Latest / Bloomberg Intelligence / Credit Suisse, Financial Instability, the ECB, and Rate Hikes

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Credit Suisse, Financial Instability, the ECB, and Rate Hikes · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
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Speaker 1: at Bloomberg dot com slash podcast. Let's talk markets here
0:22
Speaker 1: and kind of where we go from here. What should
0:25
Speaker 1: we expect maybe from this Federal Reserve next week after
0:27
Speaker 1: we've had this move by the ECB. Bring in Jay Halfield.
0:30
Speaker 1: He's the CEO, founder and portfolio manager at Infrastructure Capital Advisors.
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Speaker 1: And Jay, let's just start with Europe and the ECB.
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Speaker 1: I mean, they're still, like the US Federal Reserve, still
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Speaker 1: very much on this inflation fighting path, raising their benchmark
0:45
Speaker 1: raak by fifty basis points where a lot of people said,
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Speaker 1: maybe pause, maybe just twenty five, but no, thanks Paul
0:52
Speaker 1: for having me in again. You have to keep in
0:55
Speaker 1: mind the European system is radically different in the US,
1:00
Speaker 1: so they were way behind our FED full percentage point
1:04
Speaker 1: bard our FED. And also their inflation is worse because
1:09
Speaker 1: of their natural gas crisis. It's come down, but it's
1:11
Speaker 1: still a huge problem. And then thirdly, all their banks
1:15
Speaker 1: are essentially money center banks, like our money center banks
1:18
Speaker 1: are killing it right now. They're getting all these deposits
1:21
Speaker 1: in and keep in mind that that's free money right now.
1:24
Speaker 1: So that's the real problem with our system is that
1:27
Speaker 1: smaller banks are losing deposits, and that's every dollar that
1:31
Speaker 1: goes out costs them roughly five percent, so paying fifty
1:34
Speaker 1: base points or zero if it's a demand deposit, and
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Speaker 1: then you borrow from the Fed at libor plus spread,
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Speaker 1: and so their earnings are getting smashed as we speak.
1:44
Speaker 1: And that's the core issue, and that's why we've been
1:47
Speaker 1: calling for a rape cut to reduce that the inversion
1:51
Speaker 1: in the Yelk curve. So when you compare that to
1:54
Speaker 1: then what the Federal Reserve is doing the read through,
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Speaker 1: I think one of the takeaways from the ECB is
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Speaker 1: simply that they hiked regardless of the chaos for credit squeezes.
2:02
Speaker 1: If credit squeeze is a bigger bank and a bigger
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Speaker 1: risk than say SPB as, which I think is the consensus,
2:09
Speaker 1: then does that then insinuate the Federal Reserve is going
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Speaker 1: to stick to twenty five or fifty or whatever the
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Speaker 1: calls were pre SPB. Well, that's certainly possible because they
2:18
Speaker 1: have shown zero ability to process real time data. So
2:22
Speaker 1: and specifically I would point to oil, which is something
2:25
Speaker 1: that we fast coming from Jay Hatfield broadcast. So the
2:29
Speaker 1: two key indicators of inflation are housing in oil. Oil
2:34
Speaker 1: has come down seventeen percent since the financial crisis started,
2:38
Speaker 1: the bank runs started. And what I don't think the
2:41
Speaker 1: FED appreciates, which is strange because they have research papers
2:44
Speaker 1: that demonstrate this. There's a five percent bleed through of
2:48
Speaker 1: energy prices the core. In fact, if you look in
2:51
Speaker 1: the seventies and draw a line where the two gigantic
2:54
Speaker 1: increases occurred, so two hundred and one fifty core went
2:57
Speaker 1: up shot up within three or four months. So this
3:01
Speaker 1: is not this research paper just proved it, you know,
3:05
Speaker 1: through through econometric models, but you can see it in
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Speaker 1: the data. So now we have a significant deflation CPI
3:13
Speaker 1: dash R as dropping at a two percent annual rate.
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Speaker 1: And now if you layer in this depreciation in oil,
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Speaker 1: we're headed for a pretty significant deflation. I mean, essentially
3:24
Speaker 1: we're in deflation right now. It's just not going to
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Speaker 1: show up in the indices for a year because they're
3:28
Speaker 1: lagged by a year. So, you know, do you think
3:32
Speaker 1: this banking situation here in the US, this run on
3:35
Speaker 1: these handful of banks will prompt the FED or should
3:38
Speaker 1: it prompt the Fed the pause here? If not, maybe
3:40
Speaker 1: being absolutely pause that's what they should. Well, they should
3:43
Speaker 1: really cut right, but they are behind every Almost every
3:47
Speaker 1: market participant would agree they're behind the curve. So the
3:51
Speaker 1: best case is probably that they pause. They definitely should
3:54
Speaker 1: not raise rates. That would be a disaster. And again
3:57
Speaker 1: they're in a much different situation where they are already
4:00
Speaker 1: raised much higher and we have a bigger inversion than
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Speaker 1: they do in Europe. Jay, one of the common piece
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Speaker 1: of commentary that came out of I believe Nomura off
4:09
Speaker 1: the Fed FDIC move this past weekend was that's essentially
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Speaker 1: stimulative and you might then see the Fed end quantity
4:17
Speaker 1: of tightening as a result. Do you view this kind
4:20
Speaker 1: of banking fallout and what has the pre FED has
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Speaker 1: been prompted to do as stimulative. Well, in the long run,
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Speaker 1: it will be stimulative. And that's one reason that we
4:30
Speaker 1: were saying before this banking crisis that the market would
4:34
Speaker 1: be weak during this period and that we would be
4:36
Speaker 1: in thirty eight hundred to forty two hundred. That's without
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Speaker 1: a banking crisis. So the fact that that range is
4:42
Speaker 1: still working is remarkable. But there's a simple reason for it.
4:46
Speaker 1: Long term rates are plummeting, and it's not actually true,
4:50
Speaker 1: but everybody trades tech stocks like they have a longer duration.
4:53
Speaker 1: They actually don't, but they still trade it that way.
4:55
Speaker 1: They're all all publicly traded companies roughly have twenty two
4:59
Speaker 1: year durations. But they're also a safe haven. They don't
5:02
Speaker 1: borrow money, they have tremendous cash reserves, and they're very
5:06
Speaker 1: powerful companies, so they're being used as safe haven there
5:11
Speaker 1: dominate the market. So if you look, there's there's an
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Speaker 1: enormous rotation into large cap tech safety and out of
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Speaker 1: things that are related to financials, including rates, which is
5:23
Speaker 1: irrational because rates are dropping. That's good for them. They're
5:25
Speaker 1: well capitalized, so that's why the market's not crashing, But
5:29
Speaker 1: underneath it, it really is crashing. Like if you look
5:32
Speaker 1: at the regional banks for obviously, from your perspective, what
5:36
Speaker 1: are we seeing with these regional banks, the svbs, the
5:40
Speaker 1: maybe even the FRC today the signature bank are these
5:43
Speaker 1: one offs or they have a systemic background to them.
5:48
Speaker 1: Do you think, well, I think it's it's not fully
5:50
Speaker 1: systemic because as I mentioned, money center banks and superregionals
5:54
Speaker 1: are going to benefit, and that's the dominant portion of
5:57
Speaker 1: the banking system. But and this is going to be
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Speaker 1: an issue for politicians hopefully, is that their banks are
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Speaker 1: getting crushed, so the community banks and the regular regional banks.
6:08
Speaker 1: Because if you think about a CFO, so there's sort
6:12
Speaker 1: of an implicit guarantee, but it's kind of like the
6:14
Speaker 1: commercial sort of is not good enough. So if you're
6:17
Speaker 1: CFO and a bank, I'll mention any names certain bank closes,
6:23
Speaker 1: like my CFO call and say hey, should we move
6:25
Speaker 1: all of our reserves? Because you have to make that
6:27
Speaker 1: call because you're going to be fired if you said, oh, yeah,
6:30
Speaker 1: I know, Silicon Valley Bank happened, but we thought that
6:33
Speaker 1: the FTI C would step in and they decided not
6:35
Speaker 1: to for political reasons. You're fired. So you have to
6:38
Speaker 1: move your reserves, your checking spread it out, and you're
6:43
Speaker 1: going to move it to super You probably don't want
6:45
Speaker 1: fifty or five hundred accounts, so you're going to move
6:47
Speaker 1: it to money center bank, where then you're not going
6:49
Speaker 1: to get fired, Like if city groups goes bankrupt, you're
6:52
Speaker 1: not gonna get fired. So there's going to be an
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Speaker 1: ongoing run on small banks. It's a huge problem because
6:58
Speaker 1: they're going to become unprofit. They're going to get downgraded
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Speaker 1: by the rating age whis which that precipitated Silicon Valley's demise,
7:07
Speaker 1: along with the worst equity offering ever executed in human history.
7:12
Speaker 1: I don't I'm certain there's never been an equity offering
7:15
Speaker 1: that resulted in bankruptcy, right, Like, you don't need to
7:17
Speaker 1: do a post meeting to see if that was a
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Speaker 1: good That sounds like a Morgan Stanley bank are pitching
7:21
Speaker 1: against think any on any particular firms. But that is
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Speaker 1: the worst equity offering in the history of human quick
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Speaker 1: question here, and forgive my ignorance on this. That doesn't
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Speaker 1: necessarily seem like a new concept here naturally that if
7:36
Speaker 1: you want, the bigger banks are going to be safer
7:38
Speaker 1: because essentially they're too big to fail, especially since oh wait,
7:41
Speaker 1: why did a lot of folks invest in these smaller banks? Anyway?
7:44
Speaker 1: Was the incentive there? Well? I think that there's also
7:47
Speaker 1: too much heat being put on the san Francisco fed
7:50
Speaker 1: because no stress test ever said you're going to lose
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Speaker 1: all of your deposits in twenty four hours. Yeah, there's
7:56
Speaker 1: never been a situation like that. Even like during the
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Speaker 1: financial crisis, we did guarantee the deposits, so we created
8:02
Speaker 1: a system. By accident, we're having this two hundred and
8:05
Speaker 1: fifty limit, which is never hasn't been increased, and there
8:07
Speaker 1: have been bills to increase. It really created a tinderbox
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Speaker 1: that exploded. It's just like mortgage the mortgage market. There's
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Speaker 1: always something that hasn't been addressed that a two rapid
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Speaker 1: fed tightening cycle will expose. And there's been like ten
8:24
Speaker 1: of them, even in my career. You know, if you
8:26
Speaker 1: think about junk bond crisis, SNL crisis, commercial real estate
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Speaker 1: crisis in the early eighties, there's always oh tech tech
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Speaker 1: crash after that tightening cycle. So this is just the
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Speaker 1: flaw that should have been fixed. Should have guaranteed all deposits.
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Speaker 1: It won't even cost so much because you get a
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Speaker 1: low you can have a lower rate on more deposits.
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Speaker 1: So you know, would it would hurt the money center
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Speaker 1: banks and it would benefit the regional banks. All right,
8:52
Speaker 1: So what do you what what what? What do you
8:55
Speaker 1: think folks should be doing in the market today. There's
8:57
Speaker 1: a lot of cross currents here with the FED, um
9:00
Speaker 1: with this banking crisis, if you will, is this just
9:04
Speaker 1: stay on the sidelines here, because I'm looking at the
9:06
Speaker 1: market here and it's kind of hanging in there. Yeah,
9:08
Speaker 1: so that's the rotation going on. So I'm sure we'll
9:11
Speaker 1: have the SNPF, but I'm sure the tech stocks are
9:14
Speaker 1: starting to rip an offset the bit here. Yeah, right,
9:17
Speaker 1: So I do think that ultimately this is bullish because
9:21
Speaker 1: assuming the FED, but I would wait to have the
9:23
Speaker 1: FED pause, not raise rate, and hopefully good commentary about
9:28
Speaker 1: even being willing to cut, and then that will take
9:31
Speaker 1: the key the key overhang on the market, which I've
9:33
Speaker 1: said before on your shows, is that as the FED
9:38
Speaker 1: because they were just completely out to lunch and thought
9:40
Speaker 1: it was fine to raise rates at this unprecedented level.
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Speaker 1: So now because the FED regulates banks, they can't ignore it.
9:47
Speaker 1: You know, they're getting the calls from the FDC, they're
9:49
Speaker 1: getting the calls from Congress, and so it's not like
9:52
Speaker 1: CSFB that none of our you know, our politicians, so
9:56
Speaker 1: they have to focus on this and presumably they will
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Speaker 1: consider rate increases there won't be at their normal level
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Speaker 1: of being behind by about twelve months. They can't afford
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Speaker 1: to be behind twelve months here, they have to cut
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Speaker 1: rates more quicker than that. Well, doesn't that factor in
10:12
Speaker 1: things like any of the retail data, any of the
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Speaker 1: Chinese story, any of the eco stuff that we I
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Speaker 1: feel like have been paying attention to as these tailwinds
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Speaker 1: for inflation in the face of this banking fallout. Does
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Speaker 1: the rest matter? Not really? No, That's why it's important
10:29
Speaker 1: to focus on those two elements that drove inflation. I'm
10:32
Speaker 1: talking high inflation by way, not one versus two versus three. Yeah,
10:36
Speaker 1: is housing core and energy is only six and keeping
10:41
Speaker 1: my natural gas presents during an eighty percent in the
10:45
Speaker 1: last four months, highly deflationary. But every business the United
10:48
Speaker 1: States uses energy, and so that's the key supply shock.
10:54
Speaker 1: It's not necessarily the ports or chips. I mean, chips
10:58
Speaker 1: was a problem because you can't build cars. But those
11:01
Speaker 1: are the key drivers. And you should look at oil.
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Speaker 1: It's both an indicator of inflation and it's also an
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Speaker 1: indicator of the potential for a global recession. Jay, we
11:10
Speaker 1: can't let you go without getting kind of your thoughts
11:13
Speaker 1: on energy right here, I see WTI crude oil down again. Today,
11:16
Speaker 1: we're sixty six dollars at barrel. What's kind of next
11:19
Speaker 1: twelve eighteen months? What are you looking for an energy space? Well,
11:23
Speaker 1: before the financial crisis, we were at seventy five to
11:26
Speaker 1: ninety five on WTI. Because you do have a recovery
11:30
Speaker 1: in China, you do have a pretty robust US economy,
11:35
Speaker 1: which is shocking, but it's because of the pandemic, and
11:38
Speaker 1: you still do have an energy crisis or at least
11:40
Speaker 1: an energy deficit in Europe. So those are all supportive factors.
11:43
Speaker 1: But investors treat oil as a risk asset, and this
11:48
Speaker 1: is a risk off environment. So you're going to crash
11:50
Speaker 1: bullet well below our level, and so it's all bets
11:54
Speaker 1: are off until we get clarity on the FED and
11:57
Speaker 1: possibly maybe a guarantee of all deposits. I mean, that's
12:00
Speaker 1: going to be hard to get through Congress, but that's
12:02
Speaker 1: what's needed, all right, Jake, great stuff, Really appreciate it
12:05
Speaker 1: as always. Jay Haffield, CEO, founder and portfolio mentor Infrastructure
12:09
Speaker 1: Capital Visors, joining us live here in our Bloomberg Interactive
12:12
Speaker 1: Brokers studio. All right, Let's get back over to Europe
12:20
Speaker 1: a little bit, get a sense of kind of what
12:21
Speaker 1: the feeling is here with the ECB with Credit Swiss.
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Speaker 1: We could do that with doctor Vanya Straviakva, Professor of
12:28
Speaker 1: economics at the London Business School. Doctor, thanks so much
12:32
Speaker 1: for joining us here. Let's start with the European Central Bank.
12:36
Speaker 1: They came out with a fifty basis point increase given
12:39
Speaker 1: all that's going on over there with the banking situation
12:42
Speaker 1: and namely Credit Swiss. Do you think that was a mistake.
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Speaker 1: Should they have paused or maybe just raised the rate
12:49
Speaker 1: twenty five basis points? What do you think? So? Thank
12:52
Speaker 1: you so much for having me. It's a pleasure to
12:54
Speaker 1: be here. I think actually they did the right thing.
12:56
Speaker 1: Given the numbers for inflation. They have to establish credibility
12:59
Speaker 1: at this point, and I think the main concern in
13:02
Speaker 1: Europe right now is to get inflation under control. I'm
13:04
Speaker 1: less worried about solvency issues with the banks in Europe
13:08
Speaker 1: at this point, and I think they're probably thinking the
13:11
Speaker 1: same way. Of course, they will be liquidity issues on
13:14
Speaker 1: the horizon, which is what we're seeing with Credit Swist
13:16
Speaker 1: potentially at a banks, but they're ready to provide a backstop.
13:19
Speaker 1: For example, the Swiss National bandit the same for creditswis is.
13:23
Speaker 1: Of course we can do that for the Eurozone banks.
13:26
Speaker 1: So I think treating it at the moment as a
13:27
Speaker 1: liquidity rud and a solvency crisis is the right approach.
13:31
Speaker 1: Regulation is quite strict, especially for the large banks in Europe,
13:35
Speaker 1: so credit Swiss is very well regulated. For example, you
13:38
Speaker 1: know the one correcting that was done by Switzerland, and
13:42
Speaker 1: also the UK was ring fencing the retail banking of
13:45
Speaker 1: the large banks. So both the UK and Switzer one
13:47
Speaker 1: realize after the global financial crisis that these countries do
13:50
Speaker 1: not have the physical capacity to bail out their massive banks,
13:53
Speaker 1: so ring fencing the retail bank, which is essential for
13:56
Speaker 1: the functioning of the economy, essentially is giving them the
13:59
Speaker 1: freedom to not worry too much about having to put
14:02
Speaker 1: in massive bailouts. And then liquidity can be dealt with
14:05
Speaker 1: in many ways, such as providing loans against the phase
14:09
Speaker 1: value of the collateral, which is what the FEDS started doing,
14:12
Speaker 1: so that they don't have to worry about the decrease
14:14
Speaker 1: in the evaluations of long term government that Professor, I'm
14:20
Speaker 1: curious about the timeline here, it feels like the banking
14:23
Speaker 1: fallout to your point two pause point as well, has
14:27
Speaker 1: kind of thrown the idea of the energy crisis, this
14:31
Speaker 1: kind of multi year recession we were expecting in the
14:33
Speaker 1: UK out the window. To what extent are those still
14:37
Speaker 1: the factors that the BOE and the ECB have be
14:40
Speaker 1: watching well. So the problems in the UK area are
14:44
Speaker 1: separate because they have to deal with the consequences of
14:46
Speaker 1: Brexit as well mismanagement of the economy for many, many years, sadly,
14:50
Speaker 1: so we are seeing that in the news. The public
14:53
Speaker 1: sector is collapsing in the UK. We are seeing strikes
14:57
Speaker 1: daily in the news. So those issues are not going away,
15:01
Speaker 1: those structural issues that governments will have to deal with.
15:04
Speaker 1: But getting inflation under control is absolutely crucial because if
15:07
Speaker 1: we think that high interest rates are a problem for
15:09
Speaker 1: the banking sector, imagine having high interest rates for a
15:12
Speaker 1: very long period of time because we cannot get inflation
15:15
Speaker 1: under control, Potentially the problems will be even more severe,
15:18
Speaker 1: particularly for the mortgages of course, so Europe and the
15:22
Speaker 1: UK the majority of the mortgages of floating rate mortgages,
15:24
Speaker 1: and that's where the real problem will be because a
15:28
Speaker 1: lot of the borrowers might not be able to soon
15:30
Speaker 1: start repay their mortgages and that will generate a recession
15:33
Speaker 1: down the road. So the longer the high interest rates remain,
15:37
Speaker 1: which they will if we don't get inflation under control,
15:39
Speaker 1: the bigger the cost on anyone that has a mortgage
15:43
Speaker 1: in Europe and the UK, and that's where the real
15:45
Speaker 1: recession is going to come. We're getting a little bit
15:49
Speaker 1: of news. I just want to announce to our international
15:52
Speaker 1: audience here JP Morgan and Morgan Stanley in tax to
15:55
Speaker 1: bolster First Republic. This of course was the next bank
15:58
Speaker 1: that was expected to kind of get down with signature
16:00
Speaker 1: with Silicon Valley Bank. This is according to reports from
16:03
Speaker 1: the Wall Street Journal. You are seeing farc those shares
16:05
Speaker 1: up hair some of those losses still down twenty six percent,
16:08
Speaker 1: but certainly off the lows of down about thirty percent.
16:11
Speaker 1: Professor Vannia, I want to bring you back in here,
16:13
Speaker 1: not to talk about First Republic, but perhaps a similar
16:16
Speaker 1: situation with Credit Suis as well. Do the woes and
16:20
Speaker 1: the European baking sector go away if someone takes over
16:24
Speaker 1: parts of Credit Suis well? So the problem with Great
16:29
Speaker 1: Swiss is effectively, they could never gain their footing after
16:32
Speaker 1: the global financial crisis. They couldn't figure out what type
16:34
Speaker 1: of bank they will be in the sense that they
16:36
Speaker 1: were a massive bank. The asset management division and the
16:40
Speaker 1: wealth management divisions who are a big part of the bank, however,
16:42
Speaker 1: they're not competitive. The fees that they were charging couldn't
16:45
Speaker 1: compete with the black Rocks and the vanguards of the world,
16:47
Speaker 1: and essentially the decreasing fees due to the advancement of ETFs.
16:52
Speaker 1: So I think that's a structural problem. So more generally,
16:55
Speaker 1: people compare this stampede of depositors from banks now to
16:58
Speaker 1: a classic bank run. I think that's not correct. So
17:01
Speaker 1: the fundamental problem here is not about having deposit insurance
17:04
Speaker 1: that's not credible or insufficient deposits insurance, as governments are
17:08
Speaker 1: clearly willing to bank depositors in full, as the FAT
17:10
Speaker 1: has shown. It's about final investors waking up and realizing
17:14
Speaker 1: their alternatives to bank deposits that can give them both
17:17
Speaker 1: liquidity and much high return. The banking sector will have
17:20
Speaker 1: to shrink, so Credit Suite has been experiencing that true
17:23
Speaker 1: the ass management division, but this will be true for
17:26
Speaker 1: your standard depositors as well, because many banks will not
17:29
Speaker 1: be able to afford to off a high interest rates
17:31
Speaker 1: on depositors, right, So this is because on their assets
17:34
Speaker 1: then they will not be able to make the interest
17:36
Speaker 1: rates that depositors can make just by purchasing the government data.
17:40
Speaker 1: This point, I think that's the big problem, and the
17:42
Speaker 1: trend of bank disintermediation had already started, and the rate hikes,
17:47
Speaker 1: together with the SVB collapse and the negative news around
17:51
Speaker 1: credit suites, are just precipitating the adjustment. Yes, there'll be
17:54
Speaker 1: some casualties along the way, but the old bank business
17:56
Speaker 1: model is simply not sustainable in the new environment where
18:00
Speaker 1: even small retail investors can open a bangered account overnight
18:02
Speaker 1: and investing government data bays post to phrase. So now
18:06
Speaker 1: to be honest, yeah, no, go ahead, professor. What I'm
18:09
Speaker 1: particularly concerned about, and I don't hear being spoken about
18:13
Speaker 1: enough in the news, is essentially there is someone on
18:16
Speaker 1: the other end of these interest rate hedges. So the
18:19
Speaker 1: interest rate indurvatives market is the most liquid market in
18:21
Speaker 1: the world essentially, So presumably a lot of financial institutions
18:25
Speaker 1: and banks are hedge induration risk, But who is providing
18:28
Speaker 1: this hedge. So we know that this ended a very
18:30
Speaker 1: badly for AG in two thousand and eight because there
18:33
Speaker 1: were the sealers of insurance for the mortgage back securities.
18:37
Speaker 1: If the risk is concentrated and there are a few
18:39
Speaker 1: entities actually providing the interest rate essentially hedge, then I
18:44
Speaker 1: think this will be the casualties this time. We don't
18:47
Speaker 1: know yet where the risk is concentrated, which is a
18:48
Speaker 1: big problem I think regulators. Okay, so professor, just kind
18:52
Speaker 1: of getting back to the ECB here, I mean the risk.
18:56
Speaker 1: You know, we've heard a lot of folks say, hey,
18:57
Speaker 1: the ECB is making a stake here. They need the
19:01
Speaker 1: pause if they're not necessarily just for the credit Swiss reason,
19:06
Speaker 1: but for some of the reasons you outlined about you know,
19:08
Speaker 1: there's some real stresses out there in the economy, and
19:11
Speaker 1: then the ECB really risk breaking the European economy and
19:14
Speaker 1: pushing into a deep recession. How viable are those risks
19:19
Speaker 1: do you think? Well, it is true that people arguing
19:23
Speaker 1: that they might be going at a pace that is
19:25
Speaker 1: too fast, I think they are doing the right thing
19:28
Speaker 1: to defend their credibility and whatever the issues there might
19:30
Speaker 1: be with the financial sector which I don't. I do
19:33
Speaker 1: believe they will be issues. As we discussed, they can
19:35
Speaker 1: handle them in different ways, so they have a lot
19:37
Speaker 1: of macropotential tools. It's not just the interest rates that
19:40
Speaker 1: they can employ in order to handle any staguties in
19:43
Speaker 1: the financial sector. And it's almost like time to give
19:45
Speaker 1: the patient the essentially the medicine it needs, because the
19:50
Speaker 1: longer we postpone normalization going back to normal interest rates,
19:54
Speaker 1: these adjustments has to take place at some point. Okay,
19:58
Speaker 1: all right, you just have to leave it there, doctor
20:00
Speaker 1: doctor Vannier strev Stravia Kava, Professor of Economics of the
20:04
Speaker 1: London School of Business. We really appreciate getting her time.
20:06
Speaker 1: She's got some cutting edge research on the banking sector
20:10
Speaker 1: and it's just absolutely at the forefront here as the
20:13
Speaker 1: European regulators and the Swiss regulators look at you know,
20:17
Speaker 1: look at credit Swiss and what to do there. All right,
20:22
Speaker 1: let's get back to the story that just broke over
20:23
Speaker 1: the last few minutes of Wall Street Journal reporting JP Morgan,
20:26
Speaker 1: Morgan Stanley and others in talks to aid First Republic.
20:31
Speaker 1: I mean, this is so obvious. I can't imagine these
20:33
Speaker 1: bankers are actually gonna get paid this investment backers. You're
20:35
Speaker 1: putting this deal to together. I could do this, but
20:38
Speaker 1: let's bring in some of our banking experts, Herman Chang
20:41
Speaker 1: and Arnod cale Kuda. Arnold covers the credit side and
20:44
Speaker 1: Herman kind of more on the equity side. For so
20:46
Speaker 1: we got you covered when it comes to these banks.
20:50
Speaker 1: Herman to me, what do you make of this news?
20:53
Speaker 1: It kind of makes complete sense to me. This isn't
20:55
Speaker 1: I would think. And either if they're gonna put capital
20:58
Speaker 1: in or outright buy parts are all of that seems
21:02
Speaker 1: like an easy deal to do. Yeah, I think so.
21:06
Speaker 1: We still think our First Republic is a really strong
21:09
Speaker 1: franchise with a lot of wealth and managements assets that
21:12
Speaker 1: are attractive to a potential buyer. And really it's been
21:16
Speaker 1: sucking into the vortex with some of the uncertainty that
21:19
Speaker 1: that proliferated with SVB and Signature. But the capitol infusion
21:25
Speaker 1: news is definitely great news for the bank and management.
21:28
Speaker 1: So we're looking to hear more on that front. All right, Arnold,
21:31
Speaker 1: come on in here. We just had Alison Williams on
21:34
Speaker 1: in the last hour we're talking about this deal, and
21:37
Speaker 1: she said, look, this isn't an acquisition. This is a lifeline,
21:39
Speaker 1: a lifeline that might not help the stock and bond investors. Well,
21:43
Speaker 1: is it gonna help the bond investors at all? Do
21:45
Speaker 1: they care? Well? I mean in terms of them. You know,
21:48
Speaker 1: we had some big downgrade yesterday from like a you know,
21:51
Speaker 1: A minus triple plus two you know, high yield. Yeah,
21:54
Speaker 1: big deal. But but they only had an eight hundred
21:56
Speaker 1: million of bonds. This is what this we call fallen
21:59
Speaker 1: angel Yeah, but I mean relatively speaking, it's it's it's
22:02
Speaker 1: pretty small, and they have about like three and a
22:03
Speaker 1: half billion I preferred, So I think the risk is
22:07
Speaker 1: contained for a lot of the investors. But definitely, Um,
22:09
Speaker 1: you know, markets moving on all these defaults happening really
22:12
Speaker 1: rapidly Credit Swiss. But um, you know, like you guys
22:15
Speaker 1: have been talking about, this is a great franchise, but
22:17
Speaker 1: I think, you know, the headlines can be sleading in
22:20
Speaker 1: the sense of, you know, the crown jewel here is
22:22
Speaker 1: this wealth manager's business and so and from that aspect,
22:26
Speaker 1: you know, even the JP Morgan who's kind of prohibited
22:29
Speaker 1: from buying any deposit franchises, they can kind of look
22:32
Speaker 1: at the wealth franchise and say, hey, you know, Morge Stanley,
22:36
Speaker 1: that's the crown jewel you you cannot acquire, you know,
22:38
Speaker 1: wealth managing assets so um and and that you know,
22:42
Speaker 1: wealth managing assets you know, um kind of spit off
22:45
Speaker 1: fees and and that kind of stable business is great
22:48
Speaker 1: that anybody would love to have. We did have some
22:51
Speaker 1: or we're seeing some credit downgrades, Arnold. If I'm Moody's
22:54
Speaker 1: or Fitch or whatever, it is one of the two
22:57
Speaker 1: or three metrics I really look at when I think
23:00
Speaker 1: about moving my rating. Yeah, so I think, you know,
23:03
Speaker 1: looking at kind of what has transpired and the risks
23:07
Speaker 1: of uninsured deposits possibly flowing out, and based on kind
23:13
Speaker 1: of the fears that are out there, right, I think
23:15
Speaker 1: that that's what why they made these moves. I guess
23:17
Speaker 1: premptively for for um, for republic, given kind of all
23:21
Speaker 1: the headlines out there. Um, you know, I think looking
23:25
Speaker 1: at the stock reactions and people, you know, see the
23:28
Speaker 1: uncertainty of you know, what happened with the uninsured deposits
23:31
Speaker 1: of Silicon Valley Bank on Friday and Monday, right, you know,
23:35
Speaker 1: a lot of the damage may have already been done
23:37
Speaker 1: at this point. And so that's why when you see
23:39
Speaker 1: these news things about like oh, we tapped extra liquidity
23:42
Speaker 1: from the Fed FDIC O JP Morgan's extending US credit line.
23:47
Speaker 1: It's like, oh, oh my god. You know it's it's
23:50
Speaker 1: that whole thing of like, why are you saying that
23:51
Speaker 1: if there isn't a problem? Right? So well, Hermann hop
23:54
Speaker 1: back on in here, because we're talking about First Republic
23:56
Speaker 1: obviously in this capital infusion, but another that is trading
24:00
Speaker 1: the stock in terms of his trading tick by tick
24:02
Speaker 1: is Western Alliance w AL Folks is the ticker there.
24:06
Speaker 1: This is the company that recently got a five point
24:08
Speaker 1: three percent stake from Ken Griffin of Citadel. Now we
24:11
Speaker 1: know which in its own ways its own capital infusion.
24:15
Speaker 1: What kind of numbers are we looking at here? I mean,
24:18
Speaker 1: Alison was very careful about saying, look, First Republic is
24:21
Speaker 1: not being acquired yet, right, will it be? Are we
24:25
Speaker 1: looking for a potential stake still or is this kind
24:27
Speaker 1: of lifeline going to be enough? Yeah, that's that's a
24:30
Speaker 1: millionailar question at this point. Does the stake by potentially
24:35
Speaker 1: JP Morgan and Morgan Stanley stabilize the market fears and
24:40
Speaker 1: stabilize the deposit outflow If those two things happen, then
24:45
Speaker 1: you know that that would be great news in terms
24:47
Speaker 1: of Western Alliance. It's another bank that operates in the
24:51
Speaker 1: western part of the United States, and they have branches
24:55
Speaker 1: in California and Arizona and Nevada and does have some
25:00
Speaker 1: exposure to the venture and start up community, but it's
25:03
Speaker 1: very small relative to what SBB did, which is the
25:08
Speaker 1: entirety of their business. So they are unfortunately lumped into
25:11
Speaker 1: the same situation and not having some of the duration
25:16
Speaker 1: risk that the SVB had, So there's unfortunately they get
25:20
Speaker 1: thrown into the mix. All right, I'm gonna throw this
25:22
Speaker 1: out for either of you, two or both of you,
25:24
Speaker 1: whatever you want to do. I could care less all
25:26
Speaker 1: I want to because I'm trying to figure out, and
25:28
Speaker 1: I think a lot of investors are trying to figure out,
25:30
Speaker 1: how systemic is this bank issue. We're all still scarred
25:34
Speaker 1: from two thousand and eight when everybody got pulled into it.
25:38
Speaker 1: When the FED races rates by like five hundred bases
25:42
Speaker 1: points within a year, what does that mean for a bank? Sure?
25:47
Speaker 1: What's it mean for a bank is that some things
25:50
Speaker 1: get caught off sides. They weren't expecting such a rapid
25:53
Speaker 1: rising rates and they get caught off side. Doesn't mean
25:55
Speaker 1: you get caught off side. You purchase securities or you
25:59
Speaker 1: do loan at a very low rate environment and aggressively.
26:04
Speaker 1: And when rates rise, the value of those assets decline.
26:09
Speaker 1: And when there's a loss in confidence in a bank,
26:12
Speaker 1: that can just spur a lot of uncertainty the market,
26:15
Speaker 1: you know, the share price come declines. And that's really
26:17
Speaker 1: essentially what happened with SVB. All right, we'll hop back
26:20
Speaker 1: on in here, Arnold, and and talk to us a
26:23
Speaker 1: little bit about where we go from here. I mean
26:25
Speaker 1: you already mentioned that we have seen this wave of downgrades. Uh,
26:29
Speaker 1: these wave of kind of distress for some of these banks.
26:33
Speaker 1: Are you seeing the show up and say the hedges
26:35
Speaker 1: or the insurance the CDSS against some of these banks. Well,
26:38
Speaker 1: I mean I think, um, we've seen spreads widen first
26:41
Speaker 1: on this SVP and then Kretswiss you know a lot
26:44
Speaker 1: lot more and yeah, and you know, one metric we
26:46
Speaker 1: look at kind of in the corporate bond spaces, you know,
26:48
Speaker 1: the financials, how do they trade versus the overall overate
26:51
Speaker 1: bond index? And um, you know they had wind out
26:54
Speaker 1: in twenty twenty two until October and then we rally
26:57
Speaker 1: back almost a flat and then obviously not now they're
27:00
Speaker 1: training about twenty five wider again. But I think it's
27:02
Speaker 1: going to be tough for the financials to kind of
27:05
Speaker 1: kind of regain that, you know, unless the markets really
27:07
Speaker 1: calm down. I think it's gonna be tough, you know,
27:10
Speaker 1: for the financials to kind of tighten back up again
27:12
Speaker 1: compared to the role index, given kind of the default risk,
27:15
Speaker 1: which is real. Yeah, so we were talking about systemic
27:18
Speaker 1: risk broadly, but let's talk about the bond space specifically
27:21
Speaker 1: in terms of contagion, in terms of trading and sympathy.
27:24
Speaker 1: Are you seeing the credit Swiss situation bleed into kind
27:28
Speaker 1: of the regional bank situation because in my mind they're
27:31
Speaker 1: two separate issues. Yeah, no, I agree with that. Um So,
27:36
Speaker 1: you know, with the regional banks stuff, I think, you know,
27:38
Speaker 1: for the select regional banks that are having issues, um,
27:41
Speaker 1: you know, it was like, okay, maybe the bigger US banks,
27:44
Speaker 1: the biggest US banks like the JPMS ba AS, that's
27:47
Speaker 1: kind of like a safe heaven. But then when you
27:48
Speaker 1: deal with Credit Swiss and kind of the interconnectedness to
27:51
Speaker 1: the counterparties and all this and that then it's like okay, well,
27:54
Speaker 1: well then the bigger banks are kind of more exposed
27:56
Speaker 1: to that, although we haven't really seen it in the
27:58
Speaker 1: pricing yet, you know, something were to happen, I think
28:02
Speaker 1: you know, that's where you're going to be like, hmm,
28:04
Speaker 1: you know, who has kind of the most ties to
28:06
Speaker 1: kind of a you know, global systemically for an entity,
28:09
Speaker 1: It might be the trading desks and they might be
28:11
Speaker 1: coutaparts here and there, although at least Credit Swiss, you know,
28:14
Speaker 1: they had been kind of shrinking their trading portago platform, right, so, um,
28:18
Speaker 1: maybe the risks are more contain there. But but if anything,
28:21
Speaker 1: you know, you got to look at start looking at
28:23
Speaker 1: the biggest banks again in terms of kind of the
28:24
Speaker 1: systemic contagion risks from the Credit Swiss and on the
28:27
Speaker 1: regional side, the contagion and the systemic risk and the
28:31
Speaker 1: interconnectitivity really isn't there, So so that risk should be
28:34
Speaker 1: off the table on the regional bank side. So herman
28:37
Speaker 1: on the regional bank side, if I were an annals
28:39
Speaker 1: and I know about you know, fifteen minutes of experience
28:42
Speaker 1: in this um, what percentage of a bank's deposits are
28:48
Speaker 1: enshort on average? Yeah, it really runs the gamut um.
28:51
Speaker 1: So for I could just screen on that, right, Yeah,
28:53
Speaker 1: you can. You can screen on that. You have to
28:55
Speaker 1: dig deep into the regular portory filings, but you could
28:57
Speaker 1: theoretically do it. Because I know you're a smart person.
29:01
Speaker 1: I would say that it runs a gamut SBB was
29:04
Speaker 1: about five percent, signature was about ten percent. You want
29:08
Speaker 1: as an investor, I want as higher percentage as positive, correct,
29:11
Speaker 1: because I would both because they had these big deposits,
29:14
Speaker 1: well above to a big commercial deposits. Okay, and you
29:17
Speaker 1: want fifteen minutes, I got ten together. It's twenty five exactly.
29:23
Speaker 1: So you want them high. Your former employer, M ANDT Bank,
29:28
Speaker 1: what was their insured deposit? It's more about the fifty
29:31
Speaker 1: percent or around that level. Yep. See, that's what I'm
29:34
Speaker 1: looking forward to see. Why can't I just screen on that.
29:36
Speaker 1: I'm sure I can on the Bloomberg terminal and I
29:38
Speaker 1: buy the good ones and I sell the bad ones.
29:41
Speaker 1: That sounds like a very good idea. But I presume
29:44
Speaker 1: that if with Silicon Valley Bank, I'm willing to take
29:47
Speaker 1: that deposit risk. I just called it deposit risk. I
29:49
Speaker 1: don't know what you guys call it. Why do I
29:51
Speaker 1: take that deposit risk because you were not expecting a
29:56
Speaker 1: deposit flight, because you know, a week ago the strength
30:01
Speaker 1: of the institution was the venture capital relationships and the
30:05
Speaker 1: startup relationships. That became a weakness when there was a
30:08
Speaker 1: loss in confidence. Boy, I could now be a bank's analyst.
30:13
Speaker 1: I think I've learned so much. Paul Sweeney here with
30:18
Speaker 1: Pretty Gupta Matt Miller out Today we've been focusing on
30:23
Speaker 1: testimony from Secretary General Secretary of the Treasury Jennet Yellen.
30:27
Speaker 1: She is testifying in front of Congress. We started off
30:29
Speaker 1: the day with some news out of the European Central
30:32
Speaker 1: Bank raising the benchmark rate by fifty basis points, and
30:35
Speaker 1: there were calls for maybe a pause, maybe just a
30:38
Speaker 1: twenty five twenty five basis point increase, if for no
30:41
Speaker 1: other reason than to just cool the market's given some
30:44
Speaker 1: of the turmoil we've seen in there with the banking sector.
30:46
Speaker 1: Let's go back to Europe and get a sense of
30:48
Speaker 1: kind of how the market's dealing with it today. Marianne Squadell,
30:51
Speaker 1: founder of Bougeville Consulting, joins us. Marianne, I'd love to
30:54
Speaker 1: get your thoughts, so kind of what you believe or
30:57
Speaker 1: kind of your takeaways from Steam regards fifty basis point
31:01
Speaker 1: move at the ECB. Yes, well, you know, I've been reading.
31:05
Speaker 1: I used to work as a regulator a very long
31:07
Speaker 1: time ago, and what I'm hearing from my previous colleagues
31:10
Speaker 1: is that the regulators are quite confident that the banking
31:13
Speaker 1: sector is a little bit stronger in Europe because I
31:16
Speaker 1: didn't realize the rules, you know, on a mid sized landers.
31:20
Speaker 1: So in the stress test, they're confident that they're strong enough.
31:24
Speaker 1: And so I think there's there's this sense in Europe
31:27
Speaker 1: at the moment. I think that's what that's might take
31:31
Speaker 1: on it. Obviously nobody knows what's going to happen, and
31:34
Speaker 1: it's obviously a question of confidence at this stage. So
31:38
Speaker 1: you know, the backdrop of some concerns, obviously a major
31:42
Speaker 1: concerns a credit Swiss. How do you think that played
31:44
Speaker 1: into the ECB's decision here, because there are a lot
31:48
Speaker 1: of people saying, boy, if you take a look at
31:49
Speaker 1: some of the potential wider risk from continued challenges a
31:54
Speaker 1: credit Swiss, that in and of itself might suggest that
31:57
Speaker 1: they pause. So I don't know, but you know, in
32:00
Speaker 1: the UK we still have this memory of like there
32:03
Speaker 1: was even before the financial the financial crisis in two
32:06
Speaker 1: thousand and seven, there was a run on a bank
32:08
Speaker 1: which I'm don't know in the US if you heard
32:10
Speaker 1: much about it. It was Northern Rocket was a big
32:12
Speaker 1: lander and we saw in the streets of London people
32:15
Speaker 1: lining up to get their money back, and that was
32:18
Speaker 1: something major. So the governments in the UK, in the
32:22
Speaker 1: European Union, it's maybe a bit different, but in the UK,
32:25
Speaker 1: which at the time was part of the European Union obviously,
32:28
Speaker 1: So in the UK, you know, the government worked throughout
32:33
Speaker 1: the weekend. There's HSBC that bought SVB for one pound
32:40
Speaker 1: and I have a friend who invest in a startup.
32:45
Speaker 1: The startup decided to stay a client of SVB, and
32:49
Speaker 1: they feel from a client's perspective, but deposit takers perspective,
32:52
Speaker 1: they are feeling fairly reassured and the sentiment at the
32:56
Speaker 1: moment is not as panicky as as you know. Maybe,
33:00
Speaker 1: so that may have played a part obviously in the
33:03
Speaker 1: decision of the Central Bank. So, Marian, you know, I'm
33:07
Speaker 1: a former employee of Credit Swiss, so I'm paying very
33:10
Speaker 1: close attention there. Um yeah, and I do, and I
33:14
Speaker 1: a lot of things that I think a lot of
33:16
Speaker 1: us learned during the financial crisis is, particularly for these
33:19
Speaker 1: investment banks, is counterparty risk and that concept that at boy,
33:24
Speaker 1: if the market doesn't have confidence in your institution, it
33:27
Speaker 1: is game over. I don't care who you are and
33:29
Speaker 1: what the name is on the door. How do you
33:32
Speaker 1: assess that risk for credit Swiss at this point? Hmm,
33:37
Speaker 1: that's a very good question. That's it's really too early
33:40
Speaker 1: to tell. I think, Um, it's it's a very good question. Um,
33:44
Speaker 1: we don't know. That's that's SIANSO. Um, right, we don't know.
33:49
Speaker 1: All right. So what's the next step here for the
33:52
Speaker 1: central bank? Do you believe? Um? In Frankfurt? Um? Well,
34:00
Speaker 1: I don't know what they're going to decide, of course,
34:02
Speaker 1: but at the moment everybody is kind of weighing up
34:05
Speaker 1: the poison cons you know of what's going to happen.
34:08
Speaker 1: But as you said, it's a question of confidence. If
34:10
Speaker 1: you know depositors stay put, you know, there's the risk
34:14
Speaker 1: the inflation becomes obviously more of a priority. Otherwise it
34:18
Speaker 1: would be you know, the confidence of deposit takers. That
34:21
Speaker 1: is a priority. All right, Marian, thank you so much.
34:24
Speaker 1: We appreciate getting some of your time. Marian Scordell, founder
34:27
Speaker 1: of Bougeville Consulting. We started out the day we want
34:33
Speaker 1: to get back to We start off the day with
34:34
Speaker 1: the ECB really focusing on Christine Lagarde. The ECB, they
34:39
Speaker 1: stayed true to what they were saying, fifty basis point move.
34:43
Speaker 1: So whenever we get news out of the Bank of
34:45
Speaker 1: England or the ECB, there are two people we have
34:48
Speaker 1: to talk to. Marcus Ashworth Boom we take that off
34:50
Speaker 1: this morning, Bloomberg Surveillance and John Authors. These are two
34:55
Speaker 1: cranky Brits who if they've got something to say, they
34:57
Speaker 1: don't mind saying it. Folks, John, what do you make
35:00
Speaker 1: of Christine Leguard that European Central banks fifty basis points move.
35:06
Speaker 1: Don't we have the risk of a recession. Don't we
35:08
Speaker 1: have a big bank that's in trouble? What's going on? Well,
35:12
Speaker 1: I'm not feeling that cranky just at this moment, just
35:15
Speaker 1: to get that on the record, and it's also rather
35:18
Speaker 1: wonderful just watching Bloomberg Technology on Bloomberg TV at the
35:21
Speaker 1: moment where for some reason we have two cranky Brits
35:24
Speaker 1: introducing the America curmudgeonly. Yeah, I like that. I like that.
35:29
Speaker 1: I might go with being a curmudgeon, if not a crank.
35:34
Speaker 1: In terms of what the CB has done, they have
35:38
Speaker 1: you know, they have a dilemma and they've decided to
35:43
Speaker 1: go all out on the belief a inflation really matters
35:48
Speaker 1: and it isn't beaten yet and B and this is
35:52
Speaker 1: the critical one that you can separate the functions of
35:58
Speaker 1: fighting inflation and maintaining financial stability. Certainly it ought to
36:06
Speaker 1: be the case if credit suisses issue, and of the
36:11
Speaker 1: different banks that have fallen in this country is if
36:15
Speaker 1: that issue is merely liquidity as opposed to solvency, then
36:22
Speaker 1: they should be safe. They should be within their rights
36:27
Speaker 1: to carry on tightening rates. That said, the fact I
36:32
Speaker 1: personally gasped when the news came this morning, and I
36:37
Speaker 1: think plenty of other people have done as well, it
36:39
Speaker 1: is pretty seriously courageous that they've pressed ahead with this.
36:47
Speaker 1: They are very strongly signaling that they don't think the
36:51
Speaker 1: banking sector is in that much trouble, and courageous is
36:58
Speaker 1: not always something you want to be as a central banker.
37:02
Speaker 1: But what measure do they come up with that conclusion
37:05
Speaker 1: that the banking sector is not in that much of
37:08
Speaker 1: a crisis. Well, if you look at priced book multiple,
37:12
Speaker 1: suggected in my column last night for the year of
37:16
Speaker 1: the Eurozone banks, Yeah, they're trading below book but they've
37:21
Speaker 1: been trading below book value for fifteen years and there's
37:26
Speaker 1: really nothing particularly crisis written or scary about the trading
37:32
Speaker 1: in those in fact, in the actual share price given
37:36
Speaker 1: the greatest risk here is buying the stock in one
37:39
Speaker 1: of these banks rather than taking out a deposit. Plainly,
37:44
Speaker 1: shareholders are much greater risk of being wiped out than depositors.
37:50
Speaker 1: Oddly enough, we are still not showing as much stress
37:54
Speaker 1: as either eight or eleven twelve, which for the European
38:01
Speaker 1: banks was actually in many ways a bigger deal than
38:04
Speaker 1: O eight was. And I think in a way we
38:06
Speaker 1: all became experts on the TED spread. Can you give
38:10
Speaker 1: us the dummies explanation spread the TED spreads? It's the
38:15
Speaker 1: TED spreads is the comparison between the short term rates
38:20
Speaker 1: at which which banks lend to each other. Still, although
38:27
Speaker 1: libel has had an interesting history in the years since
38:30
Speaker 1: the global financial crisis, it's what we think of as libel.
38:33
Speaker 1: It's the rate at which they lent to each other
38:35
Speaker 1: compared to the rate you can get on T bills.
38:41
Speaker 1: So generally those two numbers are very close to each other,
38:44
Speaker 1: and the banks are very slightly higher. When the spread rises,
38:48
Speaker 1: it indicates that banks really have a problem trusting each other.
38:52
Speaker 1: The TED spread at the moment is still unremarkable. Banks
38:59
Speaker 1: don't have any great degree of distrust with each other.
39:04
Speaker 1: There is a danger in taking O eight, which most
39:08
Speaker 1: of us who lived through eight find it difficult not
39:10
Speaker 1: to take O eight as a base of comparison. What
39:13
Speaker 1: happened to the TED spread, what happened to banks trust
39:15
Speaker 1: in each other in a eight was extreme. Because we've
39:20
Speaker 1: gone through all this, just nobody knew who was sitting
39:23
Speaker 1: on the bad loans. They didn't even know whether they
39:25
Speaker 1: themselves were sitting on the bad loans, and trust was
39:28
Speaker 1: completely destroyed. There is nothing like O eight on the picture.
39:34
Speaker 1: The possibility that this is a liquidity problem that will
39:40
Speaker 1: require banks to put up with far less in the
39:43
Speaker 1: way of profits and will be part of a slowdown
39:46
Speaker 1: in the economy, that's a really serious issue. There really
39:52
Speaker 1: shouldn't be any risk of a true repetition of two
39:57
Speaker 1: thousand and eight, and again I'm startled that they had
40:02
Speaker 1: the courage to go through with this, But perhaps the
40:04
Speaker 1: ECB view is by being deviated from the path Fate's
40:09
Speaker 1: clearly spelt out before, they would have increased the risks
40:14
Speaker 1: that people would say, Okay, BCB is running scared. They
40:18
Speaker 1: must know something. We should run for the hills. John,
40:22
Speaker 1: you mentioned your reference to your opinion piece, and folks,
40:27
Speaker 1: you can find that at Bloomberg dot com slash opinion
40:29
Speaker 1: or OPI n go on the terminal. John's pieces entitled
40:34
Speaker 1: move along, there's no crisis to see here? Um headline
40:40
Speaker 1: exactly yes. Um. Here in the United States, I would
40:44
Speaker 1: say the consensus is soft landing, no landing, something on
40:49
Speaker 1: those lines. Probably not a hard landing. Isn't the same
40:53
Speaker 1: in Europe? Would you say? Or it seems a little
40:57
Speaker 1: bit more precarious there. I'm not sure that consensus this
41:00
Speaker 1: is quite so clearly that we get a soft landing
41:03
Speaker 1: here as it was a couple of weeks ago, And
41:07
Speaker 1: if it is, I don't quite know why people are
41:09
Speaker 1: expecting rates to come down quite as aggressively as they
41:13
Speaker 1: do in Europe. The situation is very much murkier because
41:19
Speaker 1: of this big extra factor of the energy crisis, So
41:25
Speaker 1: at one point that was a big reason to expect
41:28
Speaker 1: a really serious slowdown in economic activity this year, a
41:34
Speaker 1: perfectly reasonable one. And because the weather in Europe turns
41:40
Speaker 1: out to have been I gather to standard deviations better
41:43
Speaker 1: than you would normally expect a really mild winter, that's
41:47
Speaker 1: had much less of a drastic impact than would have
41:51
Speaker 1: been expected. So the risk of a hard landing has
41:58
Speaker 1: moved out of the well, sorry it hasn't gone away,
42:04
Speaker 1: but it is reduced very significantly, and that in turn
42:08
Speaker 1: has increased the pressure on the ECB to be somewhat
42:12
Speaker 1: more hawkish than they were previously setting out to be.
42:16
Speaker 1: But that, certainly, that energy factor, plus the way that
42:22
Speaker 1: the the the European financial system works through banks more
42:28
Speaker 1: than it does through markets, and its banks have never
42:31
Speaker 1: really totally recovered from what happened to it at the
42:34
Speaker 1: turn of the last decade, that that does make the
42:37
Speaker 1: situation very different. Usually it's the feather goes first, right,
42:42
Speaker 1: the timing of the calendar that has the ECB going first.
42:46
Speaker 1: Does J Powell take any queue from Christine Legard this
42:49
Speaker 1: time around? It makes it harder for him to pause altogether,
42:52
Speaker 1: I think, But we don't know what's going to happen
42:54
Speaker 1: in the next I've still got We've still got four
42:57
Speaker 1: and a half days before before he he. The FOMC
43:02
Speaker 1: has to make its decision absent a significant new banking
43:10
Speaker 1: issue flaring up somewhere, and I have no opinion on
43:14
Speaker 1: right the probability of that is, but absent that, I
43:19
Speaker 1: think twenty five basis points hike next week is very
43:24
Speaker 1: likely that the we don't need to get into all
43:29
Speaker 1: of it. The data does not suggest that that inflation
43:35
Speaker 1: on its own is still too high for them to
43:39
Speaker 1: stop hiking. Then the folks that are pricing in cuts
43:44
Speaker 1: for next year, for this year, I'm sorry, the back
43:46
Speaker 1: half of this year again, that's what we see on
43:48
Speaker 1: the bloomer term of the futures market very much. So, yeah,
43:51
Speaker 1: I mean, what do you make of that? And for
43:53
Speaker 1: thirty seconds, like I said, that's why I'm nervous about
43:56
Speaker 1: you're saying, soft landing is still the is still the
44:00
Speaker 1: dominant scenario if we need to cut rates the way
44:02
Speaker 1: the monket currently implies before the end of the year,
44:05
Speaker 1: that's in plies a landing with somewhat op and obviously
44:11
Speaker 1: there's a risk of that and a banking crisis would
44:15
Speaker 1: deliver that. It's still not clear to me that we
44:17
Speaker 1: have as serious a banking crisis as something all right,
44:21
Speaker 1: very very good as always. We got Marcus Ashworth, we
44:24
Speaker 1: got John Authors, We've got the euro and UK cover.
44:28
Speaker 1: That's how I like to think about it. John Authors,
44:30
Speaker 1: thanks so much for joining us here from Bloomberg Opinion.
44:33
Speaker 1: He works on the Markets team, does all that kind
44:34
Speaker 1: of great stuff. He joins us here on our Bloomberg
44:37
Speaker 1: Interactive Broker Studio, so he gets that gold star for
44:40
Speaker 1: showing up as opposed to phoning it in. Thanks for
44:43
Speaker 1: listening to the Bloomberg Markets podcast. You can subscribe and
44:46
Speaker 1: listen to interviews an Apple Podcasts or whatever podcast platform
44:51
Speaker 1: you prefer. I'm Matt Miller. I'm on Twitter at Matt
44:54
Speaker 1: Miller nineteen seventy three. On ball Sweeney, I'm on Twitter
44:57
Speaker 1: at pt Sweeney. Before the podcast, you can always catches
45:00
Speaker 1: worldwide at Bloomberg Radient