Surveillance: Wall St. and Main St. Brace for Recession (Podcast)

and of course, on the Bloomberg Terminal. Chrispa Rengui joins us right now, cost ce Io at Cobelly Funds that we do this with the broader sweep of Lisa and I getting to the evening and Wall Street week Chris, Regie, I want you to help us frame your investment thesis, the courage right now to invest for two thousand twenty four. How do you do that? How do you develop a two or even three year perspective? Well, thanks Tom, Yeah, that's exactly what we're looking at. We're trying to look

out three to five years. One of the good industries, one of the good companies in the industry trays how bad is bad? Can the companies that we're looking at make it through whatever comes in the next eight months? So when you look at it that way, we're pretty calm um, you know, we think as JP Diamond pointed out yesterday, economy is going to be much figger than

it is today in five ten years. Uh. A lot of uncertainty, a lot of balls in the air now, we're not going to get them all right, but we try to pick We try to do the best to pick the best companies, at least in my research. Comment yesterday was some David George a Baird who really leaned in and said, would everybody calm down about the hurricane that's out there? This on JP Morgan. Of course, George

just simply saying lose their acane. Well, and that seems to be actually what JP Morris Jamie Diamond was saying too. There might be a hurricane. We are expecting recession, but right now things look pretty good. But Chris, you know, you talk pretty constructively, and yet you talk about the six eyes late last year, inflation, interest rates, infrastructure, income taxes, and international relations and infection, and today you add inversion

or implosion. That doesn't sound very optimistic. How do you dove tell the simism into the year longer term optimism. Yeah, there's no question that we're gonna We've got some volatility um and we're watching all the same things everybody else is. You know, it's obviously Wall Streets on its key star Main Street seems to be doing a little bit better,

although obviously some signs of stress and moost. We're gonna be watching carefully the same data that you mentioned earlier, um, and it wouldn't surprise me that we, you know, see a recession very soon. I think it's probably shallow, probably a little lengthier though than a lot of people hope. What about the infrastructure and the income taxes. I mean, we have a lot to do on the former, and

we pay way too much in the ladder. That's not going to change, no, And you know, obviously news this morning that the most powerful Joe and Washington Joe mansion seems to have quashed any effort to get a build back better built done this term. Um. So yeah, that's kind of delayed. I think one of the I don't know if you call it pleasant surprises, but one of the things I was surprised about all the last couple of years it's been that we haven't movement on on taxas.

That's something that we need to get in order probably you know, in the next term. Um. But obviously we've got some near term issues to deal with on rates, Chris, everyone's talking about seventy verses one hundred and what we're gonna see the following meeting. But I think if you step back and look at the bigger picture, it's more important, especially if you see the framework coming back down into

Is that how you see it? Yeah? I think that's right. Um. You know, I share Bill Ackman's perspective that we probably need to get after this as quickly and aggressively as possible. Um. Maybe that means a hundred at the next meeting, but you know, at some point that gives the FED the ability to cut and to stimulate. Again, Chris, we're doing Wall Street Week tonight. Can we go Mario Gabelly on you? Can you give in your single best idea after we

go to the Elves? Absolutely, And it's the same one that I've had for the last several months, and that's Liberty Braves. I don't want to talk about my New York Yankees this morning. I want to talk a out of public company and ability to oh one of thirty Major League Baseball teams, one that happens to be doing pretty well. Um, but you know, controlled by the John Malone Liberty Media Empire and likely to be spun off and sold in the next eighteen months' trading, which applies

a billion and a half value for the team. Steve's going for closer to three billion. Probably. There you go, Christmas Ange here on Wall Street week. Thank you so much, Chris Goobelly Funds. Of course, Claudia Sam has been listening on in the foreign moment of Jerome Powell, central Banker to the world. She's founder of Some Consulting, and most importantly Claudia Sam of the Some Rule. What an oddity of recession gloom into a fully employed America? Let's get

this phrase. It was never in the Michigan textbooks. Can you have a recession in a fully employed economy? At this point, we can have anything. I mean, nothing would surprise me. It is absolutely unusual to have a recession and like to see activity, to see GDP contracting for two quarters straight, and at the same time have low unemployment and massive job games. So we might have what I've heard called a job full recession. This is not usual. You grew up in the crucible, academically, grew up in

the crucible of inflation study. Michigan is the franchise for studying, folks, the slicing and dicing. Should our bankers be looking at top line inflation or the trimmed inflation, or the core inflation or the psalm inflation. Well so, monetary policymakers ought to be looking at every piece of inflation, both the top line stripping out of food and energy and also the components, like we really need to understand what's driving

this to understand where it's going. Now. One thing that I have heard from Drome Powell that is disconcerting is the idea that topline, including these massive energy swings, will help guide their policy. That's problematic because we know food and energy whips all around, and frankly the FED those are supply problems. They can't do anything about that. So it's that is hard to hear, Um, but it is true.

We've had big energy increases and what they are concerned about is the consumers look at that and they start expecting more inflation. They change their behavior and they cause more inflation, and that would be would be bad. Well and Claudia, this is the reason why the FED is between a rock and a hard place. They don't want to cause recession, but they also don't want to allow those inflation expectations to become entrenched. You have basically argued that the FED should do what it needs to do

to take down inflation. Other supply side issues are not their issue, though, that it really is Congress and what happens in Washington. As a result, the FED shouldn't go too far at this point given the lack of action in Congress. What is too far? How far should the Fed eventually go just expecting that we're not going to

get anything in terms of legislation and play Congress. Yeah, well, we learned last night that Senator Joe Manchin is walking away from any kind of energy legislation, and that's that means the FED is on its own. The administration has floated nothing that will get gas prices down, So now it's up to the FED that inflation will be transitory one way or the other. The FED will guarantee that that's not what we're gonna want. They're gonna try. The

FED will try their hardest to avoid a recession. But what they are doing right now, the full effect of it comes next year, and that's nobody knows what's coming next year. We gotta have some things in the world go our way, and that has not been the case for two and a half years. So it's not a pretty picture. And frankly, as Congress walks away, it's getting worse. Claudia, the timing seems really bad here because the Fed is

going all out guns ablazing. We're talking about full percentage point increase right at the time when it looks like inflation really has peaked. I mean, if you look at the Bloomberg commodity indexes, on the eggs, on the metals, on the oils, they're all coming down markedly. Um, do you think we're gonna see inflation? Where do you think we're gonna see inflation at the end of the year?

And is the Fed still going to be headed up towards four This was part of the reason that the cp I print this this week was so crushing, Like the Fed is not going to stop until they see inflation published inflation from the Bureau of Labor Statistics coming down in a meaningful way. Right, We've been head faked by supply chains getting better and then plutin shows up, and then they get worse again, or China shuts down and they get worse again. So the Fed needs to

see it, and we haven't seen it. Right in, Claudia, end of the weekend, what's your soul? What to the five or six death siles of America flat on their black back with massive negative real wage growth? I mean, what how do we deal with that? I've never seen an integram like that, the area below the zero line. Yeah, well, we gotta get inflation down right. The labor market is strong. People are, they're getting jobs, they're getting paychecks. We've seen

wade raids is a little bit less recently. You gotta get inflation down. You've got to get the purchasing power right now. Households have a lot of them have some money on the side right from the relief packages and the labor market that's been strong. So that is helping with spending. But that could only go on so long. And income is the best predictor of spending. Spending is the biggest part of activity of gen P. That's okay, Claudia, thank you so much for the Friday breed, Claudia, So

I'm getting us here. End of the weekend. Her claimed some rule as well. Right now, this is a great joy. Thomas showed as CEO of Kieth Briat and what's KBW. It's a stiple company, but far more he is our great voice on the state of American banking. Is not a security analyst. He's actually out there trying to do business. Thomas showed where is the American banking industry and for

that matter, for Wells Fargo in thirty six months. So Wells Fargo I think is a unique situation unto itself because of the transition there, and and I've been listening to the results just as they've just been coming out, and I haven't had a chance to dig into them. However, I think this it depends who you are, Tom, in my opinion, what type of bank you are, and what

your business mixes. Because the big money center banks, essentially parts of their business this are already in recession, and recession is the central point to everything in the banking industry because it's gonna drive what happens to revenues and then what happens to credit. So uh, the investment banks right now are showing declining revenues. Revenues were down eleven percent from Morgan Stanley. We think anyone, any bank with a big investment banking business is going to have a

tough run on revenues. At the same time, don't forget what the core regional banks are doing. We've had two regional banks reports so far. First Republics revenues were up year over year, while Morgan Stanley's were down eleven Washington Federal, which reported yesterday, was up seventeen percent, while JP Morgan's revenues were flat. And and so I think it depends what your business mix is. And then we should also have a conversation about credit. Alright, So Tom, before we

get there, what's the leading indicator here? The Wall Street or the Main Street? I personally think the Main Street because there's a there's a smaller number of investment banks for the industry, the big investment banks, the right downs that you mentioned earlier. Uh, that's that's a real issue, which is credit spreads have widened out and as credit spread, and I think that's been already part of the story of this core quarter, which is the marks on a

lot of these assets. These are not the assets that regional banks own. These are these are the assets that the big banks owned. So I think their dilemma and their challenges are different. And it's also going to be quite stark because last year was such an incredible year, so the comparisons are are traumatic. Don't forget that JP Morgan had a difficult quarter and earned sixteen non equity. Morgan Stanley had a difficult quarter and earned fifteen non equity.

So I think you have to remember the underlying basis of the company's is still pretty good. Tom. We're not looking at a meltdown in the financial sector. There is a question, though, is Larry McDonald said, at what point do market to overtake the economy? Do they take overtake the narrative in the broader world? How much are we looking at a difficulty of companies raising money? And I speak to you as someone who has a bird's eye

view into investment banking activity through KBW. I think the world has changed, and I think every day that goes by, it's changing more. I think you're my own personal opinion about the inevitability of a recession continues to grow. And I and and and they're actually pockets of business that feel like they're already there. If you're in the equity the equity capital markets have essentially ceased. These businesses are down ceased, operations they're down sevent So if that already

feels like a recession. If you're in the mortgage origination business, uh, that is going to feel like a recession. We're looking for originations to be down, so so I think that this is going to be somewhat of a rolling experience. The question is, really, is it a crisis. I think it's I think it's inevitable that we're going to have a technical recession. The question is is it a mild recession or a crisis. As of now, my instincts are not a crisis. But but I think it's inevitable that

this economy is slowing. And and I'm watching forecasts, and I'm watching real GDP already send these signal I wonder how the housing market plays into that, tom especially because we're talking about Wells Fargo, but also because I've seen the terms mark to market used in UM bank earnings reports the last couple of days, Morgan Stanley and JP Morgan. Fortunately, consumers don't have to do that, but the consumer really stretched to get the most unaffordable houses um that they

could over the last few quarters. And if we go into a recession, is that a problem for these banks I think the underwriting has been extraordinary at least sound. I mean, first of all, when when non performers go up, which they will, the surprise shouldn't be that they've gone up. The surprise should be that they were zero for so long. Um, it's a remarkable how pristine this is the most pristine I've seen the ratios in my career. So it's inevitable that it's going to go up. But where's the real

big risk? I'll say two quick points. The shadow banking industry exploded in size during zero interest rate policy, so I think it's gonna be very, very keen to watch what happens in the shadow banking industry. There's a lot of credit, but it's it's four times the size the banking industry. We think, okay, that's number one. Number two is the majority of Dodd Frank was really good and

and so these banks have more capital, more liquidity. They may have higher non performers, but I think they're gonna be able to turn through it. The average Thomas show. Jennie on Park Avenue just emailed it and said, can show talk about a real bank? So let's do that right now. Tomas showed the Keith Priot Honorable in honor of Dave Barry. Are the banks out there that are getting it done? And one of them is First National Bank of Long Island. What can James Diamond, what can

Brian moynihan, what can Mr Sharf? What can they learn from the operation that you've awarded of the First National Bank of Long Island? Well, companies like uh that bank okay, keep it very very simple, um and um and and they and they tend to take a lot of collateral and they don't require a lot of market activity to generate revenue. They're very spread based. UM. Now they have challenges because technology is impacted your business. You need to

afford it. But I think the key the key part about that is we just went through a very long period of time of zero interest rates. Spread lending was not built to really sell when interest rates for zero. We as long as we don't get into a crisis we had a higher rate environment, it's actually gonna be okay for a typical regional bank. I got thirty seconds. How do they survive digital banking? And how does every

other bank out there? The heritage of KBW, how do they survive my mobile cell phone and my Chase account. They better get they better get on the trend because customer usages here COVID accelerated in five months during COVID read about four years of adoption. They better get on board or they will become dinosaurs. And we're seeing them working hard to do it. But there probably will be

more consolidation for that reason. Thanks for the brief, been too long, Thomas showed of KBW there with Wells Farggle reporting. This is a joy always to speak with. Vincent Reinhardt. He and uh Carmen Reinhardt wife wrote the essay of the Pandemic on the Global Slowdown that now very much is clear and on a global basis, they absolutely nailed the pandemic slow down, some of it due to the political and social policies UH scene in Asia. He is

chief economist at Dreyfus and Melon. Vince Reinhardt, the last time you were on your absolutely lights out on domestic analysis. This morning, I have to speak to you about Jerome Powell, is Central Banker to the world, and his good fortune to have Secretary Yelling assisting an e M crisis moments ago. Folks, the nation of Chile intervened in currency markets to provide

for an appreciation of the Chilean UH pace. So what's shocking, Vince Reinhardt is even with the intervention by Chile to strengthen the Chilean pace, so it barely moved the needle UH, Vince moving to standard deviations. At best, it's an appreciate should across what they need to accomplish given the damage at this moment. How urgent is it for Secretary Yelling to speak to Christina Gorgeva of the I M F

about e M falling apart? Look, when the federals are raises interest rates and we know the Federal Reserve is raising interest rates, that pulls capital into financial centers in a way from e M. E M had a tough pandemic that they could in parts move over by fiscal largess that deteriorates balance feats UH, and we're going to be seeing that in in in the year to come. So it's gonna be a tough tough time for EM.

Any time the Fed is in a firming cycle, UH, it's tough for financial conditions generally, and this will be an extremely tight firming cycle if it's right out across all of your academic work. There's always the amateur comparing contrast with I'm gonna time call that a time of naivete in a time of leverage. Do we have comfort

now that we're less naive? Do we have comfort now that we're less leveraged than August of Look, anytime financial prices move a lot, you learn something about somebody's balance sheet. You don't know who that is and what you learn, So I'm not going to say that, uh, it's all clear. What do we know? We do know big banks are much better capitalized and are more rigorously monitored, witnessed the

stress test. We do know there's a lot more transparency and the documentation, lots more reliance on the big utilities of clearing and settlement. That's all good. We also know, among other things, that the triashury market is less liquid now than it was back then. That's part of the consequence of QUI, part of the consequence of of of big treasury issuance, and it's also part of the consequence of asking big banks to have a lot of capital. They don't really want to commit as much to trading

as they used to, and they're showing that. I'd say it's a expect Yeah, I mean, what a great what a great position from which to go into a recession. Vince, Right, the big banks of shoring up their fortress balance sheets to consumer um has money in the bank, and there's unemployment rate at three point six percent? Do you think we're in a recession? So I sort of interesting technically might we be in a recession? I'll await the Atlanta

offense GDP now for later in the day. Retail control was better than expected, but last month was revised down and poorly of arithmetic counts that more important. Uh don't know if we are. It's not much of one because we've had four hundred thousand jobs nearly printed each month for the last four months. I worry about the recession later in the year and next year that will be more significant. If we're in a recession right now, it's it's it's mostly an inventory in a trade cycle, pretty

pretty damp. But it might just mean that the slopes going down to the more significant problems we have later in the year as the Fed titans more. Vince, just real quick here, Given the consumer data that we've seen, in the fact that they do continue to spend whether it's with credit cards or not. Their balance sheets look like they are in a pretty good position. How quickly could they turn over to achieve some of the negative

scenarios that a lot of forecasters have out there. Yeah, and added to your list is the retained saving from all the fiscals or jess of two thousands and two thousand twenty one one. That's that's still over a trillion trillion dollars. So that helps household unfortunately helps it's skew to hire income households who manage their balance sheets better. So I think there can be some issues going down

the road. Remember also that, yeah, the unemployment rates three six, but real wages are declining, so actually real household income income is going down. That will be a problem. And then the last thing to note is, uh, some of the benefits household has had from government policies are more forbearance, not forgiveness. Uh, that's that's going away, and and that therefore will expose their balance sheets more. It's not going to be a household recession, I don't think. I think

um households are better positioned in the US. Uh, not as obvious in other places of the world. But but the US is more of a more of more of that fortress balance sheet. Vincent, thank you so much. Dr Reynhard with Dreyfus and Melon this morning. Vincent Reynard, of course, is decades of work at the Federal Reserve for the nation.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg