This is the Bloomberg Surveillance Podcast.
I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.
Jim Zelter with us is just starting to walk out of the room. Called president of Paul Credit Card Management.
He joins us now with decades of experience and fixed on John, why don't you bring in a gentleman with an overview of this crisis or non crisis that we're in right now?
The co president at Apollo Asset Management joins us right now. Jim, good morning, Good morning, all great to catch up. I want to start here. Can we just start with the days after RECVB collapses. You've raised all this capital. This is like your moment to make things happen. How difficult was it to deploy it?
Well?
I think you had to differentiate between a deposit crisis over the first few days at Thursday and over the weekend when the government took its action, and then you really were talking to a lot of borrowers and a lot of institutions that needed help. So that week we did a very large transaction and helped out pack West.
But I think what you're really talking about this morning here is a deposit crisis evolving into a business model question, and that's really where the overall evolution of the markets are. But certainly, you know, we've been very busy. We've been very busy on all sides of our business, and there's no doubt that this withdrawal of capital, it's not a credit crunch, it's not an embulent market, but there's a transition with a higher cost of capital in debt financing across all the markets.
Let's stick deeper into that. Can you describe the spaces right now where you expect traditional banks to retrench from, to move away, to move back from, and where you think there's opportunities for you to step in even more.
Sure, you know, as we've had this conversation about private credit over the last several years, last decade, it's really been for the headlines focused on sponsor finance, which is non investment grade. The real opportunity is the regional bank model really evolves and their cost of financing is up
quite a bit higher. There's a variety of asset based strategies, whether it's in the commercial mortgage space, whether it's in the resume mortgage space, whether it's in solar finance, whether it's in aircraft finance, where the regional banks or traditional banking models, those were interesting businesses. The business that we bought out of Credit Swiss, the Atlas finance business, which
is really an abs warehouse businesses. Those businesses typically the underlying risk is investment grade, and for the most part, because of either sovereignty two in Europe or other rules, those are just become much more capital intensive and capital consuming for the banks. And so there's a variety of those asset classes that I mentioned that's like forty trillion versus a ten trillion private credit opportunity in the US.
But Jim, what I didn't hear you mentioned was just a pure unsecured, revolving loan of credit, which is basically what a lot of these smaller regional banks delivered to smaller companies. Is that a no go area at this point.
No, I think listen those are smaller, idiosyncratic corporate loans and someone needs to fill the gap in that. And the reality is the cost of financing has gone up to to four hundred basis points in the last month, So those companies are getting that financing. You've not seen it yet in the earnings, but certainly that's where we
believe this whole idea of tighter financial conditions. It's that exact company that you're talking about that's probably having a more challenging period of time right now securing that financing.
How does that change the equation for you when you decide what size company you want to invest in. The bigger, more stable, better access to financing going to have and even better profile versus an even worse one for some of the smaller ones.
Sure, typically at Apollo, if the capital is coming from our balance sheet, we're usually talking to companies with companies and having ebada less more than fifty million dollars. That being said, we have a portfolio of sixteen portfolio finance companies, of which the CS business now called Atlas is one of them, and they'll range in the companies that they financed that that's three thousand employees, about eighty billion of assets.
Those companies will lend to companies anywhere from ten to fifteen million in revenue, so much smaller, much deeper and broader.
Are they as attractive?
Well, what you've seen really across the board, let's just talk about commercial real estate. A lot of conversations about that. Commercial real estate finance for the most part, like a single a CMBs piece of paper that was three point fifty when I came out here six months ago, that's six seventy five today. It's just math spread of widen from one seventy five to three fifty over.
Yeah, I noticed in Washington to day Brookfield giving back two properties they can't make a go of. Well, I mean the commercial real estate thing is tangible. I want to look at the level of the word the D word distress that's out there right now, and I look at it just in a basic accounting standard. How blind are people like you right now off fasby one fifty seven and you can't mark the market depth that's out there? Now, what's the opacity that's out there in the system?
Well, I think I think time If you look at the overall leverage finance market, it's a couple trillion dollar market. You've got to assume defaults next year, probably going up to the mid high forest of five percent, right, So that's about one hundred million of a challenge credit if you would. In the forward calendar, if you look at commercial real estate, you got a trillion and a quarter that needs to get financed in the next twelve to
eighteen months. So there's no doubt that there's a portion of that will But you're not you're not seeing broad distressed yet. You're in this you're in the transition period. We had fourteen years of low interest rates and the real impact act on valuations. It takes a while to filter through. You're seeing some evidence in the secondary markets. In the pe secondary market, those names are trading between
the high seventies and low eighties. Credit secondaries are in the high eighties, low nineties, VC secondaries in the fifties, So you're seeing it in some markets. But this idea of tighter financial conditions, this takes three, six, twelve months to really evolve. And as you talk later on today,
you know you have your big banks reporting today. It will be very interesting to see, you know, on the regional banks, they went from a deposit crisis to a question of their economic business model, how do they make money long term? And you know the other side of that is, we feel that our business model has only gotten enhanced. We have long term liabilities and now those
ten year liabilities in our business. It allows us to be a robust, stable lender in a period right now of flux and conversation.
The heart of the math to me and the Brickfield article from Bloomberg today is just definitive. At the very bottom of it. In the last paragraph, year over year, the monthly payments on a blended piece of sub properties went from three hundred and thirty gazillion out to eight hundred and eighty. And the translation of this to me for all of our listeners and viewers is in the new math, somebody's got to put up cash to do the restructure. This is a whole new world for a lot of people.
Jim, it's called cost of For a decade plus and I mentioned to you all before, equity was the great beneficiary of low cost that really subsidized the equery return exactly. Now we've had a complete paradigm shift and it's just math. You said it earlier. The funding cost. When you hear that there's a credit card out there you're making four percent on right now, or assuming not a credit card but a bank deposit program, that's just a cost of good sold and it's a higher cost for somebody, the
consumers the great beneficiary. But back to our model, we are are looked at, you know, the the American economy. We've gone through a really tough quarter, but you know, four percent of the population, fifty percent of the financial assets in the world, we have the envy financial markets of the world. And this isn't This is we were evolving right now in a period of you know, three to nine months, but up with a higher cost of capital that's just flooting through the system.
You in a great spot. That's what we're describe in Is that because of the way the cycle is evolving, or is it more structural in nature, because it sounds a little bit more like.
The last secular it's secular.
You know, if you take the last as we've talked before, if you take the last twenty five thirty years and the evolving role of financial services around the globe, really led in the US, but following on in Europe and a little bit in Asia as well. You know, there's no doubt that that folks that are able to be able to operate with the ability that we are to really bring the proper liabilities to the equation. You know, our investors are sovereigns, institutions, pension funds from around the globe.
They're the ones that can make the five and ten year commitments along with retirement savers. Those are the folks that should be making these loans. I mean, the digital world has really changed the banking market and there's a lot of folks that are a lot more knowledgeable about the traditional banking system. But again, we just have a lot more tools in our toolbox were able to provide
a lot more capital. As I mentioned the pac West solution that happened basically in three days, a billion four facility for them that really got them through a pretty tough liquidity situation, but was a high quality assets that were looked through investment grade. And if you do that, you know, having those solutions, your your doorbell is going to ring quite a bit these days.
How much cash do you have in anticipation of the doorbell ringing?
You know, I think our latest numbers as a last quarter probably an excess of fifty billion a dry powder. Oh well, you know, I'll leave it to you. I'll leave it to you guys to talk about that. But there's no doubt that investors from Ron on the globe. I was an agent last week, and the idea of really exporting yield around the globe. You know, they've had
very low rates for a decade plus. Obviously a lot of conversations about what's going on in Japan right now with y CCO curve control and how do they transition off that. I mean, I think that's a really interesting story for the latter half of the year. But the reality is we're in an evolving market in the States. What was a deposit liquidity crisis is now a evolution of their business model, and really it's going to be a period of tougher financial conditions.
Let's finish on this. You describe a process you're expecting tougher financial conditions. I just want to build on the question Lisa asked. I hate to ask the one question, when do you expect that doorball just to be NonStop ringing, because that's what it sounds like you're looking for.
I don't I think by the time that actually happens all the activities occur. I think it's almost too late, Jonathan. I think you really need to be in the markets every single day. The reality is, you know, there was some headlines last week the private credit took a step back because of one financing. The reality is the m and A market's a little bit quieter right now, and you know LP firms want to do so.
Am I going to make some news this morning? I'm looking for a Western Alliance transaction. Would you like to break that news here this morning?
I'll let others talk about that one. I got my hands full.
Jim, this was fun, sir, Thank you, Thank you very much. Jim's out to the of Apollo Asset Management with us around the table, and please to say Dan Greenhouse, chief strategist at Solace Alternative Asset Management. Dan, welcome to the show.
Good morning, Thank you, sir.
Are we learning that the bank stress of the last month or so is more idiosyncratic than systemic or is it still too early?
I don't think there was really In my opinion, I don't think there was a debate from the beginning that this was not idiosyncratic. Clearly, there were specific factors to Silicon Valley specifically, but Signature as well that I never really found were sister wide, so to speak. That's not to say that the unrealized losses throughout the banking system isn't a real thing.
It is.
We know that it is.
But the I mean to give you the best, the best that I could give you. Silicon Valley Bank has seventeen branches and somewhere around one hundred and fifty thousand checking accounts. Fifth Third, which is a comparably sized bank deposit wise, has eleven hundred branches and like a million accounts. It's a different base, it's a different thing entirely so, so we were never particularly concerned about there being a
banking crisis, if you will. Certainly there's an issue that has to be dealt with, but I don't know that that hearing that said, I don't know that hearing from JP Morgan and Wells Fargo tells me what Western's going to tell me after the close. That's much more consequential.
We're still trying to gauge to what extent we're going to see a turn and get lending standards and how contained macroeconomic spillovers will be. Have you drawn any conclusions on that just yet.
Yeah.
Listen, the short answer to any question like that is a few basis points off GDP, I mean everywhere. I don't have any particularly new news on this. We know lending standards have been tight and going into this, we assume lending standards will tighten further coming out of it. And we also know that, on balance, the level of tightening that we've seen is traditionally associated with worse economic
outcomes than better economic outcomes. I don't think that narrative is likely to be changed at all from the large banks telling me on balance that loans are continuing to expand there's a lag, and ultimately I think it ends up weighing on GDP. By someone, we call it three tents or four tenths of GDP, something like that.
Dan, you're strategist to a hedge fund, you're living the billion's dream. Do we overweight what we think are the bets of hedge funds If we're trying to establish a strategy that's longer than three hours, if we're trying to establish a nine months or a three year strategy, is there value in measuring the long short bets of your world?
So We are not active traders. If you will, we've owned positions for ten.
Years, say ten minutes.
No, No, that's not the world in which we live. I think certainly actively trading hedge, actively trading hedge funds that flip position on a daily or is there value to.
That information is transfixed by it?
Well, yes, in the sense that momentum strategies are going to be derived from that trading activity and are going to be related to that activity. But we're, as I mentioned, a much more long term focused investor. When we take a position, oftentimes it's to control of the company. We are the second or third largest holder of several companies. Other times we'll get in and out if the thesis changes in let's say a month, but we are not
actively participating in the market. Is there value in those types of strategies, Sure, but I think it's value for a certain specific type of investor, not our client or our investivation, so to speak.
So just pushing against some of the bearishness out there has been the credit markets that you really focus on has been some of these longer term bets where people are looking more for opportunity than they're worried about losses. And you're seeing that under the hood pretty much across
the board. Do you make of that that people still do have confidence that this is going to be some sort of shallow recession, that we're going to merge on the other side with higher rates that you want to capitalize.
Now, you know, I know.
Everyone says this is going to be a shallow recession, and I find that statement to be more a function of comfort than analysis. And what I mean by that is it's very easy to say this is going to be a shallow recession because they're forget career risk. The likelihood that you're wrong in saying, well, it's going to
be something more than that is quite high. Now that said, we also, and I don't want to speak for you guys, I apologize if I'm saying this wrong, But how many times do we follow up and say, well, what do you mean by a software session? Well, I think we can define this in terms of basis points moves in the unemployment rate. If you think the unemployment rate's going up by one percent, yeah, that's probably something resembling a
shallow recession. But as we all know, there's really no instance in which the unemployment rate goes up by one percent and then stops. It's quite often a much more accelerated move from there.
It feels like we've been in this purgatory for a while. We're they're sort of on the one hand.
On the other hand, and this lack of any clarity whatsoever. When do you get clarity of what we're heading into?
Yeah, you and everyone else, I think that's obviously the top question of the day. I would have told you at the start of twenty twenty two that by the middle of twenty twenty three we will be in something or close to something resembling a recession. Now Here we are in the middle lish of twenty twenty three, and I don't think we're anywhere close to a recession. I have been in public bearish on risk assets over the course of that time. I more or less remain so now,
although there's some cavegats to that. But it's remarkable the way that the economy has performed in the face of such rapid increases, Which brings up something that you guys were talking about yesterday. I think Tom mentioned the IMF report and the world economic outlook, and the discussion of the natural rate of interest. Excuse me and I think there is a lot that we don't know about the
current environment. But with respect to the natural rate of interest, I think it's fair to say that whatever we thought the natural rate of interest was, or that the level of interest rates that balances supply and demand throughout the economy is higher than we previously thought, which means what we thought the economic damage, so to speak, would be from five hundred basis points of rate hikes is not quite what we thought it would have been. It might take six hundred or seven hundred.
I'm rapp there.
You go to do the same amount of damage that perhaps a year ago we thought five hundred.
Big ye on.
Bloomberg Financial Conditions Index, from a minus five standard deviation, we are out to a positive point one nine. That's called not doing what Jay Powell wants.
I'm just tying everything together that you've said in the last ten minutes or so March eighth, pre SVB to your yield north of five percent? Is that where we're going back to given what you've just told us.
Well, I will say, if you look at the three month and the six month bill yields, they're both now north of five percent. I was surprised at the level of decline in the two year. Let's say that to the extent that the two year is going to be anchored to the federal funds rate, ish a drop of that's move. And you see this E code in the Fed fund futures, in the ear dollars future market card wrest it's all, it's it's it's the level of pricing adjustment.
Seemed accessive to me based on my original comment, which was I didn't think that SVB was anything other than idiosymprodity.
I got bad news.
Doug Cass is listening and he's got a Yankees question, but we're not going there. Doug Cass looks out and says, look, dividen SPX one point seven percent. Lisa's talking about five percent money. How does the stock market elevate off of that five percent yield?
Yeah, listen, it's a tremendous head wind right now, and I don't think it's sufficient.
First of all, high Doug.
But it's not sufficient to look back historically and say, well, the market rally in nineteen eighty three and interest rates were much higher, which everyone meaningfully older than me likes to remind me of. I think there are challenges to the equity market right now from the fixed income space. That said, in the credit market, where we spend a good amount of time, the high yield market is still yielding somewhere around eight and a half percent, which isn't
particularly high yield. Even triple c's, which is the lowest part of the market, which isn't really a market so much as a bunch of videosyncratic names to get lumped together, is yielding yet less than a thousand basis points. If you had anything resembling poor economic expectations priced into markets, they just simply wouldn't be.
Treating their credit.
SPIZ would be at four forty on high yield, we were three five hundred basis points for what five minutes PREMI.
I mean, if credit is a leading indicator, it's not indicating much stress.
That's not so.
Hey, Dani, this was smart. It's great, Cat than you. Thank you. Dan Green has that of Solace Alternative Asset Management.
Kufiy A bunch joins us now from nationwide really definitive and parsing GDP out and what it means for the nation, Kathy, the stock market is going up? Is that an indicator to you?
Good morning, Tom and Lisa.
Well, it is part of the leading economic indicators, So think about the conference Boards overall index. It's one of the subcomponents. However, that one seems to stand out from other leading economic indicators. It's it's been as resilient, or maybe more resilient than even.
The labor market.
So we have to see really how the earnings announcements and guidance play out. You know, if the equity market continues to kind of hold in there as you alluded to, the bond market's been pricing in recession for a long time.
Now, what's the framework of the consumer right now? I mean nationwidse got a huge handle on this. To frame the consumer mood like now and into the next thirty days.
Is it buoyant? Is it lethargic?
What's the consumer mood that you perceive?
So what we've seen is consumers still feel the weight of high inflation, even though the headline number has been slowing a bit. Is we know that the core particularly the core services number has.
Been very sticky.
And I think the fact that interest rates remain very high also ways on consumer sentiment. I think that the key though is the labor market and if you look at the Conference Boards measure where I used to work, three to five questions are focused.
On theabor market.
When the Michigan Sentiment Index does rely is influenced more by the equity market, and I would say even gasoline prices. So you have both, you get a different look at the consumer from both of those surveys. I would say overall, the consumers feeling it could very conservative at this point. You know, a lot of the pent up savings they
had have been expended. They've been able to splurge a bit on the service spent side of things, but now have to kind of recalibrate, especially if we're right and that cracks start to develop.
In the labor market.
Katy, there are a number of things that you said that are actually quite controversial, starting with this idea that inflation is going to be too sticky, it's going to allow the Fed to hold rates where they are. The market completely disagrees and thinks that the Fed's going to go back down near four percent by the end of this.
Year with rate cuts.
How do you fight back or how do you argue against people who say, if you look at the disinflationary forces, they're actually stronger than the headline numbers. May figure may may account for including US rents posting their first drop since March twenty twenty.
Yeah, and the rent prices should that inflation should accelerate at some point pretty meaningfully. As captured by the CPI and pc price in disease, real time rent increases.
Have slowed quite a bit.
Home prices overall have actually in many parts of the country fallen, So those both suggest that the rental inflation will slow.
But even when you exclude that, as.
Chairman Pal has suggested, you look at that super core service number, it's very sticky, and things like transportation services and for instance, car repairs are still running double digits year on year. Inflation and insurance premiums we know from what we do continue to rise as well to capture the highigher car repair costs. And it's even broader than that, that service prices overall still remains sticky.
And I think you really need to see the.
Labor markets slow before we start to see that correction, because with car repair, it's not that you can't get the parts, is that the labor is still so expensive.
So if this is the case and you do have stick your inflation.
You have a FED holding rates around five percent for a long time. What kind of shallow recession is this going to be? What are the contours of that?
Yeah, so, and that worth just noting that, you know, typically the FED reserve slow in raising rates and fasting cutting rates when we go into recessions. So we're seeing the opposite dynamic in this business cycle. But the contours is that the consumer balance sheet overall is in good shape.
Business balance sheet overall is in good shape.
There are pockets of issues, just like in the financial market, in the banking system, there's pockets of stress, but overall in better shape.
And we think that keeping the FED.
Funds rate elevator for some period of time should allow to gradually slow and you avoid a really hard landing in that in that sense, and that's assuming though that inflation does you know, continue to gradually slow.
Katy.
One fun of question, do you do you have a run rate of American GDP real GDP of over two percent or do you have to model it below?
Yeah?
So first quarter does look like it's it's running around two percent, even it's been a bit about two percent. But as we go into the second quarter, looks slower to us. The retail sales data indicate the consumer spending is the momentum slowing going into the second quarter. And these housing numbers this morning, building permits a leading indicator. I think people are getting joyful that housing may be
on an upswing. But keep in mind that you know, interest rates matter, supply matters, but employment and income is really the key indicator for the ability for people to buy homes.
Kathleen Bush Jenzik, we have joy that you're with us with nationwide they're chief economists. This is a joy And for global Wall Street, in particularly American Wall Street, now's the time to stop and lean forward.
David Conrad has not done one.
But two tours of duty at Keith Briett and it Woods definitive on large cap banks. He works for the banking franchise of KDW. A Stiefel company. David thrilled to have you on today. What I know is I got forty eight thousand people at Gulben Sachs. I got two hundred x thousand people at Bank of America. It's over a quarter million bodies. I know when they're stress bodies go out the door. Will there be layoff announcements today.
Probably not today. I mean, we've already seen a few. We think they will continue to be a trend throughout the year. But we are seeing, you know, much better trading than we thought coming into this quarter, which will help. But you know, there are longer term pressures on that interest income that will weigh on returns for the industry.
What does it mean to see Apple Goldman generate a four point one five percent savings account?
What does that mean for mister Solomon?
I think from Goldman has an interesting standpoint where they've never had a funding advantage, right, so they've always borrowed wholesale. So the fact that they're borrowing an expensive savings account is actually a creative for Goldman. The interesting thing, though, is the pressure that it puts on the rest of the industry. You know, the savings account in north to four percent is a staggering premium to what banks are.
Paying right now.
Are we learning anything from the big bank earnings?
David and I say this because we thought this would be the tea leaves we were looking for, and then we get guidance. It's kind of like, eh, we're not sure, but we're setting aside more loan losses.
We're doing well.
We don't want to celebrate too much because it's liability in Washington, DC. Are we learning anything more substantial from you?
Well?
I think yes and no.
Right, So, JP Morgan was really a very positive result and I think is going to be an outlier through throughout their earning season. I think the other names that ever reported have been somewhat more in line with expectations, and they're really the key. There is declining overall deposits,
but more importantly a negative deposit mixshift. And what I mean by that is checking account non interest garing deposits are down mid to high single digits quarter over quarter, and that's putting pressure on the cost of funds.
So what are we going to know what the verdict is on this earning season.
It's sort of been purgatory for a while and people are kind of using the data point to fit their narrative.
We've been talking a lot about that.
When will you be able to say decisively yes, this shows that there is a real lack of credit availability under the top tier of companies and banks.
Yeah.
I mean I think a couple points here. One, I think Bank of America will be interesting. Today Again we saw JP Morgan had relatively lower cost the funds relative to the group. So how much of the benefit from the flight from some of the stressed regional banks is really supporting this quarter?
You know.
The other thing though, is is we haven't seen any loan growth. The one aspect that we have seen is credit cards, so we have seen growth there, but be careful what you wish for. And so I think, you know, the trend that won't really be showing up this quarter, but going forward is the increased liquidity requirements we think will really damp in credit growth.
David, you have such a perspective working with Tomas Schold. I think of KBW, I think of Sandler O'Neil, where you guys are doing banking twenty four to seven. Do you just assume a new round of consolidation and combination in the KBW world over the next three to five years. Is there a new acceleration to go from four thousand banks down to x thousand?
Yeah, definitely, I think right now, you know, we're kind of jammed up. One it's tough to get deals approved, and two the marked mark or the balance sheets are really limiting right mergers. But we to your point, three to five years out, the regulations, the environment's getting more and more difficult.
We expect a lot of consolidation.
Let's go all nerd right now. What's the average blended marked to market marked down? Right now? On a par one hundred, it's trading, it's marked down. Is it a two point three point marked down? Or dare I say is it a twenty point marked down?
I think it's it's more in the ten percent marked down.
You know, I think we're really focused on the bond books right now, you know, and really it's really not really the markedown per ses little liquidity associated with that, right that's what you have to work the two in concert. But you know, we are seeing much better rebound in some of those marks this quarter, probably about thirty percent otter than what I thought in terms of the rebound of the negative marks we saw last quarter.
Just a sign of the times that you get earnings releases, and we've just got bny Mellon crossing the bloomberg, and the focus seems to be on one thing. Deposits first quarter total deposits two hundred and eighty one point twenty nine billion, The estimate two seventy seven. So that's a touch better than expected. A bit of commentary from leadership at the bank, BNY Melon CEO saying we need to
remain vigilant given the heightened uncertainty. Lisa goes on to say, we're pushing forward with the strategic agenda.
So the deposits actually came in better than expected, but net loans came in below expectations. And this is what I think really speaks to how banks are managing the bottom line. This may not speak to a big deposit flight, but it is speaking john to this restriction and credit extension, and that perhaps could be the leading to leave for the market in the economy.
APS bank in line TOM one twelve, the estimate one twelve.
David Conrad with this is KBW. David, if you're still there. I look at BNY Mellon and it's just a MALDI seven eight return over the last ten years. What's the expectation of total return from a bank?
Is that what I'm going to make you know?
It's interesting, you know we've said that a lot about the universal since the Great Financial Crisis? Right are the utilities all this increased regulation? I don't really think that's really the case, right. I mean, JP Morgan just put up a high teens r ATCE, you know, with almost fourteen percent capital, right, and so I think it puts more stress on you on your strategy, on the management team.
But we're really seeing, though, is the bigger banks with the diversified revenues and the scale are delivering I think better expectations.
As we move forward.
What's more interesting, too, David, the deposit growth or lack thereof, or the loan growth or lack therein.
I think the.
Loan growth is you know, more of an economic side. It's probably less impactful for our models, but it does concern us about you know, GDP growth for instance. Long you know, I think the deposits is really the uncertainty that creates a lot of deltas in our in our near term earnings expectations.
You know, we've gone through a.
Period of QE and government stimulus and people working from home, and we just have a lot of deposits at the bank that are going to be normalized here and I think, you know, this normalizes trend. We've been here before. You know, checking account balances are thirty five percent of to all deposits they probably should be twenty two to twenty five percent, And so.
That trend has happened before.
But what hasn't happened before is that trend reversing while we're having increased liquidity requirements from the regulations. And so you know, those two things working together, I think due to your point limit the credit extension.
Hy David, wonderful to hear from you, as always, David comment there of KPW.
Carl Weinberg joins his chief economists and managing director high Frequency Economics. I got five things to talk to Carl about and no time to do it because of China.
Carl, you're writing a blistering.
Note this morning, and what's fascinating as you say, there's a lot of noise in a four and a half percent China GDP data. Maybe it's not as good as it is, but you end by saying, this is a trajectory to six percent growth. Do you buy that right now, that they can get to six percent GDP growth?
Oh? Sure, thank Tom, Good morning there.
But they could be asleep at the switch and GDP could not grow at all from even where it was at the end of the fourth quarter, and they'd still get their year over year change in GDP at six percent at target. You know, there's a basis effect. Last year was a reasonable year, so growing from a low base is not a great accomplishment. Look at that four and a half percent GDP number, okay, pre COVID, we have never seen a GDP number as low as four and a half percent since the day to begin in
nineteen ninety five. So you know, let's not be teenagers and talk about relative to expectations or relative to the last three quarters which were awful for China. This is a better than expected number and a better than previous number.
Sure, but it's an awful number.
But within your acclaim China, note they're going to do what they've always done, which is clear out the property market, get it back going as an incentive for the public. They're going to straighten out the SOEs and that what is your forward run rate for China GDP? If it's not seven percent, have long ago and far away.
Two to three percent?
Maybe Tom really well, China's economy has been driven by investment, and that investment in previous decades has had a huge rate of return on investment, but in recent years they're using public money not to invest in productive infrastructure, but to invest in real estate, and investing public money in owner occupied housing is a zero rate of return for
GDP investment. So we're subtracting away all of the fill up from investment out of GDP growth that we saw in the past, and that's a strategy that leads to subpar economic growth in the very very low two to three percent range.
Is this the reason why, Carl, the reaction of markets has been less than incredibly enthusiastic. We haven't necessarily seen an incredible cry of enthusiasm from Chinese equities and bonds, and we're seeing oil actually lower on the day. Is this the correct read that anything that China prints it might have a high number, but longer term it's going back to a much lower number. And this isn't necessarily screaming recovery.
Lisa, you hit the nail right on the head.
If only GDP would print a high number, we get a positive reaction to it. But four and a half percent year over year GDP for the first quarter is an abysmal result. The only good thing you can say about it is it's better than some people forecasted. And the only other thing good you can say about it is it's better than the three quarters before it. But again, to repeat, this is the worst quarter for GDP growth that we would have seen in the pre COVID period.
We're nowhere back to normal in China.
You also point out, Carl, that trade with Russia by China really was an incredible increase.
That really got your attention.
And what's your takeaway from we won one hundred and thirty six percent increase in terms of trade with Russia by China.
Yeah.
I nearly fell off my chair when I saw that result, Lisa, that's the real story this morning. If you dig into the trade numbers from last week, China's exports to Russia exploded one hundred and thirty six percent just in the days after Putin and g meet. The only other time we've seen a number for a year over year growth of exports that big was when Putin came to China for the Olympics two years ago and immediately we saw one hundred and forty percent growth of exports year over year.
China is selling something to Russia.
I don't know what it is, but as you might imagine, it could be problematic materials.
Doctor Weinberger, I've was sitting on a stage at the IMF and I said, I can't wait to talk to Carl Weinberg about the unspeakable at the IMF meetings, which is, will China join Western restructuring methods and processes?
You are true expert on this.
Do you have a belief that China can restructure Ghana's debt along with West?
Well, I think China can restructure China's death They own most of it, and I think though that they don't want to restructure it within the Western framework. And if anything, this is an opportunity for China to channel refinancing through its own institutions rather than through the existing Western institutions
to promote their own. So restructured loans to the emerging world should be restructured through new credits at a China's institutions, and that way, China becomes more important geopolitically, more dominant in the world stage than it was before. I think that's what's going on in this restructuring business.
Carl, What does global GDP look like? You know, the IMF news of a subpar five year view. The optimist kerl Weinberg. I just can't see you go on all IMFGDP growth.
What do you think of it?
Well, you know, they call it a rock recovery, but where's the recovery. GDP grows along, you know, at a three percent rate, a little bit lower than normal. That's not much of a recovery. But most important, Tom, your takeaway from the IMF forecast should be that they're flat is a board straight as a line for five years, and that ain't never happened before. If you read Larry Summer's review of the IMF's forecast, he says they're forecasting
isn't that good. They've never called the recession before. But more importantly, if your economy is not in recession now and it hasn't been recessioned recently, it's got a twenty percent chance that it's going to have a recession in the next year.
And that's what we want to look at.
The variance that the IMF doesn't address in its forecasts.
And there are risks ahead of US.
I heard you talking with Marvin Lowe a few minutes ago about risks of US recession. There are risks to growth out there, and we have to keep an eye on those risks more than on the center of the channel.
If you will.
That's a really interesting point, a really interesting last point to wrap it up, Cal, Thank you, sir as always, Kin Wineberck, there a figh frequency Economics.
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