don't change too much. What you'd read now right now, particularly from policymakers, it's steady hand,

steady ship. Right, what you really want is basically at twenty five basis point hike. I agree with what Lisa said before. Has anyone really looked at the projections from the ECB last week? Not really right, because they've been only marginally changed. Really, that's what you need from the FED as well. Right, you don't need overaction, right, you don't need too much. What I would do is what I'm really waiting for, is at twenty five basis point hike.

Not too much change, not too much flip flopping around in projections or opinions, or hiking or lowering the dots, but really steady hands, steady ships saying, look, we've managed to contain it so far. We can press ahead with the inflation fide. We don't need to be as aggressive anymore as we've been a couple of months ago. Let's see this through. I think that is if we think about it and we talk about restoring confidence. The number one rule in restoring confidence is steady hand, steady ship,

don't overdo it. And Max Wader for to get your thoughts as always to kick off the week, Max certain there of HSBC joining us now, I'm please to say Mara Rodriguez Valadaris, managing principal at MRV Associates, Mara, thank you for being on the program with us. Last weekend it was Signature, it was SVB. This weekend it was Credit Suis. What are you expecting next weekend? Right, that's

really the question. I'm afraid that the regional banks in the US, of course, are still very very sensitive to this crisis and confidence frankly, but the eyes of DUIs is very very different. And unfortunately I heard some Swiss regulators and government officials blaming the US banking chaos for the demise, and this one cannot be pinned on the

American banking sector. Unfortunately, klepto, cracks and crooks have long been banking, as it has decades long unfortunately history of many many scandals, So if anything, I would really be worried about those really big banks that have weak operational risk.

That's what we really need to be looking at. We just had Bill Dudley, the former president of the New York Federal Reserve, and he was talking about how the one difference now or one of the main differences now from twenty years ago, is that big banks don't want to acquire other banks so quickly, the litigation risks, the regulatory risks that a company that are significant and opaque.

What do you make of that in terms of how many provisions to be put around the UBS acquisition of Credit Suis and what that means for distress that we're seeing in certain pockets of the US. He's actually right, because the big banks have a lot of interconnections. There's just a tremendous amount of opacity that investors don't know.

And I think that that's what we really should be focusing in the coming days because right now everybody's trying to go through all the fine print of the memorandum of the UBS memorandum of the takeover Credit Suis, But imagine all the opaqueness in the banks, especially in Credit Suis there's a lot of duplication. There's going to be unfortunately thousands of people who will be fired all over the globe because of course UBS will get a says to who gets to say you have shared facilities in

terms of liquidity. You also have a lot of systems at both banks, many which are legacy systems, and so UBS is going to have to be combing through this all very very carefully. Are there hidden liabilities at Credit Suite that UBS hasn't had a chance to find out? There is no way that they were able to do all this level of in depth due diligence to be able to do this deal. And so that's really what UBS, in any big bank would be worried about in terms

of trying to buy out another one. There are two issues here, or there are a lot of issues here. But there's what's going on with Credit Suites and UBS, and there's what's going on over in the US and some of the regional banks. The interlinkage perhaps is a confidence story, but the stories are separate in what is going on and why? And I want to just go

to the US story for a second. Myra and this question of supervision of the federal reserve and the role of people to identify problems and adequately prevent against them spiraling out of control. What is your concern level in the inability to do that with Silicon Valley Bank and some of the others that have drawn scrutiny recently. Yes, I'm glad you said the words supervision, because that's really

we need more supervision, not necessarily regulation. However, having said that, if big banks were required to be called systemically important, which is exactly what the Trump law deregulated, then those banks the size of Silicon Valley would actually be disclosing more about their liquidity, the composition of their deposits. And in the US we have a very complex regulatory and

supervisory framework. You have the state regulator. So state regulators often do not have the money, they don't have the resources, and they're the ones that are right there on the ground. So the state regulators are the ones that have to be empowered, and the banks should be required to disclose more about their liquidity, their capital. There other kinds of risks, such as leverage, the concentration. If investors had that information more often than just once a quarter, they would be

able to discipline the banks. You cannot count on regulators or rating agencies to discipline the banks. But the banks are opaque, and they should really be disclosing a lot more about their concentration and liquidity risks. Mara. Bank failures, as you know, go back centuries, and I wonder if our biggest problem right now is the fact that banks fail, or the fact that seemingly we can't tolerate failure anymore.

That's exactly it. You have to let banks fail. The problem, of course, is that the people who are going to get hurt are the junior level employees, the ones that aren't getting the big bonuses. All the restaurants and hotels anywhere that had any business with those banks are the ones that get hurt. And we're no longer really a capitalist society. We are constantly letting these bank executives socialize the losses, and that's the problem. They should be allowed

to fail. There should be clawbacks for bonuses, and you have to discipline rogue professionals at these banks. Otherwise we're constantly doing this and it's always the taxpayers that are bailing people out, bailing out the banks, I should say. And it's a problem for all the different kinds of central banks. The Fed now is probably not going to be able to raise rates, but it's not just because of what's going on in the US. I mean, do you think that Switzerland right now is good raise rates

or the European Central Bank? We have global inflation, but now come all of these problem banks, and so it is really going to be quite a channenge for all of these different central banks as well, of course, as the bank regulators globally. Does this not just an American problem? Let's kinshap soon. I appreciate your time this morning. Thank you.

Mario Rodriguez Volataris of m Anti Associates Beyond Cooperman chairman and CEO of Omega Family Office joining us now and Leona, I just want to first start with what's your impression of everything that we've seen over the past I would say week last weekend with what happened with Silicon Valley Bank and just now with UBS taking over Credit Suet. We are being overly simplistic to me, It's kind of like textbook. We've degenerated into a system of leadership at

a crisis. We have a self induced crisis by irresponsible fiscal monetary policy. The last decade. I did not forecast a silicon bank issue, but I didn't have a view that we were heading to a crisis of some kind. And we're seeing it and we're getting a predictable response by government, and so I think it's sad, you know, what's going on in the country, But what they're doing is what is necessary to be done. I have to preserve the system. So I'm assuming that the Fed goes

twenty five BIPs on Wednesday. They're twenty five and done. They can accept a higher level of inflation and that they would like to accept because of the stress and the financial system. They have to stabilize the treasury market. The volatility of bond is so great that that's destabilizing the equities. Well, I want to Leon, I want to pick up on that, because we've been talking about that. We've seen unbelievable fluctuations in the basic most liquid instruments

in the world, right treasuries. What's the read through a fact of just even that volatility on other risk assets and how much further does it have to take that out in terms of volatility pressuring equity valuations. That's not my area of expertise, but I would say that this is a response to the debt build up in the country.

You know, in twenty seventeen we had twenty trillion dollars of national debt, and today we're not going to do a thirty two trillion five years later, five or six years later because a growth rate in debt for an excess to the growth rate of the economy, which is going to create issues. You know, who is the buyer buy The banks are not the buyer of bonds anymore. So you're relying upon the kindness of strangers and they're probably not imbued with their financial policy when they look

at the politics of the country. It's also very depressing. You know, we have a country that I think is largely centrist to nature. It's been taken over by two political parties, with the radicals radical right radical left ruling the day. We don't need this, well, Leon, Leon. We're dealing with a situation where the political overlay is raising questions about the debt ceiling debate, and we can get into that and people are trying to figure out what

that means economically and for the market. Your expertise is in the SMP in the market and market calls and you've been warning about a recession for a long time. You've been saying that this is a self induced error of monetary policy and woes. And I'm curious, first of all, whether you're getting more optimistic about returns because of the declines that we're seeing and because of perhaps people waking up to the reality of the potential for recession as

you've been saying it. Well, my view has been as follows. I tell the story about at the Faraoh. I told us almost a year ago on TV The Farrell excuse me, had a dream. The dream was interpreted by Joseph. It was in the Bible. His dreams were heading for seven lean years after seven fat years. And that is my view. I think the forty eight hundred SMP will be high, that will stand for quite some time. And then I

kind of analogized that to my own career. I got my MBA from Columbia Business School on January thirty first of nineteen sixty seven at a six month old trial at the time. Now he's a healthy fifty six year old. I had no money in the bank at a student loan to repay. They were not for giving student loans, and I couldn't a fortification. I went to work the

very next day. I joined Gome and Sacks. To my twenty five year career, from February first to sixty seven, that was a thousand and nineteen eighty two was one thousand and So I made my money picking stocks. You know, I'm not selling eightying anybody because I'm a retired money manager and I'm turning eighty years old in a few weeks. But I would say that I think we're in a stock pickers environment. I expect the returns to the SMP to be very pedestrian. I think what's going on in

the world is negative a price ratios. And I want to make this point. If the government is looked upon to monerate the downside risk, the government has every right to monerate the upside return. Okay, we this Chips Act. You know, I think Intel, since it a balanced you to fifty billion dollars, they don't need the government to

build plans for them. They could do it themselves. I'm in favor of private sector solutions, and the extent that the political system is getting corrupted, that's negative for capitalism long term. So Leon, from your perspective, you have major career in picking single stocks. Where are you putting your money now? Given that you still are investing, if perhaps for yourself and for others, where do you go? I'm

like a one off kind of guy. I'm looking at a couple of these mortgage routes that are yielding fourteen to sixteen percent discount to book value, where they're buying back, they're on stock whenever it's they have you achieved? But you know those are one off. My biggest exposure has been energy, and that's cost me some money this year. I'm generally of the view that world travel will come back,

which will be a plus for energy demand. China coming out of lockdown will be a plus for energy demand. We're getting no longer complete the strategic Petoleum reserve. We have to rebuild it, and we're not replacing reserves the extent that we are we should be in terms of where we're producing. Yeah, I have a bunch of oil stocks my portfolio that have current yields of five or ten percent, production costs well below current prices. They're largely debt free in their position to buy back on the

bad stock. My favorite is Paramount Resource Stup in Canada, pou You know, they produce well for thirty one dollars a barrel. They're growing production at fifteen percent. The stock yields over five percent. Yeah, Leon, bobbing up against the clock thirty seconds. Do you agree with Elizabeth Warren that there should be insurance for deposits it's more than two hundred and fifty thousand dollars and that banks should have to pay for that. There's very little that Lizard Warren

says that I agree with. But uh, you know, I think we have to do whatever we have to do to stabilize the system, and we will do it. But I think I'm focusing a long term implications of what they're doing, So I think that yes, they should do whatever they got to do to stabilize the system. It's a damn shame that we have to do what we're doing, that we none it should have been this problem, you know, mister Powell. You know the Fed head said that the

stock market wasn't overvalued. This is a few years ago. Because if we're interest race were it never by the time people interest race didn't belong where they were, Leon, remember're gonna have to leave it there. Thank you so much for joining us Leon Cooperman of Omega Family Office. We really appreciate your time. Michael Arrakeetzi joins US now co founder and CEO Heiress Management. Michael, wonderful to catch up with you, sir. I think we need to talk

about speed, just how quickly this is moving. What do you make of it all? I think you hit on a big challenge in today's mark environment relative to past cycles. I think with the speed with which money can move through the system, the speed with which information is coming at us, it's getting harder and harder to distill the signal through the noise. So we're talking with you, Michael at a time when people are wondering who will take over some of the institutions that are seeing some distress,

who will come to the rescue. And we were talking with Bill Dudley about how big banks learn their lessons the financial crisis and are concerned about litigation risks. From your vantage point, given the arias overseas three hundred and fifty two billion dollars of assets, including more than two hundred billion dollars of credit, what's your view on that?

Where is your role? It's interesting? I think the private credit markets have been playing a little bit of a stabilizing role here over the last couple of weeks and months, as liquidity in the traded markets is not what it used to be. I think folks like Arias are coming in and really providing liquidity in certain markets where liquidity has gotten been. One thing I think about now is one of the larger private credit managers is We don't know exactly how this all will unfold, but I can

tell you one thing. We will see more regulation of banks, both mid sized and large. We will likely see a change to bank capp or regulatory framework here in the US and abroad, and that capital contraction will make it ever more important than private credit plays a role in funding real economy. So at what point and I want to go to the funding the real economy in a second, But just in terms of the here and now, is

aries going in and picking up bank bonds. Is aries coming in and discussing how to finance banks that perhaps are threatened with deposit outflows. I remind you, Lisa, we play strictly in the private market, so we do have certain pockets of capital within our opportunistic credit and distress

businesses that will dabble in the public market. Opportunity gets created here, but the opportunity is set for aries and those that look like us really is to come in and be a liquidity provider to the small companies that may be challenged to get liquidity from mid size and regional banks. And it could be as a real good counterparty to the bank on right PAP grades that they try to revisit the liquidity are on their own Balanteam.

You talked about the broader capital sphere that we're watching and this concern about whether commercial real estate operators as well as individuals and small businesses can get the loans that regional banks used to provide to them. Michael, private credit might step in, but how much more expensive will it be to get it from a private equity company or a private debt firm than from a regional bank. Look, I think historically the private credit markets have been more expensive.

That's largely because they tend to provide a level of creativity or innovation, or frankly, more leverage or structural flexibility than a bank solution could. So I think the market is pretty well attuned to a higher cost of capital. I think you raise an important point though here is what we're dealing with now is liquidity and duration, not credit. We're already seeing the impact that cost of capital is

having as rates from moving up so quickly. I think we first need to get to a point where the equity valuation environment adjusts in the new realities that people can actually afford a higher cost of capital. If that's where this takes the Michael. One issue that's come up repeatedly over the last week, it's this idea that ultimately now will end up we're tighter lending standards, tight to

financial conditions. Think a lot of people are lining up to give us the stats about how dependent certain parts of this economy are on the financing from small and medium sized banks. We're thinking about real estate a whole lot more. Michael, how are you thinking about the ripples from what's developed in the last couple of weeks from these banks and what regionals are going through, and what it means for an asset class that I imagine you're

exposed to look. I think it could be very challenging. I think that the FED is doing everything it's supposed to do to step in and provide confidence. I was pleased to see the larger banks in the market step in to provide support to First Republic. I think at the end of the day, again, this is duration lookquid to be and confidence not credit. So I would hope that folks calm down again to see the signal through

the noise and get back to lending. But it is a real risk obviously, the extent that people continue to lose confidence have it leaves that part of the banking sector and it is going to make it harder for people to act as capital. For sure, it feels like a year ago. But last week Larry Fink of Blackrock said that there are a number of shoes that are

going to drop. First it was Silicon Valley Bank, then it was other smaller and red medium sized banks, and next it would be the private credit and private equity and venture capital markets that wouldn't get that credit. Do you agree with that. I think one thing that is probably most missed understood about the private markets, which is why you know, it's always been this view that the canary in the coal mine, and yet every time we have a crisis or a mini crisis, private markets tend

to emerge fairly unscathed. And I think the big difference that folks don't really appreciate is one. Most private credit assets are held unlevered to the extent their lever they're modesty leverage with matt duration and match funding. Duxtapose that with a bank that is ten to fifteen times lever and you get obviously a much different outcome. And markets

like this. Similarly, on the equity side, they are operating out of funds with end to twelve year life cycles, and so most private owners of assets that are institutionally backed are neither force sellers or forced buyers in any market, and that provides a level of stability that I think people may underappreciate when we go through markets like when we're in right now. That's a constructive point. Michael, gotta leave it there. It's wonderful to hear your thoughts. Thank you,

Michael Arrogetti, the of Ari's management. 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