Surveillance: Fed Signal with Betsy Duke

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This is a joy.

Because this is the person to lean forward to on small banks and the Federal Reserve System of America. Elizabeth Duke is a former governor. She is a former chair Wells Fargo, and far more importantly, in the middle Ladies was at the Bank of Tidewater. We welcome the gentle lady from the Bank of Tidewater as well. Betsy, you lived, you live the eighties banking crisis. Is there an analog here? Is there a similarity to what you and Isaac and McTeer went through.

So I think the situation with the banks today is much more similar to the savings and loan crisis than it is to what happened in two thousand and eight. So I think that's a good analogy. But I don't see it getting nearly that bad. The savings and loan industry got caught flat footed because prior to that, deposit rates had been capped, so and their business model was to make long term mortgage loans. So when the cap came off of interest rates and vulkars started raising rates,

So Bett, did you agree with what we heard from Richard Kaplan that this is just the beginning and that there is going to be significantly more distressed or do you think that it's more nuanced than that.

I think it's much calmer than that.

Actually.

I think what happened with Silicon Valley and with Signature is that the FDIC and the regulators got caught flat footed. They just weren't expecting it, but they have recovered. I think really well, if you look at First Republic over this weekend, that except for the size that was business as normal for the FDIC.

At this point, Betsy, do you think that the risk for the FED is not moving enough, not hiking enough, or perhaps discounting some of the weakness That could just be the beginning of what we will continue to see with the lag effects taking hold.

So I think, first of all, I think the FED has a better sense of what's going on within the banking industry, so they have a better sense of how

Betsy, always wonderful to hear from you, particularly given your experience of the Federal Reserve. Next week, we've all been waiting for this release of the Senior Loan Officer Opinion Survey. Betsy, when you're on the FED, do you have advanced information of what is in that report? Will they know basically what's going to be released next week when they meet today.

I don't if it's a week from today, I don't think they'll have it today. But the sluice is a very very soft data point. It sort of tells you, you know, directional, but it doesn't give you any hint on magnitude. So I think it will give them some information, but I'm not sure that will be enough information. I've seen any clear signal yet that of credit is doing any of the Fed's work for it.

What would you look for that signal? Then, Betsy, start.

To look for it in consumer credit tightening up possibly, and particularly some of these lenders to consumer credits, so the FinTechs or the non bank mortgage companies. If you start seeing stress in those companies, that's where I'd looked for it.

Betsy.

There's a bank out there called the Bailey Building and Loan and it was something you and I studied carefully. I think you were at Old Dominion when you studied the Bailey Building and Loan from It's a Wonderful Life.

They didn't have cell phone, Betsy, yourself, No, well, yeah, that's true. I'm talking about myself.

But the answer, Governor's the basic idea here is they didn't have cell phones in their hand. How does the behavior of the Bank of Tide Waters of twenty twenty three change given the digital media you didn't have to live with that.

The panic is still the same thing. And if you go back to the savings and loan crisis, before one of those institutions closed, it was pretty well telegraphed that that was an institution that was in trouble. We took over some branches from a failed thrift, and it was remarkable to me that some of the uninsured deposits had actually stayed, even though it was pretty obvious for years that the institution was in trouble. So the smaller banks,

Ben see what of our themes on the show today led by John Ferrell, the gentleman from Britain who was stunned at the political.

Input and not stunned in the federal reserve system.

Not stunned, don't mischaracterize excuse, We're not stunned. I think it's irresponsible.

Okay, well, let's talk about the irresponsibility here in green Span. We are looking at which SANDWICHI who was eating on FED Day. Now we've got politicians of both persuasions weighing in, should they now?

The FED has always been just absolutely resolutely non political, but the political forces are always out there with opinions on what the FED should do, whether it be in supervision or regulation or monetary policy. I think the political environment has more to do with the regulatory and supervisory policy and how they react than it does monetary policy. I've never seen any in my experience with the FED, any reaction to political pressure on the monetary policy side.

Bessie Tug, thank you. It's going to catch up with you as always. Let's do this again.

Right now.

Bruce Casman joins us with JP Morgan, the chief econdoms.

Bruce, I want to go larger with you right now, as.

Your mandate of your wonderful Weekly Prospects. On Friday, the IMF stunned with a five year view of tepid global growth. The fact is, moments ago, West Texas Intermedia, the banner I have is sixty nine point six to zero, and right now we're already at sixty nine point five seven.

Is oil?

One of the one metrics leading us to a global slowdown?

Is the IMF called for.

I don't think right now oil, given everything that's happening geopolitically, given how the market is segmented, I don't think it's telling you very much about growth directly.

I'll put more weight on.

What we're seeing in terms of the survey data, the high frequency indicators. It's telling us that the US is pretty sluggish here and is probably lagging the rest of the world. But global growth is actually picking up as we move through the first quarter and into the second, with China and Western Europe doing quite well.

Well.

Versus is critical.

I'm going to rip up the scripture that Lisa and John Kerry the weight on the FED and all that's going on today, reaffirmed the JP Morgan call on China twelve months forward.

There's some doubt about the Chinese economic expansion. Do you agree?

Well, I think there's plenty of doubt about where China is going to be over the medium term, but I don't think there should be much doubt about the fact that this is an economy, that it's reopening, that it's got very depressed levels of activity, and that it's got policy makers which I wouldn't call supportive, but they're definitely moving away from what had been quite restrictive policies last year. I think we're going to see about six and a

Bruce, let's get back to the topic and the Federal Reserve a little bit later. The language and their statement from their last meeting, the committee anticipates that some additional policy firming maybe appropriate. We're going to get that additional policy firming today. How do you expect the language it's going to change? If you expect it to change at all in this statement, I.

Think it's going to change to be more equivocal. Instead of talking about some additional policy firming, I think they'll talk about any additional firming will be dependent upon, and then talk about both the economic conditions as well as its assessment of financial conditions. So it's going to be an equivocal hawkish bias. It's not going to point directly to tightening. It's going to keep the conversation though on the possibility of tightening.

Do we have a sense of the balance of risks right now, Bruce, in terms of inflation reaccelerating versus a financial market crash or just an economic crash with like effects just starting in the regional banks being the opening salvo.

So, as you noted, there's a lot of risk here. There's inflation which is still elevated and is showing quite a bit of persistence. There is stress in the financial system. And I think we should put also in the mix is that everything that we see is telling us that we have a pretty underlying strong private sector here. This is not a private sector which is fragile, and the way these things interact is going to be very.

Interesting to see.

From our own point of view, we think the economy is less likely to slide into recession. In the near term, we think inflation is not going to come down, and we think the FEDE is going to pause in the face of these uncertainties, and how that plays out six months from now becomes really an interesting story. We do think the credit drag will be material and start to build, but we don't think inflation is going to come down

But put aside the easing for a second, even just staying with rates above five percent, there is a question at a time when you see the job openings come down at a record pace, when you see this idea of smaller banks that are facing an existential threat, as people try to game out what that credit stress will look like, how do you get the sense that inflation is still the pre eminent concern.

Well, obviously it's not a preeminent concern that the FED is going to be pausing with run rates on inflation well above four percent. So I think what you're seeing from a FED and what you'll see today is a FED that is worried about inflation, but is balancing it against the backdrop of concerns about financial stability, as well as, of course the idea that it's moved a lot very fast and it may be desirable to take a pause. This is not a FED that is focused entirely on inflation.

Far from it, perst I see compare and contrast to two thousand and eight. Last night I saw an inflation adjusted bar chart of the Washington Mutual and Company dibaccle of two thousand and eight inflation adjusted out to the number of banks we've seen recently that are troubled as well. When does the FED blink? I mean, how far does that barchart have to grow up for twenty twenty three before? When the facts change I change at the FED.

Well, let's just say, first of all, the FED has blinked. Powell at his Congression testimony talked about raising the terminal rates significantly. They didn't do that.

They're now moving towards a pause.

I think we've gotten a shift of about fifty basis points from the FED in terms of guidance here, which isn't based on what we're seeing in the economic data. So I think the FED has shifted. I think to get the FED to think about easing in an environment where inflation is as strong. We need to see growth break or we need to see a generalized financial crisis take place, neither of which do we think is going to happen anytime soon.

I'll take your point verus on a generalized financial crisis and we don't see that. But to go back to Maynard Kanes, when the facts change, the FED will change.

How close are we to.

That, given FDIC, given Senator Warren and all the other distractions of today. There's a point here where Vice Chairman bar says to Chairman Powell, we've got.

A problem, right, and I think we're seeing the FED operate on its liquidity facilities. I think we're seeing the FED move to a pause an environment which they otherwise wouldn't. The question you're asking is is the FED going to preemptively ease without the economy having shown that damage. I would also just note here that in terms of the way financial markets are functioning more broadly, they're still functioning

Hi, Bryce credit cans Shall we quote it? Said Chris Casman.

Right now?

And this is a joy David Chevarini who's been doing bank analysis and he's one of the few people out there at webbush who's not only looked at bank analysis, brought it over to the new technology of bank analysis, quite expert to talk about these names, particularly on the West coast, new to so many of us on the East coast. David, welcome to the show. And my answer here is I love in your research note you talk

Do you know what's going on or is it a mystery?

Yeah, so it's a little bit of a rebound from the standpoint of a lot of depositors that were spooked in early March have come back to a few of these banks, and Western Alliance is the one that has seen the biggest rebound of deposits post quoter end, where they had seen six billion of deposits outflow, and then they've since rebounded by about two billion, so a third of those deposits have come back, and I think it's a bit of handholding of their customer base to bring

Interesting, David, I look at this and the zeitgeist this morning is clearly to the shorts. It's like George Soros and Drunken Miller nineteen ninety two with a Bank of England. The shorts are jumping from bank to bank to bank and all of your experience, is there a way that management can adapt to push against short selling within their institution.

Yeah, there's not much you can do other than execute on your business plan, because it seems as if, you know, one approach would be okay, put out more information, put out more data to try and ease concerns. But many times that backfires, and we saw that happen, you know, just last March, because then investors start to think if a bank management is coming out to defend their numbers, then investors may think that there is an underlying problem.

But David, this is no longer a crisis of confidence with respect to whether you're going to get your money back. It's also just people moving their money to places that yield more the where they can get more return, and we can see that from some of these banks that have to offer significantly higher rates and say the JP Mortgans of the world in order to get people into

Yeah, I would agree with that, And our overarching kind of theme for the group is caution. We did a bulk downgrade in June of twenty twenty two for exactly the reasons that you just brought up, and so we are expecting that interest margin pressure to continue to weigh on the group.

Now.

We did see this stability and the immediate aftermath of SVB going down signature bank going down, but I think the narrative is going to shift back to what you just mentioned about funding pressures as well as credit quality, because we are seeing that the FED is likely to have another height today and that's ultimately going to result in a slowing economy and rising credit costs. So we

We heard from fallas former FED president of the Dallas Fudger Reserve Kaplan overnight, and he was talking about how he expects this to become a really significant problem for the regional banks. How much are you expecting an SNL like consolidation in this system, regardless of whether it's systemic or not, just that we're going to see tie ups unlike what we've seen in forty years.

I don't think it'll be as bad as the SNL crisis, but I do expect consolidation to occur. And I think that the FED would react much more quickly if things did start to get so extreme that it could start looking like an SMNL crisis. And what I mean by that is the FED would probably look to pivot quickly and kind of cast aside their inflation target and really bring down rates to stem it. There is potential if the FED did not pivot, there is potential to see, you know, a crisis truly developed.

Hold on a second, that's significance. You're saying that if we see more banks go out of business, that this Federal Reserve will just do a one to eighty and start cutting rates, regardless of whether inflations actually come down.

I would think so you know, my base case is that we've seen all of the banks that are going to go under have gone under. But if by chance, we do start to see a domino effect start to occur and instead of four banks going under, we have you know, ten banks going under, and I think the FED would have no choice but two but to pivot.

John from work emails in David and he says, ask him what your single best buy is? I mean, come on, this is the ultimate straw hats and winters. What's a Chevalini single best buy in this banking disaster?

Yeah.

So one bank that got a sweetheart deal through this crisis, New York Community Bank. You know, they acquire certain assets and deposits from Signature Bank, and that puts them in really good position to grow their balance sheet, to really cross sell into that deposit base and really generate good earning seccretion. We're expecting twenty percent secretion from that, and tangible book value accretion.

Was a bit better.

So New York Community Bank is one that we put on the best ideas less recently.

David Shevarini with us with Webbush joining us now on oil and rita'son co founder director or research and energy aspects. I get the girl slowdown story or Marita, I want to go to a British phrase elasticity, which I can't stand. Americans are like, say what, And the answer is, I'm going to use responsiveness. What is the responsiveness of oil to a China slowdown? I mean, in a global slowdown? A stag part of this debate, what is the responsiveness of oil demand?

And I mean, obviously tom oil demand is driven by economic growth, So in China in particular has been the biggest driver of oil demand this year so far, and it's expected to remain the case next to her as the economy is still opening. I do think a lot of the China slow down fears are a little overblown because a slowdown has been mostly in the manufacturing side, which is due to the fact that the US and Europe

Amrita, Can you speak to Christian Malex point the fact that right now we're seeing people price in our session into oil prices, at least in the West, at a time when there are also is tightening credit conditions, which is going to lead to a lack of investment, which will cause oil prices to go much higher later on, even if they go much lower in the short term. Do you agree with that kind of outlook.

Absolutely.

I think we've been saying this even before Christian has been saying this that we have a structural supply side problem in this market, particularly between twenty twenty three and twenty twenty six. You know, we've we first highlighted that back in twenty eighteen, twenty nineteen, because beyond Opek and that to very few open countries, nobody else has been investing and the lower prices go. Right now, we've already seen shale pulled back, and a tighter credit means that

How local prices go before that path? And I ask pers at a time when we see oil prices being one of the disinflationary drivers at least so far this year, if they've become an inflationary driver back in twenty twenty three, twenty twenty four to twenty twenty five, this could create an issue. So how far down could they go before popping up?

I mean, I think in the short term, with all the issues around or the uncertainties around the US debt ceiling, do you think we could see a six handle both for TI and for Brent. Of course, if genuine supply demount fundamentals were to weaken, and that's the dichotomy we have right now. Physical fundamentals are actually strengthening as we speak. We've been seeing counter seasonal draws globally, but particularly in the US since March so and OPEC cuts haven't even

I'm ready to thank you as always, I'm ready to send their energy aspects joining us on a crude market.

Now. Right now, we're going to dive into what's happening in that big part of the auto economy.

Ford Motor.

John Lawler is the chief for the Officer of Ford Motor and joins us this morning off of Verning's Dayan Reese Over at Bloomberg John their headline is Ford dips, his lack of outlook sparks concerns. Give us the immediate outlook for Dearborn right now. What do you see in the next ninety days.

Well, you know, just looking at our Q one results, they were solid, good quarter, twenty percent top line growth, solid adjusted EBIT at three point four billion, and we held our guidance between nine and eleven billion dollars for the year from an adjusted EBIT standpoint. Look, I think all of us can agree that it's unclear how the macroeconomic environment is going to unfold through the year. There's lots of puts and takes that we're seeing as we

It's extraordinary the auto business, how separate it is from say Apple Computer tomorrow with the twenty five multiple you guys are doing single digit multiples with a five percent yield. Is there any pressure on you as a CFO to adjust your auto company to a modern cash distribution that makes you more competitive within the markets.

Look, there's a great opportunity for us with our FOURD plus strategy and where this industry is heading with connected vehicles, software and services on top of the traditional products that we've delivered from the automobile standpoint.

So we see that as a positive.

We know that in this industry what we need to do and our focus is on really strong capital allocation, making sure we're getting returns on that capital and quarter over quarter performance, and that's what we're focused on.

John.

It's going to change the multiple for us.

How complicated is it for you that Elon Musk is cutting prices at a time when you're already losing three billion dollars a year on your EV effort.

So I think you know you got to think about this is where you have pricing power and where there's competition. You can't paint the segment with a broad paint brush. Look on the Lightning incredible demand, Our order banks are off the charts. So from the F one fifty Lightning Electric vehicle. We have pricing power and that's maintaining our

How much is this competition and how much is just this lack of demand?

Well, I think you're seeing as an industry standpoint, we've had an imbalance between supply and demand. Right we were constrained due to COVID and the issues with supply chains. You're starting to see that ease, so you're starting to see more supply come on online. Therefore, we're getting more into balance and you're seeing some pricing pressure on the top line.

Provide me with the distinction not only within your good competitor in Detroit, but the distinction of your EV approach versus others worldwide. What is the Ford unique feature on electric vehicles?

Five years out.

Okay, So when you look at our approach to EV's, I think it's as good as anyone's and better than most. We were a first mover, we're in the marketplace, we're bringing customers into Ford. Ev Customers are not loyal at the first purchase, but once they purchase a brand, they're loyal to that brand. Sixty percent of those customers are new to Ford. And now we're on our second generation

As you try to be as efficient as possible. John, you've talked about cost cutting. How much does that include job cuts that hadn't already been announced.

So, look, we can't just look at this as job cuts. We have to focus on and good companies focus on all cost areas, and we're going to do that.

But in this transformation and.

What we're seeing here in the industry, there's going to be parts of our business that need to upscale and grow, and there's parts that need to reduce and that's going to be part of our focus as we go forward.

All right, we're looking for tickets John, John Ferrell, help me out here with John Lawler. I mean you're going to do a relationship with Red Bull and Formula one Racing. John Lawler, are you going to be in Miami for the Formula one? I believe it's this weekend and can we come along?

Unfortunately I'm not, but if I were, I'd be happy to host you there.

We are not going to be there, if you sure, if you can comby next time, John Lolli thought, thank you.

All right to the Bloomberg Surveillance Podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern im Bloomberg dot Com, the iHeartRadio app, tune In.

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