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Chris Maronak joins us now director of Research at Jenny Montgomery. Scott, Chris, We've been on this journey with you. We've appreciated it every step of the way. We've got some kind of resolution. I think what's interesting for us this morning is JP Morgan is positive in the pre market when they say things like our government invited us and others to step up, and we did. Are they doing us a favor or have they got something good here?
Well? I think they did both.
I think they did us a favor because they were able to do this at a lower cost to the government. If you look at the bid that they made and the gain that they're booking, it's a lesser gain than what we've seen at the other transactions, particularly comparing the SVB.
For Citizens deal for Citizens.
Had a real excellent transaction a month ago. This is a less of a gain for JPM, But I also think it represents the upside to the wealth management business the FRC had. So that's really the honeyhole that JPM Morgan sees, and that's where I think that there's opportunity for them in the long term with the assets and the asset management clients.
Chris, is this a bailout by the FDIC.
Not really, because the FDIC could have made much better terms. I think that's ultimately why PNC or other bidders were not successful. I think JPM was willing to come in at at a less of a data, less of a discount.
So at the end of the day, the FDIC is seizing the.
Assets, they are going to do a loss share, similar to other smaller transactions we saw back in twenty eight, nine and ten, and really the SVB and signature transactions too. But I think at the end of the day, it's a better transaction for the system and the DIF.
Did the FDC wait too long, Chris to allow this crisis to continue to allow the drip drip of good assets, of good workers at this bank to leave.
I think in a case of a week or two, yes, I would have preferred to see this resolved earlier in April, But at the end of the day, I think we got where we needed to go.
I think they were trying to see if there was a.
Private market solution, perhaps private capital, perhaps the equity markets would step up with the preferred or an equity raise, but that was just not in the cards for a first republic.
So this was the best alternative.
Chris, when you read lines like and you mentioned it a moment ago that jp Morgan and the FDIC have agreed to share the burden of losses, what does that actually mean in practice?
Can you explain that for our audience?
Sure, so, as JPM now has the assets and deposits, they will work through those and particularly loans. As they collect those loans, there'll be a laws share agreement for any losses that come out, and then that will be shared with the FDIC. It's very similar to what we had in twenty eight, nine and ten. Typically the assets back then were much worse. These are assets that are simply marked for interest rate risk, not for credit n so Ultimately, I think you'll see JP Morgan sit with
these assets and sell them and move forward. It's possible that much of what they are holding here comes back to them in the next twelve day, ten months of interest rates change and the FED change is policy perhaps a quarter or two from now, that's going to have a ce change to how these assets are valued.
So timing is everything, and I think.
That's ultimately why the bid end up being less of a discount for JP Morgan than the other banks.
Did they share the upside as well than Chris?
They capture most of the upside, so I think the upside all goes to JP Morgan.
That's fascinates in Premo well, especially fasciniting.
Especially because in the stories it actually said they shared the upside as well as a downside. So it's confusing that basically JP Morgan ends up with the entirety of the upside at a time where the FBIIC wants to mitigate socializing the losses and privatizing the games.
Chris, can you give us a little bit more clarity on that.
What are you reading at the moment that gives you a better idea of what's going to happen there.
Well, I think the laws share agreement's going to be very typical.
And what we saw back in the transactions in twentyd and eight, nine and ten it was a very typical law share arrangement where the FDIC sees the bank, they cut the law share arrangement, and then the bank collected the assets. The bank becomes the conduit for the FBIC to collect the money to collect the loans. It's less of an issue with deposits. It's much more with the loans that were made. To remember, the loans the First Republic had were largely.
Low rate mortgages with low loan to value.
So these are not risky loans that in many cases these are very low risk loans. They simply had interest rate risks because they were done at three and a quarter three and a half, and the mortgage market today is closer.
To six chris.
As you know, and as we know because we've talked about this over the last couple of weeks in a much bigger way. JP Morgan already had more than ten percent of US deposits. Now that's been seen as problematic for the regulator. We assume in this morning that that exception has been granted already just by the very nature of this being authorized.
At the moment.
Correct, absolutely, So can I ask the question, then, does this become a problem if they hold more than ten percent of US deposits. I assume that was a line in the send for a reason. Why are we willing to go beyond it?
Well, I think at the end of the day, if you had to take a lower bid and therefore a bigger loss for the FDIC and for the Deposit Insurance Fund, it would have been problematic for the other banks. The other banks would have had to pay more than they already are paying. The cost of FDS insurance will go higher in the coming quarters the next year. So if you could limit the hit to the DIIF to the Deposit Insurance Fund, that really is the best outcome for
both the banks and for the system. So ultimately, this is about building confidence, and I think you build confidence a by having first Republic result and b by seeing that a very good operator who has strong capital, remember the Fortress balance sheet that JP Morgan has always advocated that allows them to do the transaction.
I think it's going to be rare. I don't think we're going to see others like this.
It really was the bank that was caught by the Friendly five A BESTVB six weeks ago.
Chris, is too big to fail a good thing?
Now? Well, not necessarily.
I feel that the regional banks and mid sized community banks are in a great position to step up and serve the businesses and the households of the country, So too big to fail is not necessarily the outcome that I'm looking for. I think there's a many banks who are well capitalized that can step up, So the su regards having this episode resolved is a good thing. I do think you're going to see that part of the credit solution in the country is seeing these mid.
Sized banks perform and perform well.
I think you're correct that the credit is tightening, but I don't think it is being shut off.
Hey, Chris Wonderfu to get your view on things.
No down will catch up again soon, Chris marinak there of Jenny Montgomery's scuff. Kathy James with this around the table from Schwab Kathy Wander for to catch up with you. I can't believe it's the first time we're talking in person. It's under like three years because I get to talk to you so often. It feels so bizarre.
I know, just great to be back in the studio.
Wonderful to be with you.
This is another bank that's gone under in the United States for America, another last minute deal, spending the whole weekend negotiating this mess, and here we are. The Federal Reserve gets to decide to high interest rates on Wednesday, and seemingly it is going to go another twenty five basis points. And I'm sure you've heard the same commentry we have that every single bank that goes under is idiosyncratic,
and this isn't about what the Federal Reserve's done. In fact, we heard from John Williams, the New York Fed President, just say a couple of weeks ago that he doesn't think it's because they went from zero to five so quickly.
How do you respond to.
That, Oh, I think it has a lot to do with how much the Fed has tightened and how rapidly they've tightened. You know the old saying that the Fed titans until something breaks. I think that clearly they've moved at such a rapid pace that there's an impact on financial stability, and we're seeing it in some of the bankings areas now. It doesn't mean that credit risk, which is what they normally get concerned about, is a big issue.
But I think it's hard to divorce the Fed's actions from what's happening in the banking sector.
Do you think it gets worse then, given that they're going to keep on hiking, or at least we'll hid one more time this week.
Yeah, we're kind of hoping this is the last rate hike. But it tells you a lot about this FED that they hiked in March when we had banking sector problems, and they look like they're going to go ahead in May when they have banking sector problems. One would think that this is probably the end of the rate hike cycle at this stage of the game.
I wonder what kind of key man risk there is for the Federal Reserve at this point, given the fact that on Friday they did put out a report talking about what went wrong with SVB, seem to have passed in the back few mirror, but there are ongoing questions about how accurately they are regulating some of these banks. I mean, is this potentially going to, I don't know, up end the leadership at the fed at a certain point.
Well, I would think at least we're going to get some dissenting boats this week, or at least one or two, and I think that, yeah, they have to reconsider the regulatory environment that they're in as a banking regulator and supervisory capacity. So I would think, you know, I don't know. I don't have any particular predictions in that, but I do think that there may be certainly some rewritten rules and certainly a re examination of what's been going on.
We were just talking with Michael Showell and he was talking about how for now it's interest rate risk, but that eventually it could very easily become credit risk, especially as a lot of companies and individuals have a trouble paying back such high rates. What's your sense of just how significant that credit risk is and whether it's accurately reflected and where the market is right now.
Yeah, one thing that we've seen is the credit spreads really haven't blown out in the way that you would anticipate given what's going on in the market. So we do think that there's some risk of widening where I think the bank loan sector certainly is vulnerable. Private credit.
We don't know what's happening there because they don't mark the market, but I have to think that there's some bad loans there that are having to be restructured, and the high yield spreads have been much to than I would have anticipated at this stage of the game.
Just very specifically, after SVB happened and now First Republic, some people were saying they were going to come in and buy bank bonds that had gotten beaten up because particularly for regional banks, that there was still value there. Gerard Cassidy of RBC put this out, where JP Morgan is not assuming First Republic's corporate debt or preferred stock, does this raise another risk, another layer of risk that makes that proposition perhaps less valuable than some people were arguing initially.
Yeah, you've seen bond holders and equity holders and preferred holders get washed out in these deals. So I think you have to be pretty selective when you're looking at the banking sector now in terms of the bonds. You know, again, I think they're good bonds and they're not so good bonds, and maybe there's some opportunities there, but I do think you have to be really selective.
Kathy, I've asked this question a few times, so I'm going to ask it again. It's a little bit unfair of me. So you can take as much time to think about it if you want. The risk that sham and pound runs now for months, In fact, for the linelast twelve months, we've been talking about the risk of him becoming Burns. Is the bigger risk now that he becomes treche and hikes at the most inappropriate time?
Just think that's thrue. Why do you come down on that one right now? Is it Burns or Treesche? What's the big risk for him?
I think it's Treche And have all along I thought that this FED was moving too fast and ignoring some of the lags between tightening monetary policy and what impact it has on the economy and on the financial system. And we've seen a lot of stress in the financial system in various ways even before this, and so I think the risk is greater that they moved too far too fast, as they have then having the Arthur Burns
problem of having to tighten down the road. I don't think this is a repeat of the sixties and seventies. It's a very different economic environment.
Would you go as far as saying you don't think the inflation story is as sticky as some people might say it is.
Yeah, I do. I think we've seen the good prices come all the way back down. I mean, oil prices are lower than they were pre pandemics, so we've seen the supply side come back. And when you look at your balance sheets on consumer side, are good people spend money because they have jobs. But it doesn't look to me like that it's necessarily a big push and inflation.
We still have aging population, we still have demographic drag, we still have a lot of savings globally, so I'm not sure that we need to move as fast as.
They have moved.
Kathy, good to see you. I can't believe it's been like three years plus, but it has been. I don't know where that time's gone. Kathy Jones a chance swap. Thank you very much joining us on Somebody's headlines. Mara Rodriguez Va Darrez, managing principal at mr V Associates. Maara, wonderful to catch up with you again. Just working through this together over the last few weeks. It's been a
pleasure for all of us here on the show. Can I just get to that headline from Jamie Diamond that on banking faiblures this is getting near the end of it. Do you get this sense that this is anywhe near the end of it?
Respectfully, I'm not sure that I agree.
What is not idiosyncratic here is we're discovering that, unfortunately, a lot of these banks are not very good at interest rate risks and liquidity measurements, which really is what should be astonishing. This is the basics of banking, and as long as the European Central Bank, the Bank of England, and of course the Federal Reserve continued to raise rates, I'm afraid that this turnoil may not.
Be over yet. Marie, do you think that the regulators models effectively account for interest rate risk given that they were not able to get ahead of some of these cases, You know.
They actually do.
And one of the things that has really come out since Friday with the Federal Reserve reports as well as the FDIC reports, is that a lot of problems, for example with Silicon Valley Bank and Signature, we're actually identified by the regular The problem was the enforcement and there have long been many, many requirements for banks to measure interest rate risks. The problem is Unfortunately, with every new crop of risk managers and lenders, they always think that
this time is going to be different. They don't pay attention to the history that interest rates go down and they also go up, and you need to constantly be testing your asset liability measurements, all your different kinds of models for interest rates going up and down. So this idea that people have been caught by surprise they didn't realize that interest.
Rates could go up, is really truly astounding.
One thing that Jamie Diamond did say was that there would probably be some reduction in lending on the heels of their acquisition of this bank A First Republic. What's your sense of how many smaller banks are going to get a wired, how much lending is going to get taken out of the system if there are more potential incidents just like this.
Yeah, I am worried about some of the smaller banks, even some of the community banks, some of the smaller regional banks. It's hard to compete with the incredible advantages that a JP Morgan, Bank of America City Bank have.
These are globally systemically important banks. It's not just their size, it's just the diversity of the different businesses that we have, and here we are twenty twenty three, and it almost feels, at least from the history books, that we're kind of back to eighteen ninety five with JP Morgan rescuing the American government in nineteen thirteen when JP Morgan was rescuing banks, that kind of bank has become incredibly powerful, so it
now has incredible exposure to operational risk. What kinds of skeletons are going to come out with this acquisition of First Republic.
We really need to keep an eye on those.
Kinds of things. Joked about thirty minutes ago that Washington, DC was still asleep, wasn't awake yet and hadn't seen this deal. Then she messaged me a moment ago and said, it looks like people are waking up. Senator Warren on Twitter in the last I think twenty minutes said this, The failure of First Republic Bank shows how deregulation has made the two big to fail problem even worse. A poorly supervised bank has been snapped up by an even
bigger bank. Congress needs to make major reforms to fix a broken banking system. Mara, what's broken about it and what kind of follow through follow up are you expecting after this stress of the last couple of months or so.
Well, one thing that has definitely broken is that after all the time that legislators and various lobbyists spent with Dodd Frank, there's a good portion of Title one that was actually got it where banks the size of Silicon Valley or First Republic were no longer considered systomachly important. That's incredibly incorrect, as we've seen this, and it has very signific and repercussions to the entire financial industry as well as to main street.
Think of all those people who are now getting hurt and.
Are going to be losing their jobs every time that one of these banks fails. So you need to declare these banks systemically important. That then means that they would get enhanced supervision. They would have to do a better job of measuring liquidity risks, especially doing simulations of periods of stress, which is what they should have been doing all along. And so there is an element of truth that there is deregulation. However, you also need to provide the examiners and all the different.
Kinds of supervisors with resources.
They don't have enough in terms of manpower in terms of human resources, and they also need more resources in terms of technology to be able to better detect when some of these risks are percolating with the banks, and you need to fire executives and high level risk managers when they don't do their jobs, and they there definitely
need to be clawbacks. All these executives are walking away with millions, and what about everybody else at the bank and in the surrounding community that is going to lose their job?
What about firing regulates us.
That's right if indeed there's a good post mortem and we discover that there are any kind of professional in the various state as well as the national regulatory entities that aren't doing their job, they need to be fired. And part of the problem is the tone at the.
Top, the way that things were.
You know, let's face it, President former President Trump made terrible appointments. The tone of the top then filters down and it very much became both to offsite and on site examiners to have hands off and to almost be friendly with the banks. That's not what we want. We want examiners, both on site and the offside supervisors to be empowered to not only talk about what the problems
are at the banks, but then you need enforcement. All of the treasure trove of documents that was released on Friday shows that those examiners were on top of things.
It was the enforcement that completely lacks.
Sadly, was Chairman Powell a terrible appointment.
I had? That's a very interesting question.
I think one thing that I think that he has done a very very good job in very difficult circumstances with monetary policy. That is where his background is, where his expertise is. His background is not in bank regulation, bank supervision, bank examination. These are interrelated, but they are different things. I think that somebody like lyel Brainard should have been appointed to head the banks earlier during the Trump administration. When I say head the banks, I mean
the bank supervisory part. Obviously, I think that mister Barr has been a good appointment, but he.
Barely got there.
So there's a lot of different parts to the Federal Reserve, and Miss Chair Powell's background is not in supervision and examination. Former Chair Tarula was fantastic, Unfortunately he never got the official designation. So there are some talented people there, but they were not put to head bank supervision when they
should have under the previous administration. And those things take time and they're all surfacing now, so there definitely has to be a serious post bortem about what needs to be done about both state as well as the national agencies.
Mar thank you, Mara Rodriguez Viadarus. There of MRV associates going into key week, the Fed on Wednesday, payrolls Friday, Apple earnings on Thursday. We've got to start with the banking sector in America. Lori Cavacina joins US now head of Usacuity Strategy at RBC Capital Markets. Lorii does that deal over the weekend put this issue to bed, Well, let's.
Hope, John.
I mean, we've been watching the KBW Bank index performance very closely. We think it's become as important of a sentiment barometer as anything else.
That you can look at these days.
And I think when we go back to the financial crisis, when we go back to the tech bubble, we look at things like world Com, Bear, Lihman, and Ron. What we know is that the problem children in any crisis have to settle down before the market can can settle down itself. And I think that if you look at that index, that bank's index, it's been trying to stabilize. It's remarkable the resilience that we've seen. We know that earnings revision trends and small cap financials, which is a
good proxy for regional banks, have been absolutely smoked. And that's something else that you know, we really need to see happen in here before I think the market can be content with the idea that the pain is out of the way. So time will tell, John, But I do like what I'm seeing.
In the data.
SVB failed.
In March, the equity market rallied First Republic was essentially going under. In April, the equity market rallied Laurie. Can you make sense of that? The fact that we seem to have left behind the KBW bank index and the broader s and P five hundred has carried on grinding higher.
Well, there's another child.
That the market's paying attention to, not just its problem child of the regional banks, but it's you know, sort of oldest, you know, stellar child, the text sector, and the earnings there I think are in a recovery process. If you look at the rate of upward divisions, another good proxy for earning sentiment It got absolutely smoked last year for the T I MT space broadly, and it's actually in recovery mode this year. We're seeing things get
less bad. We've even seen the tech sector briefly in our upward revision territory, and frankly, John, that is just the child that.
Matters more to the market right now.
It's it's just bigger in terms of its market cap representation. So the structure of the S and P five hundred is in such a way today and this is very different from what we've seen in the past. But if tech is behaving well, it also pre traded the pause
essentially and is looking ahead to rate cuts. We can debate, you know, whether or not that's going to actually happen, but basically, the recovery, the improving trends, and the positive interest rate dynamics for the tech sector have been enough.
Well it's not just the tech side sector though, Laurie, as you know, you've been tracking the earnings and even in some of the consumer discretionary areas, you've seen consumers absorb higher prices. They have absorbed going around the world traveling as much as they possibly can. At what point does the fact that even these bank failures that we're talking about not tighten credit enough to really do the work for the FED, and that comes in as a potential surprise for markets this week.
Well, look, I do think that the FED is likely to go ahead and hike later this week. That's basically priced into market. I think for the FED to not do it at this point in time would spook the markets more than helping it. But I think that you have to always go back to the reasons why the FED is doing what it's doing. And if the FED is saying, Okay, we can go ahead and hike one more time, we think this is a relatively contained implosion.
We think that the economy is strong enough to go ahead and do that. That is a vote of confidence for the here and now. Now.
I do agree with you that we're seeing a tighter lending environment coming up.
I was listening to.
Bloomberg earlier this morning and liked what I heard one of the analysts saying about, you know, this doesn't really seem like it's a cliff. It seems like it's something that's going to come in, you know, in terms of
drill and drabs over the longer term. I think we have to go back and ask what is sort of the state of the consumer balance sheets coming into all this, And I think the resiliency that you're seeing in terms of that consumer spending speaks to the fact that so much of a mess was cleaned up during COVID from all the stimulus programs and all the time that people were forced to spend at home, and that strength is now coming in and it's an asset and a buffer
for this economy, and it's showing up in those consumer earnings results.
Is the best way to play this in large cap companies and not necessarily the Russell two thousand. It's more exposed to other banks that, as Charlie Munger said over the weekend, could be laden with some of these other bad loans, or at least to underpriced loans based on where interstrates currently are.
I think, you know, we go back to these crises that we saw in the past. If you go back and look at, you know, sort of the big growth stocks back in the tech bubble, it took a very very long time for this to become a leadership berry again. And you can say the same things about the banks coming out of the financial crisis.
So I think it's right to have some caution there.
We've moved to a neutral on the financials and say that in small cap as well, they're cheap at who the heck knows how cheap they actually are. I do think outside of the financials in small cap you can find interesting things to play.
On a recovery thesis.
Small cap consumer discretionary the sector looks extraordinarily cheap right now and should benefit from kind of a recovery going into twenty twenty four.
The same fundamental.
Tailwinds that we would see in the big CAF names, but the large cap consumer discretionary stocks are actually extraordinarily expensive right now, so we think there's a better risk reward in those small cap consumer names.
I do, though, think Lisa, as long.
As markets are kind of jitterate, and as long as markets are focused on, you know, kind of getting ready for FED cuts down the road, I do think that tech is going to have some tailwinds now. We are watching the positioning there very very closely. The nastaf futures are starting to get elevated. When that breaks, when that peaks, it's going to take down the tech stocks for a little bit. It's going to impact the broader SMP five hundred as well. But for now, I think the earnings
trends are good. I think the FED trajectory in terms of where the market expects to go is good. So I think you can be selective in small cap, but I do think that the tech space and big cap should do pretty well.
Laurie, you're not verish. I just want to be upfront about that. You're really not. You've been constructive in some ways in many ways over the last few months, Laurie. How hard is it to convince someone to take money out of money market funds and put it in the equity market.
I think that it depends on what part of the market you're talking about, the time horizon you're giving investors, and the.
Purposes that it's supposed to achieve.
So one of the things we've been talking a lot about lately is the energy sector, which has really really nice divid in yields, balance sheets that have been cleaned up. It's been kind of an orphan sector for the last few years. It's come back over the last year or so, especially with rush of Ukraine in the spotlight.
That's a pretty easy.
Conversation to have with investors right now, even though there are some shorter term concerns.
About oil prices.
I do think at the end of the day, one of the things we see retail investors do is come into the S and P five hundred for yield opportunities.
And even though the growth sector.
The growth part of the market is zigging and zagging right now in terms of all the strength we're seeing on earnings, there's some really interesting yield opportunities if you look in other sectors.
Those aren't tough conversations to have.
Frankly, Lurie, thanks for paminas LERI cavistd that of MBC Capital Markets.
Joining us now to really give a sense of what the risk reward is for a federal reserve, the balance of risks at a time of inflation that is coming down but still incredibly high. Joseph Lavornia, a chief US economist at SMBC Nico Securities, Joe, wonderful that you're joining
us here on set. I'm wondering, from just a high level perspective, what is the impact on the economy from failures of banks that have left the biggest banks in America assuming the smaller ones even bigger and not going to fill in some of the lending.
There are two key things, Lisa. Number one, this problem resides with the Federal Reserve. Management issues exist in banks, no question, But this FED raised rates much more than the guidance suggested.
They put those rates way above.
Where the markets suggested last summer. They were supposed to be based on the version of the yield curve and the banking system. The lending system doesn't work when you have a higher short rate versus the longer rate. Yield curve not just as a predictor of recession, but causes recessions. And the sad thing is the FED is going to now regulate these smaller medium sized banks when it was FED policy itself that caused this crisis. That's number one.
Number two, given the tightening and lending standards we saw in January before this SVB Signature Bank First Republic situation, Rose banks were already tightening lending standards small medium in large banks at the fastest pace since previous recessions. So I can imagine that when we get the data a week from today, on Monday May eighth, at two, it's going to show further tightening and lending standards and that is unambiguously bad for the economy.
So you just said a number of things that I want to dig into, and I'll get to the FEDS and sort of how quickly they raised rates in just a minute. But if you're saying that they raised rates so quickly that the banking model did not work, then what kind of follow on effect do you expect in other regional banks Even though a lot of people say they have been fortified, they have raised capital, they have addressed some of the issues.
Well, that may be true. So there's two issues early.
So one is systemic, like how many other banks perhaps are behind the banks that have had troubles, and we don't know the answer to that. The FED is backstop these banks through these various lending programs. The issue, though, is will these banks make loans and extend credit that to me is unlikely to happen. In other words, they're going to call in deposits or call in loans, try to raise deposits, revolving lines of credit won't be extended.
That's bad for growth. So whether there is another systemic issue because of let's say bank mismanagement, we'll call it with quotes, is a sort of irrelevant in the sense that what the FED has already done from a monetary policy transmission mechanism is they've they've basically killed credit and money and lending create.
So you don't think that it was the issue of Randy Quarrels for not necessarily enforcing some of the regulatory oversights that the FED flagged at specific banks that have run into trouble.
No, I mean, that's just political cover. I mean, if you looked at the bond market through April of last year, was the middle part, the longer part of the curve. Those were bond market returns at that point were the worst returns you had in measured history. So the market was not People did not expect the FED to keep going in seventy fives, and it was after that first seventy five when the yeal curve inverted and the FED stupidly ignored it.
Okay, but then what would you say to people who point to the actual economic data that's coming in. It's been stronger than expected. Consumers keep spending. There has been ongoing credit creation. This morning, we have ten different issuers ready to sell corporate debt even though rates have risen so much. What would you say to people, say, the economy has proven it is resilient and it has been able to withstand this, and then someone actually, it hasn't driven inflation down enough.
Inflation's lagging, inflation's coming down. If you look at the tree of the CPI, the upswing in the downswing has been identical in this cycle. Their pockets of the economy that are strong. We had the same debate Lisa back in eight. I remember vivil I wrote a piece on this. You look on eight we had people debating if we'd
entered recession. The economy grew over two percent in the second quarter of two thousand and eight and what turned out to be the deepest recession since the thirty So the fact that the data are all in alignment is normal. We had where housings in recession, manufacturings in recession, inflation's coming down. Core CPI will be sticky. Rents are a
big piece, but we know the housings weakening. What is so wrong and just waiting and seeing what happens for this spillover, if any in the rest of the economy. If that could have done that numerous times over the past year.
Well, they've gotten it wrong. Though they've got gotten it totally right, and they got the transitory concept wrong as well, and that some people would argue, including muhammadl Aaria, that that was the reason for how rapidly they rose real they raised rates. So yes, perhaps they did raise them too quickly, but that was the least worst option after not raising them for as long as they did. So
what would you say to that? I mean, was the first misstep in the real misstep not raising them back in the summer yea twenty twenty.
Absolutely J. Powell channeled his inner poll voker when he wanted to be reappointed. So you're absolutely right, and Muhammed's right about that. However, you don't correct one mistake by making another mistake. And I could imagine the people who have been arguing the Fed to raise rates, who have got to get inflation down. What happens, least hypothetically, we go into recession this year, as I believe will happen, and we're in next year presidential election year. What kind
of political pressure is the FED going to take? Because it doesn't matter who's arguing, is one side is going to be happy they're cutting or not cutting or whatever it might be. So the FED has really put a huge bull's eye on its back, and it could have been prevented. And part of the problem is that to Fed all these meetings, it's all this unanimity.
There should be debate.
Economists don't agree in anything, except for those at the FED.
This is something that people are expecting. Well here perhaps more of going forward. But right now, given where we are, given how quickly they've raised rates, what is the bigger risk if they pause at this point? Is that the right course of action?
Is it justation at a point where people are concerned that.
They're going to reignite some of the credit creation.
Inflation is easy to handle your raise rates. The FED should have paused a while ago. The FED will be cutting and should be cutting break even inflation, the yield curve, the dollar, commodity prices, none of these things have been suggesting for the last six or seven months. There's really
any sort of inflation problem. Not that inflation's not needs to come down, it will, but the FED should stop this crazy policy of tightening, and they should continue with the balance sheet, but they should cut on the rates.
That should people are expecting. The market is pricing in a twenty five basis point rate hike at Wednesday's meeting. Based on that rate hiking cycle, based on what you're seeing in the fundamental economy, what do you think will be the outcome for the US economy.
Recession by third quarter of this year. I mean, the thing is, you look at the index leny indicators in the six period of peak twenty one months before the economy peaked, that would put an economy peak this year in September. We're down almost eight percent over the past twelve months. Virtue, All the indicators are declining. The EIL curvistil inverted. You mentioned the bank lending. That tightening is
still working itself through the economy. Why in the role of your raising rates, you're actually making the problem worse because you're lifting money market rates, which is encouraging to record deposit flight. It's like, I don't understand what these people don't see it. It's kind of like remember in Zulander with Will Ferrell that you know we got to a piano key necktie, like the Fed you those short rates, So those bill rates are up at five percent plus you've put them there?
What are you doing?
Never thought that i'd hear Zulander cited as a model for FED policy. Joseph Lavornia of SMBC Group, thank you so much for being with us. 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
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