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We begin with our top story, calling labor market data reinforcing speculation the Fed will cut rates this year. Bob Time at Aventless Merchant Capital say the market is caught up to reality of Fed rate cuts, saying quote any cuts they make in the second half will be minor. Bob joins us Now for more bbcome morning morning, Jonathan. The market's moved towards you. They were looking for six cuts this year. It was ridiculous. We're now looking for
like one or two. Can we just start with what you think of the recent economic data, the information we've sort of got our hands around over the last couple of days.
I think it's consistent with what we're seeing in the whole first half, which is, if you look at the second half last year, then the numbers coming out were a little bit pleasing for economic growth, probably a little bit pleasing for inflation being lower than we expected, and
the labor market continued to be very robust. You get into the first half of this year and the economic numbers are probably a little bit weaker than we thought, the inflation numbers are a little bit higher than we had anticipated, and for the first time, we're seeing just a little bit of looseness in the labor market. I don't want to overstate that because I think, you know,
the labor market is still in very good shape. But I think in both cases, you know, the economy strong second half last year, you can't cut inflation a little bit higher than you want this half, you really can't cut. So Jonathan, I think twenty five basis points here or there.
Who knows, right, There's.
No precision in this, but by and large, I think the risk for the FED, the risk for the chairman, is to cut too early before there's any economic weakness and then having to reverse course as.
Inflation, you know, begins to grow.
So my senses, they're going to be patient, they're going to be you know, everyone's.
Used this word data dependent.
But until we see a weakness in the economy or inflation really down to two percent, then they're just not.
Going to cut.
But the economy in the market have surprised a lot of people. I talked about expectations in January. Where we were there, where we are now, Let's talk about where we were last spring. Last spring, if we were sat around this table, the majority of people were speaking to Lisa, to me, to Anne Marie, and they were telling us that what we're going to see is a real tightening of financial conditions. Thanks won't be able to lend us much anymore. Companies are going to suffer. Here we are
twelve months later. Credit spreads are super super tight, and credit availability, particularly for large companies, is there and ready for everyone, even with rates of five point five percent. You've got your finger on the pulse of this if you've been surprised by that, the availability of credit to this economy still with interest rates where they are.
By and large, No, and I think sometimes there's an advantage to travel.
A lot of times there's not.
But I spend a fair amount of time in the Middle East and in Asia, and when you listen to people there looking at what's going.
On in the US, it was okay, we did too long on caming.
Inflation raised rates five hundred and fifty bis points in nine months.
We all know the economy is going.
To collapse, and it's kind of like, really like, the economy is still there, the labor market is still there, and is so clear to me that we have such a competitive advantage in this country with the depth and breadth of the financial services industry, and I think it's a real asset. Europe doesn't have it, China doesn't have it. You know, hedge funds, venture capital, private credit, you know, all of these ways to get credit into the economy,
into small businesses, into middle market businesses. We have many investments with Cascadia in Seattle, in Austin, with Marshbury in Cleveland, investing in advisory platforms for middle market in family owned businesses. And it is incredible how many angles we have to get credit out into the economy in this country relative
to other countries. And I think it has you know, I think looking at the US from outside, there's real admir for how did we manage this with five hundred and fifty basis points and nine months and the economy has stayed relatively stable.
There also is a question underpinning that, which is how effective is FED policy and really having any influence whatsoever on credit growth, et cetera. There's a theory that the economy's just been a whole lot more resilient to rates as they go up to five and a half percent. Is anyone talking about how rate cuts won't necessarily have any effect whatsoever on the economy, also, especially just peripheral ones, because of all of this credit creation already in the system.
You know, I think there's a lot of people that haven't ax to grind. You know, if you're in commercial real estate, you want to see rates come down for kind of the sector that you're in. But if you mentioned history, Jonathan, if we take a more historical look, since two thousand and eight, the Great Financial Crisis two thousand and eight, until the FED started raising rates, FED funds to averaged just under one percent.
If you look at.
Two three four decades prior to two thousand and eight, FED funds would have averaged about four percent. So I think we're in a much more normal environment right now, and I think the worst thing that could happen is that we saw the FED every well, you know, if the FED starts aggressively cutting rates, it's going to be because the economy is weak, and so that's that's not necessarily good news.
So we're not rooting for FED rate cuts, but we do.
Think you know, if you look out over the next couple of years, rates in the four to four and a half percent four and a half to five percent range is probably the logical explanation a bit lower than here over time, but not below four percent.
We've been talking about is good news, bad news, bad news, bad news, bad news, good news for smaller companies, it has been bad news regardless. It seems like over the past couple of weeks, and for small banks regional banks as well. In particular, the KBW index is down some twelve percent on the year, really down sharply over the
past couple of sessions. Do you think that rate cuts will eventually be positive for these shares or do you think that there's some sort of structural issues with holdings and other potential challenges, but just make it bad news as bad news for them no matter what.
We have a strategy to invest in regional banks, so I do have a bias here. We see a great opportunity, and you know, kind of you if you turn that on its head and say, your strong regional bank, you've addressed your capital issues. And we all know that higher interest rates we're impacting their treasury portfolios as they have
for every bank, and they've impacted loan provisions. But let's just you know, pick an example of an investor I US investing in a strong regional bank, so the capital levels are fine, there's no issues with a portfolio, and then look forward, you're really doing well with interest rates at this level. Higher interest rates are really good for banks, and it's been a long time since we've seen loan demand like this. So the go forward position for a
strong regional bank is actually outstanding. The question is will we see consolidation, which we believe we will, and are there strong banks, which we believe there are. And I think one of the great attributes for again you go back to the depth and breadth of the financial services industry in the US. The fact that we have these regional and community banks providing a service that the larger banks can't to small family businesses is a real strength.
If you talk about consolidation, I wonder how much it's going to be consolidation and how much is going to be failures. Yesterday, there is Access Financial the latest potential target of some bad research, and a lot of it stemmed around its commercial real estate holdings. Some people argue that lower rates will actually cause property prices to go down because it will allow more sales to kind of
get unleashed in the market. Do you think that there's going to be a rash of failures that basically, it's sort of like people sniffing out cockroaches and if they smell something that's not okay, they just pull their money in. It's sort of a self fulfilling prophecy. Do you expect that kind of activity to sort of come back?
Well, I think in our view, one thing that is certain is that since two thousand and eight, when the regulator is and the politicals claim that we will never see too big to fail again, the larger banks in the US have gotten bigger, more concentrated, closer to government, and far more systemic, so they're safe. You know, the economy is good, but it's in no one's interest to allow the larger banks to continue to acquire the smaller banks.
What we think is appropriate is that we strengthen some of the strong regional banks, whether it's the capital markets, whether it's Atlas Merchant Capital, doing investments to give them the capital levels that are necessary for them to acquire some of the banks that I think are too small to succeed, really really good banks that have been more like community banks that have had good, solid roes for decades, but in this environment, with the shock in rates, they
have to adjust their treasury portfolio. With the loan loss provisions, they have to adjust that. And the thing that is more permanent is the regulatory intrusion post SVB will increase their costs around technology in KYC.
So we do see an.
Environment where consolidation is a positive and a natural as opposed to weekend failures and big banks taking them over at the last second.
We started this conversation by talking about some of the misconceptions people had from the outside, looking in, from outside of America, looking inside America, from inside the financial system. What do you think is the biggest misconception that people in Washington have about the Worldie workh.
I think they misunderstand what has happened over the last fourteen fifteen years since the financial crisis, with larger, more concentrated, more systemic, you know.
The Big Four, the Big eight.
If you look at the top banks, I think you know between the top two or three banks of Wells Fargo and Bank of America and JP Morgan, it's over fifty percent of the deposits. And we saw a recent report where if you take four and a half thousand banks in the US, JP Morgan alone is twenty percent of the profitability. So banks are more concentrated, and I think what they're missing is the value to the economy of having a strong, robust, regional and community banking sector.
And I think for US that is an opportunity over the next couple of years. And I think the thing that is really really key here that people miss is the go forward if you are a healthy bank, to go forward with higher interest rates and loan demand is outstanding.
The question is are you ready to be investing and are you ready to be lending?
Well, we've got to talk about November, all the concerns that people are talking about, Trey tariffs, the erosion of governance, at least was talking about that a little bit earlier this morning. What are you concerned about? What's the radar for you going into twenty five.
So I think, Jonathan, if there is a dark cloud, and I've been pretty positive when we were talking earlier on the depth, the breadth of the financial services industry here, the strength of theomy, the strength of the US dollar relative to other If there's a dark cloud, it's it's the debt levels. You know, when President Trump started his
first term, so seven and a half years ago. Between then and now, during the four Trump years and the three and a half, if you will Biden years, the debt of this country has gone from twenty trillion to thirty six trillion. And you can't say that was about economy. It was kind of a goldilocks moment, right of seven and a half years of a strong economy. So where are we going to go? It's not in the markets right now, Jonathan Elis. I don't think it's talked about a lot.
But if there's a.
Dark cloud over the next couple of years, it's how are we going to manage?
You know, what changes are we going to make?
I think the second piece of it is, no matter who is elected president, you know, out as far as we can see, what president is going to come in and say, you know, no more debt. It's kind of been the easy solution to spend, spend, spend, and so I do worry about it. I think it's out there somewhere. Is it a year away, is it three years away? Is this is this comes back to be an impact? I'm not sure, but I'm a little bit surprised it's not talked about more in the markets.
Well, we talk about it plenty too much.
Some people might say we talk about it pretty much on a daily basis. And Steve Weisman of Newberger Berman, I just can hear him if he were sitting over there, he'd say, this is all hogwash. People have been talking about this for forty years and they've been wrong, They've been late. I mean, it's not going to happen for twenty.
Years, thirty years.
It could happened, and then it doesn't really matter. It shouldn't be baked into the markets. Do you agree?
No, I mean, I think I do think that there's going to be consequences of the debt levels. And I think going from twenty trillion to thirty six trillion, and you know, economists will give you all kinds of different percentages of it's too high and it's become a significant burden in terms of, you know, balancing the budget each year. So I think it is going to have an impact on the US economy over time, and I think it's going to have an impact on tax policy and other things.
It's not discussed much in the market today.
How do you see a planing out?
You've got some experience in the Ringdom we'll do over the last couple of years, particularly or focused on what happened with liszt trust. How do you see this ultimately playing out just a slow game where they've got to slowly respond to this and show the market they're serious about it. Or is it something where you see the market starts to reject the policies that come out of the White House.
Listen, right now, the dollar is very strong. I think I don't have the data exactly, but I think we're at an all time high relative to most competing currencies. And I think one of the implications, if I'm correct that the debt levels are too high in the US, would be is there an alternative to the dollar? And it's a legitimate question, but there is no legitimate alternative.
Where are you going to go? I mean Europe.
I remember Jonathan in nineteen ninety two and I was with Morgan Stanley. We did the first euro wa European currency bond for of all people, the Bank of England. You know, there was a lot of hope that you'd have a single bond market across Europe. But today you do eurobonds for Italy, you do them for Germany, you do them so each one has different risks, and there's
not an integrated capital markets in Europe. I think they look at what happens in the US with hedge funds and venture capital and private capital, and they look at what happens in the US, you know, in the impact of that on the economy, and they don't even have an integrated bond market. If you look at China, they have absolutely no interest in the transparency or convertibility that's required.
So I think it's a very very legitimate question to look at an alternative for the dollar, but there is no legitimate alternative, and.
That's the problem when it hits the fan, what are you going to do?
Well?
This is fantastic, always great to see, so thank you, Jonathan blub Diamond.
I've Atlas mentioned capital