Prepare for the Fed's RUG PULL *This Friday*

let's take a listen to what the Federal

Reserve I just had to say on CBS faced

the nation and then what we're going to

do is we're going to look at some world

and Global reactions to what's going on

in the financial markets especially

what's going on with China where's all

that inflation that we were supposed to

be getting from China some other impacts

we've got really great piece that we're

going to go through right after we

listen to Neil kashgari on CBS so let's

take a listen here add some commentary

as a helpful here we go in New York with

these failed Banks doesn't Exist

Elsewhere in the country

the banking system is resilient and it's

sound the banking system has a strong

Capital position and a lot of liquidity

and has the full support of the Federal

Reserve and other Regulators standing

behind it now I'm not saying that all of

the stresses are behind us I expect this

process will take some time but

fundamentally the banking system is

sound this process what do you mean by

that

well when when tensions flare up in the

banking system and stresses emerge uh we

often hope that they'll be resolved very

very quickly sometimes it takes longer

for all the stresses to work their way

out of the system so we know that there

are other banks that have some uh

exposure to long-dated treasury bonds

who have some duration risk as they call

it on their books we also know that

commercial real estate there are a lot

of commercial real estate assets in the

banking sector and there are some losses

that will probably work its way through

the banking sector so that process will

take time to fully become clear but

fundamentally the banking system has a

lot of capital to be able to withstand

those pressures

one of the things I think is so great is

that as treasury eels have actually

plummeted over the last a few uh days

here uh through the banking crisis the

value of bonds that banks are holding

has actually gone up so you're actually

by having a banking crisis you're

creating less risk of the furtherance of

the banking crisis

and you mentioned commercial real estate

because so many of these mid-sized banks

are lenders in that space so that could

impact Construction in other words this

could have a real impact on the economy

does it tip us towards recession

well it definitely brings us closer

right now what's unclear for us is how

much of these banking stresses are

leading to a widespread credit Crunch

and then that credit crunch you're right

just as you said would then slow down

the economy this is something we are

monitoring very very closely now on one

hand such strains could then bring down

inflation so we have to do less work

with the federal funds rate to bring the

economy into balance but right now it's

unclear how much of an imprint these

banking stresses are going to have on

the economy

you know what I think is so remarkable

is that back in January of 21 we looked

at history and history gave us this

remarkable outline it said look if

inflation is high force a recession and

inflation will go away when people

actually internalize that we're in a

recession what do they do they spend

less money and so either the velocity of

money goes down the total spending goes

down total GDP goes down whatever it

takes forcing a recession is a fantastic

way well I shouldn't say it's a

fantastic way because it's somewhat

painful but it is a way to solve

inflation that's because you're what

you're really doing is you're reducing

demand now there's the other argument

that you could just accommodate Supply

more but that's much more difficult the

FED can't really do much to affect

Supply Congress can but who really

thinks they can actually pull something

off here so far all they've been doing

is pulling off stemi checks for chips

and EVs and Energy Products which hey

fine with me because I've got a bunch of

stock in this but it's something to

watch very carefully and that's what

we're focused on and chairman Powell

said as much this past week at the

Federal Reserve that that tightening and

credit might be doing your work for you

in terms of slowing down the economy

does that mean it would make Neil

Kashkari hit the break on rate hikes at

your next meeting

well we have to see you know right now

the stresses are only a couple weeks old

there are some concerning signs the

positive sign is uh deposit outflows

seem to have slowed down uh some

confidence is being restored among

smaller and Regional Banks uh at the

same time we've seen the capital markets

have largely been closed for the past

two weeks if those Capital markets

remain closed because borrowers and

lenders remain nervous then that would

tell me okay this is probably going to

have a bigger imprint on the economy so

it's too soon to make a new forecasts

about the next interest rate meeting

that we have the next fomc yeah and I'll

tell you we're going to go through some

reports here in a moment on what some of

the reactions have been to this banking

crisis in terms of tightening lending

standards

and spoiler alert it's not seemingly to

be that big of a deal but we'll talk

about it with some reports in a moment

meeting but these are the factors that

I'm going to be most focused on you know

when it comes to confidence among

Americans in the system right now CBS

News just recently did a poll and only

15 percent of people pulled by us said

they had a lot of confidence in the

federal reserve's ability to manage

these banking issues why should the

public trust the FED now when this risk

to Banks was missed out in San Francisco

in New York and when the Fed was late to

the game on catching up with inflation

you know the covet pan pandemic has

thrown some curveballs at us that none

of us have experience in any of our

lifetimes and it has taken us time to

catch up and figure out exactly where

the economy is headed the interest rate

risk that brought down Silicon Valley

Bank is something that we've all been

very focused on we've been communicating

it to Banks all across the country for

the last couple years that interest

rates are going up and most banks have

done a much better job of managing their

risks in advance of those interest rates

going up and so there's still

uncertainty in the economy there are

still stresses you have a group of

people at the Federal Reserve who are

totally committed to our mandates to

committed to achieving the public

service responsibilities that we have

and we're going to continue to let the

data and the evidence guide us and that

is the best reassurance that I can give

is that a lot a group of people are

non-partisan focused on doing their very

best on behalf of the American economy

and American households you know what's

interesting is that you actually have an

incentive as a bank not to hedge your

Cur your uh interest rate risk because

when you hedge your interest rate risk

you have to take an expense when you

take an expense it makes your earnings

per share look lower which makes it look

like you're not performing as well as a

CEO of the company well the reality is

you're actually protecting the company

but if instead of taking an expense on

hedging risk you could just take your

losses and your your basically your bags

and hide them under hell to maturity

Securities then you don't have to book a

dime of losses

oopsie-doopsies that's exactly why you

get some of this uh drama unfolding uh

at uh base like Silicon Valley Bank

because people are scratching their ads

going why why did you not book any kind

of Hedge events oh well because that

would make your income and expenses look

less profitable and you were

incentivized via stock options or

bonuses or whatever to have the most

profitable p l so maybe there's some

accounting reform that some folks are

now calling for because the the

incentives are very skewed for banks but

we're about to see the first hearing on

Capitol Hill

this week about what just happened but

there were flashing warning site warning

signs out there at svb bank the Silicon

Valley Bank in the months leading up to

its failure on this program just earlier

today Senator Warner of Virginia who's

on the Banking Committee said The

Regulators missed basic banking 101 the

interest rate mismatch how could that

risk have been so missed by The

Regulators at the Federal Reserve in

Washington and in San Francisco

well I don't know any specifics about

the svb case because they're not

regulated by the Minneapolis fed and I

know Vice chair bar is conducting a

rigorous review to understand exactly

what happened it has been publicly

reported that the Federal Reserve did

take action specific to svb to get them

to address these exposures I don't know

more than that and I'm looking forward

to Michael Barr's review and his

findings which we're all going to take

very seriously I can tell you at the

Minneapolis fed we have conversations

with our bank supervisors and then with

the banks about these risks all the time

doesn't mean that we're not going to

make mistakes doesn't mean that we are

perfect but I know across the Federal

Reserve that bank supervisors have been

focused on these very exposures since

before the interest rate increases even

began last year well just on this

program last week Senator Warren says

she doesn't have confidence in Mary Daly

the San Francisco fed president

do you

I do I know Mary Daley exceptionally

well I've worked closely with her for

the last several years she's an

outstanding public servant committed to

helping all of us fulfill our mission

for the public nonetheless we have to

look at the findings that Vice chair bar

comes out with take those findings very

seriously all right we're going to back

off that and get into uh some of the uh

impacts that banks are expecting and

analysts and financial markets are

expecting you know kashgari doesn't go

on to say much more after that so one of

the first things that I'd like to

understand is how much do we actually

think this banking crisis is really

going to hit the economy uh and uh and

that's a big deal especially looking at

sort of GDP hey what what do we think in

terms of GDP uh and so there are a few

different analyzes Morgan Stanley

provides one Morgan Stanley suggests

that credit shocks will take a toll on

the economy but it will take time to

figure out how large those effects could

be however in their estimates we think

that this pullback in Bank lending which

was already underway we were already

seeing tightening and lending standards

this pullback could end up shaving off

about 10 basis points from GDP that's a

belief from Morgan Stanley however these

effects could end up taking a lot longer

to play out they actually think the

largest impacts could be felt around Q4

of 2023 and q1 of 24. this kind of leads

to this idea that maybe we have to be

more patient with when we actually think

the impacts of all of this hiking and

the credit squeeze will actually come

patience is probably the biggest thing

that I've learned in this cycle

especially I think we we all had this

memory out of covid or even how quickly

uh bailouts were instituted in 2009 we

had this more recent memory of quick

actions from The Fad quick actions uh

you know you had the September crisis in

2008 by February of 2009 the Fed was

running the money printer right in in

2018 as soon as there was a slight sign

of Market stress the FED turns around

runs the money printer covet pandemic it

wasn't even a matter of a few months it

was a matter of a few weeks before they

started writing the Monday printer so

this this idea of of the the fed you

turning is taking a lot longer and

because of the inflation that we're

seeing now which hopefully ends up

proving to be dare I say the word

transitory but take a look at Goldman

here Goldman also gives a projection a

little bit further out Goldman suggests

that we could see a tighter credit

reduced GDP by around four tenths of a

percent that's about four times as much

of the impact that Morgan Stanley thinks

uh but you could kind of make sort of a

range here and suggest that it looks

like analysts are thinking somewhere

between 0.1 to about 0.4 to the negative

on GDP is what we might expect from

tightness here as a result results of

these banking failures but anyway they

suggest that we're probably looking at

seeing this this hit somewhere around

the fourth quarter so again another

analysis where maybe that hit just

doesn't come as quickly as we think uh

and uh and it's unclear obviously how

much that hit will be Bank of America

talks about uh funding risks uh as well

a little bit of that credit Suite

squeeze uh they do talk about some of

the stabilization that we're seeing in

in banking since then but also Bank of

America thinking somewhere around a 25

basis point hit to GDP when it comes to

credit tightening so when you combine

all three of these Morgan Stanley

Goldman Sachs Bank of America clearly

the hit to GDP is probably going to be

somewhere between 0.1 to about 0.4 now

what's crazy about that is if we

actually look at the summary of economic

projections that the FED just gave us

they just lowered their forecasts for

GDP uh from 0.5

to

0.4 now the fascinating part about that

kind of hit is taking us to 0.4 if we

end up getting hit with a 0.4 reduction

like Goldman Sachs estimates but well

then oopsie doopsie you might be right

there at zero or even slightly negative

and that's where that recession is so

recession time are still looking like Q3

to q1 in that range this certainly does

as Neil keshkari said it push us closer

to that and you can see when you look at

the data fed thinks we're at a 0.4 GDP

is how we end the year Morgan Stanley

Bank of America Goldman altogether think

we're gonna have a hit of somewhere

between 0.1 to 0.4 percent because of

the banking crisis we're knocking on the

door recession could we be flat hey

taking flat is actually okay in a weird

way if you're flat and non-negative

you're not in a recessionary environment

so that'll be quite fascinating to see

play out uh but uh look I think they're

they're this is leading a lot of people

to call for the Fed to pause by May

that's the next time we actually see

from or hear from the uh fed and so we

can look at right monitors to see what

expectations are now but no going into

May these are where estimates estimates

are likely to be quite uh fluid for a

while for example you've got a one

Economist suggesting hey uh this is this

is let me see where did I write his name

I just have his citation over here I

wanted to reference him by name I lost

this citation anyway while I look for it

he's talking about how important it is

for the FED to actually pause uh here it

is it's uni credit an analyst over at

Uni credit says the FED should

definitely Pause by May to make sure we

have plenty of time to play out uh the

implications of this credit tightening

from the banking sector now if we look

at the Fed rate monitor it looks like we

have a 38 likelihood of getting another

25 BP hike and a 62 percent likelihood

of a pause right now which a pausing

right now would somewhat align with what

Jerome Powell hinted in the last press

conference where they had even started

to talk about the idea of a pause it's

the first time Jerome Powell has ever

mentioned a pause in this tightening

cycle and that was talked about at the

last meeting it was talked about at the

last press conference and it's actually

now more priced into markets than not

obviously markets are pricing in cuts by

the end of the year of around 100 basis

points the FED says we're not pricing in

any of those sorts of cuts and that's

likely because if the FED starts talking

about Cuts then people might start

spending stocks might start taking off

Financial conditions might loosen and

they could basically hurt the status quo

where we are now in other words if the

status quo stays stable right now

everything stays status quo right now

everything stays stable then potentially

inflation goes away but if the FED says

we're going to the Moon boys girls that

could have the opposite effect and

actually re-ager re-aggravate uh

inflation so I think those are some of

the concerns that Federal Reserve is

playing with right now to someone

manipulate potentially what's happening

in markets now we do have catalysts that

we want to pay attention to this week as

well there are quite a few specifically

the fed's preferred inflation Gauge pce

before I talk about the fed's preferred

inflation gauge it's worth noting we do

have earnings coming up this week as

well Carnival Cruise Lines this morning

Walgreens tomorrow morning with LoveSac

Dave and Buster shift Lulu after the

Bell tomorrow uh that's Tuesday

Restoration Hardware Wednesday after the

bell and on Thursday we'll get

blackberry and canoe we do have quite a

few data points coming out as well let's

take a look at Barclays they give us a

nice little sum up here of the various

different catalysts that we're going to

be looking for so today we'll have uh

fed Governor Jefferson a new fomc voter

discussing monetary policy at an event

at 5 PM Eastern that's after the market

closes we'll have wholesale inventories

coming out on Tuesday you can see the

projections right here the forecast is

for a growth of inventories of one tenth

of one percent

Advanced trade these are tomorrow's

catalysts here fhfa Federal housing

Administration over here

numbers we'll get those tomorrow okay

Schiller 20 City index for housing

prices

expected to actually come in at negative

a 0.6 year over year so your first

slight negative on the s p k Shiller

here starting to get that year over year

lapping uh keep in mind even the

treasury yields have followed mortgage

yields mortgage rates have been pretty

stable mostly because spreads risk

spreads have widened on mortgages

probably because banks are dumping mbs's

to try to increase their liquidity

positions anyway pending home sales

Wednesday Thursday we'll get a real GDP

uh the expectation is about 2.6 percent

for GDP we'll get initial jobless claims

looking at looking for 195. Barkin will

speak at an event on Thursday at 12 45

at the same time as Collins a non-voter

will give a speech so we'll get a voter

and non-voter on Thursday it's a little

bit of fed speak here and then here's

the important set and this is Friday

we'll be covering this live when the

data comes out but we're getting we'll

be getting the personal consumption

expenditures read on inflation that read

is expected to come in at 0.3 percent uh

that is the Barclays forecast the

consensus though is point four percent

and the the latest report was actually

0.6 so we'll hopefully see some

softening over here on PC uh the closer

comes into Barclays at point three the

better point three good point four

starts getting a little bit bad 0.5.6

not great remember if you multiply these

numbers by 12 you'll actually get your

annualized figure so if we get uh 0.3

we'll be sitting at somewhere around 3.6

pce inflation which is much closer to

two than obviously if you annualize 0.6

which comes in at 7.2 uh you'll also be

getting a core pce also looking to match

at about 0.3 uh consensus though on Wall

Street is 0.4 University of Michigan

estimates uh for inflation I actually

think I have the forecasts and the

consensus for that let me see here that

would be Friday Friday Friday Friday

Friday Friday Friday Friday University

of Michigan inflation expectations we

want to make sure they stay anchored

very important they stay anchored we do

not want any kind of runaway of

inflation expectations and the forecast

for the 31st is

uh one year inflation expectations three

point eight percent that's stable with

the prior read as the forecast is 2.8

stable with the prior read for the one

year out or sorry that's the five to ten

year inflation expectation so we could

fill these in right here uh actually uh

the forecast matches the latest here

which is three eight and uh two eight uh

for their forecast and consensus here so

uh then we'll have uh some more feds

speak as well look at all this fed speak

we get this week I mean a lot of

different fed speak again let's just

highlight the FED speak here so you've

got fed speak at 5 pm today uh fed

Governor Jefferson fomc voter new guy

we've got uh bar an fomc voter here

testifying before the house Financial

Services committee on Friday this should

actually be really interesting because

Barr is doing the investigation into the

banking drama so we'll be able to get

some banking updates over here

Williams uh at uh 3 P.M on Friday the

market will still be open then right at

close we'll get a Waller uh speaking at

a conference and then cook uh speaking

uh after the close on Friday as well for

more of a dinner event so this gives you

a little bit of an update on sort of

where the fed's head is obviously the

fed's head is likely to be in wait and

see mode we don't actually get another

fed Catalyst until the May event which

is May 3rd now interestingly that'll be

right between uh two CPI releases so

you're going to get the March data on

April 12th so mark your calendar for

April 12th and then the next CPI release

won't be until May 10th which will

actually be about a week after the next

fed press conference then you're going

to get the uh jobs data at the beginning

of may as well and the beginning of

April here coming again so mark your

calendar for April 7th for the next jobs

data and then the next jobs that after

that doesn't come out until May 5th

which is again after the next fomc uh

press conference on May 3rd now that's

interesting that means the next CPI on

April 12th and the next jobs report on

April 7th will actually be the only New

pieces of data we get uh the larger two

pieces of data there'll be a lot of

miscellaneous reports but in terms of

CPI and jobs those will be the only two

reports we get before the May fomc

meeting which means the next jobs and

the next CPI report will actually be on

the 7th and 12th will be pretty

important for trying to predict what the

FED is going to do come May 2nd so pay

attention to that as a catalyst so with

that update on the Federal Reserve it is

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