ODEON CAPITAL CONVERSATIONS Odeon Conversations

The Federal Reserve is shrinking its balance sheet. Bank assets are flat. The money supply is plunging. These are some of the negative indicators of the US financial system, according to DICK BOVE, chief financialstrategist at ODEON CAPITAL GROUP. Some positives: A rising stock market and the latest readings from the Personal Consumption Expenditure (PCE) and the Purchasing Managers Indices (PMI), he adds. “One of the two indicators, either the negative or positive, has to give way,” says BOVE. “My belief is that the financial system, if it doesn’t reverse itself, is going to cause the economy to slow down.” MAT VAN ALSYTNE, ODEON co-founder and managing partner, weighing up many of the prevailing financial headwinds, says that the “goldilocks”
American economy is on course to eventually make a sharp reversal. “When it happens,” he says, “it is going to be scary.”

The latest PCE numbers opens the CONVERSATION. The core PCE rose in April by 0.4 percent, and by 4.7 percent year over year, raising new questions about the Fed’s thinking on interest rates. “If the PCE keeps going up, it can’t stop raising rates,” says BOVE. While inflation still remains elevated, there’s an interesting twist right at the grocery store. The CONVERSATION discusses new ODEON research on a potential price war among retail chains. Elsewhere, the CONVERSATION looks at Morgan Stanley’s announcement of 3,000 job cuts with China expected to see some of the biggest reductions. Meanwhile, Bank of Hawaii, a community bank serving home owners and local businesses is now at high risk, according to BOVE. Joining the CONVERSATION is JOHN AIDAN BYRNE who cites a new study which explains the nature of some of the money flows propping up the US stock market.

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After 13 years at the helm of Morgan Stanley, JAMES GORMAN plans to step down as CEO within 12 months. He will remain as executive chairman. DICK BOVE, chief financial strategist at ODEON CAPITAL GROUP, says GORMAN'S departure is a major "blow" to Morgan Stanley. "To lose someone with his capabilities would be like JAMIE DIMON walking out of JP Morgan," says BOVE, referring to JP Morgan's highly-regarded CEO. While Morgan Stanley has not yet named a successor, three division heads have been identified as contendors. BOVE though has a warning. "If they actually let this succession fight last for a year," he says, "I think they will destroy big parts of Morgan Staney." BOVE looks back on an earlier succession battle, a brutual two-year affair at Citibank for insights on what could happen at Morgan Stanley. "Morgan Stanley's history suggests that it could easily go in this direction," according to BOVE.

BOVE also looks at regional bank, KeyCorp, comparing its near and long-term outlook, noting how it is in positioned in the Midwest to benefit from the "inevitable reindustrialization" of America. It is also a source of funding for domestic energy resources. Also on his radar is PacWest, a Beverly Hills, CA-based bank that BOVE says is fighting for its very survival. Elsewhere, the CONVERSATION studies the latest Fed survey on US bank money flows, which shows the industry continues to see a decline in loans and deposits. Meanwhile, a link between the debt ceiling crisis and the rising stock market is suggested. MAT VAN ALSTYNE, ODEON co-founder and managing partner, explains how the crisis could actually be fuelling a rise in equities. And we'll have an update on how US banks with operations in China are scaling back and firing staff. Joining the CONVERSATION is our host, JOHN AIDAN BYRNE.

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The CONVERSATION examines the latest Empire Manufacturing Index, a measure of business activity in New York State, which is now 42 points below where it stood 12 months ago. The widely-followed index is at its lowest level since 2009, showing decreases in orders, shipments and payrolls at factories. DICK BOVE, chief financial strategist at ODEON CAPITAL GROUP, in a recent note, points to the Empire Manufacturing Index along with other indicators, such as labor markets conditions, as signs of a long-anticipated recession taking hold. "The Empire study shows not just a slowdown, but a huge drop," BOVE says on this episode, referring to this US economic contraction. BOVE discusses his other research, such as the tighter lending standards at banks, as well as his fresh data on the housing market. While the US has not technically entered recession yet, BOVE says consumer behaviour suggests a recession may have started. "The economy is slowing," he says.

Elsewhere, in an unconfirmed report out of China, an insider tells BOVE that a large number of major US banks with operations in China, are firing local staff en masse. "I am told that there is a huge wave of firings by American companies who do business in China," BOVE explains, noting how one insider feels the layoffs are poliitically motivated. BOVE believes the layoffs, if confirmed, are linked instead to the currency markets, and China's desire to undermine the US dollar. Joining the CONVERSATION, JOHN AIDAN BYRNE, says China's ambitions, and economic rise, should be kept in context given its history of oppression as well as the full reality of its economic progress.

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The US Federal Reserve raised interest rates again this month by 25 basis points, bringing it to a range between 5% and 5.25%. The widely-anticipated hike marked the tenth time the Fed has moved rates upward since March 2022, as part of its aggressive campaign to tame inflation. And while the Fed appears to be succeeding, the ripple effects have brought pain to the banking sector. Rising rates crippled the portfolios of Silicon Valley, Signature and other banks holding long term securities. Still, regulators and lawmakers have said the worst is over in this banking crisis. DICK BOVE, chief financial officer at ODEON CAPITAL CONVERSATIONS, nevertheless, repeats his warning, now with more urgency, that more bank failures are coming. "This was a systemic problem which has not been corrected and, therefore, the crisis continues," BOVE sas. "There will be more bank failures. And it will be significant." Joining the CONVERSATION, our host, JOHN AIDAN BYRNE, citing a new poll, says nearly 50 percent of Americans now worry that their bank deposits are not safe.

Elsewhere, the CONVERSATIONS takes a closer look at the latest jobs and unemployment data. Despite a dip in the US unemployment rate to 3.4 percent, mass layoffs continue, job openings have contracted significantly across multiple sectors, productivity is declining and wages have flattened out. "The trend line is saying the job market will weaken, and unemployment is going to increase," BOVE says. "We're going to have an economic problem." The CONVERSATION will also look at the latest challenges for the US dollar as a global reserve currency.

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The CONVERSATION examines the sale of troubled California-based First Republic Bank to JP Morgan. The deal comes after a stormy period in the banking sector with the failures of Silicon Valley and Signature banks, a dark cloud hanging over First Republic and a brewing S&L-style crisis facing many banks. "The Federal Reserve and the FDIC just screwed smaller banks in America big time," says DICK BOVE, chief financial strategest at ODEON CAPITAL GROUP, referring to the First Republic sale brokered by regulators. "JP Morgan now effectively becomes the Central Bank of the US," he adds, referring to the sheer scale and size of JP Morgan post the sale. Additionally, regulators will assess a special premium on other banks for the cost of the deal.

JP Morgan, already America's largest banks by assets, picks up First Republic with 84 branches catering to mostly wealthy clients, for $10.6 billion. JP Morgan has some 4,800 branches, and now a larger national footprint with the acquistion. Indeed, JP Morgan is likely to see its earnings grow by $1 billion on an annual basis, according to BOVE, a sum that far exceeds official estimates. In light of the bank crisis, BOVE says the evidence points to a new game in time, short sellers punishing vulnerable banks.

Elsewhere, the CONVERSATION looks at the trajectory of inflation, interest rates and jobs. Then there is the high-stakes drama of the debt ceiling talks in Washington. Our host, JOHN AIDAN BYRNE, notes how the number of high-wage earners filing for unemployment benefits has hit a new record, raising concerns about the overall state of the labor markets.

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The CONVERSATION opens with DICK BOVE's review of the latest data from the Fed's Beige Book on economic conditions in America. BOVE concludes that all the data points to a peak in activity across many sectors. "Everything that came back was indicative of a significant slowing in the economy," says BOVE, chief financial strategist at ODEON CAPITAL GROUP. Alongside a separate Fed weekly report of financial indicators, one showing a decline in bank deposits, BOVE says economic activity is shrinking. "Every metric in the economy looks so negative," adds MAT VAN ALSTYNE, ODEON co-founder and managing partner.

The Fed's campaign to tame US inflation appears to be succeeding. But with the succession of interest rate rises unleashed to reduce the pace of price rises in the economy, came trouble for smaller banks. The CONVERSATION examines the health of the US bank sector weeks after the collapse of SVB and other banks. "Banks are in a pickle and the only answer to their dilemma is if the Fed dramatically lowers interest rates," says VAN ALSTYNE. BOVE says that course of action is unlikely. "The Fed is beating inflation," says BOVE.

Taking a deeper dive, BOVE sees increasing risk of a major Savings & Loan (S&L)-style crisis for smaller US banks in the current era of high interest rates and declining assets in bank portfolios. The S&L Crisis resulted in the collapse of about a third of the 3,234 savings and loan associations in America in the period 1986 and 1995. Joining the CONVERSATION, JOHN AIDAN BYRNE raises the prospects of a far deeper recession than many are anticipating as he reprises the recent analysis of market statesman and billionaire investor, RAY DALIO.

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