Bloomberg Wall Street Week March 31, 2023

most influential voices. Larry Summers, the former Treaty Secretary, Katherine Keening, CEO of d N y mon Sam's l Sherman Pan, founder of Equity Group Investment in Bloomberg wool Street Week with David Weston from Bloomberg Radio picking up the pieces. After a thunderstorm hit banks from Silicon Valley to Zurich, Congress, Central banks and investors try to regain their bearings. This

is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers of Harvard on the effects of a shaken banking system on the economy. Either the banking crisis will pass without the incident, or we're gonna see some kind of real downturn, We're sure. Sharman of Rockefeller Capital on whether there's a price we will pay for all of that government intervention it's that contradiction that we can't seem to handle what we want and what's the outcome.

And former Treasury and CFTC official Tim Masset on whether we should have seen it coming. At the end of the day, this really was about bad bank management. The month of March is supposed to come in like a lion and out like a lamb. But this March entered like a lamb and then was savaged by the lion of serial banking crises. This was a week for starting to sort through the wreckage, with what's left of SVB sold to First Citizens Bank Shares. This is a fit

the bank sentence. I think it gets the right base off the hook, gets the fdic of the hook. I think everyone's happy with this deal. And Congress is honed in on the SVP debacle, with ED Vice chair Michael Barr saying there's a lot of blame to go around anytime you have a bank failure like this. Bank management clearly failed. Supervisors sailed in, our regular choice system failed. Over In Zurich, UBS started the process of completing its

forced marriage to Credit Suis. UBS chair Calm Kellerher announced that bankers from Credit Suis would have to be put through what he called a cultural filter to make sure they fit, and that Sergio Marte would return to take over as CEO to make it all work. Integrating two

systemically important giant banks is really double trouble. And if that weren't enough, France's two biggest banks faced what could be over a billion dollars in fines as part of a government investigation into possible tax fraud and money laundering. French banks including BNP, Perry Baugh and Society GENERALIC face collective finds of more than a billion euros as part of an investigation into tax fraud and money laundering in China.

Ali Baba announced it would try to avoid the government's hostility to big tech by getting smaller, specifically by breaking itself into six separate parts. We do believe that if you break the pieces up to some of the polits a bigger than the whole. And It was another week of job cut announcements, with McKenzie adding fourteen hundred and Disney seven thousand, which notably included Ike promotter who sold

Marvel the bob Iger. Disney has begun the first round of the seven thousand job cuts that it announced in early February and memo that Bob I get the CEO has sent to staff. And to top it all off, on Thursday, Donald Trump became the first former president in US history to be indicted with criminal charges filed in Manhattan tied to hush money payments to adult film star

Stormy Daniels. Donald Trump becoming the first former US president to be indicted, the arrangement coming as early as next Tuesday. The specific charges, however, are still under sealed. For all the drama of the week and the month for that matter, the markets in the end pretty much took in stride. The S and P five hundred wound up the week

up a solid three point five percent. The NAZAC was up three point four percent, while the yield in the ten year added ten basis points but still ended the week below the three point five percent threshold at three point four six. To take us through it all, we welcome now Laurie Calvacina, she's RBC Capital Markets head of US Equity Strategy, and Julian Salisbury he is Goldman Sachs Asset and Wealth Management Chief Investment Officers. So welcome both of you. It's great to have you let me start

with you on the equity side. At least, I was a little surprised that the equities held up so well considering all the turmoil. Look, I think there's this view out there that equities are out to lunch and are kind of asleep at the switch, and I don't think that at all. I think the market reaction was pretty rational.

I think if you look at it from a top down perspective, despite everything we've just gone through in the month of March, if you look at economic forecasts, if you look at earnings forecasts, they're still anticipating the damage to be contained in twenty twenty three and twenty twenty four to be a recovery year. And we know that equity investors are ready to kind of move on from twenty twenty three and look ahead. If you look at it bottom up in terms of what's actually been doing

the heavy lifting, it's technology. I think investors are starting to think about a sluggish growth environment going forward. Tech normally works well then, but I think one thing we know is that where whatever you thought the FED was going to do prior to SVB, your expectations have been pulled in. So I think markets are still trading the pause. They're trading the ultimate return of cuts, and technology stocks tend to be one of the best performing sectors after

both of those. So I think it's quite rational. So, Julian, you manage an awful lot of assets, say gold and sacks and equities, but going well beyond equities, what are you seeing If in equities it seemed pretty solid through other thing, what are you seeing in bonds? What are you talking abou seeing alternative investments? Also on the equity side, it is kind of extort. And if you look back of the events of the last month, and here weel we are ending the month up three or four percents.

If you know at the beginning of the month are like the events that we're getting to unfold, I'm not sure you would have predicted that. You know, what we're seeing right now is on the alternative side, continued demand, an interest in alternative asset classes, you know, given the vaul, utility and uncertainty of the environment. So I would say private credit, private real estate are still attracting a lot of interest. Was still seeing sluggish in US in terms

of interest in private equity and growth equity. But the more kind of yielding income producing assets are attracting people because of the higher base rate environment, so the actual nominal yields on these asset classes is interesting to investors. So to the turmoil on the banks, Julian actually help the bonds in the sense that people rushing into barns, they wanted to buy more barns because they were so uncertain of where we were going. I think there were

two things. First, the flight to quality generally, see saw money moving out of weaker banks into stronger banks. From from a deposit perspective, you'ress saw very significant fund flows into money market funds. I mean we saw I think there's a matter of public record fifty two billion dollars of flows into our money market funds in a two week period, just example of people looking to really move their money out of again weaker banks into more diversified risk.

Also seeing people moving into bonds and other income producing assets. And then I would say, you know, again like pushing out a little bit of duration now and expectation that wherever I agree with Laurie's point, whatever you thought the path of rates was going to be, you know that the peak grade and the time horizon in which rates starts to roll over. Us probably come in because of

the dampening effect that this has happened having on the economy. So, Laurie, if in fact, in the bond situation, people like this safety relative safety of bonds. Is there an equivalent in equities? Are you seeing because of some of the certain terminal with the banks and still uncertain about the economy. Are there's certain equities that people tend to go to when

they're a little unsure the future. There are and you know, things like utilities, healthcare, consumer staples, you know, or tend to be where people go big caps in general, so we've seen small caps underperform, but technology stocks, interestingly, over the last I would say like five or six years,

have become another safe haven. And we know that areas like utilities, consumer staples have been highly overvalued because people were really pushing into them last year when they were moving out of tech, and so I actually think, you know, it's interesting Tech had already been I think largely de risked last year, so people feel comfortable now coming back to it is more of a safety trade. July. One of the things people talk about it is a possible

credit crunch. You react to actually what happened with the banks? Are people providing for that? Are there ways to provide for that? Or do you see a credit crunch around the corner. Sure, Look, I think that the very acute near term issue has been taken off the table. I think the policy actions to stabilize the bank the liquidity

around the banking system has proven to be effective. But I do think there are a few things that are fairly certain for the sub two hundred and fifty billion dollar banks that have been subject to less stringent capital and liquidity or requirements, They're going to be required to hold more capital, They're going to be required to hold more liquidity, The cost of they're going to charge for their borrowers is therefore going to go up. They're also

going to be subject to greater regulation. So I think credit availability is going to become tighter. Whatever you thought it was going to it's certainly going to become tighter result of these actions, and that is going to impact certain areas of the economy, particularly I think commercial real estate, which was already feeling very very fragile, and this is going to be, you know, just further add to the pain. Okay,

Junior Salisbury and Laurie Cavesino. We'll be staying with us as we turn from where we are in the markets to where we are headed in the markets, and that's coming up next down Wall Street Week on Bloomberg. Yeah, yeah, this is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Some quarter, huh heck. The three months in the financial world that ended tonight provided at least three times the usual thrills and spills, So it wasn't just

a quarter. It was at least seventy five cents. And what did it all mean? By almost anything? You wanted it to me and provided you picked the right two bits. That was a Lewis recogniser at the end of its multuous march back in two thousand. Sounds a lot like today, frankly. But then the number one movie in the country was Aaron Brockovich starring Julia Roberts, and the number one song, well,

that was Say My Name by Destiny's Child. Still with us or Julian Salisbury of Golden Sacks and Lory Cavesina of RBC Capital Markets. So Julian, let's start with you here. One of the things we've seen is apparently pulling back by the banks in making loans. What does that mean as an opportunity potential for private credit? Sure, I mean one of the reasons the banks are being forced to pull back right now, it's concerns around their own liquidity situation.

Liquidity kills banks, not solvency generally. You know, you look at the private credit market. Somebody was asking me about this the other day, you know, what's going on with these shadow lenders, and I said, this wasn't a shadow banking problem, this was a banking problem, classic asset liability

mismatch problem. The private credit market very differently. Generally, the participants in that market have very long dated liabilities, so they have the ability to be consistent and thoughtful about the way they deploy capital. They're not subject to redemptions.

They can be a consistent relationship lender to private equity firms, so when they see an opportunity where the markets step back capital markets are closed, they can come in and be a provider of choice and enable private equity transactions to take place. So it's an attractive asset class. It's defensive in nature, it's floating rate in nature, and at a time like this, you can extract a particularly attractive

credit and illiquidity premium. Is there any transparency risk in road markets those to say, in public markets you sort of know where the value is. Private markets you're not quite as sure. And right now we've seen some hidden

liabilities we didn't know we're out there. Look it's it's a it's a great question, and I do think the discipline of being held to account minute by minute in the public markets is a great discipline, but there are you know, there are also certain types of businesses that benefit from growing and scaling outside the without being subject

to you know, the day to day scorecard. Essentially. You know, certain types of businesses that don't aren't profitable for a long period of time sometimes are better off being built and compounded in in private market format. So look, it's

a it's a it's a great question. But I think generally what you find is these are large sophisticated investors managing this this these pools of money, and you know, there's there's upsides to that as well, because you're not forced out of the trade, you can carry the trade, so you can take a long term view of value rather than thinking what's going to happen over the next one week, three months, or six months, Laurie, there's some debate about whether we should call it's a bank in crisis.

So it was a crisis for Silicon Valley banks, and that clear it's a crisis for the banking industry overall. But it certainly was a lot of turmoil. I know that you have specifically looked back in the past. It's some similar crises or points of turmoil, and you actually took a look at the NASTAC one hundred during some of this take us through that we have a charter show. Yeah, so you know, I'm a great student of history when it comes to markets, and I think this is going

to end up having its own name. It's going to be its own unique crisis. But to me, this is more like World Com than it was like Barren Lehman. And we took notice of the fact that the banks were trying to stabilize recently, and so we went back and essentially looked at kind of the problem industries in both that two thousand and two thousand and three period and the financial crisis, and what we found was that after both Baron Lehman, you basically saw the banks continue

to act really really poorly. If you go back though to the tech bubble period, we saw that after World com NASTAC one hundred actually stabilized and kind of entered this very long, lengthy bottoming process. So it wasn't quite a clearing event, it was something close to it, but it did sort of, you know, sort of cathartic in a sense that you know, some of these excesses were exposed and dealt with, and then the market you know, took some time to heal, but ultimately was able to

move on. Thank you so very much. It's great to have both of you with us, as Julian Salisbury of Golden Sacks and Lory Calvacina of RBC Capital Markets. As the month of March draws to a close, it looks like maybe all of the uncertainty about the banking system is starting to quiet down, helped in large part by the US government stepping in once again, this time to

ensure deposits of people in Silicon Valley Bank. Racher Scharmer has taken a look at exactly what that might have for implications more broadly for the economy and welcome now. Rascher Scharmer, of course, is the founder of Breakout Capital Partners as well as chairman of Rockefeller International. Racher. Welcome back to Wall Street. We great to have you here once again. The government rides to the rescue here. That's

good news for the people being rescued. But what possible ramifications might it have more broadly, Yeah, I think David, this is a great time to step back and see as to how Lord the bar has become now for government intervention. Now, of course, the banking sector is always a very sensitive sector because of the risk of a contagion.

But what strikes me here is that how far we have come over the past few decades where you get more and more stimulus, more and more government intervention, and at the same time you have a slump in productivity growth. And I think that this is the point that is very underappreciated. At the surface, it seems as if the economy has once again survived a crisis and here we are.

But I think what we forget that there's a price we are paying for this, that because of this constant government intervention, we're keeping alive a lot of zombie companies in this country, and the number of startups in fact, over time is going down. So why is this happening. This is happening because we're keeping a lot of deadhood in the system. The number of zombie companies in America today is nearly twenty percent of all companies can be

classified as zombie companies. That number used to be barely two percent in the nineteen eighties or so. So that is the contradiction here, which is that we do not want to any pain, and that's completely justified, and we want the government to come to the rescue, but we also don't like the economic outcome where we have low economic growth, less and less and living standards, and that I trace back to the fact if you have low productivity,

that's what you will get. And the low productivity is the direct consequence I think of such expansive government intervention. So we'll share, no question, we've had a lot more government invention, no doubt about that. But there's another factor as well. We've had very very low interest rates, which has allowed some of those so called zombie companies, companies that basically can't forward to service their own debt survive.

As the FED has moved to a higher interest rate regime, might that help some on the front of zombie companies the allocation accoun and therefore maybe ultimately productivity. It could be, but so far there's basically evidence of fit. Look at the default rates. You know, the default rates are so low in the country today now, as you know that in capitalism, having some default rates is a very essential part of it. So this goes back to what sort of system do we want? So the default rates in

the economy today are very low. Now, all this sounds almost a bit masochistic, that do we want more pain? Do we want more companies to go bust? Well, if you want capitalism, that's what you should be prepared for, because a capitalist economy should be a dynamic economy where you have much greater company creation. You have a lot of the deadwood that dies, and you don't have the creation of too many monopolies or very large companies that benefit also from very low interest rates as we know.

So I think that it's that contradiction that we can't seem to handle what we want and what's the outcome that we're getting, or sure, do you think there might be a way to engineer in such a way that you take away the worst of the pain and yet you still have some discipline the market. And let's take then example of Silicon Valley Bank. To be sure, all their positors were guaranteed, they were made safe, but the bondholders were wiped out, the shareholders were wiped out, the

management was wiped out. That's not exactly moral hazard, is it. But as I said that, looking at each individual instance almost seems justified. I'm looking at the cumulative effects here that if you have so much government intervention which is constantly at hand, then what are the consequences of that? So each individual instance it's very hard to argue against because no one likes to see that kind of pain.

But what is it that we have seen. We are seeing the size of government stimulus over time having increased massively. If you look at each economic downturn, we have seen the size of monetary stimulus increase a lot, as we've seen every economic downturn, and we've seen lesser and lesser defaults because often the government's intervening also in a non monetary the non fiscity weed like this sort of did just now such a pleasure heavy with this is very illuminating,

thank you, that's for sure. Charmant he is chairman of Rockefeller International. Coming up. We wrap up the week with our special contributor, Larry Summers of Harvard. That's next on Wall Street Week on Luberg. This is Wall Street Week. I'm David Weston. I don't like to say we're back with our very special contribute. He's Larry Summers of Harvard. So Larry, let's talk about inflation. We got those core PC and other PC numbers. Then this week we know

the Fed pays attention to them. They were a little bit better than they had been. Yeah, they were. I don't think one should make too much of that. I think we are still a substantially unsustainable inflation country unless the economy turns down fairly hard in response to the credit issues raised by the banking system, and we don't know yet whether that's going to happen. So, in a sense,

the outcomes here are a bit bifurcated. Either the banking crisis will pass without incident and without large impact on credit, and which case we really do have serious inflation issues and the Fed will have to tighten much more than is priced in, or we're going to see some kind of real downturn here. And I think both are plausible. Outcomes, and I recognize that there's a chance we'll skate through right in between, but I'd have to say that seems

very much odds off to me. Soft landings are very hard, even in the best environment. So I think I heard in your answer We're gonna have to wait to see what the aftermath of the banking kerfuffle has been here, but gives us a sense of what you're expecting, and more important, what you're looking for. When will we know where there's a credit crunch. The lesson of financial crisis, if you study their history closely, is that it's not just all one big downturn. It was six months from

Bear to Leahman. Even the week in which the Leaman events happened, the stock market went up and the FED did not cut rates, and the FED statement that week was heavily about inflation. So I think it's too early to give any kind of all clear sign. I think eventually we I think we've gotten to a point where I would say it's unlikely that there will be more

panicked weekends with bank runs. Not impossible by any means, but I'd say that's certainly less than a well under a fifty percent chance but whether you're going to see some other kind of accidents, whether you're going to see a substantial restriction in credit, that's not very clear. When you have a series of earthquake tremors. One certainly hearing

many anecdotes around constriction of credit. And the question really is is that going to go nonlinear where constriction of credit leads to declining asset prices, leads to non performance of loans, leads to more credit constriction. And I don't think we know yet whether it's going to go nonlinear, and I think we're going to be much of the way through the summer before I would feel comfortable being

confident that it wasn't going to go nonlinear. Laurien, One thing we do know at this point is that the FDIC is on the hook for a lot of money for guaranteeing all those deposits in the billions of dollars here, What do you make of the financial aspect of this, what the ft is putting up as opposed to what some of the banks are benefiting from. I'm surprised by how much the FDIC has had to spend on these resolutions relative to the things that were being said earlier.

They were hoping to sell SVB as a whole entity, and then in order to get somebody to buy it, they had to chip in a set of stuff that was cumulatively worth twenty billion dollars. The arithmetic a similar relative to the scale of the bank at Signature Bank. There are a lot of questions about those transactions. I'm still confused about why the holding company at of SVP is still being valued in a meaningful way, and I'm will want to see assurance that no executive there is

getting deferred compensation. But these were studyingly expensive transactions. Ultimately, everybody's gonna say it's not coming back to taxpayers, but banks are taxpayers on behalf of people, their depositors, their customers, there people they lend to. And the twenty three billion dollars the FDIC has spent is one hundred bucks per adult American and that's a fair amount. So I wonder if we can't be looking at the procedures that they're

using and finding ways to do better. And it looks like some of these deals were pretty attracted given what happened to the shares of some of the acquiring banks, right, Yeah, And I think that, yeah, that's right, David. There are two parts of it. There are what seemed like huge games that the banks that were lucky enough to get into this got over fifty percent for the acquirer of SVB, close to forty percent for the acquirer of signature. So there's that piece of it that they may have overpaid.

There's also just a question of why it was necessary to pay so much. Learn a very different subject, we had for the first time in history of former US president indicted this week, Donald Trump was indicted for certain allegations. We're not even sure about what they all are yet, rising out of a hush payment that he was made. I really wonder about the connection of our justice system with politics. You have talked on this program before about

what's been going overund Israel. What are the risks in Israel here in the United States that we politicize our clerl justice system, David, Everyone, even former presidents of the United States, is entitled to a presumption of innocence. God knows.

I don't know the facts of those matters. What I think we saw in Israel was that when there was a sense of the intertwining of politics and the basic rule of law, and the judicial function that had, in addition to all the other consequences, really quite problematic of

financial and economic consequences. And so I hope all the actors in this, both President Trump and those who feel loyalty to him and those involved in carrying out this prosecution, we'll be doing their very best to keep politics out of it, to act in ways that will provide reassurance that it is the rule of law that's being elevated rather than the political side, because ultimately the ability to have a viable market economy rests on their being confidence

in the judiciary. And finally, we're gonna try something new here that you suggested is sort of a quick round, lightning round of some issues and people and whether you are long or short on them. Let's start, first of all with foreign direct investment in China. We had the premiere over there leeching this week. Really make a case for why there should be more foreign investment in China,

long or short. Short deeds, not words are most important, and I think they're just enormous uncertainties about everything Chinese and about the Western response, and that's gonna chill investments substantially. Larry, you brought chat GPT to wall three week and now we have something like eleven hundred tech people who are writing another thing. Let's hold off on this chat GPT four. Let's make sure we know what we're doing before we keep moving forward. You long or short today on chat GPT,

I'm long. It's continued development. One of the important developments in the last several weeks has been the engineering of the technology so that it can be used on much smaller computers. And that means the genie is out of the bottle. They're gonna be all kinds of people doing all kinds of things. And I think this is going

to be a story. Like other technologies. Stories may take longer to think, longer to happen than you think it will, but ultimately it will happen faster and more pervasively than you thought it could. And final, Larry, we've talked about golf affairment. I know you're an avid golfer. We've got the Masters coming up next week. We've got two favorites right now, accorded to the betting ads, they are Scottie Scheffler and Rory McElroy. Are you long or short? Rory McElroy,

I'd be long. Rory think he's overdue, and I think this may well be his moment. Okay, Larry, thank you so very much. That's our special contributor here on Walstere Week. He's Larry Summers of Harvard. This is Wall Street Week on Bloomberg. Finally, one more thought. Michael Kinsley famously said that a gaff is when a politician tells the truth,

some obvious truth he isn't supposed to say. To reach the level of the true gaff, it isn't enough that a politician puts himself in an embarrassing situation and can't climb out of it. That happens all the time. Just last week, President Biden mistakenly he mistook Canada for China and got roundly criticized for it. I applaud China for stepping out, assuming I applauded Canada. But let's be honest,

we all knew what he meant. Nor is it really a gaff when a leader simply forgets how to spell, as then Vice President Quaile did when he insisted a sixth grader at a spelling bee had to add an e onto the end of potato. And of course we've all watched former President Trump reached to make a point and found that his reach may have exceeded his grasp, as when he praised the Continental Army of seventeen seventy

five for seizing airports. Our army manned the airport, it ran the ramparts, it took over the airports, It did everything it had to do. And at Fort McKendry under the rockets Glare, it had nothing but victory. But none of these can be considered a true gaff. Numb pointed at some basic truth that no one wanted to say. This week, we saw the results of a true gaff in the banking world when Credit Suis was in the

cross heres. Earlier this month, Bloomberg's Manners Cranny asked the head of one of its major shareholders, the Saudi National Bank, whether it might double down on its investment, and his response was refreshingly clear and emphatic. The answer is absolutely odd for many reasons, outside the simplest reason, which is regulatory and statutory. We now own nine point eight percent

of the bank. If we go abuff ten percent, all kinds of new rules kick in, whether it be by our regulator or the European regulator or this was the regulator and we're not inclined to get into a new regulatory regime. But sadly speaking the truth, clearly and directly is not always a defense. This week, SMB chairman amar abdulwa Al Gudari stepped down, reportedly for personal reasons, but just in terms of credibility and communication and guidance, they

felt they had to do this movie. They didn't explain why they replaced them as chairman, but it goes without saying that much of the recent terminal probably has something to do with it. Score one for never answering a reporter's question directly. That does it For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.