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The Fed, Bank of England · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEO's, market pros and Bloomberg experts, along
0:11
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
0:18
Speaker 1: at Bloomberg dot com slash podcast. All right, so the story. Obviously,
0:22
Speaker 1: we've got a dueling stories here. What is the FED
0:25
Speaker 1: doing and what is the banking system doing? We need
0:28
Speaker 1: some informed analysis and judgment. That's why we're bringing Neil Grossman.
0:33
Speaker 1: He's a co founder and former CIO of t k
0:35
Speaker 1: n G Capital. So Neil, we kind of had a
0:37
Speaker 1: little bit of some dueling testimony yesterday with FED Chairman
0:41
Speaker 1: Pale Secretary Yellen. What's your takeaway from the Fed's balancing
0:46
Speaker 1: act of way, I got to fight inflation, but I've
0:48
Speaker 1: also got a shaky, maybe banking system out there. How
0:52
Speaker 1: do you think he did yesterday? I think he tried
0:54
Speaker 1: to flip thread the line as best as he could.
0:57
Speaker 1: I think the approach to saying, look, we still have
1:01
Speaker 1: an inflation problem and we're not going to give up
1:03
Speaker 1: on that's important. I think that's going to transmit confidence
1:07
Speaker 1: to the market over time. But he also is willing
1:10
Speaker 1: to say a few things. Obviously he's aware of the
1:13
Speaker 1: banking issues. I think he sort of threw SVB under
1:16
Speaker 1: the bus a little bit, but he was willing to
1:21
Speaker 1: say that some of the consequences not only of what
1:23
Speaker 1: they're doing directly with rates, but the consequences of the
1:29
Speaker 1: impact of credit tightening and other things that are now
1:32
Speaker 1: beginning to flow through the economy are going to have
1:35
Speaker 1: an impact as well. And I think ultimately what they're
1:37
Speaker 1: trying to do is slow the economy sufficiently to cut
1:42
Speaker 1: demand and that will take pressure off prices, and I
1:44
Speaker 1: think that's what he's hoping is going to happen. I'm
1:46
Speaker 1: gonna actually guess that if you've watched what's happened to
1:51
Speaker 1: commodity prices in the last few weeks, I mean, oils
1:55
Speaker 1: drop significantly, some of the others that you're likely on
1:58
Speaker 1: top of the po to you on your comparisons, that
2:01
Speaker 1: we're going to occur anywhere anyway that between now in
2:05
Speaker 1: the summertime, you're going to see some of the edge
2:09
Speaker 1: come off of prices. And the risk is that they
2:14
Speaker 1: take that as success too quickly, but I think they're
2:17
Speaker 1: going to find that there is a benefit that it's
2:20
Speaker 1: about to start to appear well, Neil. One of the
2:23
Speaker 1: major pieces of commentary from like Barclays, from Moodies, from
2:27
Speaker 1: a lot of people who are calling for a pause
2:29
Speaker 1: was that the Federal Reserve doesn't necessarily need to tighten
2:33
Speaker 1: credit conditions further because the lending practices that are coming
2:37
Speaker 1: in the next few months are going to do the
2:39
Speaker 1: job for it. To what extent is that true? What
2:42
Speaker 1: kind of timeline are we looking at there? I mean,
2:44
Speaker 1: I think it's going to happen somewhat quickly, but they're
2:46
Speaker 1: they're going to always be offsets. For example, last time
2:49
Speaker 1: we were talking about, Yeah, weren't you just here about
2:52
Speaker 1: the mortgage issue, right? Yeah, Interest rates have fallen rather
2:57
Speaker 1: significantly in the last three weeks. You're likely to start
3:02
Speaker 1: to see, for example, refinancings show up, and you're probably
3:05
Speaker 1: likely to see to the extent that borrowers can buy homes.
3:09
Speaker 1: The drop in rates is going to make homeownership more affordable.
3:14
Speaker 1: That's running through the credit system as well. But on
3:17
Speaker 1: the other side of the coin, smaller businesses like you're
3:20
Speaker 1: just talking about biotech. I've actually been paying a lot
3:23
Speaker 1: of attention to the biotech space from now a couple
3:26
Speaker 1: of years. You're watching that anti fungal stock. Well, yeah,
3:28
Speaker 1: I'm gonna I'm gonna have to go check that myself.
3:30
Speaker 1: But the maybe we should send it to Washington now.
3:35
Speaker 1: But the interesting thing is if listening in I listened
3:39
Speaker 1: to at least one or two biotech calls a week,
3:43
Speaker 1: and it's been apparent if you actually look at how
3:47
Speaker 1: our biotech industry funds itself, their currency of exchange is
3:52
Speaker 1: their equity. And companies have great ideas, they spend years
3:58
Speaker 1: trying to produce great drugs. Yeah, and along the way
4:02
Speaker 1: they have to keep issuing stock to fund themselves. Well,
4:06
Speaker 1: the ratepe process has made the value of that stock
4:10
Speaker 1: sixty eighty percent less valuable. And if you've looked, it's
4:15
Speaker 1: the market for fundraising in biotech in the last year
4:18
Speaker 1: is almost shut down. So it's actually a microcosm of
4:22
Speaker 1: what you started to see in the broader tech space. Yea,
4:25
Speaker 1: and yes, so for all these little companies that all
4:28
Speaker 1: the all the tech startups, they're the same, They're they're
4:30
Speaker 1: the same. MONI a fan of biotech stocks. I always
4:33
Speaker 1: say they're they're binary, right, Your drug either works or
4:36
Speaker 1: a dozen that extermines your future. And that's why the
4:38
Speaker 1: hedge funds love them. Uh Neil, How serious is this
4:42
Speaker 1: banking problem in this country? How concerned are you about it? Um?
4:46
Speaker 1: That's a hard that's a very hard question to answer
4:49
Speaker 1: at them. I think the problems with the smaller banks
4:53
Speaker 1: will have a very interesting economic impact. By the way,
4:56
Speaker 1: for whatever it's worth, I was on the board of
4:58
Speaker 1: a community bank, which was quite interest thing. I think
5:02
Speaker 1: if we go and look at this, though, again, this
5:04
Speaker 1: is going to all fall back on the FED. The
5:05
Speaker 1: bottom line is the central Bank in the United States
5:07
Speaker 1: taught people to ignore risk, to believe that that they
5:10
Speaker 1: were never going to do anything too much. The fact
5:13
Speaker 1: that we got interest of inflation to eight percent before
5:17
Speaker 1: anyone even bothered to dissent and then was told I
5:20
Speaker 1: think that when we started hiking last year in what
5:24
Speaker 1: was it marches, that they were going to that their
5:27
Speaker 1: projections called for rates to peak at two and a
5:30
Speaker 1: half or two and three quarter percent in the fall,
5:32
Speaker 1: and that was all that was going to be done.
5:35
Speaker 1: Nobody the SVB didn't react, and you know, you're gonna
5:40
Speaker 1: have to look at the balance sheets. Traditionally, banks we
5:42
Speaker 1: worry about credit risk. We don't under seem to understand
5:46
Speaker 1: that rate sensitivity irrespective of credit is a big deal.
5:51
Speaker 1: SVB was extraordinarily exposed to move into long rates with
5:56
Speaker 1: very well we would consider very high credit quality. Well,
6:00
Speaker 1: let me ask you about that really quickly, because you
6:02
Speaker 1: just said you were on a board of a community bank,
6:03
Speaker 1: and I've been dyne asked somebody this. When you are
6:06
Speaker 1: hedging duration risk from a market's perspective, it seems like
6:09
Speaker 1: a fairly simple trade. Right, You shorten your short the
6:12
Speaker 1: front end of the curve, and it feels pretty easy,
6:15
Speaker 1: and your perpect yields go higher. Why is that so
6:18
Speaker 1: hard if hedging costs aren't spiked. Well, well, two things.
6:20
Speaker 1: First of all, there's look, you can hedge every risk
6:24
Speaker 1: on a book. Yeah. Right, By the way, I also
6:27
Speaker 1: ran a very long long day and interest rate swap book.
6:29
Speaker 1: If you hedge, if you hedge anything everything, you end
6:32
Speaker 1: up with no profit that to begin with. Yeah, but
6:36
Speaker 1: you don't only hedge the short The short end is
6:39
Speaker 1: your funding source in general. Yeah. The long end, or
6:42
Speaker 1: the longer duration historically is where you're making your investments
6:46
Speaker 1: traditionally steep yelk curve, positively slowly you'l curve. Is why
6:49
Speaker 1: banks do it this way. They borrow short term and
6:53
Speaker 1: by the way you can have you can have a
6:54
Speaker 1: floating rate liability that that has a longer data maturity,
6:58
Speaker 1: which is something they probably should have been thinking about.
7:01
Speaker 1: You invest out the curve, you have positive carry, YadA, YadA, YadA,
7:05
Speaker 1: if you're going to ignore the hedging risk what you
7:08
Speaker 1: did out there and we were very cognizant, I mean
7:11
Speaker 1: every board meeting was talking about where you wanted to
7:14
Speaker 1: have your risk hedged and with these again, this is
7:18
Speaker 1: where I think some of the problems came. As short
7:21
Speaker 1: rates went up, the cost of their tradition, their major money.
7:24
Speaker 1: Remember they have ten billion twelve billion of capital. They
7:26
Speaker 1: had one hundred and eighty billion dollars of deposits. Deposits
7:30
Speaker 1: are almost alway and I don't know what their Federal
7:32
Speaker 1: Reserve fellow Homelown bank borrowings look like, but deposits are
7:37
Speaker 1: basically tied to short rates. Now, demand deposits have very
7:42
Speaker 1: low interest payments, but traditional deposits pay interest, and as
7:47
Speaker 1: interest rates go up, that means the value of the
7:51
Speaker 1: carry to your long investments keeps going down. Yeah, and
7:55
Speaker 1: they just got caught between the fact that they were misheaged,
7:59
Speaker 1: they were losing revenue stream and at the end of
8:01
Speaker 1: the day, the real problem with SKVB is they had
8:04
Speaker 1: four billion dollars or so of insured deposits. I'm going
8:08
Speaker 1: to just divert for one second. One of the things
8:10
Speaker 1: I've been listening to everyone talking about which has driven
8:12
Speaker 1: me crazy is this argument that people shouldn't have to
8:15
Speaker 1: have to A very popular man, Neil Grossman, is sorry
8:19
Speaker 1: about that, that that we shouldn't have to think about
8:23
Speaker 1: The average person shouldn't have to think about the risk
8:26
Speaker 1: they're taking with deposits. Well, you don't. Two hundred and
8:28
Speaker 1: fifty thousand and below no thought process. But this company
8:32
Speaker 1: had very concentrated, large sized deposits with sophisticated institutions who
8:37
Speaker 1: should have had known something about this, But it was
8:40
Speaker 1: easy for them to realize that they had a problem.
8:42
Speaker 1: The money moved very quickly, and when you lose let's
8:46
Speaker 1: say thirty percent of your deposit, that means that that
8:49
Speaker 1: amount of money that was supporting your investments is gone.
8:53
Speaker 1: You have to sell investments, and that's how you get
8:55
Speaker 1: a run on the bank and a massive drop and
8:59
Speaker 1: against Capito Sinish about thirty seconds left here. The FED
9:03
Speaker 1: fund futures market is pricing in rate cuts. Do you
9:06
Speaker 1: believe the Fed will cut rates in twenty twenty three
9:08
Speaker 1: in the absence of a stock crash? No? Okay, right,
9:12
Speaker 1: or some or some truly existential event that creates a
9:18
Speaker 1: situation they have no choice. Look, I don't think by
9:20
Speaker 1: the end of the year you'll have reached anywhere near
9:23
Speaker 1: his two percent target. And even if you do it,
9:26
Speaker 1: you need to have it reach and be shown that
9:29
Speaker 1: it's stable. So I think the answer is going to
9:32
Speaker 1: be and the markets will begin to accommodate and function.
9:35
Speaker 1: The question is is if something structurally wrong out there
9:39
Speaker 1: that we can't see that creates that type of thing,
9:42
Speaker 1: that we're going to start to see the economy slow.
9:44
Speaker 1: But that's not necessarily. I'm not refinancing my mortgage anytime, SHO.
9:47
Speaker 1: I got you, all right, Neil gross because I'm not
9:48
Speaker 1: going to do it. So I got a four in
9:49
Speaker 1: front of it. Neil Grossman, co founder and former CIO
9:53
Speaker 1: of t k NNG Capital, joining us here in our
9:55
Speaker 1: Bloomberg Interact, a broker studio. You're listening to the dam
10:00
Speaker 1: Ken's her Line program Bloomberg Markets weekdays at ten. AMI's
10:04
Speaker 1: Daring on Bloomberg dot Com, the I Heart Radio app
10:06
Speaker 1: and the Bloomberg Business App. We're listening on demand wherever
10:09
Speaker 1: you get your Podcastle's looking at this market here, just
10:14
Speaker 1: kind of moving up higher, get, you know, kind of
10:16
Speaker 1: retracing a little bit of some of those losses we
10:19
Speaker 1: saw yesterday. Where do we go from here? Let's check
10:21
Speaker 1: in with somebody who does this stuff for a living,
10:23
Speaker 1: Jackie Bowie. She's a managing partner ahead of em EA
10:27
Speaker 1: for Chatham Financial. She's located in London. So Jackie, thanks
10:32
Speaker 1: so much for joining us here. How do you put
10:34
Speaker 1: in context yesterday's trading versus what we've seen so far
10:38
Speaker 1: this morning? Kind of a kind of one eighty to return.
10:42
Speaker 1: How are you guys looking at it? Yeah, well, they
10:46
Speaker 1: think the markets have seen a lot of turmoil and
10:49
Speaker 1: fear in the last a few weeks with the banking
10:52
Speaker 1: situation globally and with the big central banks announcements We've had,
10:58
Speaker 1: you know, yesterday with the Fair and then today with
11:01
Speaker 1: the Bank of England and nothing particularly scary coming out
11:05
Speaker 1: of that. I think there's definitely a little bit of
11:08
Speaker 1: a relief in the markets, and we see across the
11:11
Speaker 1: intrast rate market too, which when the Fed made their
11:14
Speaker 1: statement yesterday and again Bank of England literally out in
11:18
Speaker 1: the last hour or so, the market reaction has been
11:21
Speaker 1: pretty muted. So it maybe just feels like a little
11:25
Speaker 1: bit of a sigh of relief that we may be
11:28
Speaker 1: through some of the difficult and turmoil and the risk
11:31
Speaker 1: of financial instability that we've had in the last few weeks. Well,
11:35
Speaker 1: speaking of that financial instability that we've seen in the
11:38
Speaker 1: last few weeks, how long is that going to continue?
11:41
Speaker 1: It feels like when you're looking at these markets, they're
11:42
Speaker 1: still moving pretty volatily. If the banking crisis is indeed,
11:48
Speaker 1: dare I say it over or without chinxing it, how
11:51
Speaker 1: much longer can we expect that this is going to happen? Well,
11:55
Speaker 1: if we believe what the central banks have been telling
11:57
Speaker 1: us in the last few days with their announcements, we
12:02
Speaker 1: should be fairly comfortable that we've we've seen the worst
12:06
Speaker 1: of it. With regard to you, it's not likely to
12:09
Speaker 1: have further contained a contagion and spread throughout throughout the
12:13
Speaker 1: rest of the financial industry and across other banks. If
12:17
Speaker 1: you read some of the announcements from the Bank of
12:20
Speaker 1: England today, they were very clear in trying to reinforce
12:24
Speaker 1: the message about the liquidity positions that are in place
12:28
Speaker 1: and overget the global central banks have continued to support
12:32
Speaker 1: the liquidity in the markets and through the global slop lines,
12:36
Speaker 1: which you know they've said they'll continue that through the
12:39
Speaker 1: end of April. So there's a definite coordinated attempts to
12:43
Speaker 1: try and allay fears in financial markets that there is
12:47
Speaker 1: more to come. And yeah, and I guess that they
12:50
Speaker 1: interest rate moves from the central bank. So the FED
12:53
Speaker 1: raising last night and the Bing of England raising today
12:56
Speaker 1: for National Bank also race today. So did there no
12:59
Speaker 1: region central bank. So the markets that are probably interpreting
13:03
Speaker 1: that to say, well, actually they don't seem overly concerned
13:07
Speaker 1: about the financial instability and continue to be focused on
13:11
Speaker 1: their inflation targets and using monetary policy to meet those
13:16
Speaker 1: inflation targets. Hey, Jackie, as the head of em EA
13:20
Speaker 1: at Chattam Financial, I'd love to get your opinion on
13:23
Speaker 1: credits with ubs. What's your take now that we have
13:26
Speaker 1: a couple of days of hindsight about that transaction and
13:29
Speaker 1: more importantly about the health of the banking sector across Europe. Sure, well,
13:36
Speaker 1: I think we're all still digesting the actual structure of
13:41
Speaker 1: that transaction, and clearly there's a lot of issues arising
13:46
Speaker 1: around how it was structured with regard to the situation
13:50
Speaker 1: with certain bondholders, certainly from the clients that chats and advise.
13:56
Speaker 1: What we're focused on is trying to understand how you
14:00
Speaker 1: bs will actually absorb credits waste. You know, it's not
14:04
Speaker 1: a small institution that it's a huge, you know, systemically important,
14:08
Speaker 1: which is why it was rescued the way the way
14:11
Speaker 1: that it was. So we're still just trying to understand
14:14
Speaker 1: what the exposures are for for UBS as they take
14:17
Speaker 1: that bank on. We've focused on the derivative markets, of course,
14:21
Speaker 1: so that's where our main focus will be. But I think,
14:25
Speaker 1: you know, even at a very basic level, you're taking
14:27
Speaker 1: out one huge lender in the market, So does that
14:31
Speaker 1: mean that in lending is going to be tighter? And
14:36
Speaker 1: we're already seeing in credit conditions tightening across the European
14:40
Speaker 1: banking sector as it stands at the moment. So I
14:43
Speaker 1: think there's some concern that it will reduce credit capacity
14:47
Speaker 1: in the market. But again there isn't any director read
14:51
Speaker 1: across to other European banks, Jackie. Let's go a little
14:55
Speaker 1: bit more international here and talk about the Bank of England.
15:00
Speaker 1: Some expectation here, This could be that their potential last
15:02
Speaker 1: right hig the ECB not really showing signs of slowing down.
15:06
Speaker 1: What is it or who I should say is the
15:08
Speaker 1: most hawkish central bank in the world right now, because
15:10
Speaker 1: I just can't tell, so probably we would say the ECB.
15:16
Speaker 1: So the European Central Bank, So they raised fifty basis
15:20
Speaker 1: points last week and continue in their statements to be
15:26
Speaker 1: pretty hawkish with regard to how much further in those
15:30
Speaker 1: right rises could be. And actually, if you move away
15:33
Speaker 1: from what the central banks are telling us in their
15:37
Speaker 1: statements and look at what the market is pricing, you
15:41
Speaker 1: would also come to that conclusion. There's an expectation from
15:45
Speaker 1: the market that they said would is going to start
15:49
Speaker 1: cutting weights they said, not saying that, in fact that
15:52
Speaker 1: they're saying the opposite, and the same with the Bank
15:55
Speaker 1: of England. But on the ECB side, for the European
15:59
Speaker 1: for the Rose Zone, there is no expectation that those
16:02
Speaker 1: rates are going to start coming back down the other side,
16:05
Speaker 1: so certainly most hawkishness still coming from and the European
16:09
Speaker 1: Central Bank. I would say, Jackie, what was your takeaway
16:12
Speaker 1: from a very active afternoon in US markets yesterday with
16:16
Speaker 1: a Secretary of the Treasure yelling speaking, and of course
16:20
Speaker 1: we had the conference press conference and statement by FED
16:25
Speaker 1: Chairman Jpal What was your takeaway from that collectively? Well,
16:30
Speaker 1: I would say that the language in the statement was
16:34
Speaker 1: definitely softer, and I think the market took that very positively,
16:40
Speaker 1: you know, signaling that they are coming to the end
16:43
Speaker 1: of the tightening cycle. And again you can get into
16:47
Speaker 1: the real granularity of the exact words that were used,
16:50
Speaker 1: and I think the exact quote was there. Maybe some
16:54
Speaker 1: additional firm may be appropriate, you know, just that slightly
17:00
Speaker 1: software language and certainly gates the markets and confidence that
17:05
Speaker 1: the central banks are not very focused well, that they're
17:09
Speaker 1: not using the financial instability as a reason to change
17:12
Speaker 1: the monetary policy direction. Well when it comes to monetary
17:17
Speaker 1: policy direction, though, it also feels like everyone is expecting
17:21
Speaker 1: this to be the end of the tightening cycle, but
17:23
Speaker 1: inflation still hasn't come down By the margin that I
17:26
Speaker 1: think a lot of central banks are looking for. Could
17:29
Speaker 1: we potentially see, instead of cuts in the back half,
17:31
Speaker 1: a reacceleration of that hawkish monetary policy. I think that's
17:37
Speaker 1: definitely a possibility. And in quite the UK have their
17:41
Speaker 1: inflation numbers yesterday morning and they surprise to the upside.
17:46
Speaker 1: And the concerning trend within that is that it was
17:49
Speaker 1: the code inflation, so food pricing. Everyone's been talking about that,
17:54
Speaker 1: the increased cost of salads in Europe and the shortages
17:57
Speaker 1: and some of the food items. So we started to
18:00
Speaker 1: see the improvement and inflation globally due to the fall
18:04
Speaker 1: and the energy prices, but that's been substituted by increases
18:09
Speaker 1: in core core inflation, which is more of a more
18:12
Speaker 1: of a concern, you know, And I guess in the
18:14
Speaker 1: US there's an expectation that, well, what's you know, the
18:17
Speaker 1: feder forecasting, of course, since the inflation to decrease back
18:21
Speaker 1: down to about three point six percent by the end
18:24
Speaker 1: of this year and then start to get back to
18:27
Speaker 1: that two percent target by the end of twenty twenty five.
18:31
Speaker 1: There's a lot of things that have to go in
18:33
Speaker 1: the right direction for that to be achieved. So yeah,
18:36
Speaker 1: I agree with you. I don't think it's completely outside
18:39
Speaker 1: the realms of possibility that that cup and interest rates,
18:44
Speaker 1: if it comes, might come a little bit too early
18:47
Speaker 1: before inflation is completely under control. All right, Jackie, thank
18:51
Speaker 1: you so much for joining us. We really appreciate getting
18:53
Speaker 1: some of your time and your perspective on these markets.
18:55
Speaker 1: Jackie Bowie. She is the managing partner ahead of EA
18:59
Speaker 1: at Chatham fan Chell, based in London. I appreciate getting
19:03
Speaker 1: some of her time. You're listening to the tape. Ken's
19:06
Speaker 1: are Live program Bloomberg Markets weekdays at ten am Eastern
19:09
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19:13
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Speaker 1: Amazon Alexa from our flagship New York station, Just say
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Speaker 1: Alexa play Bloomberg eleven thirty. Let's piece together for these
19:25
Speaker 1: banks out there. Pretty you know, we had maybe listen
19:28
Speaker 1: to Chairman Pall yesterday and Secretary yelling. I'm not sure
19:32
Speaker 1: I heard the same kind of message in terms of
19:36
Speaker 1: the support for the banks out there. So I want
19:38
Speaker 1: to really get a sense of what the experts think.
19:41
Speaker 1: And Alison Williams is certainly one of those she's a
19:42
Speaker 1: senior banks analyst for Bloomberg Intelligence. So, Alison, what did
19:47
Speaker 1: you take away from again that dueling testimony yesterday from
19:51
Speaker 1: FED Chairman Powell and Secretary Yelling about how they view
19:55
Speaker 1: kind of what's going on in the US banking system.
19:58
Speaker 1: So I think the one thing that I'd be consistent
20:01
Speaker 1: is that they you know, they are sending trying to
20:04
Speaker 1: send a message of confidence in the system in terms
20:07
Speaker 1: of the FED focusing on um fighting inflation and its job.
20:13
Speaker 1: As as to Yellen's comments, I mean her comments that
20:16
Speaker 1: they're not looking at blanket insurance, I think does not
20:19
Speaker 1: roll out other types of actions, and I think, you
20:24
Speaker 1: know that maybe what's taking so long, if you will,
20:28
Speaker 1: We've seen a lot of different people speaking um, politicians,
20:34
Speaker 1: advisors to politicians about how they're looking about thinking about
20:36
Speaker 1: the issue a blanket Uh. You know, obviously a blanket
20:43
Speaker 1: insurance of all deposits would solve all of you know,
20:46
Speaker 1: would make people feel better, but that also causes international
20:50
Speaker 1: ramifications than to you know, all the other countries have
20:53
Speaker 1: to do that or risk deposit flight, and also be
20:56
Speaker 1: extremely expensive because the banks do pay for that insurance.
21:01
Speaker 1: And ultimately that would be passed on to customers. You know,
21:05
Speaker 1: there's also the tough part about, you know, the legality
21:09
Speaker 1: around implementing that, about being able to change that. And
21:12
Speaker 1: so what I think that UM regulators are more trying
21:16
Speaker 1: to think about, our politicians are trying to think about,
21:19
Speaker 1: is you know, is there a way to try to
21:21
Speaker 1: target the area where the concerns are. And so it's
21:26
Speaker 1: not at the biggest banks this time. They're they're benefiting
21:31
Speaker 1: from a flight to safety is the presumption and some
21:34
Speaker 1: of the reports that we see, and it's not the
21:36
Speaker 1: smallest community banks. It's really this sort of center regional banks.
21:42
Speaker 1: And a lot of the issue there is that you
21:45
Speaker 1: have these banks serve small and medium businesses and a
21:49
Speaker 1: lot of the uninsured deposits they have relate to these businesses.
21:52
Speaker 1: So it's not like your average consumer that can diversify
21:56
Speaker 1: and put some money here and there. It's generally, you know,
21:59
Speaker 1: the a company that works with their lender and has
22:02
Speaker 1: all their operating cash in one bank. And so I
22:05
Speaker 1: think that's that's the question. How can those relationships be
22:09
Speaker 1: preserved and yet at the same time give people comfort
22:12
Speaker 1: that those deposits u won't be flighty Alison do we
22:18
Speaker 1: or should we expect more consolidation in the sector. It
22:22
Speaker 1: feels like this idea of acquisitions from First Republic and
22:25
Speaker 1: extra financing, it really is a result of kind of
22:28
Speaker 1: the baky turmoil that we've seen. But moving forward, does
22:31
Speaker 1: this almost incentivize consolidation, I mean, it's consolid This is
22:37
Speaker 1: a problem that doesn't necessarily solve the issues, if you will,
22:42
Speaker 1: because that the main issue across all the banks, right
22:46
Speaker 1: is that you know, these health to maturity portfolios and
22:51
Speaker 1: the deposits supporting them, and so you know, if you
22:54
Speaker 1: if you are just adding balance sheets together, it doesn't
22:58
Speaker 1: make a difference until you you know, unless you get
23:00
Speaker 1: to that level of the big secure banks. So First
23:06
Speaker 1: Republic is obviously the one that everyone's watching, and at
23:10
Speaker 1: the biggest banks are not allowed to acquire beyond ten percent,
23:15
Speaker 1: So there could be a question about the next tier
23:18
Speaker 1: of banks that you know, are these I think regulators
23:22
Speaker 1: might want to see some uh, some of these maybe
23:26
Speaker 1: smaller banks combine where it's not necessarily um I guess
23:32
Speaker 1: needle moving to the extent that the deposits aren't necessarily
23:35
Speaker 1: needle moving UM. But that also reverses the you know,
23:40
Speaker 1: it's it doesn't. It doesn't say much for the incentive
23:43
Speaker 1: for the larger regional banks to do these deals. So
23:47
Speaker 1: so hopefully that may clear. I mean, I don't think
23:49
Speaker 1: that small regional banks combining necessarily fixes or addresses the
23:54
Speaker 1: fundamental issue. We certainly with the banks that were see
24:01
Speaker 1: I think, you know, obviously banks buyers are able to
24:05
Speaker 1: get those assets at attractive levels and make those attractively
24:09
Speaker 1: economic or make it attractive economics. But First Republic one
24:14
Speaker 1: has to presume that people are have looked at it,
24:19
Speaker 1: or there's been discussions and somehow the economics and perhaps
24:25
Speaker 1: the views of buyers versus sellers are not aligned. And
24:30
Speaker 1: so I think it does. You know that there is
24:32
Speaker 1: sort of a degree of negotiating power involved, and we
24:38
Speaker 1: think the First Republic does stay volatile until you know,
24:42
Speaker 1: they figure out a longer term solution. Alison yesterday, on
24:45
Speaker 1: a interview with David rubin Sein from Carlisle Group Cities CEO,
24:52
Speaker 1: Frasier warns that mobile money is quote a game changer
24:56
Speaker 1: for bank runs. People can just click on that. Is
24:59
Speaker 1: that a widespread fear within the industry or is a
25:03
Speaker 1: recent phenomena? How did you take that? So you know
25:07
Speaker 1: I'd say to two things that actually maybe three things
25:10
Speaker 1: about you know that the environment today. First, UM, you know,
25:14
Speaker 1: Jane Fraser is right that the digital does make it
25:17
Speaker 1: much easier for people to UM move deposits from from
25:21
Speaker 1: one bank to the other. UM. The other thing that
25:23
Speaker 1: a lot of people are are talking about social media
25:26
Speaker 1: and you know ten that stoke fears UM, you know,
25:32
Speaker 1: the the equivalent yelling fire in a crowded theater, and
25:36
Speaker 1: so it is that also a factor UM. But the
25:40
Speaker 1: third thing I would point to is that again what
25:43
Speaker 1: the where the issues are are more sort of these
25:46
Speaker 1: chunkier corporate deposits UM. And so there's there's also a
25:51
Speaker 1: focus on sort of the specific nature of some of
25:54
Speaker 1: the banks that are UM, that work sees and that
26:00
Speaker 1: people have concerns around. You know, if you have if
26:04
Speaker 1: you're catering to one very specific segment of clients and
26:08
Speaker 1: those clients are all in touch and interrelated and all
26:11
Speaker 1: behave the same way very quickly, does that certainly increase
26:16
Speaker 1: your risk? So, Alison, we've got about thirty seconds here.
26:20
Speaker 1: I have to ask what comes next for the banking sector.
26:23
Speaker 1: Is the worst of it behind us? I think I
26:27
Speaker 1: think there's potential for volatility until we get some kind
26:31
Speaker 1: of solution on the deposit front. I do think it's
26:35
Speaker 1: tricky for regulators. They need to walk a fine line
26:37
Speaker 1: in terms of doing enough to avoid people having fear
26:44
Speaker 1: and not do too much that it actually stokes those spheres.
26:47
Speaker 1: But you can but you can see from the stocks
26:50
Speaker 1: and again, since we're really since the issue really is
26:53
Speaker 1: sentiment that sort of tipping things one way or the other,
26:56
Speaker 1: and that has the potential to drive reality. As long
27:00
Speaker 1: as you can have this volatility, I think that I
27:04
Speaker 1: think that the regulators do you have to think about
27:07
Speaker 1: doing something to study those fears. All right, Alison, thank
27:10
Speaker 1: you very much once again for taking the time out
27:12
Speaker 1: of your busy day and getting us up to speed
27:14
Speaker 1: on the latest state of the US banking environment. Alison
27:18
Speaker 1: william she's his senior Global Banks and Asset Managers Analysts
27:21
Speaker 1: for Bloomberg Intelligence, located our Princeton University Princeton office down
27:27
Speaker 1: there in Princeton, New Jersey. You're listening to the team
27:31
Speaker 1: Ken's are Live program Bloomberg Markets weekdays at ten am
27:34
Speaker 1: eastering on Bloomberg dot com, the I Heart Radio app,
27:37
Speaker 1: and the Bloomberg Business app we're listening on demand wherever
27:40
Speaker 1: you get your podcast. Well, we heard some pretty tough
27:45
Speaker 1: talk I think for FED Chairman Pal yesterday, as tough
27:48
Speaker 1: as you could probably be in terms of In addition,
27:50
Speaker 1: you know that twenty five basis point increase and they're
27:52
Speaker 1: going to continue to fight inflation. That's going to be
27:55
Speaker 1: job number one. But the markets not buying it. Here
27:57
Speaker 1: looking at the FED funds futures here, so let's see
28:00
Speaker 1: where we might be going from here in terms of
28:02
Speaker 1: the rates. We do that with Jennifer Lee, senior Economist
28:04
Speaker 1: and managing director be More Capital Markets and Jennifer again,
28:08
Speaker 1: you look at the FED futures, Fed funds, few futures markets.
28:11
Speaker 1: They're pressing in right creases like starting in like fifteen
28:14
Speaker 1: minutes from now. I mean, how do you square that
28:17
Speaker 1: with the rhetoric we hear from not just FED Chairman
28:21
Speaker 1: j Pal, but also Christine Legard at the ECB a
28:23
Speaker 1: couple of weeks ago. You know, it's uh, I can't.
28:27
Speaker 1: I can explain it. First of all, good morning, and
28:29
Speaker 1: if I can, just before I'm going to answer that,
28:31
Speaker 1: I have to say that you guys gave me a
28:32
Speaker 1: good chuckle. I need a chuckle earlier a few minutes ago,
28:35
Speaker 1: when you're talking about the different ticker symbols with with
28:38
Speaker 1: with wolf and I just remember the one called move
28:41
Speaker 1: from from I don't know how many years back, could
28:43
Speaker 1: you're in the commodity boom anyway into that um anyway.
28:47
Speaker 1: So it's it's it's difficult to to you know, thread
28:50
Speaker 1: the needle on this, but I think it's just their
28:52
Speaker 1: way of installing some sort of calm, you know, saying
28:55
Speaker 1: that we have to you know that, don't re mind,
28:57
Speaker 1: don't forget to the market stats. We will have our
29:01
Speaker 1: other focus besides financial stability, of course, by fighting inflation
29:05
Speaker 1: and you know, and Leaguard's UCB, the governing Council, it
29:09
Speaker 1: has probably been one of the most hawkish ones surprisingly
29:12
Speaker 1: of the year and they still remain very hawkish. Um um.
29:15
Speaker 1: The one of their own hawks, Eel from the Netherlands,
29:18
Speaker 1: was just still the wires talking about, you know, the
29:20
Speaker 1: great hike coming in May, and I think with the
29:23
Speaker 1: said yesterday, you know, I think he did the right
29:25
Speaker 1: thing with the twenty five basis point where he hike
29:27
Speaker 1: and he's seeing less than that would have made them
29:29
Speaker 1: look soft, to be quite frank, you know, and so
29:32
Speaker 1: it's still putting in that twenty five basis great hike
29:34
Speaker 1: and warning that you know, some of this credit tightening
29:37
Speaker 1: is going to do some of the jobs for them,
29:38
Speaker 1: but you know, again saying that inflation was too high.
29:41
Speaker 1: And I thought that was kind of interesting in that
29:42
Speaker 1: press not doing the press conference, but in the actual
29:45
Speaker 1: statement itself, when they just put very simply that inflation
29:48
Speaker 1: remains elevated. You know, Um, can't get any clearer than that. Well, Jennifer,
29:53
Speaker 1: I I feel like that seems to be the consensus
29:56
Speaker 1: view that the right upcoming regulations are going to kind
30:00
Speaker 1: to do some of the Fed's job for it. But
30:03
Speaker 1: I have to ask, aren't some of these tighter banking
30:06
Speaker 1: standards and regulations also uh subject to congressional approval, which
30:11
Speaker 1: we know are super speedy as always in Washington. Um, Yes,
30:16
Speaker 1: and then yes for sure. So that that is going
30:18
Speaker 1: to be another way of tightening a little bit more,
30:21
Speaker 1: and it's going to make you know, probably the sector
30:23
Speaker 1: a little bit more nervous, you know, knowing that they're
30:25
Speaker 1: going to be watched a little closer and they'll probably
30:26
Speaker 1: have to put a little bit more of a side. Um.
30:29
Speaker 1: So all of this combined is going to help, you know,
30:32
Speaker 1: tighten financial conditions a little bit more. Of course you
30:35
Speaker 1: can't tell from today, but you know, each day there's
30:38
Speaker 1: so much volatility, but you know, whatever the end game
30:40
Speaker 1: is going to be, we're probably going to see tighter conditions.
30:43
Speaker 1: And this is why you know he's they're they're banking
30:45
Speaker 1: for just probably one more you know, as of right now,
30:47
Speaker 1: just one more great hike um and then and then
30:50
Speaker 1: letting see um and playing and stepping to the side
30:52
Speaker 1: to see how things play out. But what is the
30:55
Speaker 1: timeline on that though, to my point about the congressional
30:57
Speaker 1: kind of um approval that it's going to take to
31:01
Speaker 1: enforce those standards, that could take a while. And I
31:04
Speaker 1: wonder to what extent if waiting for that kind of
31:07
Speaker 1: credit tightening or that kind of regulation, perhaps isn't the
31:10
Speaker 1: anticipation that's going to do the FED shop for it,
31:13
Speaker 1: or are you going to see that kind of kick in.
31:15
Speaker 1: I don't know next year. Oh, you know, that's that's
31:19
Speaker 1: that's a tough question to answer. I don't think anyone's
31:21
Speaker 1: going to expect anything to to happen overnight, let alone
31:26
Speaker 1: by the end of the year. But I think you
31:28
Speaker 1: know with at this point, it's going to be you know,
31:30
Speaker 1: watching data with the FED and um and again if
31:33
Speaker 1: the if the data remained very strong, um, you know,
31:36
Speaker 1: then the FED could start speaking hawkishly again. Um. You know,
31:40
Speaker 1: they're going to take it. You know, as Christine Legar
31:42
Speaker 1: was saying, meeting, my meeting, and everything's going to be
31:45
Speaker 1: data dependent. Like at one point last week, I think
31:47
Speaker 1: people are asking, you know, does the data even matter anymore?
31:50
Speaker 1: And I believe I said yes, and I still hold
31:52
Speaker 1: to that because at the end of the day, it's
31:54
Speaker 1: how the economy is going to fair and that's what's
31:56
Speaker 1: going to drive the Fed's decision going forward. And Jennifer,
32:00
Speaker 1: I wonder what where we are in terms of that
32:02
Speaker 1: recession talk these days. I mean, I look at the
32:05
Speaker 1: initial jobs claims today, another print below two hundred thousand
32:09
Speaker 1: jobs market. The jobs market remains pretty darn strong here.
32:14
Speaker 1: What is your recession call here? As we look forward
32:16
Speaker 1: to the next several quarters. So we haven't changed it
32:20
Speaker 1: in a while. We're still looking for that the contraction
32:23
Speaker 1: to kick in, probably around I'm going to say mid year,
32:26
Speaker 1: but it's probably gonna be Q two in Q three,
32:28
Speaker 1: that's where we have our negative prints and then a
32:31
Speaker 1: little bit of a rebound in the fourth quarter, and
32:33
Speaker 1: we're still looking at about point seven percent goals for
32:36
Speaker 1: this year, but certainly off to you know, four hundred
32:38
Speaker 1: and whatever basis points of great hikes. Obviously it's starting
32:41
Speaker 1: to take its toll, but that job market remains so
32:44
Speaker 1: tight still. Those initial claims, you know, it's it's unvoisable
32:48
Speaker 1: how low they are right now. But at some point
32:50
Speaker 1: you're going to start business start seeing businesses pull back
32:54
Speaker 1: cool a little bit on their hiring intentions, you know.
32:56
Speaker 1: But again, we still have to work off of those
32:58
Speaker 1: ten million job openings out there before we start you know,
33:01
Speaker 1: getting into the bone. Well, in terms of the layoffs, again,
33:05
Speaker 1: I want to ask about the lag because it feels
33:08
Speaker 1: like the labor market is still incredibly tight. If you
33:10
Speaker 1: hear what some of these companies are saying, they're not
33:12
Speaker 1: all laying off people, some are actually hiring. And I
33:15
Speaker 1: have to ask what is going to pop first, the
33:19
Speaker 1: housing market or the labor market. Well, the housing market
33:23
Speaker 1: has started to seem like it's finding a bottom, you know,
33:27
Speaker 1: with mortgage rates. I'm still high, of course, but you know,
33:29
Speaker 1: but they're you know, but they're you know, they seem
33:32
Speaker 1: to be cooling off a little bit, so that's helping.
33:34
Speaker 1: And of course we've seen some pretty decent housing releases
33:38
Speaker 1: over the last few weeks. I'm not going to acknowledge
33:42
Speaker 1: too much of what we thought today from new home
33:43
Speaker 1: sales because there's such a big downal revision to the
33:46
Speaker 1: prior months. The housing seems to have stabilized somewhat. The
33:50
Speaker 1: job market remains strong. But again, as you say the layoffs,
33:54
Speaker 1: I mean, um also just layoff announcements, and then it
33:57
Speaker 1: takes time to filter system some people what could be,
34:00
Speaker 1: you know, laying off one job and going on into another. UM.
34:04
Speaker 1: So I think it's going to take a little bit
34:05
Speaker 1: of time as well. But again with this expected pullback,
34:09
Speaker 1: with rates still heading higher, and with so much talk
34:12
Speaker 1: now about you know, something more than a mild contraction,
34:15
Speaker 1: you know you're going to start seeing some pullback I
34:17
Speaker 1: think in business hiring intentions. Jennifer, As an economist, how
34:22
Speaker 1: are you viewing some of these you know, banking challenges
34:26
Speaker 1: out there, some of these small regional banks in the
34:29
Speaker 1: United States, the credit Swiss, the UBS issue. As an economists,
34:32
Speaker 1: how concerned are you about the maybe the US banking system,
34:35
Speaker 1: maybe the global banking system. UM, okay, you know, I
34:41
Speaker 1: think I am a little concerned just given that regional banks,
34:44
Speaker 1: you know, um I still make up a fair share
34:47
Speaker 1: of the credit process, especially in the commercial real estate side.
34:51
Speaker 1: But obviously we know we are in better shape than
34:53
Speaker 1: we were, you know, back in two thousand and eight,
34:56
Speaker 1: with more regulations, with so much more regulations in play,
35:00
Speaker 1: and of course we're probably going to see a little
35:01
Speaker 1: bit more on that front now, um, but at least
35:04
Speaker 1: see a lot of these you know, as we all know,
35:06
Speaker 1: has been very specific to these specific to these particular banks.
35:09
Speaker 1: But unfortunately, it's all about confidence and making sure you
35:12
Speaker 1: have confidence the entire financial industry or financial sector, which
35:16
Speaker 1: is critical. And that's probably why you know, we saw
35:18
Speaker 1: defense ticking in the line about how resilient the US
35:21
Speaker 1: banking system is. The Bank of England did that as
35:23
Speaker 1: well this morning again to instill common confidence in the
35:26
Speaker 1: entire financial system. Who is the more important player in
35:31
Speaker 1: these next days, arguably weeks. Is it J Powell or
35:34
Speaker 1: is it Janet Yellen? Woo um can see, well that's
35:40
Speaker 1: a good question. Well, Janet Yellen sort of dalls a
35:43
Speaker 1: lot of the Hope yesterday when she you know, said
35:46
Speaker 1: that she's sort of kaiba or poopoo the idea of
35:49
Speaker 1: that blanket deposit coverage. But um, you know what, I
35:52
Speaker 1: think it's gonna be both. Can I say both? You know,
35:55
Speaker 1: because obviously you know, they always say that they CANTA.
35:58
Speaker 1: They're not going to influence moneteer Paul see from the
36:00
Speaker 1: from the Treasury fed share Powell. You know, it's not
36:02
Speaker 1: going to see the government how to do their job either.
36:05
Speaker 1: So I think both of them have to book, you know,
36:08
Speaker 1: hand in hand in many ways. And the fact that
36:10
Speaker 1: you know they know each other so well is probably
36:12
Speaker 1: going to be helpful as well, um, you know, to
36:14
Speaker 1: help things stabilize and in still more common financial markets. Jennifer,
36:18
Speaker 1: you're up in Toronto. Love to just get the latest
36:20
Speaker 1: from you on kind of your view of the Canadian economy.
36:23
Speaker 1: How's the average Canadian industry feeling about things? Um? Well,
36:30
Speaker 1: I think so far the data have been pretty decent
36:33
Speaker 1: so far here in Canada. Um and the Vega. Canada
36:36
Speaker 1: actually was the first major central bank to step off
36:40
Speaker 1: the great tightening cycle and step to the sidelines. And uh,
36:43
Speaker 1: and they're pausing. But at the same time, you know,
36:45
Speaker 1: this is all contingent on whether or not the economy
36:47
Speaker 1: continues to slow as the expected inflation starts to cool,
36:50
Speaker 1: and we actually did see like our latest inflation right. Well,
36:53
Speaker 1: everyone else is still remaining very sticky, especially in the UK.
36:56
Speaker 1: The Canadian inflation rates flowed further um um down to
37:00
Speaker 1: about five point two percent year a year for February, which,
37:03
Speaker 1: by the way, it's exactly how what the UK inflation
37:07
Speaker 1: radars right now. So I think the banking candle is
37:09
Speaker 1: quite quite comfortable staying on the sidelines, whereas everyone else
37:12
Speaker 1: has still got the feet on the gas a little
37:14
Speaker 1: bit of interns or the breaks in terms of raising rates.
37:17
Speaker 1: All right, Jennifer, thank you so much for joining us.
37:19
Speaker 1: We always appreciate getting your perspective. Jennifer Lee, Senior economist
37:23
Speaker 1: and Managing director at BMO Capital Markets, located up in Toronto, Ontario.
37:28
Speaker 1: Looking at the SMP five hundred still rated at four
37:31
Speaker 1: thousand level, up about one point six percent, holding on
37:34
Speaker 1: to those games from earlier in the day. The Nastack
37:37
Speaker 1: up two and a quarter percent, so big moves there
37:39
Speaker 1: in the tech heavy Nastack. You're listening to the tape
37:42
Speaker 1: Kens are live program Bloomberg Markets weekdays at ten am
37:46
Speaker 1: Eastern on Bloomberg Radio, the tuning app, Bloomberg dot Com,
37:50
Speaker 1: and the Bloomberg Business App. You can also listen live
37:52
Speaker 1: on Amazon Alexa from our flagship New York station, Just
37:56
Speaker 1: say Alexa Play Bloomberg eleven thirty. Ford Motor Company came
38:02
Speaker 1: out with an announcement this morning that it expects three
38:05
Speaker 1: billion dollar loss on electric car business in twenty twenty three,
38:09
Speaker 1: breaking it out really for the first time. And they
38:12
Speaker 1: also had kind of what I'm going to call, you know,
38:14
Speaker 1: kind of a teaching if you will, with analysts and
38:16
Speaker 1: investors here in New York to kind of show them
38:19
Speaker 1: because they're changing the way they're presenting their financial statements.
38:21
Speaker 1: I really want to break out and highlight the traditional
38:24
Speaker 1: and internal combustion engine business from their EV business and
38:29
Speaker 1: our own. Joel Levington is at that meeting. Joel Levington
38:33
Speaker 1: is a global director of Fixed Income Research and to
38:35
Speaker 1: see your auto and industrial credit and us at Bloomberg Intelligence,
38:38
Speaker 1: and Joel's dialing in from this meeting. So, Joel, three
38:41
Speaker 1: billion dollars, that sounds like real money to me. What
38:45
Speaker 1: do you make about some of the losses that Ford
38:48
Speaker 1: is talking about before they break even in several years. Hey, Paul,
38:52
Speaker 1: that might be happier you fee check, but it's a
38:54
Speaker 1: lot to me. What I would tell you is that
38:56
Speaker 1: I think what people are more concerned about is their
38:59
Speaker 1: target of trying to get to eight percent operating margin
39:02
Speaker 1: by the end of twenty twenty six, more than where
39:04
Speaker 1: they're starting, because that trajectory is really high to scale
39:08
Speaker 1: up that much, to get pricing, to get raw material
39:12
Speaker 1: cost reduction, and to get the design right on new
39:16
Speaker 1: products if you can take a lot of costs out
39:18
Speaker 1: of the products itself. So I think that's one of
39:21
Speaker 1: the areas of skepticism that was kind of felt in
39:24
Speaker 1: the room during the question and answer session. Well, one
39:27
Speaker 1: of the issues for a lot of these legacy automakers
39:30
Speaker 1: that you simply can't be as cost effective or cost competitive,
39:33
Speaker 1: I should say with Tesla, but one of mate Tesla's
39:36
Speaker 1: major kind of shining qualities is that their supply chain
39:41
Speaker 1: is far more local and far more domesticated. Is that
39:45
Speaker 1: something that Forward and some of these other automakers can
39:49
Speaker 1: properly address, Critty, That's a great question, and I think
39:53
Speaker 1: it's one that I would say yes, but I don't
39:56
Speaker 1: know if they are ever going to get to the
39:58
Speaker 1: point of matching Tesla in cost or cost capacity, or
40:02
Speaker 1: design excellence. I think from those points of view, it
40:05
Speaker 1: really makes Tesla of the dominant force in terms of
40:09
Speaker 1: how they're thinking about pricing and where they want their
40:12
Speaker 1: cars to go, and it certainly will give them a
40:14
Speaker 1: competitive Tesla a competitive advantage over traditional linemakers like a
40:19
Speaker 1: Board or General Motors for years to come. So, Joe
40:24
Speaker 1: three billion dollars in losses this year, did they give
40:26
Speaker 1: the street an estimate for when they expect to break
40:29
Speaker 1: even on this EV business? Yeah, Paul, they expect. Well.
40:33
Speaker 1: They gave a couple of lines of comment on that.
40:35
Speaker 1: The first thing was that their first generation of EV products,
40:39
Speaker 1: they expect them to be towards break even next year,
40:43
Speaker 1: but the business to continue to report losses as they
40:46
Speaker 1: invest in Gen two and Gen three technologies. But really
40:50
Speaker 1: you're seeking kind of like a hockey stick, having to
40:53
Speaker 1: happen somewhere in the twenty five and twenty six time frames.
40:58
Speaker 1: I think that draws a lot of skepticism. I would
41:00
Speaker 1: also say just a reporting structure itself that they're talking
41:03
Speaker 1: about draws skepticism really because it's while the company is
41:07
Speaker 1: doing it to create transparency in each of the different
41:10
Speaker 1: businesses that it has. By doing that, they're giving up
41:13
Speaker 1: the regional breakouts they have been doing it by region,
41:18
Speaker 1: and so there's also a loss of transparency when you
41:22
Speaker 1: switch over. And I think there are a lot of
41:25
Speaker 1: investors just from questions that I take as well as
41:27
Speaker 1: analysts just from the questions of the room, that you know,
41:31
Speaker 1: don't like to see data that they had for years
41:34
Speaker 1: suddenly go away. Well, what about other ways of for
41:39
Speaker 1: kind of rewarding shareholders and all Paul loves talk about dividends,
41:43
Speaker 1: which I'm about buybacks as well, which a lot of
41:44
Speaker 1: companies are suspending all of those kind of sweeteners for
41:47
Speaker 1: the investor. Any word on those. They didn't really talk
41:51
Speaker 1: today pretty about about shareholder rewards at this point. They
41:56
Speaker 1: do have a May twenty second Capital Markets Day where
41:59
Speaker 1: I think will get more into that. But I would
42:02
Speaker 1: say for a company that is investing heavily basically in
42:05
Speaker 1: a startup business and the ed business, to go heavy,
42:09
Speaker 1: especially on the dividend side, when you're using extraordinarily high
42:13
Speaker 1: amounts of capital expenditures, probably doesn't make a lot of
42:16
Speaker 1: sense to you know, like rapidly grow your dividend or
42:19
Speaker 1: suddenly use a lot of capital for share of purchases,
42:22
Speaker 1: because death financing on an auto is kind of poison
42:27
Speaker 1: just given a CIX locality in the business. So I
42:32
Speaker 1: guess the issue if I guess them a Ford or
42:34
Speaker 1: GM investors, I guess I should I should not have
42:39
Speaker 1: expectations that my profit margins can be similar to those
42:43
Speaker 1: of Tesla. But I guess why is that? Is that
42:46
Speaker 1: just my cost structure is different? Yeah, totally, Paul, You're
42:50
Speaker 1: one hundred percent right, because if you think about the
42:52
Speaker 1: traditional OEM things like operating multiple businesses or having you know,
42:59
Speaker 1: a significant amount of product lineups. Uh, it doesn't really
43:03
Speaker 1: fit into the Tesla model. Right. You have four cars
43:06
Speaker 1: and you have high scale volumes, and if you look
43:09
Speaker 1: inside the Tesla, it's designed so it doesn't have a
43:13
Speaker 1: lot of widgets in it. All of that is cost.
43:16
Speaker 1: And that's what I mean in terms of design on
43:18
Speaker 1: the forward side, Like that's going to need to change
43:20
Speaker 1: to be more Tesla like. And that's true for GM
43:23
Speaker 1: and every other manufacturer that's going to compete against, UH,
43:27
Speaker 1: that's going to compete against Tesla. They're all going to
43:29
Speaker 1: have to shift how they develop products. How can they
43:32
Speaker 1: make their battery packs smaller and more economical to compete
43:37
Speaker 1: more effectively against the major player, which is Tesla. Of course,
43:41
Speaker 1: Tesla doesn't have a pens, underfunded pensions and OPEV liabilities
43:45
Speaker 1: either that the legacy autos do, which is just another
43:49
Speaker 1: burden that that they have to fees, you know, Joel,
43:52
Speaker 1: I find it so ironic that finally the auto industry
43:57
Speaker 1: has gotten to the point where they can maximize profit
43:59
Speaker 1: on a per unit basis on industrial internal combustion engines,
44:04
Speaker 1: only producing fifteen million cars, minimizing incentives. It's never been
44:07
Speaker 1: more profitable to make a traditional internal combustion engine car,
44:11
Speaker 1: just at the time when the whole industry is switching
44:14
Speaker 1: over to EV. It's it's ironic, and not in a
44:16
Speaker 1: good way. Yeah. No, you're totally right. And I think
44:19
Speaker 1: which you'll see from all of the autos, all the
44:22
Speaker 1: main autos, whether they're European or US, is that this
44:25
Speaker 1: mixed shift is really going to constrain their ability to
44:29
Speaker 1: further grow their profitability at least for the next few years.
44:32
Speaker 1: It's going to be a challenge to see that margin
44:34
Speaker 1: go higher, putting aside any cyclical pressure that you're going
44:37
Speaker 1: to feel from what feels like a recession. Maybe not
44:41
Speaker 1: too far ahead of us. Hey, Joel, thirty seconds left.
44:44
Speaker 1: Your credit analysts, how do you like the bonds here
44:46
Speaker 1: at Ford? How are they looking? Yeah, well, the bonds
44:49
Speaker 1: I'm actually you know, we don't have a biseller hole,
44:53
Speaker 1: but we do have a green versus yellow or red
44:55
Speaker 1: on the bonds. And really, to me, they're a combination
44:59
Speaker 1: of defenses, highly liquid bonds with a company that wants
45:02
Speaker 1: to get back to investment greed, but that none of
45:04
Speaker 1: that is priced into the bonds right now. I think
45:07
Speaker 1: that's something that they could achieve within the next two
45:10
Speaker 1: years and maybe even the next eighteen months. So if
45:13
Speaker 1: something like that happens, there is the potencil see the
45:16
Speaker 1: bond tighten further right, All right, Joel, Great stuff, Really
45:19
Speaker 1: appreciated Joe Levington. He's a global director Fixed income Research,
45:23
Speaker 1: senior Auto and industrial credit analyst at Bloomberg Intelligence. You're
45:26
Speaker 1: listening to the tape cans are live program Bloomberg Markets
45:30
Speaker 1: weekdays at ten am Eastern on Bloomberg Radio, the tune
45:33
Speaker 1: in app Bloomberg dot Com. And the Bloomberg Business app.
45:36
Speaker 1: You can also listen live on Amazon Alexa from our
45:39
Speaker 1: flagship New York station. Just say Alexa, play Bloomberg eleven
45:43
Speaker 1: thirty smooths app on Apple Today. Apple to spend one
45:48
Speaker 1: billion dollars a year on films to break into cinemas.
45:52
Speaker 1: That's interesting. And then Apple considers bidding for English football
45:56
Speaker 1: streaming rights. That's interesting because that's big bucks. Does this
46:00
Speaker 1: mean for Apple they started to do a little bit
46:02
Speaker 1: more than just dip their toe in the content business.
46:05
Speaker 1: Let's check in with an expert or in house expert.
46:07
Speaker 1: Githa Ranganathan is an analysts Senior analyst at Bloomberg Intelligence
46:12
Speaker 1: covering global media. So, Gita, you and I have seen
46:16
Speaker 1: Apple kind of dip its toe from time to time
46:18
Speaker 1: into programming, even into sports programming. When you see Apple
46:22
Speaker 1: on this one billion dollars a year to break into
46:25
Speaker 1: into the cinemas, what does that tell you? They definitely
46:29
Speaker 1: are looking to be taken much more seriously. I think Paul,
46:32
Speaker 1: both in Hollywood and in the streaming world. So you know,
46:35
Speaker 1: Apple obviously has made its big streaming four rate. It's
46:38
Speaker 1: been out there now for years with its product Apple TV. Plus,
46:42
Speaker 1: but I don't think they've really made a big dent
46:45
Speaker 1: in terms of number of subscribers, right they probably they
46:47
Speaker 1: haven't actually officially disclosed any numbers, but they have probably
46:50
Speaker 1: about twenty two forty million subscribers. Those are the estimates.
46:54
Speaker 1: You compare that to the global leader Netflix two hundred
46:57
Speaker 1: and thirty million subscribers, or even a Disney Plus which
46:59
Speaker 1: has a hundred and sixty two million, So they are
47:02
Speaker 1: they obviously have a long way to go in terms
47:04
Speaker 1: of scale. So I think what they're really looking to
47:07
Speaker 1: do here is kind of just double down in terms
47:09
Speaker 1: of their commitment to media, in terms of their commitment
47:11
Speaker 1: to content. Remember this is pocket change for Apple. I
47:13
Speaker 1: mean they have over one hundred and sixty five billion
47:16
Speaker 1: dollars just in cash and create about you know, one
47:19
Speaker 1: hundred and one hundred billion in annual free cash flow.
47:22
Speaker 1: But they're really looking, I think, to be taken much
47:24
Speaker 1: more seriously. And Gita, I think it's really interesting because
47:28
Speaker 1: what I think of, especially in the pandemic, and how
47:31
Speaker 1: much pressures and you know this well, Paul, the cinemas
47:33
Speaker 1: that went through and then you think of Sale the
47:35
Speaker 1: Top Gun last summer, right, that movie grossing over a
47:39
Speaker 1: billion dollars second best. What are you looking at those
47:41
Speaker 1: sales behind Avatar last year? But Kita, when you're looking
47:45
Speaker 1: at what Apple is doing here, what exactly are they
47:49
Speaker 1: seeing And do you think that they're expecting that we're
47:52
Speaker 1: going to see any type of full recovery here after
47:56
Speaker 1: all the pressure that the cinemas went through during the pandemic. Yeah,
48:00
Speaker 1: that's a great question, and that's something that we've kind
48:02
Speaker 1: of been grappling with. You know, this questions just been
48:05
Speaker 1: this lingering fear about whether the box office will ever
48:09
Speaker 1: go back to its glory days. And really the magic
48:11
Speaker 1: number that we're looking here in the US is, you know,
48:14
Speaker 1: eleven billion dollars. So last year we made about seven
48:17
Speaker 1: point four billion, so still kind of thirty five percent
48:21
Speaker 1: short of that number. This year, it looks like we're
48:24
Speaker 1: heading to about eight and a half billion, so, you know,
48:26
Speaker 1: slightly better than last year, but still again not at
48:28
Speaker 1: that mark. And really there's so many factors at play here.
48:32
Speaker 1: I mean, one of the things of Jess and Paul
48:34
Speaker 1: has been that, you know, there hasn't really been enough product.
48:37
Speaker 1: I mean, we've seen some of these streaming services kind
48:40
Speaker 1: of push a lot of their titles directly to their
48:43
Speaker 1: streaming services, so that's been one thing. And then the
48:45
Speaker 1: COVID you know, pandemic obviously caused a lot of production delays.
48:49
Speaker 1: It takes about two years in general to make a movie.
48:51
Speaker 1: Obviously production was completely shut down, so we're kind of
48:54
Speaker 1: seeing a lot of these releases pushed out. And so
48:57
Speaker 1: with Apple kind of making this commitment, kind of following
49:00
Speaker 1: in the footsteps of Amazon, I think it really is
49:03
Speaker 1: a big vote of confidence just for the theatrical model
49:06
Speaker 1: and for box office in general. I'm not sure I
49:09
Speaker 1: can answer your question on whether they can make a
49:11
Speaker 1: full recovery, but I think, you know, we're definitely inching
49:15
Speaker 1: closer to that eleven billion mark just kind of with
49:17
Speaker 1: this commitment. So, I mean, Keith, when I see this
49:22
Speaker 1: story about Apple wanted to release films into theaters, I
49:25
Speaker 1: think they want to be eligible for the Academy Awards.
49:29
Speaker 1: I think they're looking for, you know, getting that pad
49:32
Speaker 1: on the back from Hollywood. It might too cynical there,
49:35
Speaker 1: not at all. I think you're absolutely right. In fact,
49:38
Speaker 1: they actually did one did win the Best Picture Oscar,
49:43
Speaker 1: while they go with quota yea, you know, so they
49:46
Speaker 1: have kind of got some critical acclaim. They're obviously, you know,
49:51
Speaker 1: definitely they want to kind of go after, you know,
49:54
Speaker 1: the awards. You're absolutely right, But I think they're also
49:58
Speaker 1: kind of trying to see if they can generate box
50:00
Speaker 1: office because if you look at Quota, yes, it did
50:02
Speaker 1: very well in terms of critical acclaim in terms of awards,
50:04
Speaker 1: but it only generated about two million for them in
50:07
Speaker 1: the box office. And so I think when they make
50:09
Speaker 1: a bigger commitment and a bigger splash, I think that
50:12
Speaker 1: generates some additional revenue for them as well. So, Keith,
50:15
Speaker 1: let's step back just a little bit. Media in general.
50:18
Speaker 1: You know, the industry is really doing a multi year
50:21
Speaker 1: pivot from the traditional distribution model of cable TV and satellite,
50:25
Speaker 1: where we all knew what the economics were and they
50:27
Speaker 1: were pretty darn good, to now a streaming dependent model
50:32
Speaker 1: where a we don't know the economics really and kind
50:35
Speaker 1: of what we do know it doesn't seem to be
50:36
Speaker 1: as good. What are investors doing? Do you even get
50:40
Speaker 1: your phone calls picked up either? Does anybody even want
50:42
Speaker 1: to ever meet with you to talk about media stocks?
50:47
Speaker 1: They are they have fallen a little bit out of favor.
50:50
Speaker 1: I do agree with you, Paul on that, but I think,
50:53
Speaker 1: you know, most of the media companies now have kind
50:55
Speaker 1: of realized that they're readjusting their strategies and kind of
50:58
Speaker 1: cost rationalization has kind of become this big focus, not
51:01
Speaker 1: just in media, but I think in all of tech,
51:03
Speaker 1: and definitely I think Netflix has realized that, you know,
51:06
Speaker 1: Disney has realized that there's a huge cost cutting program
51:09
Speaker 1: going on to Disney right now. So all of that
51:11
Speaker 1: is kind of now working its way into kind of
51:13
Speaker 1: the streaming bottom line. And obviously we're seeing Netflix kind
51:16
Speaker 1: of generate pretty healthy profits when it comes to the
51:17
Speaker 1: streaming business. You know, Disney is still a few years out,
51:21
Speaker 1: but I think they are all kind of definitely normalizing
51:25
Speaker 1: the content budgets for sure, and then there's not this
51:28
Speaker 1: mad chase for subscribers, you know, at any cost anymore.
51:33
Speaker 1: So I think we're going to see a little bit
51:35
Speaker 1: of a shakeout, but I think in one to two
51:36
Speaker 1: years we are going to see a much more clear
51:39
Speaker 1: path to profitability. So I wouldn't count out media just yet.
51:45
Speaker 1: On the flip side of that, I was curious your
51:47
Speaker 1: thoughts on whether we should expect to see more technology
51:49
Speaker 1: and growth companies. When we're thinking about Apple as well
51:52
Speaker 1: as Amazon, like you were mentioning if more will invest
51:55
Speaker 1: to produce movies in cinemas. Oh absolutely, I think just
51:59
Speaker 1: as we see. I mean, this is the perfect time
52:01
Speaker 1: for Apple and Amazon to kind of double down. They
52:03
Speaker 1: know that legacy media companies are pulling back, they know
52:06
Speaker 1: that they're very cost conscious. Financial discipline is you know
52:10
Speaker 1: the key mantra right now at all of these companies.
52:12
Speaker 1: So this is really the time for them to go
52:13
Speaker 1: after the movies, to go after sports rights, and that
52:18
Speaker 1: they're doing exactly that. What's the latest on Netflix here?
52:21
Speaker 1: I see the stock is a big mover up today.
52:24
Speaker 1: Just pointed that out to me. What's is generally the
52:27
Speaker 1: call on Netflix these days? So again with Netflix, it's
52:30
Speaker 1: going to be a little bit of a choppy outlook
52:31
Speaker 1: when it comes to subscribers. They're no longer issuing subscriber guidance.
52:34
Speaker 1: So the big thing that we are waiting for with
52:37
Speaker 1: Netflix is really this whole new password sharing crackdown that
52:42
Speaker 1: is supposed to debut in the US in the next
52:45
Speaker 1: few months or so. And really what then that does
52:48
Speaker 1: is well, they might buy something, there might be some
52:50
Speaker 1: you know, initial I think resistance from from subscribers. I
52:54
Speaker 1: think at the end of the day, what we're getting
52:56
Speaker 1: down to is that our poo number and really see
52:59
Speaker 1: a react ration in revenue growth. And I think that's
53:02
Speaker 1: really where the narrative is kind of heading. So again,
53:06
Speaker 1: a little bit of subscriber shopping is but I think
53:09
Speaker 1: Matt Nedwig going to see good revenue reacceleration towards the
53:11
Speaker 1: end of the year. All right, Keithan, thank you so much.
53:13
Speaker 1: I always appreciate getting the update with you. I think
53:16
Speaker 1: I've cut off my kids off my camp, but I
53:17
Speaker 1: don't know. I have a sneaky suspicion that they're still
53:20
Speaker 1: shamming on my trying to get strict to fall. I
53:23
Speaker 1: know I'm trying to help out Netflix. Here Keithan Ranganath,
53:26
Speaker 1: and she covers all things media. She's a senior analyst
53:29
Speaker 1: at Bloomberg. Can tell he's one of the best on
53:31
Speaker 1: the street on the media space. I recommend reading her
53:34
Speaker 1: at BET I go on the terminal. Thanks for listening
53:37
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
53:41
Speaker 1: to interviews with Apple Podcasts or whatever podcast platform you prefer.
53:45
Speaker 1: I'm Matt Miller I'm on Twitter at Matt Miller nineteen
53:49
Speaker 1: seventy three and on Fall Sweeney, I'm on Twitter at
53:51
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
53:54
Speaker 1: worldwide at Bloomberg Radio