It was quite a back and forth week. We had the Powell testimony that seemed
to go higher. We had the jobs numbers and then we had
the SVP situation. What do you make of all of it?
Look, I think that the overwhelming thing that happened this week was the
receivership of SB Bank. Right.
It's a it's one of the largest bank failures that we've had since the
financial crisis. It's the 16th largest bank in the US.
I don't think that the issues that you see with SBB are systemic.
I would agree with what Larry Summers has said earlier.
However, I do think it was an opportunity for everyone in the market
to take a very big pause today and really think about their positions and
think about their liquidity, which is why you saw some of the
less liquid parts of the market really get hit much harder today, like small
cap stocks and high yield bonds. Also, we know we're down pretty
dramatically today. So, Sara, even if it's not systemic, is
it possibly a canary in the coal mine as they talk about that, although it may
maybe just as maybe they got special situations, the underlying circumstances
could be reflected in other parts of the economy as well as, frankly, financial
markets? Well, David, one never knows what.
But Silicon Valley Bank did have a very concentrated corporate deposit base.
And so there are other regional banks in the U.S.
Their deposit bases in general seem to be much more diversified.
So that's one of the primary reasons why this may not be systematic.
But confidence is crucial for banks. And
there doesn't appear, especially given the likelihood that Silicon Valley bank
depositors will be made whole. Any reason for this to spread through
the banking system, which could be a reason to be looking at some of the
other banks as as investments given they're selling off so rapidly?
Well, it wasn't even. I don't think as a practitioner of zero,
by the time it started sort out, it looked like the regional banks were
getting hit harder than the big money center banks.
Does that suggest that some of the regional banks may be opportunities for
investors, rather? It does depend on what they hold if in
their asset. Bases, they have a huge amount of
commercial real estate, particularly office, that could end up being very
problematic. What we're all really talking about here
is a new era. Interest rates are rising and until they
stop rising in full again, there's a complete new view on credit.
Credit is going to be very difficult to obtain.
We're in a credit crunch. So whether you're in real estate and you
have a tough time with occupancy or or you're a technology banker, this is this
is a whole different environment. So be really careful if you're looking
at regional banks, make sure they're trading down at their tangible book
value book, less goodwill. But that's really solid ground.
There's nothing else could go terribly wrong in their assets out of their
balance sheet. But what other parts of the economy in a
business are interest rate sensitive in this sense?
Because we've had a long regime, frankly, a pretty low interest rates.
That seems to be gone, right? Well, look who's benefited the most from
very low interest rates. The real estate sector was probably the
first one. Right.
That's the single biggest beneficiary of it.
You'd have to also take a look at the private markets, private credit, private
equity, private real estate all benefited from very low rates.
So, you know, the the fact that you have is drying up liquidity.
The Federal Reserve has been raising interest rates aggressively for the past
12 months. They're trying to slow down the economy.
And when you slow down the economy, certain things break just like
cryptocurrency broke last year. Then you had the problems in the gilt
market in the UK and now you have a U.S. bank that's just failed.
Try to slow down their Covid. How much, Barbara, are we going into
recession as a broken matter? Because inflation seems to be more
durable than people thought. They're going to have to step on the
brakes so hard that we have to go into recession.
I don't think there's a recession on the horizon over the course of the next 12
months. Right.
There's a very long lead time between policy implementation when you're
raising interest rates and when you go into recession.
The US economy is extremely strong, right?
You had three hundred eleven thousand jobs printed this past month.
While it looks like the labor market is starting to ease a bit and weaken a
little bit, I would say that the U.S. economy is a very durable supertanker.
It would probably take a seismic shock of some sort in order to derail it at
this point. And I don't think SBB is that shock.
Sara, you specialize in equities, in particular investing in equities when it
comes to equities. What is your base case on that
recession? And more importantly, does it matter?
Does it really affect which equities you invest in, whether you think there's
going to be a recession or not? It matters if a stock does, nobody price
in some slowing. There's no doubt.
I mean, my colleagues and I really do believe that the Fed is intent on
slowing the U.S. economy in the same with the European
Central Bank. Maybe they're a year behind the Fed
and at some point time, maybe the Japanese will tighten monetary policy
with a new central bank head. So there's a there's a lot of tightening
out there. And the other side of that is typically
economic slowing. That's what brings down inflation.
And inflation is the target. So we're expecting some element of
slowing it. It may be severe.
It's hard to know. But what we do know is what's priced
into stocks and not all stocks, but in certain areas that many of them have
already discounted in economic slowing. Not all the cyclicals, for example, but
there are there are some industries that have and that's the opportunity where
it's already priced and then we can have it.
And then the worst can happen. And the stock has nowhere to go but up.
Boral's play the parlor game. What do you think the terminal rates
gonna be for the Fed to get inflation down to where it needs to go?
I don't think it's as high as probably what the market's pricing in.
I think maybe the Fed Reserve has to tighten one, maybe two more times if
that, and then be done. The reason is the way that you price in
a higher terminal rate is either you have a faster labor force growth or
faster productivity growth. The U.S.
doesn't have any thought, any thought showing of that being the case at this
point. So for us, we do not believe that our
star is 6 percent or something above there at this point.
I don't think that the US economy can grow so fast or it's been such a
dramatic change that it's been over the past 20 years.
So we don't think that rates have to go much higher at this point.