Bank Crisis Fallout | Bloomberg Surveillance 05/02/23

English First Republic and JP Morgan Merger

In this section, the speakers discuss the merger between First Republic and JP Morgan, as well as stress in the banking system and systemic issues.

Merger Talks

• The speakers discuss the potential benefits of a merger between First Republic and JP Morgan.

• They mention that there is still a fair amount of stress in the banking system.

• The question is raised whether there is a general problem or if it is only in banks.

Debt Ceiling Concerns

• Janet Yellen's statement about being unable to satisfy government obligations by early June is discussed.

• A high-stakes debt limit meeting between congressional leaders on May 9th is mentioned.

• The urgency of markets compared to a lack of urgency around the meeting with congressional leaders is contrasted.

Resiliency of Equity Market

• The resiliency of the equity market despite concerns about debt ceiling and other issues is discussed.

• Republicans' frustration with growing their way out of economic problems with only one percent GDP growth is mentioned.

Concerning Issues

• The speaker mentions that there are many concerning issues beyond just the debt ceiling, including an inverted yield curve, banking crisis, peak multiples in equity markets, deglobalization, and frictions between major economies like China and the US.

The Impact of COVID-19 on Office Space Usage

In this section, the speakers discuss the impact of COVID-19 on office space usage in the US and Europe.

Office Space Usage Post-COVID

• Castle Back to Work data shows that office space usage across all US cities is running between 40% and 50% compared to pre-COVID levels.

• There is a lot of vacant property and more capacity being built, making commercial real estate a key risk focal point wherever we are.

• High liquidity coverage ratios in Europe suggest greater protection for banks than in the US where there appears to be a lack of breath in terms of liquidity coverage across the banking system.

• Consolidation is happening because banks are fragile in this world, and too big to fail are reaping the benefits of getting attractive businesses at a good price with liquidity backing from authorities.

Banking Sector Risks

In this section, the speakers discuss risks associated with the banking sector.

Risks Associated with Banks

• Authorities are plugging holes but there are still risks associated with higher rates and what that means.

• The gap between money market rates and deposit rates means people may wake up to the fact they can get higher rates from deposit markets.

• Moral hazard is a different matter that does not solve some underlying risks coming through from higher rates.

Investing in Regional Banks

In this section, the speakers discuss investing in regional banks.

Investing in Regional Banks

• Banks have a handbrake factor in our sector model across all regions. The weight is higher in the US for obvious reasons given what's happening real-time. That takes banks to a neutral rank within the sector.

• Our models continue to point to a preference for UK and European banks. In the US, defensive sectors in the US equity market have never been this cheap going into a US recession.

• You can get quite good protection in US equities and defensives into a recession.

The Impact of Inflation on Bond Markets

In this section, the speakers discuss the impact of inflation on bond markets.

The Impact of Inflation on Bond Markets

• The bet is much more on what inflation is going to do and if the job market will allow Powell to relax.

• Equities are negative 0.2%. Another big week for equity.

English Debt Limit, Inflation in Euro Area, ECB Interest Rate Hiking

The debt limit is discussed and it is stated that there needs to be trillions of dollars in cuts to the federal budget. Underlying inflation in the Euro area slowed for the first time in months. A case for the European Central Bank to slow its most aggressive interest rate hiking.

Debt Limit and Inflation

• The debt limit will not be raised unless there are trillions of dollars in cuts to the federal budget.

• Underlying inflation in the Euro area slowed for the first time in months.

• After stripping out food and fuel, consumer prices rose from a year ago.

ECB Interest Rate Hiking

• There is a case for the European Central Bank to slow its most aggressive interest rate hiking.

English White House Considering Promoting Federal Reserve Governor Philip Jefferson

The White House is considering promoting Federal Reserve Governor Philip Jefferson to a Vice Chair. A Latino candidate could then be named to an open board slot.

Promotion of Federal Reserve Governor

• The White House is considering promoting Federal Reserve Governor Philip Jefferson to a Vice Chair.

• A Latino candidate could then be named to an open board slot.

English Writers Strike, Russia Casualties, Popular Shows on American TV

Writers Guild members are striking for higher pay when there are rapid changes in the way people watch TV programs and films. Russia has suffered more than 100,000 casualties since December in the fight over Buckled -- a city in eastern Ukraine. Writers of some of the most popular shows on American TV are walking off the job.

Writers Strike and Russia Casualties

• Writers Guild members are striking for higher pay when there are rapid changes in the way people watch TV programs and films.

• The White House is considering promoting Federal Reserve Governor Philip Jefferson to a Vice Chair.

• Russia has suffered more than 100,000 casualties since December in the fight over Buckled -- a city in eastern Ukraine.

• Writers of some of the most popular shows on American TV are walking off the job.

English CEO of Citigroup Jane Fraser's Statement

Jane Fraser, CEO of Citigroup, stated that she is pleased to get the major source of uncertainty that was remaining from the bank turmoil addressed.

CEO Statement

• Jane Fraser, CEO of Citigroup, stated that she is pleased to get the major source of uncertainty that was remaining from the bank turmoil addressed.

English Commercial Real Estate and Distorted Interest Rates

It is discussed how commercial real estate and distorted interest rates have contributed to banking failures.

Commercial Real Estate and Distorted Interest Rates

• It is underplayed that events that got First Republic and other banks into this mess still exist.

• Regional banks are an area we are concerned about because of deposit flight and highest exposure to commercial real estate.

English Internal Rate Of Return Guesstimate Of Fortress Diamond

The internal rate of return guesstimate of Fortress Diamond is discussed.

Internal Rate Of Return Guesstimate

• At the bottom was an internal rate of return guesstimate of 20%.

• One reason the internal rate of return is so strong is that in an agreement with the FDIC, which is common, the FDIC when they sell these banks out of receivership will take a loss sharing agreement with the buyer.

English Interest Rates and Recession

The discussion revolves around interest rates and recession.

Interest Rates and Recession

• If we just invert and get back to normal interest rate structure, it is a huge number if they get the markets to cooperate.

• In 1994, 95, Alan Greenspan took rates from three to six percent and we did not have a recession. He started cutting rates in 95.

Kaufman as a Public Utility

In this section, Matt Levine and John Authers discuss whether JP Morgan and Bank of America are public utilities.

Are JP Morgan and Bank of America Public Utilities?

• Gerard Cassidy from RBC Capital Markets suggests that JP Morgan and Bank of America are financial utilities.

• Banks that consistently pay dividends through the cycle and deliver mid to lower teens return on changeable common equity are attractive.

• Jonathan questions whether customers will be affected by the deposits they assume from First Republic. Gerard explains that in bank failures, buyers get to reprice deposits downwards, which makes them more profitable.

• The CFO of JP Morgan believes that the reprice experience will blend over time into the rest of their deposit franchise. That means there deposit and rate of return will come down to zero.

• According to Gerard Cassidy, JP Morgan's size and strength gave them an advantage in acquiring First Republic. He also believes that it is extremely profitable for JP Morgan.

Differences between First Republic and Other Stressed Institutions

In this section, Matt Levine, John Authers, Tom Keene, and Jonathan Ferro discuss why dealing with First Republic is different from other stressed institutions.

Why is Dealing with First Republic Different?

• Jamie Dimon addressed this yesterday; this was a deposit run problem. It was a classic duration issue of long assets on duration, short on funding. This was not a credit problem.

• Unlike other stressed institutions like Aaron or Washington Mutual in the past, First Republic had pristine credit.

• This situation is not as risky for JP Morgan because it's a mismatch of assets versus liabilities. They are now going to benefit from the market of those assets and the yields it creates.

Equity and Bond Markets

In this section, Tom Keene and Jonathan Ferro discuss the state of the equity and bond markets.

State of the Equity and Bond Markets

• The equity market is softer on the S&P 500. Equity futures are down by 0.2%.

• The bond market was anything but snoozing yesterday. There was a treasury selloff, and yields pushed higher.

• Big tech debt offerings caused yields to be higher by more than 10 basis points across the curve.

Central Bank

The discussion is about the Australian bank surprising and whether there will be a surprise in the language tomorrow. There is also a conversation about the distraction caused by tension, and how there are many things to navigate.

Surprises from Central Banks

• The Australian bank surprised everyone, and it's possible that there may be another surprise tomorrow.

• Everyone is too complacent about the meeting tomorrow given what is going on.

• There are many things to navigate, including short-term paperwork and foreign-exchange niceties.

Dynamics of Financial System Foreign Exchange

• Head of Foreign Exchange Strategy for Global Basis at RBC joins the conversation from London.

• Euro-yen signals perhaps our prematurity and looking for strength.

• Loan officer survey this morning looking for demand for loans coming sharper and cementing the case for a 25 hike.

Interest Rates

The discussion focuses on interest rates, specifically around Japan's policy normalization, ECB meeting this week, Europe's recession status, inflation reduction act subsidies in the US, and how all these factors impact investment.

Interest Rates Impact on Investment

• Bank of Japan will normalize policy but not happening anytime soon.

• It felt like a decision between 25 and 50 into the ECB meeting this week.

• Europe is not yet in recession; however, we soon material tightening in interest rates.

• Why invest in Europe at the moment with structurally higher energy prices without tax benefits?

• Inflation reduction act subsidies lower gas prices make it more attractive to relocate investment toward the United States.

Debt Ceiling Debate

The discussion revolves around investors' views on how much discretionary fiscal tightening will come after resolving debt ceiling debates and how it could impact the US dollar.

Impact of Debt Ceiling Debate on US Dollar

• Investors have a view that it is going to get resolved, but it will get noisy in the interim.

• The question is how much discretionary fiscal tightening will come on the back of the resolution?

• If we see a lot, it could be an argument for getting more bearish on the US dollar.

Elsa Lignos on FX Market Speculation

In this section, Elsa Lignos discusses the impact of speculation on the foreign-exchange market.

FX Market Speculation

• Elsa Lignos describes the assumption that weakness is present in the foreign-exchange market as speculative noise.

• She believes there is good effort to be had in the market, but investors may want to look elsewhere for better opportunities.

ECB and Federal Reserve Central Bank Decisions

This section covers upcoming central bank decisions by the ECB and Federal Reserve.

Central Bank Decisions

• The ECB is expected to look for a 25 basis point hike, with some speculation that they may go for 50 basis points.

• The Federal Reserve will also have a decision coming up soon.

Formula One Racing Discussion

This section covers a discussion about Formula One racing.

Formula One Racing

• Tom and Jonathan discuss their opinions on ESPN's coverage of Formula One racing compared to Sky Sports' coverage.

• They talk about how different race tracks can feel like car parks or parking lots.

• Jonathan expresses his desire to experience the sound and smell of a race firsthand.

• Tom jokes about getting labeled overalls if they were to attend a race together.

News Update with Lisa Mateo

This section provides an update on recent news.

News Update

• President Biden has invited top congressional leaders for a meeting on the debt limit next week.

• The Treasury Department warned that the nation risks default as early as June 1.

• The FDIC is calling for a sweeping overhaul of deposit insurance, with a targeted coverage approach being the best option.

• Inflation in the UK has slowed down slightly, but grocery bills are still climbing.

• Morgan Stanley is expected to eliminate about 3,000 jobs by the end of this quarter due to a dealmaking slump.

• HSBC will buy back as much as $2 billion of stock and resume paying quarterly dividends for the first time since 2019.

Treasury's Best Estimate is Unable to Satisfy Government Obligations by Early June

The Treasury's best estimate is that they will be unable to satisfy all of the government obligations by early June and potentially as early as June 1.

Meeting with Congressional Leaders

• President set a high state debt limit meeting between congressional leaders, inviting them to meet May 9.

• McCarthy agreed to that meeting according to a GOP aide.

White House Correspondents Dinner Focused on Politics

The White House Correspondents Dinner was focused on politics and nothing to do with economics or analysis.

Setting the Stage for the Election

• The dinner is ultimately for the election and about setting the stage and placating constituencies.

• It is unclear what Joe Biden's constituency is. Is he playing to the middle or liberals?

Silicon Valley Companies Offering Yields

Apple has entered into offering yields in Silicon Valley, which is interesting because they have a long-term vision.

Consumer Deposits

• Everyone realizes you have to get some yield on your cash, there is safety towards larger banks but Apple's entry in this space is interesting. They are trying to attract consumer deposits.

• Clearly they have a long-term vision and can do it without being financial or a bank.

Uber Earnings Report Analysis

Uber earnings report shows that their mobility business looks better but is a drag on profitability.

Yearly Revenue

• The only way you can make money in this business is at scale. Half of the scale comes to the supply side and on the brighter side they have organic momentum.

• Three or four years out, it is more a margin improvement story and as long as they keep the growth and keep delivery on the margins, I think you can say it is not valued as a tech stock as it should be.

Lyft Struggling with Driver Supply

Lyft is struggling with driver supply and job cuts announcement.

Logistics Business

• If you start looking at these companies as a logistics business, they are competing with Amazon and Shopify, businesses that layer e-commerce and logistics together. They can partner with Walmart or Target but need scale. The B2B side of things has bigger scale. That's what Grubhub did partnering with Amazon.

• There aren't any expenses of $800 million per quarter when consumers are coming to your app. There is a lot to be fixed on the cost structure side and Uber had the scale of $30 billion in annual revenue rate so they're tearing down costs.

Uber Cash Flow Switch from Negative to Positive

Uber's cash flow switch from negative to positive is extraordinary.

Cost Structure

• They are spending about $9 billion in cost of revenue and no one has understood why these companies are so bloated. It will get the benefit of doubt as long as they keep delivering on the margins, that's a $500 billion business which will be key to operating.

• Uber has the scale of $30 billion in annual revenue rate so they're tearing down costs.

Uber Competing with FedEx

Uber is competing with FedEx and valued at six to eight times.

Logistics Business

• The market is looking for how much the profitability, this is adjusted, not a GAP number. It will get the benefit of doubt as long as they keep delivering on the margins, that's a $500 billion business which will be key to operating.

• They are probably valued at six to eight times and if you start looking at these companies as a logistics business, they are competing with Amazon and Shopify, businesses that layer e-commerce and logistics together.

Bond Offerings and Treasury Market

The discussion revolves around the bond offerings and how it affects the treasury market.

Impact of Bond Offerings on Treasury Market

• Bond offerings contribute to the move higher in yields on treasuries.

• CFOs want a constant stream as yields go up, hence they offer bonds.

• Maturity has gone from north of five to south of four.

Apple's Debt Offering

The discussion revolves around Apple's debt offering and equity.

Apple's Debt Offering

• A week after their earnings, Apple does a debt offering.

• They have 94.4% equity, which is not ideal for doing a debt offering.

First Quarter Revenue Surprises

The discussion revolves around first-quarter revenue surprises for various companies.

First Quarter Revenue Surprises

• First Republic reports small upside surprise with Q1 revenue at $850 million against an estimate of $757.7 million.

• Modern F1 principal reports Q1 revenue at $5.6 billion and EPS at $2.80, raising guidance for full year with stock up by 1.6%.

Banking System Stress

The discussion revolves around stress in the banking system and its causes.

Banking System Stress

• There is still a fair amount of stress in the banking system.

• It is hard to divorce Fed action with what's happening in the banking sector.

• Bloomberg Surveillance live from New York City for our audience worldwide.

Market Expectations

The discussion revolves around market expectations for the upcoming days.

Market Expectations

• Equity market is down by 0.1% on the S&P 500.

• Feds meeting begins in Washington, and the market is looking for a 25 basis point hike.

• ECB Thursday Emma payrolls Friday, Apple earnings are just around the corner.

Uber and Recession Talk

The discussion revolves around Uber's business and recession talk.

Uber and Recession Talk

• Uber is about moving people around, and there is a slight recession talk.

• Tom does not see a lot of negative GDP chitchat.

Bank News

The discussion revolves around bank news and getting smarter on banking stuff.

Bank News

• We need to get smarter on bank stuff and start with John Malavine.

• Professor suggests either preserving production industrial banking system by removing FDIC insurance limits immediately or financial as Wall Street banks to take hold, an outcome that would necessitate nationalization of the sector.

Central Banks' Choices

The discussion revolves around central banks' choices regarding their actions.

Central Banks' Choices

• We now have two choices before us - either we preserve our production industrial banking system by removing FDIC insurance limits immediately or financial as Wall Street banks to take hold, an outcome that would necessitate nationalization of the sector.

• Mohamed El-Erian was channeling a gentleman from Leap Zig who wrote a definitive paper on this topic.

Inflation in Euro Zone

The discussion revolves around inflation in the euro zone and short-term rates.

Inflation in Euro Zone

• Inflation came a little bit hot in the euro zone early this morning, and that currency is negative 0.1%.

• Short-term rates are inflammatory, but it depends on how far the central banks will push it.

Economic Outlook

In this section, the speaker discusses the current economic outlook and earnings projections for Q1 reporting. They also mention a contraction in EPS numbers and potential risks to watch out for.

Margins and Earnings Projections

• Margins are slowing down, leading to flat growth year-over-year for the S&P 500.

• EPS number is expected to contract by about 10%.

• GDP growth is expected, but with slowing consumer spending and inflationary pressures.

Tech Industry

• Tech industry has been performing well recently but may be getting ahead of itself.

• Running ahead of itself in yield markets.

• Market is expecting Fed cuts after this meeting, but it's too soon for that.

Tail Risks

• Commercial real estate space is a hot topic due to loan renewals.

• Student loans could impact consumer spending.

• Uncertainty around Fed cuts or pausing could make things tougher in the summer.

Opportunities During Tough Times

In this section, the speaker talks about how investors can weather through tough times by looking at secular growers and opportunities in certain industries.

Secular Growers

• Rather than going full cash, look at secular growers as an investment opportunity during tough times.

• Cap goods space still has volume holding up despite market conditions.

• Median entertainment is attractive due to continued consumer spending on experiences and services.

GDP Growth Expectations

In this section, the speaker discusses GDP growth expectations and how they factor into equity analysis. They also talk about potential earnings contractions and their impact on equity levels.

GDP Growth Expectations

• Expectation for GDP growth just above 1% for this year, with a flat 2024.

• Sharpest pain points for GDP contraction are Q4 of this year and the beginning of next year.

• Earnings contractions are already occurring due to margin pressure.

Equity Analysis

• Expect a 10% correction in the next 3-6 months off the back of earnings.

• Multiples and equity levels will be pushed lower during tough times.

Apple Earnings and Mercedes Magazine Subscription

In this section, the hosts discuss Apple's upcoming earnings report and a subscription to Mercedes magazine.

Apple Earnings

• The hosts mention that they will see how Apple performs on Thursday.

Mercedes Magazine Subscription

• Tom mentions that he has a subscription to the full digital package of Mercedes magazine.

• Jonathan asks how much the subscription costs, and Tom responds that it is around $600 per year.

• Jonathan expresses surprise at the cost of the subscription, and Tom jokes that only he and two other guys in Manhattan have it.

Debt Limit Meeting, Euro Area Inflation, Uber Earnings

This section covers news related to debt limit meetings in the US, inflation in the Euro area, and Uber's first-quarter earnings.

Debt Limit Meeting

• President Biden has scheduled a high-stakes meeting for next week on the debt limit.

• The Treasury Department warns that a potential default could come sooner than expected if there are no cuts to the federal budget.

• House Speaker Kevin McCarthy has said he will not extend the debt limit unless there are trillions in cuts to the federal budget.

Euro Area Inflation

• Underlying inflation in the Euro area slowed for the first time in 10 months after stripping out volatile items like food and fuel.

• Consumer prices rose 5.6% from a year ago, backing up the case for European Central Bank to slow its most aggressive interest rate hike campaign later this week.

Uber Earnings

• Uber reported first-quarter earnings that beat estimates, and consumers continue to spend more on rides and food takeout despite rising prices and an uncertain economic outlook.

• While there were fewer than expected monthly users, bookings beat estimates, indicating that customers are taking trips more frequently.

President Biden's Comments on Debt Ceiling

This section covers President Biden's comments on the debt ceiling in the United States.

• President Biden speaks about the importance of ensuring the continuing reliance of the US economy and financial system.

• He emphasizes the need to make sure that the threat of Speaker McCarthy and defaulting on national debt is off the table.

Importance of Getting Debt Limit Done

In this section, Tom discusses how important it is to get the debt limit done.

• Tom emphasizes that they have to get this done, citing Watergate Europe as an example where leaders understood that they had to get things done.

• Jonathan mentions that June 1 sounds urgent and important, but waiting a week to have a meeting doesn't sound that urgent. Tom agrees with him.

Meeting Between President Biden and Speaker McCarthy

This section covers details about a meeting between President Biden and Speaker McCarthy.

• Anne-Marie Horndern joins in discussing how likely it is for this meeting not to happen this week given Treasury Secretary's statement about when Treasury can exhaust their special accounting measures taken since January could be as early as June 1.

• The meeting is scheduled for May 9, and it is likely to happen in the Oval Office.

Debt Ceiling Negotiations

This section discusses the ongoing negotiations regarding the debt ceiling and how it may play out in the coming weeks.

Biden Invites Congressional Leadership to White House Meeting

• President Biden has invited congressional leadership, including Hakeem Jeffries, Speaker McCarthy, McConnell, and Schumer to a meeting at the White House.

• McConnell has made it clear that he will defer to Speaker McCarthy on this issue.

• All four congressional leaders have been invited to the White House for this meeting. Speaker McCarthy has accepted and all eyes will be on him as he's been asking for another meeting since February 1.

Potential Outcomes of Negotiations

• The issue at hand is that the White House continues to say they will not pass a bill regarding the debt ceiling that is not clean.

• Speaker McCarthy says he will not do so either.

• There could be a path where every side has a little bit of a win if they go to September and pass a clean debt ceiling bill but also a budget that has spending cuts.

• Some say it gets cut in the Senate and for Democrats in the House, they are the ones who have to sign onto this.

Concerns About Fractious Republican Party

• Many people point to how fractious Republicans are in the House with many wanting deep spending cuts that no Democrat or some centrist Republicans would ever sign up for.

• Senator Manchin was able to pass his debt ceiling lift plus spending cuts package for the house. Joe Manchin said it's time for President Biden to sit down with McCarthy.

• There is concern that this situation is different from previous ones, and many are talking about 2011 when the U.S. was downgraded even though negotiations were happening at the time.

Conclusion

• The negotiations regarding the debt ceiling are ongoing, and there is no clear outcome yet. Many are concerned about how fractious Republicans are in the House and how deep spending cuts may be a non-starter for Democrats or some centrist Republicans.

The Federal Reserve Meeting

In this section, the hosts discuss the upcoming two-day meeting of the Federal Reserve that concludes tomorrow. They also mention that the Fed is likely to keep its options open for further rate hikes beyond the 25 they expect tomorrow.

The Federal Reserve Meeting

• The Federal Reserve will have a two-day meeting in Washington.

• There was no relief rally in the equity market yesterday even with the banking solution by First Republic.

• Tons of corporate debt supply came to the market, yields pushed higher.

• The RBA coming out with a surprise rate hike and signaled there may be more.

Banking Crisis and JP Morgan

In this section, Thierry Wiseman of Macquarie Futures joins the hosts to discuss how JP Morgan is different in 2023 than it was during the 2008 financial crisis. He explains that while 2008 was primarily an asset side problem, today's crisis is primarily a liability side problem.

Banking Crisis and JP Morgan

• Thierry Wiseman explains that 2008 was qualitatively different from today's situation for banks in the United States because it was primarily an asset side problem.

• Today's crisis is primarily a liability side problem due to lack of confidence in banks.

• Lower interest rates can help promote economic growth and confidence.

• Thierry Wiseman believes that there have been examples of debt ceiling crises being resolved in the past, but today's differences are political rather than economic.

Debt Ceiling Crisis: What Happens Next?

In this section, the speakers discuss the potential outcomes of the debt ceiling crisis and how it may be resolved.

Potential Outcomes

• The U.S. Treasury may issue debt and face challenges in court by opposition.

• The Supreme Court could issue an injunction that would put the debt ceiling situation on hold.

• The Treasury has hundreds of billions of gold in storage at Fort Knox, which could be used to issue gold certificates to fund government operations.

Views on Debt

• There is a cultural overlay that views debt as bad, but it depends on where it is going and what activities it supports.

• Debt is fine as long as there are limits and it supports investment, assets being created in the economy, and more productivity.

Risk Assessment

• If a payment is skipped, Moody's may not necessarily put the U.S. in default or trigger CDS payments on swaps since U.S. Treasuries do not have cross-default provisions.

• As long as Treasury bills have value in dollars, they will serve as good collateral.

Pacific Expansion

• Thierry does not necessarily believe in China's expansion.

Week PMI Better This Week

The hosts discuss the week's PMI and plan to talk about the debt ceiling later. Lisa Mateo reports on President Biden's meeting with top congressional leaders regarding the debt limit.

Discussion of PMI and Debt Ceiling

• Tom and Jonathan discuss the week's PMI.

• They plan to talk about the debt ceiling later.

• Lisa Mateo reports that President Biden will meet with top congressional leaders regarding the debt limit next week.

• The Treasury Department has warned of a risk of default, but the U.S. will not negotiate with Republicans.

• Kevin McCarthy, who passed the debt plan, said he would not increase the debt ceiling without cuts.

News Update: Debt Limit Meeting and Deposit Insurance Overhaul

Lisa Mateo provides an update on news from around the world, including President Biden's upcoming meeting on the debt limit and a proposed overhaul of deposit insurance.

Debt Limit Meeting and Deposit Insurance Overhaul

• Lisa Mateo reports that President Biden will meet with top congressional leaders regarding the debt limit next week after warnings from the Treasury Department about a risk of default.

• The U.S. will not negotiate with Republicans over this issue.

• Kevin McCarthy, who passed a debt plan, said he would not increase the debt ceiling without cuts.

• A U.S. regulator wants a sweeping overhaul of deposit insurance as pools of money used to protect clients have been drained.

• The FDIC says switching to a targeted approach would be best but requires Congress to act.

Job Cuts at Morgan Stanley and BP Share Buybacks

Lisa Mateo provides an update on job cuts at Morgan Stanley and BP's share buybacks.

Job Cuts at Morgan Stanley

• Senior managers at Morgan Stanley are discussing plans to eliminate about 3000 jobs by the end of this quarter.

• Many of the cuts are expected to take place in the banking and trading group.

• Morgan Stanley has about 82,000 employees.

BP Share Buybacks

• BP is slowing the pace of share buybacks despite posting first-quarter profits that beat estimates.

• The surplus cash flow it uses to boost returns shrank by about 40%.

• BP says it will repurchase $1.75 billion of shares before announcing second-quarter results, down from $2.75 billion in the previous period.

Red Bull Racing Team and Aston Martin

Christian Horner discusses Aston Martin and Formula One with Tom and Jonathan. Mike Krack, team principal for Aston Martin F1, joins them later.

Red Bull Racing Team and Aston Martin

• Christian Horner speaks with Tom and Jonathan about Aston Martin's success in Formula One.

• Fernando Alonso is now driving for a competitive car at age 41.

• Mike Krack, team principal for Aston Martin F1, joins them later to discuss their unexpected success in the constructors championship.

• They attribute their success to recruiting new talent across last year that complemented their existing workforce.

Importance of Technical Director at Aston Martin F1

Mike Krack discusses how important it was to bring a technical director to the Aston Martin F1 team.

Importance of Technical Director

• Mike Krack explains that bringing a technical director was one of many recruits they made across last year that complemented their existing workforce.

• All these new hires came together as a great group, getting all the strength out of everybody which led to their unexpected success.

Preparing for the Miami Race

In this section, Mike from Red Bull Racing talks about how the team is preparing for the upcoming race in Miami and discusses the relationship between their two drivers.

Red Bull's Drivers Relationship

• Red Bull has two great drivers who are also great human beings and teammates.

• Unlike other teams, there is no fierce rivalry between Red Bull's drivers as they understand that F1 is a team sport.

• The team needs to get every possible opportunity to do better than others.

Miami Racetrack

• Mike thinks that the racetrack in Miami has everything that a modern Formula One racetrack should have. It has high-speed corners, low-speed corners, and is completely resurfaced.

• He believes that the heat during the weekend will add a lot of difficulty to cool the cars but mainly keep tire management under control. All in all, he thinks they are for a great weekend and great racing.

Sustainability of F1 Cars

In this section, Jonathan asks Mike about his thoughts on sustainability in F1 cars.

Future of Combustion Engines

• By 2026, F1 will run only on sustainable fuel and will increase the amount of electric power given to cars which will be around 50/50 with hybrid engines already being used in Formula cars.

• The developments in sustainable fuels are adding or massively increasing life of combustion engines which can make these nice cars we have today sustainable and able to run them longer.

• Mike thinks that the combustion engine will have its time for the next 10 years, but ultimately it will fade out and Formula One will not be with the combustion engine 20 years from now.

Red Bull Racing's Powertrain Manufacturer

In this section, Tom asks Mike about Red Bull Racing's powertrain manufacturer.

Relationship with Honda

• Red Bull is quite happy with their current powertrain manufacturer and has a lot on their plate at the moment for 2023 and 2024 to make further progress. They are not really too much into 2026 at this stage.

English The Fed, Jobs Market, and Value vs Growth Stocks

In this section, the hosts discuss the upcoming Fed meeting and jobs market data. They also talk about the value versus growth stocks debate.

The Fed Meeting and Jobs Market Data

• Apple earnings and a Fed meeting are coming up.

• There is difficulty in making a call on the Fed due to conflicting headlines.

• The median estimate for payrolls on Friday is 180,000 with unemployment around 3.5%.

• Some people believe that this is a boom labor economy.

• Economic data including durable goods and JOLT survey matter to this debate.

Value vs Growth Stocks Debate

• The value trap in the market right now is low-quality stocks that do not pay attention to fundamentals.

• There will be several important events happening soon such as the ECB meeting, payrolls report, and Apple earnings after close Thursday.

• Ann Miletti from Allspring Global Investments believes that big tech names' valuations are frothy at present.

• Fundamentals of big tech names look better than expected but risk-reward is not favorable as it was at the beginning of the year.

Real Estate and Investment Strategies

Ann Miletti, CIO of Allspring Global, discusses the challenges of regional banks holding office real estate. She also shares her investment strategy and thoughts on market timing.

Regional Banks Holding Office Real Estate

• Many regional banks hold office real estate, which is problematic.

• There has been a lot of talk about this issue, but Ann fears there may be other problems that are not being discussed.

Investment Strategy

• Selling stocks to time the market requires good timing both on the way out and on the way in. This is not what good investors do.

• Good investors select the right companies and stay invested in those companies throughout the cycle. History has shown that investors are rewarded for doing so.

• It's important to own fewer names but still be diversified across your portfolio to avoid bringing too much risk to the table. The right number of names depends on each investor's preference, but owning 75 to 120 names in mid-cap or small-cap space could be a better average to think about than large-cap space where indexes carry so much weight in the top 10 holdings.

Market Timing

• Ann does not believe in selling stocks during May as it is an old average that she does not follow. No one can predict market movements with certainty, and no one coming into the studio has a crystal ball either.

Investment Opportunities

Ann Miletti shares her thoughts on investment opportunities in healthcare, technology, emerging markets, and value investing.

Healthcare

• Healthcare has underperformed and has not recovered well post-COVID. There is still a lot of room in the tech space and healthcare services space, and multiples haven't recovered.

Emerging Markets

• Emerging markets look interesting as some countries have rates that rocketed much higher than they did in the U.S., but now they are starting to come down. They are ahead of where we are in the cycle, and the dollar is starting to show some weakness. When the dollar weakens, it is good for emerging markets.

Value Investing

• There is value and good long-term growth potential if you want to talk about value investing.

Debt Limit and Inflation

Lisa Mateo provides updates on President Biden's meeting on debt limit, underlying inflation in Euro area, and Russia's casualties.

Debt Limit

• President Biden has set a high stakes meeting next week on the debt limit as Treasury Department warned a potential default could come sooner than expected. The House Speaker said he will not extend the debt limit unless there are trillions in cuts to the budget.

Underlying Inflation

• Underlying inflation in Euro area declined for the first time in 10 months as consumer prices rose 5.6% from a year ago in April, backing up the case for ECB to slow its most aggressive interest rate hike campaign this week.

Russia's Casualties

• The White House says Russia has suffered more than 100,000 casualties since December.

English Overview of Debt Ceiling Crisis

This transcript discusses the potential debt ceiling crisis in the United States and how it may be resolved.

Potential Solutions to Debt Ceiling Crisis

• The Treasury could continue issuing debt if a political resolution is not reached.

• There may be a scheduled meeting on May 9 between Congressional leaders and the President to discuss the issue.

• Senator Schumer has scheduled two votes, one on a clean debt ceiling height and one on the House bill which Republicans might vote for.

• Staff advise they are willing to hike the debt ceiling to $33 trillion which would get it out to the election presidential cycle.

Perspectives on Debt Ceiling Crisis

• Thierry Wizman believes that there will be a resolution but it may come down to the wire.

• Henrietta Treyz thinks that this situation is similar to previous crises and that staff will play an important role in resolving it.

Treasury to Continue Issuing Debt Despite Political Situation?

In this section, Henrietta Treyz discusses whether the Treasury can continue issuing debt despite the current political situation.

Can the Treasury Continue Issuing Debt?

• Congress is likely to insist on acting and will not allow the Treasury to ignore the political situation.

• Default is not an option, and investors should skip over headlines and see that Kevin McCarthy put a bill on the floor well before he needed to.

• Four weeks is more than enough time for Congress to act.

JOLT Survey and Fed Meeting Preview

This section covers Michael McKee's discussion of JOLT survey results and previews of the upcoming Fed meeting.

JOLT Survey Results

• The JOLT survey indicates a shortage of workers leading employers to bid up pay. A drop in JOLTS is considered good news.

• The JOLT report is not seen as widely accurate due to low response rates from companies but it is still something people look at.

Fed Meeting Preview

• The biggest question at the upcoming Fed meeting will be how they sell staying at 5.25% for a lengthy period of time.

• The market thinks that there will be circumstances under which they would think about cutting rates, which could indicate a problem with credibility and financial conditions for the Fed.

PC Index Targeting

In this section, the speakers discuss the PC index and its targeting. They mention that they are still looking at over 4% on PC, which is the index they do their targeting. They also think they will get down to 3% or 3.5% when rents decline.

PC Index Targeting

• The speakers discuss the PC index and its targeting.

• They mention that they are still looking at over 4% on PC, which is the index they do their targeting.

• They also think they will get down to 3% or 3.5% when rents decline.

• It has been a slow process but you should be able to take a big portion out.

Sports Update

In this section, the speakers provide an update on sports news including Boston Bruins swag on sale and updates on hockey and baseball.

Sports Update

• The speakers provide an update on sports news.

• There is some Boston Bruins swag on sale if you are looking for that.

• Michael got a note from his brother that said it was perhaps the worst defeat in hockey history.

• The Red Sox are not in last place so good news.

Fed Coverage Preview

In this section, the speakers preview their upcoming coverage of the Federal Reserve including interviews with Claudia Sahm who was recently active on Twitter discussing Fed policy.

Fed Coverage Preview

• The speakers preview their upcoming coverage of the Federal Reserve.

• This includes interviews with Claudia Sahm who was recently active on Twitter discussing Fed policy.

• Tom mentions that he anticipates our Fed coverage tomorrow including Michael McKee with the Chairman.

Fed Policy Discussion

In this section, the speakers discuss Fed policy and whether they will pivot or not.

Fed Policy Discussion

• The speakers discuss Fed policy and whether they will pivot or not.

• Claudia Sahm mentions that there are a lot of reasons why later in the year they will not cut.

• They will not cut if there is a recession or banking or financial market turmoil.

• The history of the past makes sense for this Fed to stay the course.

Data Dependency

In this section, the speakers discuss data dependency and how it affects the Federal Reserve's decision-making process.

Data Dependency

• The speakers discuss data dependency and how it affects the Federal Reserve's decision-making process.

• The Federal Reserve has become data dependent in a backward-looking way.

• If they don't look forward with their decisions, it will be too much.

• They are playing with fire in terms of pushing when we already have a lot in the pipeline.

Unemployment Recovery

In this section, Claudia Sahm discusses unemployment recovery and how national data masks what is going on underneath the hood.

Unemployment Recovery

• Claudia Sahm discusses unemployment recovery and how national data masks what is going on underneath the hood.

• Over 40% of states haven't made a full recovery from unemployment but they don't talk about that.

• There's progress in jobs but unfortunately inflation has eaten away at that progress.

• We've done a lot to close gaps at the bottom which is truly something to celebrate and try to protect.

Middle Class Recovery

In this section, the speakers discuss the recovery of the middle class in the COVID era.

Middle Class Recovery

• The speakers discuss the recovery of the middle class in the COVID era.

• The bottom decile and quintile have been doing well but what about the broad middle class?

• Claudia Sahm mentions that we are doing well, covering owing to a strong labor market.

• Unfortunately, inflation has eaten away at income and wealth which is not as dependent on jobs as basically everybody else.

Resiliency of American Economy

In this section, the speakers discuss whether there is a great misjudgment beginning with IMF about the resiliency of the American economy.

Resiliency of American Economy

• The speakers discuss whether there is a great misjudgment beginning with IMF about the resiliency of the American economy.

• Neil of Renaissance sent Tom a blistering note underscoring his optimism on consumer and good incomes.

• Claudia Sahm has full faith in the American consumer and workers.

• She also has full faith in what is happening in Congress and Federal

English Interpretation of Short-Term Yield

Claudia Sahm, an economist, discusses the rise in short-term yield and its interpretation.

Rise in Short-Term Yield

• Three-month LIBOR climbs including more recent measurements.

• The stunning rise in short-term yield fits with this degree of pessimism.

• It's harder than usual to parse what markets are doing due to a lot going on.

• Markets are predicting a recession and there is way more pessimism.

English Top Congressional Leaders Meeting on Debt Limit

President Biden has invited top congressional leaders for a meeting on the debt limit next week after the Treasury Department warned that the nation risked default as early as June 1.

Debt Limit Meeting

• President Biden has invited top congressional leaders for a meeting on the debt limit next week.

• The Treasury Department warned that the nation risked default as early as June 1.

• The White House said it would not negotiate over extending the debt ceiling.

• Speaker McCarthy passed a plan last week saying he would not extend the limit without cuts.

English Regulator Wants Overhaul of Deposit Insurance

A U.S. regulator wants sweeping overall of deposit insurance due to banks draining money usually reserved.

Deposit Insurance Overhaul

• A U.S. regulator wants sweeping overall of deposit insurance due to banks draining money usually reserved.

• The FDIC is switching to a targeted coverage approach that would require Congress to act.

English Job Cuts at Morgan Stanley

More job cuts are expected at Morgan Stanley in the midst of a dealmaking slump.

Job Cuts

• Senior managers are discussing plans to eliminate 3000 jobs by the end of the quarter.

• Cuts are expected to take place in the banking and trading group.

English Fed Raised Rate Much More Than Forward Guidance Suggested

The Fed raised rates much more than forward guidance suggested, putting those rates way above where the market suggested last summer there was supposed to be.

Fed Rate Hike

• The Fed raised rate much more than forward guidance suggested.

• They put those rates way above where the market suggested last summer there was supposed to be.

• Yield curve is a predictor of recession and causes recessions.

English Trending is Out There

Christopher Varona at Strategas Securities discusses how under the surface, sector by sector, group by group, there are names you would expect behaving in a similar way but responding disparately.

Trending Market

• When we look at the external trend of the market, we could say generously it is up but under the surface it is a mess.

• Sector by sector, group by group, there are names you would expect behaving in a similar way but responding disparately.

• At this moment you are in search of trending.

Homebuilding and Financial Markets

In this section, the speakers discuss the strength of homebuilding and the state of financial markets.

Tech Stocks

• The big tech stocks have outperformed, but there are underlying problems.

• Tech is being confused as strong, but under the surface, it has the same problems.

Weakness in Financial Markets

• Under the surface, financial markets are worse than the broader market.

• Yesterday's new low list included regionals, banks, consumer finance, retail, metals of mining and steel.

• The concentration at the top of the market whether it is ETF's or passive investments contributes to this weakness.

• It doesn't look like economic growth will re-accelerate or slow down.

Bank Index and Gold Prices

In this section, the speakers discuss bank index trends and gold prices.

Bank Index

• The bank index is not doing well. There is a lot of weakness in banks, autos and steel.

• To buy banks again they need to reclaim levels seen before.

• Targets for recovery are six months plus.

Gold Prices

• Gold has been a leader for better part of last six or seven months.

• Consolidation in gold prices has been benign even as rates have pushed higher.

• Physical gold is best way to express gold.

• GLD is recommended over gold stocks given their weakness broadly.

Dollar Trend and Best Buy

In this section, speakers discuss dollar trend off DXY and best buys in healthcare sector.

Dollar Trend

• DXY mainly consists of euros so 60%. Dollar trend is down.

• Lowered dollar over next 12 to 24 months seems likely.

Best Buy

• Whole Logic looks good in healthcare sector.

• United Health Care is also a good option.

Uber's CEO discusses earnings

In this section, the CEO of Uber discusses the company's recent earnings report.

Discussion of Earnings Report

• The CEO mentions that the earnings report was positive.

• Despite this, futures are negative by seven.