Surveillance: Rate Cuts with Peterson

I want to start by just asking how much has your outlook for the US economy changed over the past two weeks. It really hasn't. We have been calling for a recession starting in the second quarter and extending through the fourth quarter. If anything, this might accelerate things. Certainly, consumers have already dialed back spending on goods, businesses are not spending on investments, and also the housing market has really folded in on itself. And really the last jew

to fall is services. Now, a credit crunch really doesn't affect services because people don't tend to finance restaurant and visits other than using their credit cards. But certainly we think that in terms of durable goods and certainly the ability for businesses to invest that tighter credit conditions are not a good thing for them, and that will potentially cause the economy to have maybe a little bit worse

recession than we're expecting. So that's what a lot of people are saying is that this brings forward the recession. But you ring another specter to the table here, this idea of a potentially deeper recession. At what point do liquidity concerns at banks become a credit problem for the consumer a credit problem for the economy akin to what we have seen in history when there are liquidity issues. Well, if you're a bank and you're concerned about your deposit

levels dropping, you're less likely to lend money. But the things that consumers are already pulling back, they're not going out and buying cars and homes because interest rates have risen significantly, almost five percentage points and roughly a year. So there may not be a much effect on the consumer, but certainly I think there's a risk for businesses who tend to need cash, especially to pay their workers and to invest in and in short term and long term venture.

So I think the pressures will probably be more on businesses relative to consumers. Does this also shift your view on how much unemployment could go up or do you think that we could get this downturn without some sort of structural increase in joblessness just simply because of the mismatch right now in the labor market, well, the industries

that are letting people go or the former pandemic darlings. Again, it's tech, it's financed, it's real estate, it's construction, it's transportation, warehousing, which were linked to the strong demand for good. So that's what we're still seeing in terms of layoffs and weakness.

But you still have these huge labor shortages and areas that are less sensitive to interest rates, such as healthcare and restaurants and hotels, and so what we really need to see is consumers turn that dour sentiment that we're seeing in our consumer confidence gage, which we've seen over the last year, into Okay, I no longer want to purchase services. And certainly higher interest rates may not get

at that issue. But if consumers think, well, I might be next in terms of layoffs, then they'll pull back on spending. But all in all, we still think that the unemployment rate's probably going to rise to about four point four percent next year. That's roughly a million jobs loss. I would not want to be in that number, but

certainly not as bad as what it could be. We're speaking with Dana Peterson, chief economist at the Conference Board, as we look forward to another week, another month, potentially a rate cuts in the face of what some people are expecting is a decline in economic momentum. Dana here comes sort of the rub on the whole issue as we talk about perhaps the sooner recession, a deeper recession,

and FED cutting rates in response to that. Have we dealt with the inflation problem, especially given the stickiness that we've seen in recent data. I don't think we have. Certainly, when we see the stickiness, it's linked to wages through well services through wages and very strong demand for services, also food prices, which are being influenced by outside effects, certainly the declines that we expect in rent inflation. It's in the pipeline. We just have to wait for it

to happen. Maybe it'll start in the springtime or early summer. But I don't think we've licked the inflation problem, and so that's why we're not anticipated that the Fed's going to cut rates this year even if there is a mild recession. If you still have prices that are so far above the two percent target, why would the FED be cutting interest rates, especially if they also think that if there is a recession that it's not going to be that bad. Well, and this isn't just an interest

rate story. It's also a balance sheet story. And we saw the balance sheet increase traumatic lay over the past two weeks in terms of the Federal Reserve and its holdings, and part of this is not necessarily stimulative. Some people will point out these are emergency loans to certain banks. At the same time, Can this central bank kill inflation if it keeps going back to the same crisis area tools to try to solve financial instability? Well, I think the FEED is trying to say that it can do

two things at once. Right, It can address inflation through the credit channel by raising interest rates and also the continue dialing down of its balance sheet. But it can also provide liquidity, which yes, does hit the balance sheet, but you can think about it as two different wallets that the FET is working with here, and so the FET is saying we can provide liquidity to banks, and it's not stimulative because banks are taking this money because

they needed to make sure that they remain stable. But they're also probably not going to lend this money, so that doesn't so that prevents it from being stimulative or inflationary. So I think that's the key thing we have to understand that has many different tools, it's using these different tools in different ways, and that it can address inflation and providing liquidity at the same time. How much do

you think that the Fed can cut rates? Well, again, we think there's there are no rate cuts for this year, but we'll probably start seeing consideration of rate cuts maybe in the second quarter of next year. But we think that we're not going to go back down to the low levels that we saw even before the pandemic, because inflation may be structurally higher and it may be more difficult for the FED to maintain that two percent target.

So we think that maybe the federal funds rate next year goes down to around three quarter four percent, but certainly not back to two or one or even zero unless we have some major crisis or very deep procession. Dana Peterson, thank you so much for being with us of the conference board, joining us now as Patrick Compstrong, CEO of Plurimi Wealth. Patrick, You've usually got a ridly intestinct trade. I know you were sure Credit sways and you how some of the jet let's start there. Want

me through how that worked out? Um, so our story Credit swayed all of last year. I actually closed my sort unfortunately at the beginning of March, so I thought it covered in a two nineties two point nine Swiss pranks are there, so made about a seventy percent return on the tourt thesis. Was not much upside in the equity, even though it's incredibly cheap. But bonds are going to be safe. It's a systemically important company. Bonds couldn't fail. So I had a bit of a scary ride over

the weekend. Sure you did some of the bonds. I own our senior bonds, all senior bonds, but at the group level, and there are were scenarios where if it was a forced acid sale and UBS didn't buy the group, those bonds would have come under pressure and potentially even been worthless. But it turned out to be a good trade on both sides of those. Since we've pulled closed Credit Swiss, so we're actually short Bank of Nova Scotia in Canada now and the Adian banks became the biggest

banks in the world in the financial crisis. They weren't impaired basically by the same issues that all the other banks plummet and value, and I think they're viewed as a beacon of safety. But Canadian banks have a property bubble to deal with, and they've got rising rates to deal with, and they're very expensive. You look at every other bank in the world and they're trading at frank practions of tangible book value. In Canada they're still trading

at multiples of tangible book values. So very expensive banks, very well run banks, but with a property bubble that creates some risks. Well, let's put some numbers on that property bubble, Patrick, how about is that situation? Well, property it's always very hard to exactly quantify, but affordability index Canada is right near the bottom of the world. Property prices have gone up four hundred percent incomes a rising

in line with the rest of the world. So zero interest rate policy that led to property price jumps everywhere. Just we're really magnified in Canada. Canada has been commodity the exporter as well. So in high old prices, the economy was relatively resilient, and zero interest rate policies have led to incredibly strong property market, especially in the big cities. Patrick, I'm going to help you out disclosure. You're from Canada, right, so this is something coming from a place where you

can you can criticize your own home more easily. I am curious of whether this is just a symptom of liquidity being drawn out of the system that is exposing other areas is overly inflated that have not gotten repriced down, or you see a potential trade. What's a combination with bank lover expensive versus other banks very high on book value, higher on earnings, and you are going to see impairments on its loan book because banks their business model is

you lend money to people to buy houses. If those house prices come back to normal on any measure versus history, you're going to have bad dents in Canada. But it's not just a Canadian story. I mean aside from just real estate, and there are issues or pockets of issues in the Scandinavian countries and other areas where there also is an affordability problem. It's also in private equity. It's

also in private debt. We have seen this. We've heard this from a number of different people, and then others push back and say, well, it's either repriced or won't have to reprice because the assets will return to their value later on. Do you think that that's fair or do you think that there are pockets nodes of potential contagents. Should there be some forced sale, some price discovery in some of these assets. Yeah, private equity investors are generally

not forced in to sell. But if you mark to market properly, there's no way private equity dodge to sell off in treasuries, to sell off in equities, to sell off in every asset. In twenty twenty two, but private equity funds mark their assets down six percent some of them things like that, But those aren't realizable levels. So actually I don't want to talk about but I'm sort equt, which is a private equity a lot of private equity assets.

I'm sort soft bank, which was a play on higher interest rates and companies that have no path to profitability. But it is also tying into what you just said about marking to market versus marking to what you wanted to market out So Patrick, tell me about the lungs. Since you don't want to talk about the shorts too much anymore. What's your favorite long run? Now? My favorite long I like BBVA. If we're talking about banks, especially, that's a company that's going to grow its revenue probably

at fifteen percent minimum this year. They've told the regulator they expect to grow revenue at twenty five percent. Interest rates on zero anymore, that was a big headwind to their profitability. So I'm not anti bank. I think some of the banks makes sense. I like to pair longs with shorts. BBVA I think is very attractive value. Right now,

the ECPs coming out swinging talking about more hikes. You heard the German Central Bank governor saying the same thing, maybe even speeding up QT in three Q. You think that's achievable, Well, you've got to measure price stability, which

they're worried about. But financial stability I think is first and foremost in all the central banks as to be right now, and I actually think we probably aren't going to get as hawks responses we probably would have otherwise, and it's going to soil the seeds for future inflation down the line because central banks playbook when there is financial press still liquidity at it, and you've got conditions tightening that are offset by the liquidity is they're throwing

right now. So it's not in placemary right now, but they have a tendency to leave those policies in place a little bit longer than they could. So I think inflation is really dying out quick right now, but I think it's probably got another leg up in response to what's going to be happening from central banks in the

coming month. What's the growth profile associated with that inflation? Kilpatrick? Well, so, I think the US is probably going to fall into a technical recession, probably just based on the tighter financial conditions, less access to credit. My view was a month ago it wouldn't and my view is now that it probably will, but I think it's going to be relatively minor. The

employment situation is still robust. Employments always a lagging indicator, but one point six job openings for every unemployed person. That's got to change a lot before you see a meaningful disdropt into the US consumer Patra fascinating to catch up great cold on credit Swaice as well, Patrick Armstrong. There of plurimi wealth. I'm sure he hoped he'd held on for another two weeks onto that short but seventy percent move. Yeah, that's a pretty big move. Yeah, he

did pretty well for himself. Henrita Trace joins us now the managing partner and director of Economic Research at FADA Partners. What a moment, Henrietta. I wouldn't subscribe it that way. I don't think spying is the right way to describe it. What were your thoughts when you heard that? Look, please stop. I mean that was so terrible to watch. That was really tough, and it was definitely one of the most aggressive hearings that I can remember watching, and I've seen

quite a few of them. But I agree with your point. I think he did as great of a job as you could have done. The members knew what they wanted to get out of that moment, out of that five hour hearing, and it was some of the members were saying, the most bipartisan committee and the most bipartisan hearing that we've seen in a very long time. And I think that is really what drove the attention yesterday, and they

got the SoundBite they wanted. As he pointed out, Lisa well, but Henrietta, how quickly can they actually get something done? Where is the actual political will to do something that could make some serious ripple effects, particularly among younger Americans. I'm really glad you asked. I don't think that there will be material legislation targeting TikTok specifically, and I do not think that there will be a national ban. I understand that yesterday's hearing was very explosive, got a lot

of attention. It was the banner headline across all media platforms yesterday. But the Congress is not in a position to pass legislation to ban TikTok right now, even constitutionally if they could. What I think is happening, and I would encourage investors to do, is watch Katherine Tie, the US Trade Representative, today when she's up on the help for the second hearing in front of the House Ways

and Means Committee. That's where you're writing a big, comprehensive China Bille, and we saw her give a preview of that yesterday. It state finance. They were dueling here at the exact same time. But if you didn't want as much fireworks, and you were more interested in policy, you would have watched the Setate Finance Committee hearing and that's

what I was doing. So I would encourage people to watch Katherine Tye today Master Tie at nine am because they have issues about China's expansion into Latin America, Brazil, Russia,

ip theft, human rights, climate issues. This is the TikTok issue, is one that effectively brings everybody to the yard, gets the bipartisan support we're looking for that allows them to craft a comprehensive China bill, which the Biden administration is hoping to do after the debt ceiling standoff is resolved or worst case scenario, in his next term if he

gets reelected. When it comes to the consequences of this, how much are you watching TikTok and how much are you watching Apple and other big tech companies that have substantial businesses over in China. This is exactly what's in the restrict Act. That is the one bill that I do think could pass on TikTok. It's really about all emerging technologies, all social media, and it doesn't just target China.

It also targets around Russia, Venezuela, Cuba. It's most it's the most comprehensive and it could theoretically put every social media company on the front of the table and allow the Department of Commerce, obviously run by an extraordinarily competent Secretary Raymondo, to see what they want to do, study the issue, and then restrict and ban if they see fit they takes CEO had a tough day. Secretary has had a tough two weeks, Henrietta. Let's talk about policy.

Where is this policy effort going on the bank in front? Nowhere fast. I have spoken with Democrats and Republicans House Senate for the last two weeks or two years, however it's been since SAB collapsed. The reality on Capitol Hill is that the House Republican Conference is not prepared to move legislation on banking at this time. There are many ideas floating around, but there is no path to two hundred and eighteen votes from a majority of the Republican

call friends in the House on any legislation. And what I hear time and time again is that you need to see the impact of this banking crisis and the collapse of a couple sort of bespoke boutique firms, which is how a lot of House Republicans think about this really start to hit the heartland. You need to see farming banks, farming state impacts. You know, it can't just be commercial real estate that is reeling from this collapse

and potentially seeing their lending ability squeezed. You need to see real heartland impact that's not just in a certain

couple of places. Most of the Republican conference, I would say about eighty percent was not in office during the Great Recession, and they were not here during the banking collapse, and many of them ran on the campaign of we are against bailouts, were against heart and when they look at, you know, ensuring all deposits and passing legislation to hike the two hundred fifty thousand dollars cap, all they see is bailout and that's not going to pass in this conference.

Do you see and can you identify a mechanism for the trade ye to move forward and temporarily suspend the limit on deposits. It's to a mechanism that exists in your mind. Yes, absolutely. And one thing that I recall, you know, I was in the Senate during the banking crisis. The ability regulators to act is unparalleled, and the things that they can pull out of a hat are really impressive.

So I think the most focused right now. What I've spoken with Senate Banking Committee staff on, and I know Treasury is working on, is shoring up all the things that we would think of for extraordinary measures on the debt ceiling. I would encourage folks to look at Secretary Geitner's letters sent back in twenty twelve, where he lays out like five different baskets of funding that the Treasury has exclusive authority over that they can tap into in

the event of a crisis. This circumstance I'm referencing was the debt ceiling, but they can use that here as well. The ESG Fund in particular, is getting a lot of attention. Treasury Secretary Yellen, once President Biden gives her the sign off, is authorized to use the funds there, which were two hundred and sixteen billion dollars as of January thirty first of this year, to deploy as she sees it. So I think that's where a lot of the focus should be.

It's on the regulators importantly. I think the regulators know that Congress is incapable of action, and so they are already prepared to move and they have experienced if the members of the House do not just to finish on Secretary Yellen, she was asked whether she discussed some of

these issues, and she said she hadn't discussed them. And I struggled to believe that Henrietta just struggled to believe that the Treasury hadn't had a discussion about doing away with the cap on deposity deposit insurance through the mechanisms which you've identified. Were surprised that she used that language. I do think that there's been some maybe back and

forth in terms of what they're telegraphing. But I also get the sense the Treasury is trying to you know, exude calm and stress as the followers are to help them do earlier this week that there's not a systemic banking crisis. So I do think that acting unila early to you know, provide unlimited backstop would have gotten a

lot of blowback. Yeah, she'd committed that. Just think about how quickly that sounds like a bailout, especially when you've got guys like Gary Cohn throwing out ten million dollars numbers. It's just too high. So I do think that there was some strategy involved there, which was the worst scenario saying that you are considering it an unlimited basis, or maybe just say, hey, we haven't had that conversation. I think she picked the least bad option. What a tough

spot hemerer trace their faded partners. Who would you prefer to be this week? Framo TikTok ceo? Second, Psach, you pick TikTok ceo because you had nothing to lose. Who are already working to be exactly lose it lost already exactly? Patrick calm Strong flimy Wealth coming up. Chris Marangue joins US now coc iok Belly Funds. Chris, your words, the bank crisis a feature, not a bug of FED policy, Chris,

what do you mean by that? Well, listen, I think we've talked for a long time about Cherry Powell pushing rates. Something breaks, and clearly something's broken. He's made no he hasn't been shy about about talking about the fact that this credit crisis is going to be disinflationary. It helps them attack inflation. So as long as we can manage through this, it probably helps that part of the equation. If we can manage through it, if we can avoid

a deeper crisis, one that spreads even more. Chris, is this sector attractive to you in any way, shape or form. Well, thankfully, we have generally avoided cyclical and sorry, we've generally avoided commoditized businesses, and the borrow short lived long business is somewhat commoditized. And it's become less attractive recently, in part because funding costs are going to go up, Banks are gonna have to pay more for deposits. Credit quality is

likely deteriorating. There could be fewer loans, a fewer revenue opportunities, and almost certainly more regulation, including higher credit standards, higher ratios acquired. And that's going to impact both the P and the E for these stocks, and so they're less attractive. Not something I'd want to get involved with today. I feel like this market has been exerting the maximal pain

on the maximal number of traders at all times. Heading into this year, people were talking about value stocks and how banks fit into that, and how big tech was going to be left for dead. Big tech has ripped, banks are having trouble at this point. Do you still think that big tech can lead given the concerns around growth, given the concerns that perhaps the cost cutting and the

potential right sizing of the businesses is not over. Yeah, I would make a distinction about Obviously there's been this

rotation back to tech, back to growth. I think much of that is related to safe haven trade investors looking for these big nation state type companies with big credit balances, cash flowing businesses as a as a safe place to be Small tech, profitless tech has not shared in as much in this rotation and the higher interest rate environment, A recessionary environment is not going to be good for

those companies. So you know, we're still looking for the cash flow generators, companies with pricing power, and that's been the formula for recessionary environment, for an invitationary environment. We started this conversation Chris talking about the FED hiking rates

until something breaks, and something clearly has broken. As you said, I'm curious what that means about the way you invest in terms of do you go for diversification or do you go for further concentration and the companies that you know best. Yeah, I mean, we're obviously looking for diversification across both industries and companies, but you know, it's to a certain extent. We want to focus on our core competencies. We want to put our eggs in a basket and

watch that basket. And that's basically what we've been doing, unchanged for forty years. Chris. So we sleep walking into a crisis, a much bigger one. I don't think. I'm certainly not sleepwalking, and I don't think the market is as well. The market is well aware of what's going on, and maybe a little bit too nervous given the recency for many of us of the seven crisis. Obviously, lots of lots of risks out there, and that's where we

get paid to manage. She's in our breed's complacency. Though, those that experienced O seven who always sit there and say it's not oh seven way, Chris, it's always a little bit different, and clearly this time is different. I don't think we have quite the systemic issues in the banking system that we did back then. Obviously, you know, the BE now having raised rates so aggressively, does have some ammunition, some dry powder u to uh copcy cut

rates and improve the situation. But you know, it's what you don't know that you're worried about totally and as so much we don't know, Chris, We've got to leave it there. Thank you, sir, Chris Marangi there a cabelly Funds. Subscribe to the Bloomberg Surveillance podcast on the 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.