Bloomberg Wall Street Week - July 28th, 2023

This is Bloomberg Wall Street Week. And we may not have an overall recession, We're having a rolling recession. To Cone roll looks pretty strongly. It is when it comes to jobs. The financial stories that shape our work. Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI through the eyes of the most influential voices.

He thinks this time we can engineer. He can engineer a soft landing.

Ralph Schlastin of Evercore on how deal makers are getting ready for the next surge.

We're certainly beginning to see a significantly a greater amount of activity.

And Darren Williams of Southern bancour on the continuing shakeup in the ranks of regional banks.

The particular merger between Pecquests and Bank A Galaia.

That made sense probably for them.

It seems that that's going to be a stronger institution.

There were some puts in takes, but overall Global Wall Street had a pretty good week. Big Tech seems to be back on track with strong earnings reports from Alphabet setting up a move for Ruth port Up to president and chief Investment Officer, So.

She's going to be CFO up until September the first, and this has got this newly created role that is going to be the CIO.

I'm president and she's going to remain with the business until they find a success. And then Meta reported more users, more advertising revenue, and promises of even better yet to come.

We're really excited about what we think that this is going to bring to bear for the consumer experience and of course also eventually for businesses to connect with consumers.

Across the family of ops. Two ups had a somewhat different moment in the sun when the union representing UPS drivers, reached a tentative deal to avoid a strike, and Teamster's chief Sean O'Brien wasted no time in saying he's eager to move on to Amazon.

Amazon's definitely going to be a target to organize. We're going to take this historic agreement and use it as a template to show the Amazon workers what they will receive when they joined the Team Stit's union and reorganize them.

Things were a bit rockier for President je Over in China, who removed Foreign Minister Chin Gong after only seven months in office and brought back his predecessor Wang ye I.

Think one's going nowhere.

And then there was the case of British real estate magnet Joe Lewis, arraigned in a Manhattan court for allegedly giving illegal stock tips to the staff on his super yacht, his private jet pilots, and his girlfriends. But the big one this week was the Fed's much awaited July decision, which brought another twenty five basis points in rate increases, which surprised no one, but left open the possibility it may be done or nearly done with tightening.

It's really a question of how do you have balance the two risks, the risk of doing too much or doing too little. And you know, I would say that, you know, we're coming to a place where where there really are risks on both sides. It's hard to say exactly whether whether they're in balance or not. But as our stances become more restrictive and inflation moderates, we do increasingly face that risk.

As the odds for that soft landing seemed to increase, the US economy came in significantly stronger than expected, and inflation continued to ease so.

Better than expected GENP report for the second quarter. This is going to have the FED changing some of its forecasts, and if.

All that word enough. At the end of the week, the Bank of Japan shook global bond markets by saying it's ceiling for ten year jgvs will now be a reference point rather than a fixed ceiling. For all the drama, bond markets ended the week relatively calm, as the yield on the ten year US Treasury spiked to over four on the BOJ news on Thursday, but then settled back

Yeah, so the Fed is kind of dancing along the nice said tier. Inflation is much more under control than where we were a year ago. So we're moving in the right direction, but it's far from declaring victory. And so they're very open to being data dependent and somewhat ambiguous. And what's really unique about this cycle, David, is that the markets are embracing that ambiguity. Typically that is a volve producer, but in this case is having the opposite effet.

So great, what are the bond markets telling us, if anything, about the likelihood a recession, Because on the one hand, we got really strong economic numbers this week, surprise a lot of people. We don't see a lot of weakness in the market. At the same time, as I understand, we still are pricing in price rate cuts coming up next year.

Yeah, So I think it's important to remember that the bond market's been wrong now for a better part of a year or so, so the curve has been inverted that typically suggests that a recession is imminent. This has been the most forecasted recession that hasn't come about yet. So I think, you know, the economy, the nominal part of the economy GDP has been quite robust and quite strong, and I think that's surprised a lot of pundits. That's

Greg. What does that tell you as a bond investor, where do you invest if at all? Right now is just a good time fixed income? And if so, what parts of fixed income?

Yes, so I actually think it's a great time to be in fixed income. And it's very simple premise, and that is the income piece and the yield piece. So yields are much higher than where we were a year or two years ago. I think that is a fantastic starting point. So the income producing nature of fixed income really starts to assert itself. Where we see value is twofold.

So high quality fixed income, are you being compensated for the risk when it comes to high yield or leverage loans?

I think that's where it's a little more tricky, David. I look at it, or we look at, you know, the parts of the high yield market, We look at the lever loan market, we look at the private credit market and really question whether you're being appropriately compensated for the risks there. So these are still you know, highly levered entities. There's been a lot of leverage added to capital structures over the past decade or so, kind of

Greg, we can't let you go without talking about what happened with the Bank of Japan because it shook a lot of people. When that report came out a Thursday afternoon, there was a lot of move in the markets actually at the time, at least for a short period of time. What did you make out of what happened and does it have long lasting effects?

I think it's too early to tell. So it was you know, in the price over the past couple of days or so. But either way, ten year jgb's kind of jumped ten bases points, which is a pretty big move in that market. But essentially the Bank of Japan is drafting off of other global central banks, so we'll see, so they have this last mover advantage and so a lot of that the tightening has kind of happened away

Many thanks now, Greg, always great to have you with us as Greg Peters of PGM. Coming up, we're going to go over with the Fed told us and also what it left unsaid with the Connors Laura Tyson of the Berkeley Has School of Business. And then next week we're going to take you to Aspen for a special edition of Wall Street Week from the Aspen Economic Strategy

The FED chairman misread the economy's signals so embarrassingly in nineteen ninety nine and two thousand that he was raising in interest rates to guard against inflation when he should have been lowering them to go out against what has proved to be the biggest economic collapse in a decade.

To take us through the risks facing this FED and this FED chair. In twenty twenty three, we welcome back Laura Tyson, Professor at the Berkeley Hawes School of Business. Doctor Tyson served both as chair of the Council of Economic Advisors and as Director of the National Economic Council under President Clinton. So doctor Tyson, thank you so much for being back with us. So a lot that we heard from the FED and from Sharepowe was not a big surprise. Was there anything you found surprising?

Really surprising but forward looking or going out a little bit to say for a variety of reasons. He thinks this time we can engineer he can engineer a soft landing. He noted that that's very rare, but he did talk about the fact that we have an economy which is stronger than expected, stronger than expected. His own FED forecasters have taken out a recession for this year and put in stronger growth. But he noted, also, we have inflation coming down, we have quits coming down, we have job

Well, and underscore what you're saying, doctor Tyson. The day after the FEDS decision, we got GDP numbers out that really were substantially stronger than we expected, indicating the economy is doing quite well. At the same time, we've raised interest rates a lot at this point, a lot in

We do know that consumers continue to be a spend out of their savings, they continue to create strong demand for output, both services now and increasingly products, and Pal mentioned that yesterday the importance of the shifting of spending back towards goods, because that way you can ease some of the inflationary pressures on the services side and on the good side, as you pointed out, the supply chain

Artificial intelligence is all the rage these days, at least to talk about. I'm not sure we're seeing it show up yet, but there are some who really speculate it could have significant effect on productivity. Do you expect it may have that effect and if so, how long does that take to have to really show up in the numbers.

So one of the interesting omissions yesterday in the discussion of Chairman Pale, and this is a standard omission because FED chairs don't talk a lot about productivity. But if you're thinking about inflation and you're thinking about, well, as our wage is going up, is that going to drive inflation up further? There's an intermediate variable there that is wages, productivity growth, and prices. If productivity growth picks up and you have that allows for stronger wage growth without an

So, doctor Tis, you were there in the White House when the Internet phenomenon was really taking hold. As an economist, so often the economic numbers are backward looking. How long did it take you to see that productivity increase in the numbers? How long did it take you to figure out this is actually what's going on.

Well, we saw the numbers pretty quickly. We were surprised at the numbers. I want to say, I oftentimes tell the story that I used to do brief President Clinton regularly on the outlook for the deficit, and that depended very much on the outlet for economic growth, and that depended very much on the outlook for productivity growth. And I used to give them the pretty standard economist answers that productivity growth was likely remain slow, We shouldn't expect

Yeah, well, not a certainty, but something we could certainly hope for. Thank you so much, doctor, is always a pleasure having on the Wall Street Week. That is Professor Laura Tyson of the Haas School of Business at Berkeley University coming up. Those higher rates brought deal making almost to a halt, but there are some indications now that things may be coming back soon. We'll ask Ralph Schlastein of Evercore.

Certainly the amount of dialogue among our clients is up quite dramatically, and our backlogs are up.

This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Mergers and acquisitions. They make the investment bankers world go round, And just two short years ago it was going around pretty fast, when a record three point eight trillion dollars worth of deals were done in twenty twenty one.

We are continuing to see a just tremendous momentum in US emini.

But then inflation came along and the Fed decided it had to raise interest rates fast to get things under control, leading to all sorts of uncertainty in terms of our own business.

Oh yes, it has a big effect because when the volatility is so high, and that the VIX this twenty was thirty two and a half.

I think of when the day started, people hesitate, They.

Want to step back and wait for the smoke to clear in the environment to settle, and so transactions slow down, there's no doubt about it.

All of which took that three point eight trillion dollars in deals in twenty twenty one all the way down to two point six trillion last year, and the pace this year so far is down another forty percent from that. But now markets think we may be nearing the end of those rate hikes, leading some people like Michael Jay of Blackstone to think the deals are about to come back.

I think market participants are now seeing that we're nearing the end of this dramatic rate increased cycle and therefore feeling like there's a little less uncertainty, certainty and are readier to transact.

Though Betsy Grask Morgan Stanley says it maybe next year before we really see mergers and acquisitions get their mojo back.

We are one of those who is looking for an acceleration and deal activity as we go into next year. Part of the reason is understanding what the terminal rate is in Ray.

Heins, and to bring us up this feed on exactly where we are in mergers acquisitions, we turn to a true authority. He's Wel Schlestein. He is Chairman emeritus of Evercore. Ralph thanks so much for being back on Wall Street week. We hear a lot about the fact that M and A dropped off, as we know from those record numbers back in twenty one. Are they coming back.

We're certainly beginning to see a significantly greater amount of activity. It hasn't manifested itself yet in announced transactions, but announced M and A for the first six months of the year was down. The dollar volume was down forty percent. I don't expect it will be quite as bad in the second half of the year, but certainly the amount of dialogue among our clients is up quite dramatically, and our backlogs are up.

A big change from twenty one, for example, is interest rates. Yes, I mean that has been adding interest rate basis points as fast as it could. How does that change the nature I mean going forward? I mean, are they're going to look different the deals that you do well? It does.

It unquestionably affects the amount of leverage that you can put on a transaction, and that of course affects the private equity firms, particularly not as much industrial companies because they're all or many of them are investment grade rated, and you know, the ultimately the banks or the lenders which are increasingly non bank you know, calculate how much debt a company can support by you know, some measure

Mentioned private particularly private credit to what extent is private credit taking up the slack right now, particularly banks feel they may needed to pull back some.

Well, there was a period probably five six months ago when almost all leveraged loans, all leveraged buyout transactions were financed by private credit. And by the way, that's not a terrible thing because they're separated from the deposit insurance function, and so that's taking actually credit risk out of the banking system. So there's probably you know, a trillion dollars of private credit balance sheet out there, and so that's

What is the shakeup if I can put that one M and A doing to the investment banking business itself, because we saw credit sweet now is really obviously essentially pulling out of the business. Entire Golden SAX has been laying off of the bankers. Is it changing the personnel situation for a place like evercor Well.

The interesting thing is that so advisory you know M and A restructuring, but M and A obviously being the biggest part of it, is almost our only business. We have a research business and we have an underwriting business. But their peak they were maybe fourteen to fifteen percent of our revenues. So the vast majority of our revenues come from advisory. Goldman Sachs, which has the largest advisory business, advisory is about five percent of their revenues, so it's

We've had a record.

Number of very, very talented what we call senior managing directors, which is our most senior title, join us or commit to join us in the first half of the year. So disruption in the large firms, you know, causes people to stick up their head and say, gee, do I want to be in a place where what I do is the core business of the company rather than you know,

Let's talk about regulation for a second. There's a lot of talk has been since the beginning of the administration about anti trust enforcement, and now we've just had new proposed merger guidelines come out which are decidedly more restrictive, particularly involving private equity. Potentially, how much of a chilling effect is that having on businesses as they think about mergers and acquisition.

Now, well, I think I may have been asked this a couple of years ago when the appointments were made to the FTC and the Anti Trust position, and I said that there definitely will be a more aggressive enforcement, but for it to actually dramatically limit activity, there would have to be law change in Congress. And I was very skeptical about that happening. That has not happened, It's not going to happen in my view. So we've gone

Court because we'll win. But it must increase the friction costs. That's longer, it'd be more expensive. You have litigation you have to pay for. So is that to turn it at all? Or it is people just blow past that. It raises the bar.

But if the bar went up because of the challenges six or eight or ten months ago, it's now come down a little bit because they've lost in court and challenging them legally has become a more accepted practice.

Ralph, it's really great to have you on. Thank you so much for being back on Wall Street. Because Ralph last night is chairman emeritus of Evercore.

Coming up.

Unemployment is just a number unless you're the one out of a job. That's next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. This week we saw a continued rise in bond defaults and it decided drop off and lending, especially in Europe. To take us through the two developments and whether they may be connected. Welcome back now, Bloomberg International and Economics correspondent Michael McKee.

Can you have too much of a bad thing to control inflation? Central banks raise interest rates, credit becomes more expensive, Fewer people and companies borrow, and economic activity slows. Monetary policy is working by that book in Europe. This week, the European Central Bank reported demand for loans among companies in the Eurozone plunged by the most on record in the second quarter. Demand for mortgages and other consumer borrowing also fell. Could that be a sign the policy has gone too far?

Well.

Banks play a dominant role in financing the European economy, and the Eurozone has seen two consecutive quarters of economic contraction. It's a different story in the US, where growth has remained stronger than expected. There is bank lending, of course, and it's flattened out in recent months, but the capital markets play a much bigger role here, and there are incipient signs of trouble in those markets. Defaults are beginning

David Many thanks to Bloomberg's Michael McKee. Finally, one more thought, whe knows the answer. One reason is really as good as another. An awful lot of employees seem to be getting a no when it comes to their jobs these days. Whatever the reasons, it certainly is hitting Goldman.

For Goldman to make cuts.

This steep is very concerning because the question is when do deals come back in a way to justify these swollen workforces all across.

Wall Street and big tech heavyweights.

Most of these layoffs at scale are happening in the soupus right there, happening in the mess.

Is there happening in the facebooks?

That are happening in twits are And to a degree it's just kind of right sizing.

A fair number of people are being shown the proverbial door without a key to get back in? Are you you need your key card? And it's not just their rank and file who are feeling a bit less secure in their jobs. Think about Bob Chapek out as CEO of Disney after only twenty one months.

We think Japek failed to win hearts and minds of the troops and the creative businesses at Disney. And we think there is quite literally nobody on earth as well qualified to do that as Bob Ayger or.

Chris Licked being shown the door at CNN after thirteen.

Months, The CNN CEO Chris Liked has stepped down from the cable news channel pair and company Warner Brothers Discovery. He says his departure is immediate and that they're scouting for a new leader. This comes after the backlash over a Trump town hall in May and an unflattering profile of him by the Atlantics.

So with all the turnover out there, it's good to know that there is still one place where you can keep your job pretty much no matter what, one place that just doesn't know what a pink slip looks like. Those in the higher education have long enjoyed tenure going back as far as the sixteen hundreds. The idea originally served to protect academics from religious prejudice, making sure they could not be removed no matter how the time's changed.

The president said yesterday he would resign, so there is an interim. Yes, he'll be leaving at the end of August and interim coming in in September. But the reason is kind of shocking that over the last twenty years there were issues in research that he did not correct.

And last week came word that the president of Texas and M stepped down after fear over misandling of the hiring of a prominent black professor from UT Austin to head Texas a M's journalism program, apparently because of the politics over diversity hiring all this couldn't come at a worse time for students who run a debt to pay those schools for their sky high tuition fell Stelio wallets,