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Business App with us Randy Krasner.
Both school Randy, there's a trend of the smooth three months moving average. I'm acting very PhDe at the Eccles building. This is a very gradual trend to where Chairman Powell wants to get to. Does he have the time to wait for that trend to play out to something that's a lower statistic.
You really nailed it. That's the challenge. Now it's moving in the direction that they wanted to move. Finally, it's taken a long time to get there. Now, as I've mentioned before, what they're hoping for is this immaculatus inflation where you just slowly weaken the labor market. Unemployment rate only goes up to about four and a half percent, which is not far from what they think of as
the long run average and the inflation rate comes down. Now, the hot number on wages is really not consistent with that. We're going to be getting another labor market report before the FED makes its next decision. We'll be getting a lot more inflation data that's coming in. But as I said on this program before, the Fed's not going to quit until the labor market quits, and this is not a quitting labor market.
In these data, how do you understand the average hourly earnings and how much they've gone up. I mean, given the fact that people were saying that we're sorry to see this process where suddenly workers are losing some of the power that they gained in the media aftermath of the pandemic, does this fly in the face of that and really confirm that perhaps we're in a different environment with a smaller workforce and perhaps a greater sort of thrust to labor's power.
Sure, so labor force participation is really key to that, and Mike had had had mentioned that that's one of the challenges that the FED has had. You've got this lower labor force participation, You've got demand being continued to be very strong. Some of that had been from fiscal stimulus from before, but continuing on with fairly strong, strong demand and tight labor market means really one thing, which
is we just are going to go up. Fortunately, the hope is that they won't go up quite as fast going forward, but that's really so far that the data are not telling us that.
Randy Krassner, thank you so much, particularly, professor, thank you so much for your comments on our troubled banks. Here he is at the Boot School, Chicago. Jeffrey Rosenberg of Black Rock of course foil manager, Systematic Multi Strategy.
Fun. Great to see you, to see you here.
This is like this is our work from office. Okay, it's great to have you here as well.
Your being here.
Is it a symbol of this job economy and maybe even of this troubled banking crisis that we're somehow getting back to normal.
Well, we are getting back to normal in terms of the COVID part. I think when you look at today's report, as you guys have already covered, this is not getting back to the slowing that the bond market is expecting that the FED is hoping for. That's going to really bring down. Mike McKee said something at the beginning which I want to echo, which is we're very far away from what these job market reports need to start to look like to begin to even get close to what the FED is.
For and the pros and know that we need to get down to one twenty one hundred and even eighty five whatever, maybe a couple of negative statistics as some have called for in a presumed slow down. But what's the unemployment rate that makes Chairman Pole's sit up straight?
Well, it's one that starts to rise, he said it in.
It's a vector. It's not so much the level, it's.
The change that has to start showing the tightness in the labor market or the tightness of the labor market beginning to ease and getting some increases in the uneployment rate. He said it in the press conference that you know, part of what is the price to pay for achieving success on inflation is a rate of growth that is for a small period of time or a temporary period
of time below trend. Well, that's what you know it'll start to look like in the labor report in rising and unemployment rate, And nothing in this report really points to any of that.
So do you think that the market is overpricing the boogeyman of some sort of crisis or cracks or something to sort of cause this to halt in its tracks and reverse in some sort of meaningful way.
So let's separate the market pricing of you know, what is a boogeyman? I think.
I think the.
Market worries about tail risk shock events, crises. And look, the banking sector crisis that we saw in March in a little bit of a echo rebound that we've seen this week is that kind of thing. But that's very different than kind of fundamental economic performance, and that's not so much a tail risk. That's really much more about the trajectory. Now, the two can be linked, obviously, because if you have a crisis that feeds back into confidence and that it's the economy.
But this creates a real issue, and I'm wondering why we're not seeing it, frankly, and longer term treasure yields a little bit more, and whether this is something you're thinking about, because if you have this push pull and perhaps the FED not being as aggressive as people thought that they would be just based on the economic projection, then isn't the risk of inflation remaining high for a longer period of time that much greater and not being priced in.
Yeah, and it's the pricing in of that should be the term premium, right, There should be a premium for holding longer dated maturities because you have more inflation risk and inflation uncertainty. And that's the disconnect here. The market is really wetted to this view that we go very rapidly back down to a pre COVID two percent inflation rate, and today's data is just kind of another piece of evidence that says that's not what we're really seeing in
the economy yet. So the disconnect between what the Fed has been saying, what Powell said earlier this week in terms of a lot more cautionary tale relative to what you see in the yield curve, the inversion, the lack of a term premium that your question was just asking about, that's very much still the tension that we're dealing with it.
Toper, Carnegie, Mellon, you had Allan Meltzer, Marvin Goodfriend, and the ginormous Bennett McCollum, who we lost late last year at eighty seven years old, and they harken to what some people are looking at now, which is M two exploding with the Biden stimulus and M two coming out for Blackrock. How disruptive is this huge variability of M two and now signaling a real almost like thick oil within the system. The engine oil is getting thicker and thicker.
Yeah, it's a huge deal in terms of the structure of interest rates of monetary policy. We went from a restrictive reserve system to a excess reserve system to a plentiful reserve system. And you've seen that in the banking statistics, for example, in terms of loans to deposit ratios. Part of the increase in uninsured deposits that is kind of part of the source of what we saw is because you flooded the system with so much liquidity and that M two and so we're seeing that there are some
unintended consequences. The role of RRP and creating competitiveness to deposits. That's all part of the newness of what does it mean to operate with a balance sheet that went from six percent of GDP to thirty five percent of GDP and a lot of things that we just don't know how it works when.
Real world folks, I mean what Jeff Rosenberg is really doing. Here is the bondboard folio from sixty thousand feet. What's your conviction three years out looking at a holistic blackrock bond world.
Well, the first conviction three years out, the big change is we've reset the level, the starting level of yield. Right, so when you think about bonds, bonds are about income, and when there was no income, it was very hard to kind of really hold on to bonds. So that restoration and the FED getting off of zero interest rates and really this focus on inflation. Well the starting point of that is now five to five and a quarter interest rate yields, and so that resets the bond market.
And that's why you've seen a lot of flows and a lot of interest come back to bonds. And that's remember we had a ten year or longer period of several episodes of negative interest rates, zero interest rates. We talked about that word out lack of yield. So you're seeing a restoration of bonds in the portfolio. Because there I'm going to steal that word.
I'm gonna be saying restoration one got it. I got it from Jeff Rosenberg.
This is the this is the issue is that we're looking at the practicality of it, which is you are getting yield and you're looking at the practicality of the data, which is that the economy is still strong. And the two ideas are kind of getting to be in conflict with one another a little bit, where we're having to either see the Fed step in a little bit more aggressively to bring things back to where they want, or you have to see something change in terms of people's
assumption of the longer term inflation rate. What data are you looking at. If it's not the labor market report, If it's not what the Fed said this week, this all doesn't seem to matter anymore as people to sort of hunker down with their narratives.
So a couple of data points. So let's come back to your favorite data point, average hourly earnings in this report and zero point five. And you know why that one is a hard one to anchor on is because it's so subjective, it's so sensitive to the mix shift. So part of what you saw in the internals of today's labor report is a little bit less boost from leisure and hospitality, a little bit more spread. Those tend
to be small, lower income changes. So when that mixed shifts that helps to boost That's not giving us a good picture of inflation and wage inflation. That's just changing the mixture of what is in that component. Last week's ECI a much better measure at LANTA FED Wage tracker, much better measure, And next week we'll look at core services X housing as the kind of mapping to the labor market and the more stable long run indicator of where is inflation going to settle down. No one doubts
that peak inflation has occurred. Inflation is declining, the shelter piece is gonna decline and help push everything down. It's about do we get to two percent the way the bond market expects, or do we maybe get to three? And because this way or dynamic, you end up having a lot harder time, and the debate shifts to the cost of getting to three to two versus three versus the.
Benefits in the here and now.
Historically, how hard is it to get to recession with a labor market report like what we just got.
We're that's a three point four percent on employment right now. Yes, it's a lagging indicator, and we get that. But again, what Powell said earlier this week is a little bit of surprise that with five hundred basis points of tightening, you haven't really seen that much slowing. And you know, you look at earnings and what the companies are saying, You look at what credit markets are saying, high yield spreads, investment grade spreads away from the banking sector, of course,
and this is still a very robust economy. So the tightening has yet to show up. We expected to show up, but it hasn't yet.
Now you said that eight months ago too as well.
On the JO shocking thing is that people were talking about the lag effects, some people saying it's eighteen months now, twelve to eighteen months. But it is a serious thing, especially given the fastest pace of tightening.
Going back to go from Randy Cross under Jeff Rosenberger's wonderful Jeff, thank you so much, particularly for those thoughts on Ben at McCollum and Carne Mellan, Paul and I and John and Lisa have been remiss and that it's been distraction.
May it has been nuts this week. I'm not going to mince words on that.
And what we're going to do right now is slow down and actually talk about the American labor economy. Tiffany Welding can do this, she joins us right now from PIMCO, is there, chief us, I only talk about the jobs report economists right as well, Tiffany.
Are we fully employed?
Yeah? I think that for the most part, we think we're fully employed, you know, But I would say that it seems like every labor market report, we're finding more and more people who can come back to the labor market, or maybe we're unemployed and get jobs, or you know, maybe they're switching jobs. So you know, the labor market remains pretty strong and resilient.
Here I quoted with an Marie Hoarded today, folks, Bloomberg balance of power. Look for that an re Hoarden, our chief Washington correspondent, and Tiffany I was quoting out of the Washington Post about how states beleaguered with sub three percent unemployment rates are trying to change their child labor laws, which which I find just like throwing us back to Dickens in the nineteenth century, is an exaggeration. But hey,
stay with me, folks, It's Friday. Are we in such dire straits for labor that we're going to employ kids?
Well, you know, I don't. I don't know about that in particular, but I mean, I think the bottom line is, from a longer term perspective, the demographics in the United States, you know, would would point to lower labor supply over the medium term, you know, And that's regardless of those kinds of policies. I think, you know, one of the
other policies that might make our sense is immigration. You know, our neighbor country, Canada has obviously been able to achieve much more immigration more recently than in the US, you know, and as a result, their labor markets are are looking a little bit less tight than ours. So you know, I think that, I know, it's really difficult to get labor to get immigration reform, but looking towards those policies, you know, also, I think would be would be very helpful for the labor market.
Can I have a yeah, Paul that the reason we're having this conversation with Tiffany Wilding is over the success of America.
Yep.
Absolutely, And this is the other names it's that's a very good taken and Tiffany, my point to Tomas, we were just talking off air before you came on, is how can we entertain recession? Recession discussions when we've got such a strong labor market, how do you think about that?
Yeah, No, I mean I think that's a really good question. And the way I've been characterizing it, I guess a little tongue in cheek is is I think we have
a two handed economy right now. Obviously, economists are famous for, on the one hand, on the other hand statements, But you know, I do think that the decline in bank stocks is quite concerning, you know, and that's because, you know, historically there's been a lot of academic analysis that's been done that suggests when you have bank stocks that are falling you know, thirty percent forty percent on average, like what we've seen more recently, that tends to be indicative
of higher cost of capital for that industry. Obviously, that tends to slow their loan growth, and that's really important for the economy for future growth. So statistical analysis suggests that when we have stock declines like what we've seen, you do tend to see you know, one to two percentage point drags on GDP relative to what you otherwise would have gotten. So, you know, I think that is that is concerning, and that does cloud the outlook you know, and I think that comes on the heels of just
the fact that monetary policy is tight. Demand for loans should also be declining as you have higher interest rates, So, you know, I think all of this would still suggest monetary policy works with long and variable lags. That's still working its way through the economy, and there is still a recession that's that's probably quite likely on the horizon, even though labor markets are strong now. Inflation is obviously very strong now, you know, and it may may seem farther away.
Tiffany, what was your takeaway from what we heard from Fetcherman j Pal this week on raising the rates the base rate twenty five basis points. What was your take key takeaway if.
Anything, Well, I mean, I do think that, as I mentioned, with this banking sector stress, I think the balance of risks are changing. You know, we've been talking about solely elevated upside risk for you know, over you know, I would say maybe two years now and now that monetary policy is solidly and restrictive territory, we do have this banking sector stress that can result in a bigger downturn.
The risks.
The balance of risks have just changed, and I think the Fuberle reserve is responding to that. Monetary policy is a risk management exercise. Powell has said that multiple times, and so they see I think for the most part, the FED officials that feel like we're in restrictive territory. Let's just take a little break. We're going to go on hold for a little while and just see how the data plays out, see how these long and variable
lags work out, you know. And of course, if things continue to be this robust by the end of this year, I would expect the FED to hike again or potentially more. But if it's not right and you know, then then we're we're you know, in the world that the bond market is pricing in right now, which is recuse.
Take the unit labor cost part of a three ratio six dynamic parts productivity study and take the unit labor costs and pull that over to the worries the angst of Chairman Powell and the team. Does that signal a persistency to elevated wage increases even if it's not a real wage.
Increase, Yes, no, it absolutely does. The fact that unit labor costs are kind of around, you know, it looks like maybe five six percent, you know, is very concerning. I mean because that you know, that does have a leading quality for core inflation. If you have you know, wages that you know, whatever your labor costs are there increasing, you know that will be passed on for the most
part usually to consumers into price inflation. If I look across a range of a wage statistics, the core PCEE, you know, labor costs, as you say, I think the underlying trend and inflation right now, you know, it looks like four maybe even four and a half percent, and that's well above the two percent target. You know, so hopefully over time that comes down, you know, but there's a little bit of a you know, there's a little the other side of that coin is that you know,
the Fed probably actually needs to engineer a recession. They need they've said they need some pain in the labor market in order to get that down. But you probably need that type of economically unfortunately, to solve that problem.
Is there any study in your economic history, Tiffany Wilding where a central bank quote unquote engineered a recession?
Yeah, I mean there's a there's a lot of times right where you where you see recession, you know, I would say over no, you see it.
But does the central bank wake up and go, let's engineer a recession.
Well, they obviously never say that, you know, but if you look, you know, so we've looked over seventy years fourteen developed markets. When a central bank starts hiking interest rates, usually you get a recession on average about two to two and a half years after the start of a rate hiking cycle, you know. So there is something certainly to when central banks start to tighten policy. You do see economies you know, weakend and eventually you know, go
into recession. Now, these these issues tend to be nonlinear.
These periods tend to be kind of nonlinear in the sense that, like, the central Bank's probably not trying to do that, but you have financial market accidents, you know, Jeremy Stein, it gets in the you know, higher interest rates you know famously get in the cracks, and you just don't understand where the pockets of vulnerability are until you get to these higher levels, you know, and that again results in an economy that weakens in kind of a nonlinear way. So that's always a risk here, thank.
You, Tiffany Wilder. So that wasn't Nicer, We didn't really do bank stress. We can talk about it. She's a PIMCO.
It seems like Monday was two years ago, but I believe I tweeted out on Monday about the Fifth Bank of the United States, and ultimately that is what the liberals and conservatives are arguing about.
Is this scope and scale John in this banking system. Should we talk to somebody as an.
Expert Plat Yeah's that on the.
Second Bank of the United States and the Fifth Bank of the United States.
Chris Marrinack is an expert.
He's director of Research Jenny Montgomery Scott, and has really been excellent force. My theme on this Friday, Chris Marrinnack is let's get to the weekend and Friday the banks have to get to the weekend. What should we see into Friday afternoon in this weekend from troubled banks with new book value valuations that are shocking.
Well, Tom, I think the reality is most of these banks just have security losses that are unrealized, and those are getting better as treasury rates fall. I think you could see some action from the Fed or Treasury to reinstute the TAG program from two thousand and eight that was guaranteeing transaction accounts.
That would be very helpful.
I think most of these companies have much more stable deposit flows than anyone realizes. And that's been the challenge all week, is that we've had this temper tantrum against the FED in using bank stocks as a weapon against the Fed to try to get the Fed to change.
Hey, Chris Well said, when you listen to some of the numbers coming out of the banks, they're telling you the deposits are stable. So when you hear people like Senator Warren say that we need changes to the limits for deposit insurance, that's actually changed this story this week, not really.
I mean, I think it's good that she's supporting the changes in the limits, but I think the rest of the rhetoric correct is incorrect.
What do you think is going to be the circuit breaker, Chris, to really prevent this temper tantrum from rearing its head again as we talk about the otherwise resilient economy, Well, changing the.
Short sale rule would help.
I think also instituting, to some extent going back to the tag program would be helpful.
I'd like to.
See the FED change the stress test program to accelerate the timing.
The stress test results were already filed.
In April, and the FED as an army of folks that they could stick out to put this out next week.
It would be very useful to know that most of the banks, if not all, the banks, have passed the stress test.
The reality is, if you look at the next eighteen to twenty four months of cash flow that the banks have, it covers five hundred to six hundred points of loan losses, which is just as much as we had in the Great Financial Crisis. I don't think those credit issues exist today, despite all of the worries on commercial real estate.
If most banks really looked at.
Their portfolio did a default loss given default analysis, you'll find that the credit marks and the credit losses are very moderate in the industry.
I think we should recognize those and what.
They are, and the ability for banks to absorb those losses with existing earnings and capital, and then we can reinstitute confidence back in the sector.
You said short sellers should be investigated. What do you make of the back and forth with Western Alliance, in particular yesterday with shares plunging after the Financial Times report and then them coming out and saying this is just a tool of short selling. Is there validity to that? Do you think that people are going to exploit the jitters the temper tantrum?
Absolutely.
I mean we've seen stories that were rehashed from six weeks earlier on pack West and again with Western Alliance.
There was no news there. PacWest hired an advisor at the end.
Of March, so that was completely fail I don't know why we continue to kind of create new narratives just.
To help justify the positions.
The facts are these banks have very good cash flow, they have deposits that are much more stable, and really Quity has served in the past two months.
Chris, your note is blistering. You say the press reports are stale. Just for instance, I know a guy, he's a guy that he's with the show quite often through the week.
He's going to sit with.
His barons open on Saturday and try to figure out which bank to buy. How do you select the good banks from the troubled banks on a Saturday morning, as we've crashed, So.
We start with tangible book value and then we apply the unrealized marks from HTM held the maturity portfolios that's now disclosed in the FDIC call reports, and we've provided and so of some of our peers around the street. That gets you to adjust a tangible book. That's the
first place to start. Then I think you look at the cash flow that banks have the pre tax pre provision or what we call ppn R. It's the cornerstone of the FED stress test, and then you apply that for the next twelve to twenty four months, and that gives you a loss absorption of the current lawn portfolio edition of that. Banks have got very well disclosed information on their loan loss allowances, on their credit marks, and
particularly the amount of real estate that they have. Banks have been a wide open commona this time, which is massively different than what we saw in two thousand and eight nine.
Chris, what I hear from you is that the price sanction is divorced from the fundamentals, and I've heard that a lot from a lot of analysts on a lot of banks this week. The problem I think that a lot of other people have though, Chris, is that the fundamentals will be shaped by the price action. So even if you think the price action is divorced from the fundamentals, the price sanction is going to shape the fundamentals, Chris, does that not concern you?
Well, I lived it through two thousand and nine. Fifth Third is my favorite example. It hit a dollar in late February two thousand and nine, they came back three months later and raised capital at six dollars, and then at the end of two thousand and nine the stock was fourteen sixty. So I've seen that happen with many regional banks and all their other large companies as well. So I feel like that is the repeat event that
is going on in my world. So I think we just have to have the confidence to move forward that the facts are that the banks have better credit quality, better cash flow than the investors. Understand I realize that the barecase always sounds more intelligent, but it doesn't make it correct.
So you think that these banks, I'm viable with five percent interest rights for the rest of this year.
Absolutely, it's difficult, it's not ideal, but they can make a spread. The spread overly narrower, but they can. And we think that deposit flows are much more stable than the market.
It understands.
Hey, Chris, wonderfully get your perspective. Thank you, sir. A constructive view from Chris Marinak of Jenny Montgomery Scotch.
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