Do we have a rally going on the S&P, they're up now flirting with forty two
hundred again? Look, I think I think the market is
expecting that forty two hundred ceiling to hold here.
If the S&P manages to get through it, there's a little bit of know blue sky
out there simply because that's where all the hedges are.
So expectation that we're essentially fair valued here.
Most of Wall Street says this is you know, we're fairly valued here.
And yet you can't get much higher. And as you know, when all the bearish
say the same thing and all the strategists say the same thing, the
market tends to go in the other direction.
So in part, the market rallied so hard this week on the expectation that the
debt ceiling was going to be taken care of by this weekend.
And that's what I talk about. And not just this week, but this year so
far. Isn't the S&P up something like 9
percent, something along those lines? So what is doing that?
Is it because their earnings came in better than the expectations which had
been taken down or is it because of the Fed?
So there's a couple of things going on. The first thing is there's actually a
lot of liquidity in the system because Janet Yellen at Treasury has been adding
liquidity to the system to pay the U.S. bills, which is helping stock prices and
specifically NASDAQ prices as well. That 9 percent increase in the S&P this
year is essentially driven 85, 90 percent by seven stocks.
It's not that other stocks are in offices, that they're not heavily
weighted enough to drive the index to this level.
So you've got seven stocks driving the index.
They're all large cap tech. They're also associated with A.I..
So you've got overlapping stories here driving the index higher because it's
concentrated in those really powerful names that drive the index.
Gerard, let's turn to you on the question of the banks, because that
liquidity we're getting from the Fed to some extent is there.
If I can call it the reversal of quantitative tightening because of what
happened in the wake of Silicon Valley Bank and the other banks.
Should we expect that to keep going into the banks, going to keep drawing down
and that liquidity really?
It's going to be interesting. It's a great question because the
deposit flight is over. We know from what we saw in the middle
of March when the Silicon Valley signature and First Republic banks
failed. Now, First Republic technically fail.
Obviously not March, but at the end of April, early May.
And I would say that the deposits that we saw today that came out this
afternoon with the H. 8 data and what you saw at the agency
did it was deposits are down slightly for the larger banks, smaller banks
generally flat to down. And so there's really no need to have to
pull down liquidity, even though we still have, of course, discount window
borrowings and the backstop borrowings with the bond portfolios from the Fed.
So there's plenty of liquidity, as Lisa pointed out.
And I think that the banks are certainly going to benefit from that as we go
forward. So, Felicia, if we don't have the
problems with the depositors, it appears at the moment anymore.
Does that mean we're past the problems of the banks or are there other things
perhaps lurking out there? So I think the immediate problem of the
small and regional banks has been ring fenced for the most part.
And that's what you see actually in the equity market, because the the bank the
bank sector has is underperforming everything else and every other sector
is more or less all right. Because it's not as affected.
So the ring fencing and the policies at the FDIC and the Fed put together in
March have been very helpful in that I think ahead of us lie some consolidation
in the small and medium sized banks. Stock prices are essentially reflecting
a valuation across the entire sector, which is more or less equal, even though
they're very different members and operating businesses within that index.
So not every bank is the same that every small and regional is the same.
So there's some opportunity there. The issue really is about whether the
banking crisis is over, is how it affects the real economy and what it
does to lending. And that is going to be a slow drift
downwards. Not right away.
We've already seen lending started contract three quarters ago, very slow.
It slowly increased in the first quarter.
The contraction. But the question is, where does that
affect the real economy? Because as you know, the U.S.
has held up pretty well that it has been pretty good.
What about that? Right.
How much credit tightening are we seeing?
Do we have a real current read on how much credit tightening has gone on
already? David, this senior loan officer survey
came out a couple of weeks ago, and certainly the banks have been tightening
their underwriting standards for many months now.
But more importantly, what it showed was the demand for commercial loans and
commercial real estate loans was down quite a bit.
So the banks are always willing to lend and they're in the business to make
loans, of course. However, in more uncertain times, they
take a more conservative underwriting approach in the case of a commercial
real estate. Well, they're going to ask more of a
down payment from the owner of the property, and that may make it
prohibited for the owner to buy that property.
So you could argue, yes, they are tightening.
We agree with that. The loan growth in the second half of
2022 was extraordinary. It was almost.
10 percent for the industry. It's definitely slowed down.
Typically, it grows at the nominal rate of growth and that would be, you know,
right now. Nominal real GDP growth if the Atlanta
Fed number is correct. You may have seen this week real GDP
number forecasts came in at two point nine percent with 5 percent inflation, 4
percent inflation, whatever number you like to choose, you're looking at
nominal growth of 6 plus percent right now.
Let's get specific right now for a moment about Morgan Stanley, because we
did get that big news, surprised a lot of people.
A James Garner decided stepped down, I think after 13 years or so.
What did he do? What is the legacy he's behind?
And will his successor continue that legacy?
Or maybe head off in a different direction?
It's a really good question, because James Gorman has done a very good job.
When you think about when he took over about 13 years ago, Morgan Stanley was
in a very different place. And through the acquisitions of Smith,
the old Smith Barney, a wealth management business, as well as the
acquisitions, more recently, a bee trade neat Vance.
He has diversified the revenues of Morgan Stanley.
Wealth Management now is about 45 percent of total revenues.
Investment management is also a presence, a bigger presence today in the
investment banking and trading. Businesses are much smaller contributors
than when they were back in 0 8 and 0 9, which means this is less volatile source
of revenues and earnings going forward. So when he hands the reins over within
the next twelve months, his successor is going to obviously continue balancing
out the revenue stream because it has worked very well.
The stock valuation for Morgan Stanley is much greater than its peer, Goldman
Sachs. And under his tenure the last 13 years,
this stock has outperformed just about all the financial stocks.
Bank stocks, with the exception of J.P. Morgan, Alicia, have gotten through this
entire wonderful conversation without telling about what the Fed's going to
do. So how much of that is supporting what
we're seeing right now in the stock market now?
The anticipation the Fed will back off a little bit on the tightening.
Look, I think that's part of the reason that equities have been so buoyant and
the expectation not just that the Fed is going to pause in June, but we're going
to get rate cuts by the end of the year. Virtually everybody you speak to says,
well, the Fed's not going to cut by the end of the year.
So it's very curious to see who's pricing in, you know, the cuts in the
second half of the year. But, you know, to the extent that
inflation say sticking we've talked about this at the goods sector is
clearly in a disinflationary downturn. You've seen it in large cap, large cap
box stores. When they're talking about lower
revenue, it's because the goods are coming lower in prices.
But it's the service sector, core services, core inflation cause that 5.5
core services at six point eight percent inflation.
The Fed's job is not done. And the interesting question is all this
signaling that, you know, June is not going to be a go.
What if June becomes alive and then you get a repricing both in equities and
bonds? What's fast ahead and what do you
anticipate in June? So I think the Fed's going to try very
hard to signal that it's open, likely not to go.
But if you get a bad inflation rate and a very strong non-farm labor report, the
Fed could go.