Watch CNBC's full interview with Atlas Merchant Capital CEO Bob Diamond

Summary

In this discussion, financial experts delve into the current state of the economy, inflation, and interest rates. They highlight how the Federal Reserve's delayed action on rate hikes contributed to higher inflation, but acknowledge that inflation is now turning a corner. The conversation touches on economic correction, the normalization of interest rates, and the impact on corporate decisions. They also explore the evolving banking landscape, focusing on European banks and the future of crypto, particularly stablecoins like Circle, which they view as beneficial for payments and the banking system within a regulated framework.

Takeaways

• 😀 The Fed's delayed response to inflation has led to significant rate hikes, and while inflation may have peaked, its path down to 2% could take time and effort.
• 😀 There is a growing concern about economic risks as companies are advised to 'be your own bank' and prepare for potential downturns, even though a major crisis is not yet certain.
• 😀 The current economic correction is expected to be long but mild, unlike previous crises such as the 2008 financial collapse.
• 😀 A normal interest rate environment, with rates at 4%, could lead to more stable economic conditions in the medium to long term, fostering more volatility but better growth prospects.
• 😀 Zero inflation, while previously touted as ideal, is now recognized as potentially harmful, as some inflation is necessary for a healthy economy, particularly for fixed-income holders.
• 😀 U.S. banks have recovered strongly from the 2008 financial crisis, while European banks struggled due to lack of regulatory intervention, though some European banks are now seeing strong returns.
• 😀 In the European banking sector, higher interest rates are benefiting the bottom line more directly compared to U.S. banks, which pass more of the benefits onto consumers.
• 😀 Bob Diamond views European banks, particularly San Tan, as undervalued compared to U.S. banks, offering strong returns and a solid future outlook.
• 😀 While the cryptocurrency sector remains volatile and speculative, stablecoins like Circle, which operate within a U.S. regulatory framework, are viewed positively for their role in improving payments and banking efficiency.
• 😀 Inflation rates around 3-3.5% are considered manageable by the Fed, and they are not likely to push for drastic measures to bring it down further, aiming instead for a balanced economy.
• 😀 Investment in distressed businesses, particularly those impacted by poor decisions made during the era of zero interest rates, is expected to offer opportunities in the near future.

Q & A

What was the Federal Reserve's response to inflation and how did it affect the economy?

The Federal Reserve was criticized for waiting too long to raise interest rates, which allowed inflation to peak higher than desired. After beginning rate hikes a year ago, interest rates were increased to 4.5% to 4.75%. Despite this, the economy is still growing, although it is adjusting to higher rates.

What is Bob Diamond's outlook on inflation and interest rates in the near future?

Diamond believes that inflation has likely peaked and could stabilize between 3% and 3.5%. He expects the Federal Reserve to exercise caution and not aggressively push for inflation to drop below 2%, instead monitoring the situation and potentially pausing rate hikes once inflation is under control.

How does Diamond view the economic correction in 2023?

Diamond predicts that the economic correction will continue into 2023 but sees it as a milder one compared to past downturns like the 2008 financial crisis. He acknowledges challenges but believes the economy is still growing, with some opportunities in corporate distress.

What role does the long period of zero interest rates play in the current economic correction?

The long period of zero interest rates is seen as a key factor behind many bad financial decisions. Diamond suggests that the current economic correction stems from those decisions, especially corporate stress due to over-leveraging during a time of artificially low rates.

What is Diamond's stance on the health of U.S. banks versus European banks?

Diamond views U.S. banks as having recovered strongly post-2008, thanks to government interventions like the TARP program. In contrast, European banks have struggled and taken longer to recover, which creates a potential opportunity for investment in certain European institutions, such as San Tan.

Why does Diamond believe higher interest rates are more beneficial in the medium to long-term?

Diamond believes that the economy needs a more normal interest rate environment to ensure stability and long-term growth. While the recent higher rates may be challenging in the short term, they are necessary to prevent the kinds of poor decisions that were made during the era of zero rates.

What are the concerns surrounding speculative assets in the cryptocurrency market?

Diamond is cautious about speculative aspects of the cryptocurrency market, particularly those that are highly volatile and uncertain. He believes these should not return, as they do not contribute positively to the financial system or the economy.

What is Circle, and why does Diamond see it as a positive example in the cryptocurrency space?

Circle is a company behind the USDC stablecoin, which operates within a U.S. regulatory framework. Diamond views it as a positive example because it supports faster, cheaper corporate payments, benefiting both the banking system and the broader economy.

What investment opportunities does Diamond foresee in corporate distress?

Diamond believes there will be significant investment opportunities in corporate distress due to poor decisions made during the period of low interest rates. He specifically highlights the potential for profitable investments in distressed corporate assets.

What are Diamond's thoughts on the broader outlook for the financial sector?

Diamond remains optimistic about the broader financial sector, particularly U.S. banks, which have demonstrated resilience. However, he acknowledges that the market is facing challenges due to the long period of low interest rates, but he believes the situation is more manageable compared to previous crises.