Surveillance: US Payrolls Top Estimates

This has been an annual. I say it's to say, a monthly ritual of John Farrell talking with the gentleman from Boston. I think it's because the way the British were treated in the Revolutionary War. I think that's I think that as a conversation, and the answer is now made even more interesting as Secretary of Labor will exit and he will represent the players of his national hockey league with a good jobs report. Today, the Dow down

one one hundred and eighty points. John Farrow was Secretary Walsh. I'm pleased to say that joining us now is the US Labor Secretary Morty walshon he joins us from Washington. Secondy Walsh, what a morning for it Just amazing moves in this market that we can discuss, amazing moves on the West coast with a financial institution. Secondly, Walsh, you get to represent the administration this morning. I just wonder what your thoughts on what have been what's been developing

in the last twenty four hours or side. Well, certainly on the jobs front, we had a good day, but as you have been reporting for the last I've heard you for the last fifteen minutes, a lot of concern in different areas, and hopefully we can continue to move forward here. I know the Secretary Ellen is up at Capitol Hill today testifying. There's lots of concerns about about what the future of the stock market is. I know that.

But when it comes to jobs, we have a real good We have a good jobs report and good signs all along. Are you worried that we're starting to see things break as the Federal Reserve tries to address inflation. No, because we've been talking about now and people have been concerned about it for the last year. Really, and when you think about what we're doing here, we're seeing we're seeing jobs being added, we're seeing participation rate going up.

We're seeing opportunities for even further participation rate by making some investments, and certainly we're seeing incremental steps in the inflation coming down, so we need to continue to stay focused on that. Secondly, well, sorry, I froze there for a second because somebody behind is talking, so I kind of cut in my head. Don't worry, it's fine. It's the last interview we get to do together because I know you head into the exit too, so I'll give

you the time. I'm gonna miss you. I'm gonna miss you, Gonna miss you too. Secondly, for a couple more questions, didn't there? If I can, we heard a little bit earlier this week for the Chairman of the Federal Reserve. He took a lot of flat, a lot of heat from some Democratic senators, including Senator Warren, who said that maybe he was pushing this too far it could lead to people losing their jobs, and he said, would working people be better off if we just walk away from

our jobs with inflation of five six percent? Secondly, Welsh, how did you feel when you hurt that interaction earlier this week? What were you thinking? Listen, as I said from from BA one, my focus here is to get us many people back to work as possible and continue to see wages go up working with business so business is successful. That's what my focus has been for the last two years here at the Department of Labor. That's been the President's focus, and we're going to continue to

continue on that path. I know you're heading to the exit, your replacement facing a little bit of scrutiny right now. You work closely with her secondary Welsh. Is it a ringed endorsement from your side? Can you give her some words to support Absolutely. We've spent the last couple weeks Secretary Secretary depinutey Secretary Sue myself meeting with business, meeting with the US Chamber, and meeting with the Business Roundtable,

meeting with the independent associations. So we're meeting with all those organizations just to talk about what the plan is here at the Department label we've been we've been connected at the hip for the last two years. We work very closely together. Business I think has a very good feel for me as Secretary of Labor, and they show they'll have the same field for Julie Sue and Julie Sue gets nominated secret prove we've got to leave it there. Thank you for your service, sir, and thank you for

these monthly interactions. They've been fun. I've enjoyed them, and hopefully we get to catch up soon in your new role. The former governor of the Federal Reserve System Randall Krosner, before we spoke about the financial side. Now Krasner on our monetary system. Randy, in this milieu, can you use theory? Can you use anything that was invented at Yale years ago or at London School of Economics? The theories that matter? Are they valid and beneficial at this time? Even some

of them from University Chicago too. You know, I think it gives us a broad a broad framework for thinking through these issues. But exactly as you were discussing, these data are not clear, and as we were talking about with Lisa before, the data have been quite volatile and sometimes difficult to interpret before, and this report is not completely consistent. Although I think Mike may have hit on exactly one of the issues in the so called composition effect.

If you're growing a lot of jobs in the lower wage part like hospitality, but losing them in a higher wage part like manufacturing, that could lead to that number coming down that average hourly wage, but wages may still be going up because in each of those individual categories, wages make up. So we've got to get more more data on that. So to speak to the Chicago theory, Lisa has been beating me to death with long and

variable lags. Does that math work now? Is it useful? Oh? Well, you know, Milton Friedman articulated that like seventy years ago, and I think we're still seeing that. We certainly have seen some lags. We've certainly seen some hit in housing market and in certain sectors, but not in all the sectors. And obviously there are lags, and we'll see when the tightening of monetary policy really hits. May not come for

a few more months. Randy, we're seeing in markets people back away from the likelihood of a fifty basis point rate hike at the meeting of the Federal Reserve later this month. Do you think that that's valid given the guidance, given the strength the labor market, given the lack of significant downside revisions to what we saw in January. So

we still have a very strong labor market. There's no way around that, And especially at this point, and you know, after the fan has been hiking for for a full year, those lags may have been long and variable. But this is a bit surprising. See so little, so little impact, and so I think I don't think the Fed has

made their decision. I think exactly as John said as well as as well as Tom, the the inflation report is going to be very important because it's really you know, this is one input, a key input into what inflation is going to be. And that's ultimately what the FED cares about is bringing inflation down. If we do see inflation started to come down, they may some around the table may feel more comfortable to just say let's stick

with twenty five. But if they don't see signs of it coming down, and you just look at this labor market being pretty hot, I think a number of people will want to push for fifty. It's early days. Yet in terms of the market reaction and put the knee jerk reaction seems to emphasize that it client and average hourly earnings and the tick up and the unemployment rate as why perhaps the Fed wouldn't have to go quite

as far as previously believed. Do you think that these are significant things that these are developments that highlight softening around the edges that will show up later on. Well, as I was saying that the reduction in the average early earnings may just have be a composition effect, and so I think it's it's hard to interpret any any one report at two and too much detail and really say, ah, well, the Fed's going to change because of it. I think looking over the last three months, we still see a

very strong labor market. I think that's what the context in which j. Powell gave his testimony. I think the labor market is still pretty strong. It doesn't seem to be strengthening, but you know, if it were, then I think it would be very clear. Have to be fifty now, I think it's I think it's reasonable at the market states and even BET but I think a lot will be determined inflation number on Tuesday, Professor Cross, thank you

so much for joining US today from Madrid. Obviously, Randy Krosner with the FED and also with the University of Chicago Booth School as well, now turned to bond market reaction. He's aged overnight. Jeffrey Rosenberg joins US now portfolio manager of Systematic Multi strategy fund at Blackrock. Jeff open question, what's the multi strategy right now? The multi strategy is

defensive here, Tom. I mean, you know, there's a lot of focus on twenty five versus fifty, But I think the real message of the week was that Powell re emphasized financial conditions need to stay tight for transmission of monetary policy to work. And the thing that we lost sight of here is how is monetary supposed. Monetary policy is supposed to actually bring down into it functions mainly

through financial conditions tightening. And when you look at where we were at the end of January, financial conditions we're basically back to where they were before the tightening even began, effectively unwinding all of the tightening in policy. So the pushback here is coming from the data play, and you know, we can parse today's payroll report. I would emphasize the earlier conversation, AH is the worst measure of real time or near term measures of wage growth because of the

compositional effects. But beyond the noise of the data, the issue is that financial conditions aren't tightening enough. And Powell pushed back this week, and that means that it raises the prospects that they have to do more. That's the fifty twenty five debate, but it's really the terminal debate that is important here, and that they're much more willing

to push the risk up of a recession. Jeff Rosenberg, You're going to take in the various narratives and you're going to filter them through a Carnegie Mellon education, which is hugely probabilistically determined. Fine, can you state that we are in a disinflationary trend? Now? What is the probability at the vector coming off of this report and coming off Tuesday will signal disinflation? Well, you know, I think what we had is finally the realization of peak inflation.

And remember that was the big debate for a while, was, you know, the expectation that we'd hit peak inflation, inflation would come down, and it just kept getting disappointed. Last November we hit the peak inflation, and everybody got very excited by three in a row, three months in a row of very good inflation numbers that showed a decline,

but decline to what level? Right? The FETE is talking about getting back to the pre COVID two percent, and nothing in the data that we're seeing in terms of the persistent measures of inflation, which is really that core services x housing services, which is really about labor and markets and wage inflation. Nothing is really said that the Fed's tightening to date has done the work that's necessary to bring that back to two percent target to have

that be accomplished. Jeff, you're talking about the financial market conditions and how that's really important for the transmission of FED policy. I'm looking now at the terminal rate being priced in a five point three percent, down from five point six percent earlier this week. Do you think that this is an accurate response to the report that we just got. Well, I think the I think the market is being whip sought a lot around positioning and technicals

around twenty five verses fifty. So you have to be careful about overinterpreting kind of the longer run fundamental interpretation from today's news. And as John was saying earlier, you know, come Tuesday with a hot CPI report, all this is going to get sort of thrown out and reinterpreted. I think the broader message of the raising of the terminal rate is the right response to what Powell said earlier

this week. That we need to do more, and that's really the broader message of the failure of the core measures, the labor market measures, the core ex housing X services measures of inflation to really respond to what is a

very significant amount of tightening to date. So it's higher for longer, and you've got to price out that expectation that the Fed's going to turn around very quickly and be able to cut interest rates as well ahead spinning, Jeff, I've got to be honest, everyone said something slightly different. Everybody has a different base expectation of what the FEDS parameters are to high rates. People have ring. I mean, yes,

actually that's a completely accurate I'm looking at this. Is there any certainty in your investment thesis that you have continued to drive home that you continue to have conviction in Jeff, Well, you're going to hate this answer. The only certainty, the only certainty is is the uncertaintyer that's Ellen Melzer continue. I know you aren't gonna like that one, but but it's you know, it's really it's about recognizing that that there is a lack of ability of forecasting

and inflation. That's really the issue here is that the market consensus is pretty confident or was pretty confident, uh in a in a steady return to two percent, and the history of the accuracy of forecasting inflation here just doesn't bear out that degree of confidence. And so it's really about recognizing what we know and what we don't

know relative to the what's priced into the market. In there, you certainly saw a lot of skew to the downside, and that that downside has been playing out, you know, of course of February, the first part of March. Here Jeff Rozenberg always thank you. He is with a black Let's not waste any time you're joining us right now, is mister Mayo, senior equity analyst at Wills Fargo, A kind on the street back to days long ago with Credit Suite. So, Mike, I've got eight ways to go here.

But I want to just simply say, is this morning the opportunity for the major banks to get competitive ground. Do the major banks benefit by all this turmoil because financial America will find comfort with big banks. Well, the unintended consequences of everything that's taken place since the global financial crisis is it's increased the moat around the largest banks. So the regulation, the reduction of mergers, the too big to fail all that simply has reinforced the resiliency of

the largest banks and resiliency of the balance sheets. Credit risk is much less the resiliency of the business models, the scalability that you've gotten from technology, and yes, the resiliency of the funding. Even though deposits are declining some we think the deposits are quite sticky at the largest banks and they have all sorts of ways to fund themselves. So you know, the issues out there that you see it in the stock price to clients for the largest

banks are are way overdone. The FED stress test is conducted each year, and this year it's I see it at the combination of the last three recessions combined. And until banks can pass that test, they're not allowed to return capital. The issue of the moment is banks do have some unrealized securities losses that's already reflected in their financials. And even if you assume they never sell these securities, deposits are still about twenty percent higher relative to loans

than they've been historically. So since the global financial crisis, you know, capital is up fifty to one hundred percent liquidity is up about fifty percent. The credit profiles are vastly improved. Subprime loans or eighty percent less than where they were before and time. As you know, I was fortunate to be the first analyst to testify on the causes of the global financial crisis to the Congressional Committee. And you know, as you know, I got fired part

of that time when I was negative. Well it worked out in the end, not in the moment. But this is almost like the opposite of the global financial crisis, when there were not fears and then things were about to crumble, and now the fears are really you know, way out there, when the banks were more resilient than they've been, you know, in a generation. So, Mike, we

can talk about a resiliency. I think we also need to discuss the profit headwinds as well, and that interest margins, how much they'll have to pay for that deposit base at the largest lenders. In just a moment, right before we get there, I want to pick up on something you said. You said the moats around the biggest banks are huge. What about the smallest banks, Mike, How vulnerable are they? Have we seen and can you comment on

the lack of regulatory scrutiny that they received. Over the last ten years, well, the entire industry has had additional regulation and oversight, and so those industry statistics that I quote include both the small and the large banks. Now, you can always have idiosyncratic events, and that's going to happen, I mean, and I think one warning here is the risk outside the banking industry. So you have issues with

crypto and that can have a ricochet effect. You have an issue with VC firms not fundraising as much, needing to draw down their funds. That can have a ricochet effect. But really, I think what's not been seen yet, and I think you could see more are bigger problems outside the banking industry, as so much risk has been pushed

outside of banks into non banks. Which banks, Which of the biggest banks are most exposed to a devaluation in some of the assets most exposed to those areas, And I'm thinking of private credit, I'm thinking of less liquid loans, I'm thinking of some of these industries that are seeing some serious distress. Well, the truth is, and this goes back to the FED stress test. Every year, the FED

is recalibrating the most risky areas. So the penalty for Goldman Sacks having private equity investments has gone up and up and up the last few years, so you're you have big capital behind a lot of those types of investments. So the entire industry has become much more resilient. So you have four categories of loans. One is consumer secured that residential mortgages. You had that crisis in seven o eight and that's not happening now. Loan two values are great.

You have unsecured consumer and credit cards, and credit cards are an area to watch. You're seeing issues on the low end auto loans, low end consumer. And then you have on the wholesale side secured that would be commercial real estate. That is an area to watch, especially offices, so we're watching that. And then you have the unsecured wholesale work commercial loans, and you have leverage loans and

that's also an area to watch. Having said all that, you know this is really more of an earnings issue, not a liquidity issue, not a soleignty issue. We've taken our estimates down on some of the banks due to higher funding costs, and if anything, so far, credit quality has performed stronger for longer than I or many have expected, and that's still likely to be to be good in

a good economy. We started out by talking about how, in some ways episodes like this consolidate control, consolidate market share among the biggest banks, Which among the big banks will emerge as the winner from all of this, especially because that really determined the winners and the losers as a last crisis. Well, you have seen a theme of Goliath is winning when it comes to capital markets, and

it's really amazing the impact of regulation. I mean, the likes of Goldman Sachs and JP Morgan consolidating wholesale market share. And on the retail side, you've seen the likes of Bank of America really uh, you know, lead the way with retail banking gathering share. JP Morgan is also gathered share. So when these rules come out saying okay, banks don't merge anymore, I mean, it's like the Jamie Diamond Protection Act.

It just increases the moats around that business. And I think that's one of the unintended consequences of regulation and you know, probably should be reconsidered. Michael got to squeeze us in just quickly. It's just on the challenges that Keikope mentioned earlier this week. It's not not a profit headwind for some of the big names you just went through. I'm certain. Look, funding is going up, and last time I was on the show, I know Lisa asked me,

when are we getting paid more for our deposits? Where you're getting paid more for your deposits now? And so look the additional funding costs for the banks. Look, this could wind up taking five to ten percent out of our earnings estmates. On the other hand, the recession discount is about a thirty percent, you know factor. So if you give up ten percent of earnings but get that thirty percent valuation back, then that would you know, I come back a year from now you say, wow, the

banks actually performed well after all. Mike, appreciate the Howay has always and thanks for getting got badly for us. This morning may have that of last Tago. Our team has worked overnight to bring you the best of global Wall Street on banking, and we begin strong this morning with Gerard Cassidy, head of US bank Equity Strategy at RBC Capital Markets. He counted banks on Thursday in the savings and loan crisis of who would go out of business over the weekend. You Gerard, I mentioned the SNL

crisis of the nineteen eighties earlier. This is not this. What is this? If it's ideo syncretic, how do you describe it? Tom? Thank you for having me on, and you're so right. This is not what we saw in the SMIL crisis at all. As you remember, Tom, back in those days, it was a credit crisis. This is not an issue with credit at all for a Silicon Valley or for any of the banks. But you're bringing up a very good point. What has happened here is

the deposits. Everybody is very concerned about deposit outflows. As you guys know, during the pandemic, because of quantitative easing, the FED pumped in over three trillion dollars of deposits into the banking system, and now they're starting to leave. These wholesale deposits are surge deposits, as they're often referred to, are the deposits that are likely to leave. But again, this system has too many deposits, if you can believe that. But the core issue here is we need to focus

on core deposits. These are the small denominated deposits. I like to call them grandmon grandpon deposits. Those are very sticky, and those are very difficult to grow because it takes years together those deposits. The banks with high concentrations of those deposits, Bank America is a good example, fifth Third Regions Bank. Those deposits are sticky and there's not going to be any real concerns about those deposits. Girard, Is

this a moment to acquire shares and quality banking? Can you use the opportunity of the last couple days in crypto and in Silicon Valley to go strong with small banks that you're noted for, or dare I say even the money center banks? Absolutely, and the reason being is that we understand how fearful it is and the uncertainty out there, no doubt about it. But when you come to core banking business that the regional banks do, the community banks do, and the money centers, it's a very strong,

stable business. There's no real systemic risk here. And when the stocks sell off like they did yesterday, it is a buying opportunity for the law German investor. Also the traders, of course can get involved, the hedge onuns and so forth. But we don't see this as a systemic crasis, nothing compared to O eight or nine or ninety nine. You are the SNL crasis time, Jared. Just because it's not a systemic issue for some of these big names, and a lot of people listening would agree with you, does

not necessarily mean it's a buying opportunity. And Jared, you know where I'm going to go with this because you and I've already gone back and forth on it. There is clearly a profit headwind emerging for these big banks. I understand that they don't have the diversification issues a very concentrated deposit base at a bank like SVP. I think we all understand the unique nature of what's developing in the last twenty four hours. But Jared, there is

going to be a competition for deposits. And I think what we're all trying to understand and what are the profit headwinds there emerging? Care What are we seeing signs off particularly with was a key CORP early this week talking about deposit basis and the risk around that. Jared, can you frame that for us and what it means for the profits the bottom line of these banks? John Very,

you put your thumb right on it. We held our twenty seventh annual Financial Conferences week in which, key to your point, lower the guidance on their net interest revenue growth because of higher deposit beatas so, what's happening is consumers are moving into more higher rate deposits, which is squeezing the margins as we go forward. We expect net interest margin for the industry to probably peak in the first quarter or second quarter of this year, so there

will be that pressure or headwind on the margin. But we have to remember banks can still expand their balance sheets through loan growth depending on how the economic outlook is. So net interesting growth net interest income growth, which last year was spectacular, we still see for most banks anywhere from eight to ten percent top line growth in net interest income, even with a margin coming down because of

earning asset growth, and that will help them. We still think this year the banks as a group will be one of the few groups that put up EPs year year growth as we see twenty three today. Or I'd want to build on that, this idea of growing their loan books at a time where we potentially could be faced seeing some serious headwinds and also a lot of companies aren't going to want to borrow at the rates that a lot of these banks are going to offer. I mean, how fruitful are they going to find the

lending market. How risky are the assets they're going to have to lock themselves into in order to capture that higher rate. It's a really good question. Now. In our forecast for twenty twenty three, we do expect loan growth to slow. History has shown the industry's loan growth will

grow with nominal GDP. So if you expect inflation this year to average let's call it three to four percent, we have zero percent real GDP growth or maybe slightly negative, you're looking at about three to four percent loan growth this year. So we would say three to five percent is not an unreasonable estimate at this time, and we've seen that in other slowdowns where loan growth continues. But you're right, the loans have to be underwritten very carefully

because the real risk to bank profitability. Even though I know this margin pressure is something that discuss, the real risk has always been credit. While curdit quality today is quite good. So right now, if we don't have some sort of severe economic downturn, credits should hang in there. This year. It will be higher costs for credit, but

nothing like what we saw in past downturns. We're talking about the biggest, best capitalized banks, and then really the issue right now is in the smaller regional banks with more concentrated portfolios of depositors of creditors. Bill Ackman overnight a Pershing Square came out and said that the failure of SVB could destroy an important longer term driver of the economy because of the VC component of the economy, and recommends that if private capital can provide a solution,

a highly dilutive government preferred bailout should be considered. Thoughts Jarred, I think that's premature when you look at Silicon Valley.

Though it's important to the Silicon Valley area obviously the country and private equity, they're not the only players there, of course, and as you know, our biggest banks are involved in lending into the private equity business, so single handedly Silicon Valley, it's important to that part of the business, but it's not the only bank that has act that have PE customers, private equity customers, or a venture capital.

So I think it's a little premature to be saying that at this time, Joe, when Bramo says thoughts, Gerardi Hanks that she has thoughts, but she's really trying hard to bite her tongue what she really thinks. I was wondering what he wants special. Can you give us a brief answer, Police, I'm going to butcher something Jeremy Irons said in marchin Caller those years ago. Speak to me like I'm a golden retriever. So, Jared, if you can, this is a bit of a bit of a blank

spot for me. It's just regulation, and I'd love your thoughts on it, because I know you follow this stuff really closely. Can you talk to me about the degree of regulatory scrutiny some of these smaller banks have received over the last decade compared to say, some of the large banks and the problems that might emerge for the smaller cant banks. John, The regulators have done a very good job in changing the system compared to where we

were a pre financial crisis. As you know, and you just touched on, the largest banks go through a stress test every year, and the banking system has been fortified very strongly since the financial crisis. Now, even the smaller banks, They too go through a very rigorous regulatory process, and so I would say that the regulatory picture and the capital levels are quite strong for these banks. And that's

the critical part. When you look back to the pre financial crisis days, the level of capital in the banking system back then was materially lower than it is today. Same thing with liquidity. All the banks have to measure their liquidity. There's a liquidity coverage ratio that it's called, or you have to measure the amount of deposit outflow over the next thirty days. And in that ratio you've got to carry liquid assets to handle that. So the

liquidity and capital is quite strong now. Granted we all know uncertainty creates fear. That's what we saw yesterday. As you guys said in the pre market opening, we're seeing it again. But as cooler minds prevail, I think things will stabilize and people will realize that this is not an O eight oh nine or even in nineteen ninety moment.

If you're listening to this on radio, it makes you can't say the few that John Cassidy has out of his living bricks right now, which is just sick, absolutely depressing. So it's shooting on TV. He lives, he lives, what is that? He'll live? So large? In nine the Lobster check down the road is eighty dollars for a lobsteroy doing it oh wrong. That's a large It's wrong this all the time. It just feel like we're just doing it oh wrong, Cassidy. If I'MBC Capital Markets, thank you, sir.

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