Closing Bell - Closing Bell Overtime: Former Council of Economic Advisers Chairman Glenn Hubbard on the Fed’s Big Decision; Affirm CEO Max Levchin Talks State of the Consumer 03/20/23

Episode Date: March 20, 2023

Major averages finish higher as the markets digest the Credit Suisse rescue. Cantor Fitzgerald’s Eric Johnston on why he’s still bearish while Macquarie Group’s Thierry Wizman discusses the huge swings in the bond market. Glenn Hubbard was the chair of the Council of Economic Advisers under George W. Bush; he discusses what the Fed is watching most closely ahead of this week’s rate decision. Our Phil LeBeau on why auto inventories are finally increasing at dealerships while Eamon Javers brings us the big ruling a judge made against JPMorgan in a Jeffrey Epstein lawsuit. Plus, Affirm CEO Max Levchin on where consumers remain strong and where weakness is showing and Cowen analyst John Kernan previews Nike’s earnings. 

A relief rally to start the week as bank stocks bounce. That is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Port. Coming up this hour, we'll talk to former Council of Economic Advisers Chairman Glenn Hubbard about the signals he sees in the economy ahead of this week's Fed decision. Also, his thoughts on the latest round of layoffs from Amazon. Also, we're going to hear from Affirm CEO Max Levchin about why those tech layoffs aren't a macro issue yet. And one cohort of consumers that is feeling some stress.

Let's get straight to today's market action, though, shall we, with our first guest joining us now, Eric Johnston from Cantor Fitzgerald. Eric, great to have you on. We did see stocks pop here this Monday with the S&P up to 39.51, the Dow finishing the day up more than 1.2 percent. We did see some of those underperformers from last week that are so economically sensitive, like energy, materials, industrials leading the charge today. Your thoughts? So today was a little bit of a relief post the, you over the weekend, but I would not get distracted by some of the nuances around credit Swiss or what's going to happen with FRC or Silicon Valley Bank out of receivership. I think the bottom line from the events over the last two weeks are twofold. Number one is that credit is going to tighten significantly coming out of

this. So this was happening prior to Silicon Valley Bank. If you look at some of the surveys from loan officers, credit heading into it was one of the four, one of the five tightest conditions in the last 30, 35 years. And each time we've gotten to this level, we've seen a recession very shortly after. And that was before the Silicon Valley bank news. So no matter how this gets resolved, regional banks are a tremendous source of liquidity to this economy, and they are going to be tightening their credit standards. The second takeaway from what's happened over the last two weeks is that you can't go from the tightest policy, excuse me, the most loose policy in the history of the Fed, and then turn that around 13 months later and have the tightest we've seen in the last 20, 30 years and not have an accident happen. And so this was a reminder that not that it'll necessarily be this playing out further, but there could be something else that is going to pop up,

because that's what has always happened when you have these type of reversals in Fed policy, and this one has been sharp. So what you're saying here is that we haven't necessarily seen the full impact yet of all of this tightening of the past year. Is recession priced into the market here? It's not. I mean, it's pretty it's pretty incredible. And when you look at, you know, I think almost no chance is being priced in. And I say that based on the numbers, which is that right now the market is trading at 18 times the earnings estimates that we see in print, which if we were to have a recession, the numbers would be far lower than where they are in print. 18 times, let's look at that over

the last 30, 35 years, it's only been higher during the COVID bubble and the internet bubble. So otherwise, this has been the peaks. We're trading at peak multiple on earnings that are too high. And in terms of the odds of recession, they're very high. And the rate market, a lot of the dynamics that I can walk through, a lot of the dynamics in the rate market are suggesting that it's coming much sooner than people thought two weeks ago. And I would agree with that. I think it's been pulled forward, which is just very negative for stocks. So, Eric, you say that always, you know, since 1960, when we go into a recession, stocks make at least a one year low from the start of the recession.

That sounds like you're saying that the S&P is going below 3600. So this is a gift then you're saying sell equities, I assume. And by what? So, you know, I think it is. So if you think there's a recession coming, I feel very confident that stock prices are going lower. Stocks don't look through recessions. And, you know, in hindsight, you may you may realize that a recession was shallow. But when you're going through it, you don't know where the bottom is going to be. And so in that case, stocks go lower, multiples go lower because you don't know where the bottom of that's going to be. So this is a great opportunity to be selling equities. We've been very negative on cyclicals. Shockingly, it's been a place where a lot of money has moved into over the course of the last three or four months. We think the last place you want to be is in cyclicals heading

into a economic downturn of of some magnitude. Now, where do you want to be? You know, that becomes that becomes trickier, trickier. Cash is king. And being in money market type funds is very important because you need the liquidity. If you were to get a move lower, you want to be able to be nimble to take advantage of that equity, that equity sell off. Right. You don't want to be Silicon Valley Bank with your with your money locked up when you when you need liquidity. But you want to lock up some, I imagine, with rates being this high, because if we do head into a recession and it's significant, then rates are going to come down, right? That's right. I mean, right now, you know, the two-year yield is pricing in that, you know,

there are going to be cuts. And I think the two-year yield, you know, has it, you know, has it right. If you look at the spread between the Fed funds rate and the two-year yield, the Fed funds rate right now is about 80 basis points higher than the two-year yield. And earlier this morning, it was 95 basis points. When that happens, the rate market is telling you that a recession is imminent. And that's why there's such a deep discount in the yield of the two year relative to the Fed funds rate. And I think that's what it's telling us right now. So I think in terms of parking your money. Sure. I think parking your money in something out two to three years is OK.

I'd rather be in you know, I'd rather be much shorter term. And I do think I'm not typically a fan of gold, but I do think that places like gold are another good place to hide out. OK, you really do think a recession is coming, Eric. Thank you. Now, let's bring in CNBC senior markets commentator Mike Santoli at the New York Stock Exchange with a look at the big moves we have seen in commodities, including, I believe, gold. Mike, that's right, John. Yeah, a lot of folks seem to have kind of warmed to gold pretty recently here. They made about a one-year high, and even that high from a little over a year ago was really short-lived. So it has been higher than it's almost ever been, hit above $2,000 an ounce. This is gold relative to oil, and it gives you a little bit of a sense of what people collectively are most afraid of

or excited about. Right now, they're actually a little more risk averse looking for that gold, the money alternative. We have all these banking system issues and people somewhere expecting a recession. And then oil made about a 15 month low just today before turning around. So it shows you that we're up around this ratio. Now, you have to kind of look beyond that. That was the COVID crash in oil. Remember, it went negative briefly. And then the surge in gold as we shut the world down and people were very afraid. But look at where we are right now in terms of the level of this relative relationship there. Obviously did a little bit of a dogleg there, but it's basically

higher than it's been for most of the last 15 plus years. So it does show you it's, you know, the pendulum is swinging pretty far in the direction of gold right now. Not to say this is too predictive, but you have to wonder just exactly how long in the short term this can continue going as they have, Morgan. Yeah, and of course, so much of this is going to hinge on the direction of the dollar as well, which kind of brings us to the Fed and where the middle of this week takes us in terms of future Fed policy, when so many investors out there do think that we've basically hit, give or take, a couple of months, the end of this tightening cycle. Well, for sure. And the dollar, of course, both of these are priced in dollars, but only gold is really considered money. So that's why it does seem to be more sensitive to that. You know,

the gold also tends to do better when people don't think central banks have things under control one way or another, whether it's inflation or deflation. If people feel as if central banks have gotten ahead of some of the issues, then maybe we'll see if we get a gut check in this gold move. So what's the contrarian take here then? I mean, if gold has moved higher versus oil, what's the argument on the other side? Look, that maybe the global economy is in better shape than oil makes it seem at this point. It's worth keeping in mind the U.S.-Atlanta Fed real GDP number before we hit this whole banking skid was almost 3%. So people are estimating that a lot of the regional bank issues might subtract, say, half a percent of GDP growth. Well, that gets you down somewhere toward soft landing

territory, if that's all that really mattered. So I think there is a contrarian case to say that, you know, oil having round tripped since December of 2021 does not really price in very much in the way of a demand, a healthy demand out there. And then, you know, gold has had its run. I've kind of given up sort of explaining moves in gold. It really is trying to kind of figure out global crowd psychology. But, you know, when people are yanking money out of Swiss banks to a degree, the people who have money in Swiss banks tend to also kind of like gold when things get bad. Yeah, they tend to have it, too. Well, got to love a good contrarian case.

Mike Santoli, thank you. All right. Up next, former Council of Economic Advisers Chair Glenn Hubbard joins us with his take on whether or not Amazon's latest round of layoffs signals broader trouble in the economy. Overtime is back in two. Welcome back. Amazon CEO Andy Jassy's memo to staff today says the company will eliminate 9000 more positions in the next few weeks, mostly in AWS, PXT, which is human resources, advertising and Twitch. This follows an earlier round of layoffs that started in November affecting more than 18,000 workers. Keep in mind, the company doubled in size during the pandemic, adding about 800,000 full and part-time workers.

But are these new layoffs a sign of a broader economic slowdown? Joining us now, former Council of Economic Advisers Chair Glenn Hubbard. Glenn, I'm not sure if it's Amazon itself so much as I'm wondering, is this the lagging effect of earlier interest rate hikes starting to play out? And if so, what do we look for next? Well, it's a good question. I think, yes, that's partly it. The tech sector, as you know, it had gotten ahead of itself in terms of employment. Monetary policy takes a while to work through the economy, and we're starting to see that. The Fed usually pushes until something breaks, and something broke in the banking problem we saw.

And there's also the issue of the job market, which has held up, but I think will weaken. The probability of a recession faster is now much higher, not because of Amazon, but because of likely credit problems with the banking crisis. So just in terms of what we're seeing with this banking crisis, on the one hand, you've got interventions that are designed to inspire confidence in the system to bring stability. On the other hand, the fact that they're needing it needed at all raises concern and causes perhaps more questions than answers. So when you see a name like FRC, First Republic today, trading down multiple halts, trading down 40, almost 45 percent, the banking industry saying basically it's going to move in and continue to help this bank. Are we towards the end of this crisis or is it still too soon to tell? Well, it's too soon, but I think it's likely that the Federal Reserve and the FDIC and the Treasury have gotten ahead of it.

The new Federal Reserve program, I think, is very useful. And there will have to be consideration of raising deposit insurance limits. credit is that if small and mid-sized banks feel that their depositors want to leave them for larger banks, that may have credit constraints on small and mid-sized businesses around the country. The Fed's aware of that and is certainly working on it. So, Glenn, that's really what I'm wondering about. Last week, we had Bill.com CEO Rene Lassert saying that, yeah, there is some turbulence in the lender's willingness to extend credit to small and medium sized businesses. So if the Fed does hike 25 basis points this week, as expected, and we also have this restriction in credit availability, does that also increase the chance of a deeper, more pronounced recession? Well, let me take that

in parts. I think the Fed should be continuing to raise rates. Inflation is way too high, well above the Fed's objectives. Financial stability is another matter, and the Fed has other tools. And this is why the discussion of the new Fed facility and also perhaps raising deposit insurance rates. I do think we'll see a recession faster. How deeper it is is another story, but I think it will be faster than people had thought. So if you were putting politics and political affiliations aside, if you were advising the president right now, what would you be saying? Well, again, I think the Fed's facility is a good job.

I would be doing a top-to-bottom review of banking supervision and see how we had a failure of this magnitude. And then I think we have to have serious consideration for a temporary period of a deposit insurance ceiling increase, not all the way to infinity, but to something that might help small and mid-sized banks weather the crisis. But, Glenn, we don't know if there is a restriction in the availability of credit. We don't know how hard the banks themselves are going to slam on the brake, how much money they feel like they need to keep for themselves and how much an overall economic slowdown affects that as well, right? So how much uncertainty does that feed into the speed at which the economy slows

down? Well, it's a great question because uncertainty is a huge factor in downturns, both from business people deciding to invest less and bankers and other lenders deciding to be more cautious in extending credit. That's why I think what the Fed and the Treasury need to do is get out quickly and reassure people about the system. After all, even before Silicon Valley Bank, we were headed toward rate increases and recession. The question is not adding a credit shock on top of it. I wonder what you think happens, how the situation evolves from a regulation standpoint in terms of this idea of insuring all deposits. And we certainly see this implied

backstop, but officials like stopping short of actually saying that they would that they would backstop other depositors if other banks failed, because quite technically they do not have the legal jurisdiction to do that. Do you expect we're going to see some more legislation around this? And if so, what is that going to mean? Because at the end of the day, it's still going to come back to taxpayers, whether it's direct or indirect. Well, that's the thing. When I hear our leaders say there's no bailout that affects taxpayers, of course, that's not true for a myriad of reasons. I don't think it's wise to take the deposit insurance cap completely off as a permanent matter, nor would I even do that in a temporary matter. But I think raising it so that it protects more individuals and businesses in a crisis for a shorter period of time is something Congress may well want to consider.

Glenn Hubbard, we appreciate the insights today. Thanks for joining us. Sure. After the break, we'll tell you about a big potential shift in the auto market that could benefit buyers and why some on Wall Street are raising a red flag about tighter auto lending standards. And speaking of lending, we'll hear from Affirm CEO Max Levchin about the state of the consumer and a connected reason why he's not having wine anymore with Sunday night dinner. Be right back. Welcome back to Overtime. Time for a CNBC News update with Contessa Brewer.

Contessa. John, good afternoon and hello, everybody. Security preparations are being put in place outside the Manhattan District Attorney's Office. The Secret Service is also thinking ahead about a potential indictment of Donald Trump. A source tells NBC News the agent who protects the former president would stay with him throughout the booking process and his arraignment in court while trying to minimize the number of people around him. Near Dallas, a male student who was shot by another student outside a high school this morning has died of his injuries. A female who was also hit were told her condition is stable. Police say they arrested the alleged

shooter who has been taken to a juvenile holding facility. And the cast of the TV show Ted Lasso came to the White House today to discuss the importance of mental health care with President Biden and the first lady. Speaking to reporters, actor Jason Sudeikis, who plays an American football coach managing an English soccer team, said it's important that people know when they or someone around them is struggling. So please, you know, we encourage everyone. And the big theme of the show is like to check in with your, you know, your neighbor, your coworker, your friends, your family, and ask how they're doing and listen sincerely. You know, I mean, you all ask questions for a living, but you also listen

for a living. So, you know, who am I preaching to? The choir, that is. Well, he's got quite the pulpit there, doesn't he? Morgan. He does. It's never not a good message. Yeah. Contessa Brewer, thank you. Auto inventories are finally increasing at dealerships, and higher incentives to sell those vehicles could soon make a comeback. Bill LeBeau has the details. Hi, Phil. Hi, Morgan. Have you driven by a dealership lately? If you have, then you've noticed that there's a few more vehicles out on the dealer lot. That's because the supply of vehicles, it is gradually increasing.

It's now up to 41 days supply, according to J.D. Power. That's up 49 percent compared to last July. Auto production obviously improving as the chip and component supply has improved over the last 12 months. New vehicle auto incentives are also moving higher. In fact, if you go to most dealerships now, you will start to hear them say things like, you know what, we might have a special interest rate for you. The average incentive is now up to just under $1,500. That is the highest that it's been in the last year. But prices remain close to record highs, just under $49,000 a vehicle.

That was the average transaction price in the month of February. We'll find out what it is for March here in a couple of weeks. So you are still seeing high prices for vehicles, but we are noticing that as the supply increases, as the incentives increase, the idea is that we should see new vehicle transaction prices take a little bit lower. Take a look at GM, Toyota, and Ford. I know there's a lot of issues here behind why these stocks are not trading higher, guys, but clearly one of the things to watch here is the old guard business, the internal combustion engine vehicle production.

That really is front and center for a lot of people as they look at these stocks. So, Phil, if incentives are already up and access to credit then tightens, what happens? Do auto prices, the average price, come down? Do these automakers stock-wise perhaps take a hit? Good question. We've never seen this before, John, because usually what happens is if we go into a recession, typically auto production is much higher. Recession drives down demand, drives down production. We're not at the levels that we've seen it in the past. And keep in mind, the incentives, while they are higher, John, they're nowhere close to where they were pre-pandemic. So

it may put a break on it, especially as we see higher interest rates out there. And I think lenders are going to be a lot more judicious in terms of the auto loans and the rates that they're going to be offering out there. And that clearly is going to be a break on some people who are going to go back into the market after leasing for three or four years. This is such a key dynamic to watch because we keep talking about inflation and how sticky it is. And yes, it's coming down, but not as fast as we expect. And the good side has actually led led the move lower. But that's really been on the used vehicle side. So when I hear you talking about the fact that new vehicles continue to remain near these record high prices, these these levels, it's it seems like it's key to the bigger, broader macro conversation.

It is, Morgan. And the one thing that people forget when they look at these new vehicle prices, they say, well, gosh, it's almost fifty thousand dollars for a new vehicle. Look what's being sold right now. You rarely see somebody saying, I want to go out and I want to buy a compact car. That market is virtually gone in the United States or a midsize sedan. Very few of those vehicles sold. What we do see now, SUVs and crossovers and large SUVs, pickup trucks where the average transaction price is well over $50,000. That's another factor in driving those prices higher. Yeah. And of course, EVs tend to cost more as well. It's so key that context. Thank you. You bet. I spoke with Affirm CEO Max Levchin today about the buy now pay later providers risk management, especially in light of headlines like tech layoffs and consumer stress.

Here's what he said. I think the tech community, while subject of a lot of self-important headlines, is not a huge swath of the U.S. population, and a lot of those people are still just fine thanks to the pandemic amassed savings. So while they're sorting themselves out and finding new jobs, they're able to dip into savings or even use products like Affirm to sort of continue maintaining whatever lifestyle that they need to maintain. So we're not seeing significant delinquencies from Silicon Valley, for example, or Seattle area. And hopefully we'll continue, but we'll obviously monitor this very, very carefully. On the other hand, folks that are kind of middle America, and that is the vast majority of our consumer people that are 90 to 100 miles inland from coasts, that consumer, depending on where they are financially,

is starting to feel some stress. There's disruptions on the margins for some folks that are especially hourly employees, employees that are employed sort of with the expectation of relatively temporary employment. There's some disruption in that world. Not a lot. Not a lot. The number one factor for consumer stress that we're seeing is really things have cost more than I expected them to. Things like gas, things like food, especially if you're feeding a large family, those expenses started ballooning. Inflation. That said, Affirm isn't giving credit as freely as it did a couple of years ago. We've been working to manage our credit result very, very actively. This sort of weekly routine during the height of the pandemic,

when credit was exceptional because the government was paying everybody's bills, I would review credit results once every two weeks. And I felt very comfortable doing that after a glass of wine with dinner. These days, my Sunday nights are dry because I am going to go through the credit numbers very carefully. And then I have to be prepared to ask intelligent questions Monday morning. And so my attention to it has increased dramatically, but what we have been able to do is find ways to say yes to consumers while protecting ourselves to the downside. So for example, our requests for down payments have gone up a lot. And so that's one of the ways of figuring out, is this consumer actually planning to repay? Is there an expectation? How good do they feel about their ability to

pay us back six weeks from now, six months from now, et cetera? And what happens when you do that? Do a certain number of the requesters just say, never mind? Absolutely. So tightening access to credit. But one way of doing it, getting consumers to self-select out by asking them to pay a down payment. Yeah, it reminds me of the conversation we had with the CEO of Klarna a couple weeks ago on the show, too, and sort of the differences between these buy now, pay later companies in terms of

how they are thinking about. They all seem to be very focused on credit and the creditworthiness of their customers, but how they're approaching it with things like, I remember Klarna's CEO talking about incentivizing people to make their payments with fees if they were late, for example, which I know is very different than what Levchin does at a firm. It is different. Interesting. He argued that in this environment, lenders actually want a firm-type debt on their books because it's short-term. A firm has staked its reputation on vetting these consumers.

So he thinks they're actually going to do pretty well during this period. But no wine with dinner. He's being very careful, he says, about the kinds of consumers he's offering credit to, saying no more often. Yeah, and it speaks to what we've been hearing in general coming out of this earnings period. The fact that you do have more consumers tightening their belts. You have lower end consumers, for example, continuing to spend money on groceries where things cost more, but maybe not spending as much on discretionary.

You have higher-end consumers that are trading lower into private label as well, something Walmart has talked about repeatedly, too. And it sounds like you're hearing that on this end of things, too. It's going to be something to watch with all the earnings, consumer-focused earnings we get this week. Yes, the lenders, in some case, tightening the consumer's belt for her or him.

Yes, exactly. All right, well, up next, Mike Santoli takes a look, a long-term look, at Amazon stock performance following the news of another round of job cuts. And do not forget, you can catch us on the go by following the Closing Bell Overtime podcast on your favorite podcast app. We will be right back. Welcome back to Overtime. Amazon ending the day in the red after the company said it's planning another round of layoffs. You can see shares fell about 1%. Mike Santoli is back with a look at the stock's long-term performance versus other retail and cloud names. Mike. Yeah, Morgan, a lot of consternation actually about how poorly Amazon has done over the last couple of years. Obviously, had a really great run right into the

pandemic. But here it is up against ETFs that are reflecting an equal weighted retail sector exposure and then cloud stocks as well. So it's right in the middle of those, right? Those are the two big components of Amazon's business. It's dominant in each one and is really nothing inconsistent with how it's behaved relative to those other groups. You could actually even go back, let's say, five years. It's a pretty similar story. Now, before that, it's no contest because, of course, Amazon has outperformed almost anything in the world going into that stretch. It's up, I don't know, six, seven hundred percent over a decade, whereas obviously the rest of those sectors are not. So it is one of those issues with those those businesses at Amazon being mature enough,

perhaps to more or less reflect the broader picture of of those industries that they're in. Of course, John, could be any number of other things that are driving Amazon shares. But this seems like it tells a pretty neat story. It does. And yet Microsoft's market cap is now twice Amazon's. And one might argue that the bull case for each about enterprise software and the growth potential of that is the same. And Amazon is number one in cloud, Microsoft number two. That is a great point. And it gets to a critique of Amazon as it now is constituted. In fact, I think Goldman Sachs was talking about this a couple of

weeks ago that, you know, is Amazon's e-commerce business really a good business? Believe it or not, that's a question. Now, they've never run it to be maximizing profits on the bottom line. But, you know, there is an argument to be made that that has been obscuring the value of the cloud services side of Amazon for a while. OK, I know you're looking at this chart. It's longer term. But I got I got a day of near term question for you. And that's the fact that Amazon finished today lower despite the fact that it announced more job cuts. Recently, what we've seen is when companies have come out and said that they're continuing to cut costs and they're continuing to cut headcount, that the stock has rallied.

The fact that it didn't, does it just speak to the fact that we saw a broader rotation out of the mega cap names today? Or is it is it a sign perhaps that bad news is finally being reacted to as bad news? I do think it is part of it that there was a pullback in the mega cap Nasdaq names today. But I think also the layoffs and the cost cutting math is less clean at Amazon than it would be, for example, Meta in particular, where everyone kind of knew they were overspending and overinvesting. And any dollar that they save on headcount is really going to crash to the bottom line. You could really easily do the model. Amazon's a little more complex story. Also, you know, 9000 employees is a tremendous number in the absolute. But relative to the size of of Amazon is not tremendous. So it seems like it

wasn't quite as big a swing factor for future profitability for Amazon. I wonder, Mike, if people are considering that the warehouse workers churn on their own, unlike the corporate employees who stick around. So that workforce could be coming down because Microsoft, I mean, Amazon might just not be hiring as many back. Mike, thanks. What was it, a few months? I mean, average 10 years sometimes? Yeah, exactly. Exactly. Up next, the top strategist explains what the recent historic volatility in the bond market means for investors. We'll be right back.

Welcome back to Overtime. Bond volatility has spiked considerably since the current banking crisis began. One measure of that, well, check out the Ivol ETF. That is up today. It's coming off its best week ever. The Ivol tracks interest rate volatility and aims to hedge against inflation and yield curve steepening. Let's bring in Macquarie Group global interest rate and currencies strategy, Terry Wiseman. Terry, thanks for being with us. We've been hearing that it's historic.

Some of the volatility we're seeing in the bond market right now. My gosh, what a difference two weeks has made. Your thoughts? Yeah, I don't know that it's really historic in the sense that we've never experienced bond volatility like this. Most financial crises are associated with financial market volatility, whether it's in stocks or in bonds or exchange rates, if you will. Typically, when you see this kind of volatility, though, it does persist. It's not something that where volatility goes up for a few days and then comes down. It may persist for a few weeks, may persist for a few months. I think it's something that the financial markets and traders have to get somewhat accustomed

to. It's probably going to dampen the willingness to take risks and directional bets in the in the markets because you have a lot of two way volatility and not necessarily a trending market. But I wouldn't say it's historically unusual. We typically have this kind of volatility often after crises or mini crises. Terry, so we've been used to paying a lot of attention to the Fed for years now, and especially over the past few quarters. Your expectation is that at the meeting this week, they're not going to say that they expect more rate increases necessarily.

Is that a good thing for investors for the markets, or is that a bad thing because of the amount of volatility and uncertainty that you just talked about? Look, there's always two ways to look at it, right? If they come out and say that they're not going to hike, and I don't think that they're going to say that, by the way. I think what they're simply going to say is not say anything. One way to do that is to simply say they're going to be data dependent or conditions dependent and see what

happens before they make a determination on the May meeting. But let's just say that they do hike. And let's say for some reason that they hike and don't give a dovish signal, i.e. it's not a dovish hike. Keep in mind, the market likes to think that the Fed might have an inside view of what's happening with the banks. So it's not, and by not signaling, not being convincing about the prospect that they're going to cut rates or leave them as they are at the next meeting, it may very well spark a rally in stocks at risk-taking, right? The market may simply infer from this that the Fed doesn't think that conditions in the banking sector are so bad that the Fed should desist or just simply watch things going forward.

On the other hand, of course, the market likes to see lower interest rates, and there's probably a contingent of traders out there that would like to see the Fed either do nothing or do the 25-bip hike and signal that this is the end. I think those traders could get animated by the prospect of a so-called dovish hike. So you can cut both ways. I can tell you this. There are competing forces in the marketplace. You may have two camps of traders each thinking different ways. And the market can experience quite a lot of volatility regardless of what the Fed does just because different camps of traders look at things differently. So we just talked about

rates. We just talked about what we've been seeing in the bond market. Let's talk a little bit about what we're seeing in the FX market as well and whether some of the moves we've seen in recent days in particular, and I realize some of this is contingent on what we hear from the Fed this week, whether that market has been behaving the way you would expect, and if so, what it's signaling. So there's always a technical aspect to the markets, and there's a fundamental aspect. I think the technical aspect is that a lot of traders were using the euro and pound sterling as funding currencies for carry trades. They may have been, say, long the Mexican peso, or long the Brazilian real, or long the Indonesian rupiah, and short the hard currencies as a way of hedging against broader dollar exposure.

And as we see this banking crisis unfold, you can see whereby traders might have flattened their trades. So what they effectively do is they buy the euro and they buy sterling because they have to cover their short position. And that drives those currencies a little stronger. But that's the technical view. The fundamental view is that, look, central banks do matter for what exchange rates do. And if the Fed is going to do a hike, but it's a dovish hike,

it may very well be the case that the euro and sterling rally a little bit more and the dollar weakens. So just to put a fine point on that, the dollar weakens from here? Yeah, I think so, in part because I think that whatever crisis we're experiencing in the U.S. is probably worse than whatever crisis they may be experiencing in the financial sector in Europe. Remember, we have a lot more banks in this country. It's a lot more difficult to supervise and regulate them. And therefore, the prospect of another accident or another mini-crisis within the regional banks is greater here than I think the chances of a banking crisis in Europe are.

So I think from that perspective, the market will be a bit more weary of buying dollars, may look for safety, let's say, the market will be a bit more weary of buying dollars, may look for safety. Let's say the other hard currencies, the other so-called reserve currencies like the euro, like the yen, like sterling. And, of course, the other issue here, of course, is that I really do think that the U.S. economy is the underlying trend is actually disinflationary. In fact, it's more disinflationary here than it is in Europe. And I think this gives a lot more credence for the prospect that if there's any central bank that should be staying on hold, it's the Fed. And when we get more conviction about that, the dollar will weaken. Okay. We appreciate your insights ahead of what is poised to be another very busy week with everyone focusing on the Fed and that

decision we get Wednesday afternoon. Terry, thanks for joining us. Thank you, John and Morgan. Up next, latest developments on the U.S. Virgin Islands lawsuit against J.P. Morgan over the Jeffrey Epstein scandal. On the other side of this break. We have a developing story on a lawsuit against J.P. Morgan over the Jeffrey Epstein scandal. Eamon Jabbers has details. Eamon? John, a federal judge in New York ruled today that the U.S. Virgin Islands and women who accused deceased investor Jeffrey Epstein

of sexual abuse can move ahead with their lawsuits, alleging that JP Morgan participated in the financier's sex trafficking scheme. The judge also allowed parts of a suit by Epstein accusers to move forward against Deutsche Bank as well. Manhattan District Judge Jed Rakoff sided with the banks in dismissing several counts in the cases brought against them, but he allowed core allegations to remain and head for trial. The judge said he would explain his reasoning for dismissing some counts and allowing others

in due course. Now, the decision comes after an attorney for the U.S. Virgin Islands said in court last week that J.P. Morgan CEO Jamie Dimon knew about Epstein's crimes and, quote, J.P. Morgan Chase knew. The attorney said J.P. Morgan, quote, broke every rule to facilitate his sex trafficking in exchange for Epstein's wealth, connections and referrals. Spokespeople for J.P. Morgan and Deutsche Bank declined to comment today. In the past, J.P. Morgan has said Diamond does not have any recollection of reviewing the Epstein accounts. So far, evidence produced in the case has been embarrassing for J.P. Morgan, with plaintiffs filings showing that an executive there had an extensive personal relationship with Jeffrey Epstein, even as he oversaw Epstein's accounts, new documents will likely be turned over as the

case develops. Back over to you guys. And we know you'll continue to bring us all of the headlines as the story does continue to develop. Eamon Javers, thank you. Well, Nike is the big name on tomorrow's earnings calendar. Up next, an analyst who thinks this stock can rally nearly 20 percent. He's going to explain how China's reopening could impact the bottom line. Stay with us. Welcome back to Overtime. Nike is set to announce its fiscal third quarter earnings tomorrow after the bell. Analysts and investors will be paying close attention to the impact of China's reopening. Let's bring in Cowen Senior Retail Analyst John Kernan.

He has an outperform rating and $141 price target on the stock. John, inventory is the big thing I'm wondering about here. Nike's got this inventory to clear. And while pricing is held up with the strong brand, I wonder how quickly you think Nike has to clear that inventory in order to be healthy with the economy slowing down. Yeah, sure. Thanks for having me. Nike's inventory is most out of position in North America. It's up over 54% from the prior year. It's actually in a good position in China. And I think you'll hear them talk to gross margin improving year over year in the fourth quarter and into next year in fiscal 24.

I think much of the gross margin pressure is behind Nike at this point after they report the third quarter. But, I mean, doesn't North America matter a lot given everything that's happening over here? I mean, I know we've been paying a lot of attention to China. That reopening is good, but does it does it necessarily balance out? It's it doesn't. I mean, their gross margin should be down over 250 basis points year over year, and largely because of pressure in North America. So there is a lot of pressure modeled in the business. I think where Nike's been very conservative is with their top line guidance. So we think they can raise their top line guidance, but there will be quite a bit of gross margin pressure from North America in Q3.

You got an outperformed rating on the stock. It's rallied 17% over the past three months, essentially since the last earnings report. You like the valuation here? Well, it's not cheap right now on traditional earnings metrics on this year or next year's earnings. But if you think that Nike shipped to e-commerce and direct to consumer, when that revenue moves to 50% of the overall business, there'll be a massive inflection in the company's operating margin structure. And we think there's roughly $7 plus in earnings per share potential. So on 2025 and 26 estimates, as the shift to e-commerce takes hold, this stock is cheap. And we think it'll be one of the better performing stocks in

the group. Foot Locker had a meeting today. Stocks swung around and ended the day down about five and a half, almost six percent. The read through from that meeting to what you're expecting from Nike tomorrow. Yeah, Footlocker is in a tough position. They're shrinking to become more productive. They're going to close over 400 doors. Nike is still going to be roughly 60 percent of their overall business. But they're in a very competitive market. They're competing with Nike direct-to-consumer channels and other retailers. There's other brick-and-mortar retailers that deal with Nike that we like much better, like Dick's Sporting Goods and Academy Sports. So how much is Nike affected by what's happening in the overall retail environment?

And how healthy is the overall retail environment even for premium brands like Nike? Does the strength of a Dick's sporting goods outweigh the troubles of others? Sure. Yeah. The macro environment is very tricky. You know, where is the consumer going to be six, nine, 12 months from now? I think it's it's as uncertain of an environment as we've really been in since the last recession in 08, 09. Nike's brand is in 08-09. Nike's brand is in a point of strength. We think they can raise revenue guidance, and we think their differentiated retail partners like Dick's Sporting Goods are in a great position. A lot of these stocks' valuations reflect a lot of the macro uncertainty you're hearing now.

So I think there's good value here in Nike and also Dick's Sporting Goods. So looking at your coverage universe here, is Nike your top pick, or would it be something else if you could buy just one stock right now? It is not our top pick right now. I would rank probably Exporting Goods or Decker's brands ahead of Nike in terms of just the upside to consensus estimates over the end valuation over the next 12 months. All right. John Kernan, thank you. Thank you. Great view of Nike and the consumer. You know, Morgan, that sort of brings it all together in a way that this argument from individual brands or for individual brands and companies that they're in a strong position,

hearing that about Nike, their Dick's Sporting Goods, et cetera, hearing it from Max Levchin earlier in the show and affirm, yeah, there might be access to credit issues out there, but we think we're in a strong position. But, you know, I think the investors got to put that together with what we hear from the Fed this week to figure out what does that mean for equities? What does that mean for fixed income positions? Exactly how much is this economy slowing down and what's that going to do to the market? That's the key question. And don't forget, it's not just Nike that you're getting earnings from. We've got a number of consumer facing names.

You've got KB Homes and actually you've got some housing data coming on both Tuesday and Thursday this week. You've got Darden. So the restaurant view, General Mills, because we know food has continued to be pretty sneaky. People have to spend money on food even if the price goes up. And then you've got things like Winnebago and Chewy for pet products, et cetera, et cetera. So it'll be very key to hear what all of these different companies have to say about the consumer. In the meantime, given all the pain and all the turbulence we've seen in the banking sector and all the unknowns, or I guess known unknowns, unknown knowns, around what that's going to mean for tighter credit moving forward,

it certainly seems like the consumer is poised to be pinched from many different angles right now and what that's going to mean to the economy moving forward. Despite the knee-jerk bounce we saw in equities today, the fact that you have in recent weeks seen just a big pile into bonds and you've seen yields come down so dramatically. And what are the kinds of things that crack? You know, when we were talking to Phil LeBeau today, I kept thinking back to how the seven year right auto loan became kind of common. Well, that's fine when interest rates are low. But when a banking sector is working and it's healthy and you have regional banks that are putting money out and bringing those deposits in. Yeah. But when you're paying a lot in an interest rate over seven years, how much you end up paying for that car,

especially when it's now a forty nine thousand dollar car,50,000 car versus what it was a decade ago. All of that coming home to roost for the economy, potentially. All of that is going to come home to roost. And we're going to have to see. It all brings us back to talking about it nonstop. We're going to talk about it nonstop tomorrow, too. that kicks off and sort of this notion that whether we get another 25 basis points, which is what's currently priced into the market or not, we're essentially potentially at the end of this tightening cycle. We have to see.

We're going to have some strong, insightful economic voices for you tomorrow helping to help you figure out what to do with your money. That is right. In the meantime, that's going to do it for us here at Overtime. Fast money begins right now.