The Warning From the Fed, and Landry’s CEO Tilman Fertitta 4/12/23

0:01Right now in fast cracks in the consumer. New data from Bank of America showing spending rising at its slowest clip in more than two years. Does this mean the post-pandemic shopping spree is about to end? We'll ask a man who runs more than 600 restaurants, 15 hotels and six casinos what he thinks. Landry's chairman and CEO Tillman Fertitta will be with us. Plus, losing altitude. Airlines, a big loser today as American, warned its first quarter profits would take a hit from rising fuel and labor costs. The Delta reporting tomorrow is now the time to delay your entry into the sector. And later, one of our traders says this chart is ready to break out.

0:36the big reveal and what the surge means for the broader markets coming up. I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Markets. I got a full house here tonight. Steve Grasso, Karen Feynman, Dan Nathan and Guy Dami all here on set ready to go. We start off with a major warning out of the Federal Reserve. The minutes from the March meeting showing central bank staffers believe the banking crisis would lead likely lead to a recession this year. Yet the committee raised rates anyway. Let's get more from Steve Leisman who joins us now. Steve. Yeah, Melissa, an interesting development.

1:07Staff forecasters at the Fed saw the banking stresses. Remember, they flared up just around the time of the Fed's March meeting, and they saw them likely to lead to recession. They previously said a recession was a possible or plausible outcome, but it was not their baseline at the time in the prior meeting. Here's what else they said. They said inflation would step down markedly this year, and inflation would slow sharply next year. and outcomes depend, of course, on the severity of the banking stresses that were out there. As for the actual officials at the meeting, they didn't appear to embrace the staff's concern or the staff concerns were not enough to keep them from hiking by, you'll remember, 25 basis points.

1:46They did see the banking failures leading to tighter credit conditions and also likely to weigh on jobs growth and inflation. Here's what else they said. Some would have hiked by 50 if not for the banking problems And they also didn't raise their forecast for rate hikes for the year end like they otherwise might have because of what was going on with banks. They discussed not hiking at all, but they decided to rely on their supervisory tools to handle problems at the banks. Most saw economic risk to the downside, inflation risk to the upside. They also forecast that they would probably hike again.

2:17After the inflation report today, and we had several Fed speakers as well and those minutes as well, So markets view of what the Fed's going to do in May ended up pretty much unchanged with about a 70 to 75 percent probability of a rate hike at the next meeting, Melissa. The other possibility, Steve, is that the that the Fed officials heard what the staff said and they said, you know what, a mild recession is fine with us. We're willing to take that chance. And I think, you know, in terms of what they're going to do for the next meeting, I don't know if that's going to change at all. But I'm wondering if the notion of a pivot, of an actual cut moves up because of this development.

2:53You know, that's a great question. I want to answer the first part of what you said there, which is that it could be that Fed officials, many Fed officials already have a recession built in in the following sense. Some are seeing a one percentage point increase in unemployment that usually is accompanied by a recession. And some see growth, you know, as low as 0.4%. So that kind of low growth, well, if it was a little bit worse than that, it would be on the negative side. So you're right. They may already be embracing a recession. And we have done some work, Melissa, trying to study or think about what the Fed reaction would be to a recession.

3:28And most think it'll stop the Fed from hiking, but most don't think it'll cause the Fed to reverse course and cut rates, maybe pause, but not necessarily cut, depending upon the level of inflation. All right. Steve, thanks. Steve Leisman joining us from Washington. Looks like an airport. It is an airport, actually. Okay, so what do we make of this development? The markets took it in stride, or the markets think that a recession equals a cut, equals a pivot. What do you think? You were once again in my head, as you tend to be at 5 o 'clock each night, because that's the question. You know, if they acknowledge that this bank failure is going to lead to recession, yet hike anyway, you have to say to yourself, that's the outcome that they want.

4:12Clearly, that's a desired outcome. So I guess in that regard, the move lower midday whenever the market started to turn around made some sense. Yeah, the market shrugged it off. I mean, this morning, things were looking pretty good. 5 % was obviously a tad better than the shoe was looking for. But CORE is still 5.6%. I don't think their job is done yet. And I think that's where the market came to realization about halfway through. Yeah. Karen? Well, I thought your question was a really good one because I'm thinking mild recession, I would think, is a home run for the Fed. If you look at the task before them to go from zero to trying to get to something normal in the midst of an inflationary bubble and to come out with only a mild recession after this pandemic bust and boom like we've never seen.

4:56Or spanking turmoil. I would think of that as a win. And Powell would be, I mean, a hero, I think. That's not a bad outcome at all for them if they can manufacture that. I think they were probably too nervous about spooking. If they skipped and they paused right now, that would mean to us that the banking issue was worse than we thought it was. So I think they're too nervous about that. Why are they not talking about QT? QT is happening in the background. It's 25 basis points, probably of a reaction within the market. The financial crisis is probably another 25. That's 50. They're already raising.

5:32Why on earth are they going to continue to press until something else breaks, something already broke? I think they're asleep at the switch once again. Yeah, it's interesting, though, when that data came out this morning at 830, if you look at the two-year yield, what happened to it, it went from 407 to 387. I know, Guy, you talk about this all the time. I mean, that move was kind of astounding. And then equities were ripping, right, in the pre-market. And then what we saw is that yields came back up and equities came in. And I'm just like looking at all that bond market volatility. We've been talking about the spread between the move index and the VIX.

6:04The VIX is just pinned here at 19. Like it's just pinned here. And it seems so odd. And now that you have the move coming in, despite what I just talked about, that intraday move that we saw in such a short period of time, I feel like we're going to get away from the Fed. We get it. They're going to maybe do 25 or maybe they're not going to add the May meeting. It doesn't really matter. They're not going to go up that meaningfully from here. OK, it really then comes to when does that pivot out? when does the market start pricing in lower rates, but for what reason, right? Just kind of putting this whole thing together.

6:32And again, if it is the best case scenario that they have a slight recession, I think we're going to be so focused in the next few weeks on earnings and what we hear from here. I just don't think it's going to be particularly good. So to me, I think that we're going to probably get off of the Fed really soon. And then we're going to get focused on what companies are saying, what sort of visibility that they have and what sort of consumer, degradation that we have seen with this rate move, because that's the thing that's going to take longer to work. They're also, to Melissa's point, they're also factoring in the markets, factoring in 100 basis points of cuts a year from now.

7:06So they're going and they're not. It would be great if we were just talking about this next meeting. They're talking about raising now into the summer. And then so how fast does that cut have to really happen? The 100 basis points. That's going to spook the market, in my opinion, versus help the market. Because things are so bad, they have to cut that much. Exactly. That precipitous of a drop, 100 basis points that quickly. I feel like the muscle memory of rate cuts equals good things for the market is still embedded in investors. I think that is still, that's still the reaction, the twitch that happens when we get a whiff of the Fed may pivot.

7:44The market might believe that. I don't think the Fed officials have said that at all. I I mean, six months ago, they were talking about whether you like it or not. I mean, again, I'm paraphrasing, but it's it's higher for longer and longer means exactly that. I think they're going to get a rate to where they want it to be. And I think it's going to be remain there. Unemployment in this country is three and a half percent. It actually ticked lower last week. Why would we even considering lowering rates with a historic low unemployment? It makes no sense. Nothing has nothing suggests that they should be cutting rates right now.

8:16Unless the banking turmoil is not contained. contain. The banking, and I never do this, the banking turmoil was created by their, the duration risk that these bankers failed to acknowledge was created by all this, everything going on with the Federal Reserve. So that's not on the economy. That's on people to just understand duration risk. So it's on them. And the bank stress test that everybody champions, Silicon Valley Bank would have passed that bank stress test. So, you know, that's an entirely a different conversation, I think. Well, I don't think that that duration risk fiasco that's happened at banks is at all on the Fed, right?

8:56I mean, the Fed, it's not like all of a sudden. On the bank. It's on the banks, not acknowledging or realizing what's going on. But, you know, Federal Reserve had rates artificially low for 13 years. People got desensitized to what could happen. So I guess that, yeah, you could blame the people. But the Fed created the environment for that to happen, in my opinion. It's not like they didn't give the banks more money, right? Again and again and again with the same message. Raise, raise, raise, raise. Don't believe us? We're going to raise more. But back to the stock market, think about those rallies that we saw in 2022.

9:29They were all predicated on the potential for a pivot. So, like, the market participants were kind of waiting, to your point about the muscle memory, waiting for them to say, ah, we got to 2.25 % on Fed funds, you know what I mean? We're going to pivot or slow down, that sort of thing. And so that's the thing. If you think about where the market has come, the S &P 500 off of those lows in October. We've come a long way when you look at the rallies and a lot of the patterns that we've seen, these rallies into earnings season that kind of go in a little bit and then we come off and we've made new lows each time.

9:57So to me, I just think that if the higher for longer really does stick around and then we have a weakening economy confirmed by some of the biggest companies in our economy, then I think that the stock market right here is entirely too expensive. You think about it, I think what's the average trailing over the last 10 years, I think Fat Set has it at like 18 and a half. Well, that's basically where we are right now. Yeah. I mean, did you see KRE today down more than a percent? I don't know. Banking turmoil contained? I think there are some questions. Warren Buffett, I mean, you watched the interview this morning.

10:29He thinks there's another shoe to draw. Karen's been saying it for a while. I mean, Sheila Baird talked about it. Those stocks don't trade that way for a reason, I don't think. But anyway, we got a market flash we got to get to. Alibaba. Steve Kovacs got the details. Steve. Yeah, Melissa. The Financial Times is reporting that SoftBank is making moves now to sell most of its shares in Alibaba. That's sending shares of Alibaba down about 4 % right now. FTE reporters looked through some filings. They said SoftBank has sold about$7 billion so far this year of their stake. And the goal is to get down to just about a 3.8 % stake in the entire company.

11:06We've reached out to both companies for comment and I'll be back if we get more. All right, Steve, thanks. Steve Kovach, what do we make of this news? I don't know what to make of it. I mean, I've been so afraid of Alibaba since, you know, I owned it and then sold it down a lot. I don't know. I feel like day to day, you just don't know what the environment is going to be. This is obviously a different thing, SoftBank, than the government, but I'm not there. I mean, they've been telegraphing this. And I think when you think about what Warren Buffett said on Squawk and Friends this morning, it's interesting, right?

11:37So he sold out of that Taiwan semi-position. He sold out or he's selling out quickly and he did it quickly. Yeah. And he sold out of Boyd. You know what I mean? And he's talking about Japanese stocks and the opportunities there. So maybe there is an interesting inflection point as it relates to investing in Asia. All right. Let's get back to the economy, the CPA data and the Fed minutes. Let's now bring in former Atlanta Fed President Dennis Lockhart. Dennis, great to have you with us. Thanks, Melissa. What do you make of the Fed staff's prediction of a mild recession later this year and the Fed's decision to go ahead and raise rates?

12:08I mean, do you think that it's a tacit or implicit acceptance that we will have a recession later this year? Well, first, let me explain. From my memory, the staff is somewhat independent of the governors and the presidents in putting forth what they think is going to happen, premised on appropriate policy. So it's not a Fed position per se. I think the voting members of the committee are perhaps a lot more important. And they each have staffs behind them, at least the Fed presidents do, who do modeling and have come to their own conclusions. So I think it's one input about what the atmosphere in the Fed is as regards a recession later this year.

13:00Having said that, I noted it when I read the minutes a few minutes ago, that the staff is really predicting a recession later this year. I think it's important. I think it also feeds the overall sentiment that I read, and that is they feel they have more work to do, and therefore, Or come May 3rd, they're probably going to increase by another 25 basis points. What's your view, Dennis, of the impact of what's gone on in the banking crisis and the expected tightening of credit to come and how that factors into the Fed's decision? I mean, we've heard from many Fed officials saying that they believe that the banking turmoil is contained.

13:41We've heard it from a lot of people. But I'm wondering what your take on it is as we watch the stocks continue to have a rough ride. I mean, there's no indication in how the stocks trade, at least, that things are over. You know, I think you have to be cautious on this question. I don't think we're out of the woods that the whole environment has settled back to something we'd call normal. So, you know, I think you have to continue to monitor the situation. And who knows, something more could happen in terms of a bank failure or whatever. So first, I think that's the first point. It's uncertain that we're completely out of the woods.

14:28And then the second point, I think, is that the committee seems to be paying very, very close attention to the credit contraction risk in the economy. But it's a little early to really assess it. And they said as much in the minutes. Dennis, how come we don't hear about QT being tightening? How come we don't hear about the financial crisis being tightening? Isn't that enough? Why does the Fed have to do anything right now? Well, first of all, I think the tightening effect of QT on the real economy is more of an unknown than a known. It's something that there have been a lot of staff papers written about and a lot of, you know, very serious economic studies to try to quantify it.

15:18But it really isn't known. And it's a variable that the committee wants to put on the back burner and just proceed with. So I think the fact that we don't hear anything about QT is because it really is a background matter from the point of view of policy. Dennis, this is going to be a bit of a wonky question. I hope, though, it doesn't come off that way. The Fed should have a balance sheet, and some of it, money supply, it all plays in, right? So I think you and I both would agree$9 trillion is the wrong number, but it should be probably greater than$6 trillion. Where should it be, given this environment and given money on all those different things?

16:00Because we're probably, in my opinion, 30 percent or so in excess. Your estimate is pretty good, I think. First, we're in a new era of ample reserves, not scarce reserves. Prior to the 2008 financial crisis, we had basically a situation of very scarce reserves. When I joined the Fed in 2007, the balance sheet was$800 billion. Today it's almost$9 trillion. $6 trillion as a stopping point and then letting natural growth occur is a reasonable estimate, it seems to me. They will feel their way along until they feel the market is telling them that the appetite for reserves is at its bottom, and then they'll stop.

16:54But I think$6 trillion is a reasonable estimate. It could be lower. Dennis, it's always great to speak with you. Thank you. Thank you so much, Melissa. Dennis Lockhart. I talked to Mark Zandi of Moody's a couple weeks ago, and he said that he believed that the coming credit tightening as a result of what's gone on in the banking sector is the equivalent of two to three rate hikes of 25 basis points. That has not been factored in yet. So they're done? Is that what you're saying? They could be done? Or they're going to keep going on ahead, and then this is on top of it, and they're over-tightening.

17:33Right. Well, he's right. I mean, if he's right, then they do have a little draft kind of cover to hide behind to wait and see for a couple months and see if that actually does happen. It's interesting. You know, we're small business. Right. We talk about there was a conference reading this week. And I think Jeff Gunlock tweeted out from Double Line that like literally the index is plummeting. Right. So you're seeing, at least in the expectations of small businesses, and let's not, like, small is the small word. Small businesses employ maybe like two-thirds of the people in America, right? So if their confidence in the economy, if their confidence in their ability to access credit, their confidence in the banking system is shaken, that is the sort of thing that's going to work its way through our economy at the wrong time.

18:17So we talk about, you know, whether they're going to continue to push and continue to raise, and QT, just Steve's point, all this sort of stuff. I mean, listen, it's likely the economy is going to shift below their feet before the Fed has pivoted or paused or anything like that. And at that point, they're going to be high in the eight ball again. So as far as an investor is concerned, I think, you know, taking some stock of valuations, taking some stock of this, you know, highly anticipated recession, whether it's, you know, a shallow one, whether it's long, whether it's deep, whatever. I mean, I just don't know.

18:46I just don't think the valuations make a whole heck of a lot of sense here. And I'm not just trying to sound like an absolute perma bear. You know, over the last year, there have been times where I've been very constructive on the opportunity to buy stocks. I just don't think, given the uncertainty that we have right now and where rates are, this is one of those good times. Plus, the market's 20 percent higher than that time in October. And just quickly, you sold Microsoft. I did. Well, she browbeat me last night. I got these good reasons to sell it. And it was indefensible that I still owned it, but I do own half still.

19:17Right. But the valuation. The valuation at 30 plus times. It's concerning to you. Yeah. Very. Coming up, trouble on the tarmac. Airline stocks getting grounded after a warning from one major carrier. But with Delta reporting tomorrow, will the problems be more widespread? We're trading that one next. Plus, one retailer you can throw in your purse, I mean, portfolio, shares of LVMH jumping after its latest report. Why luxury sales are seeing a rebound ahead. Fast Money's back in two.

19:48welcome back to fast money we've got a buzzkill on american airlines the stock seeing its worst drops since last june after the company issued disappointing guidance for the first quarter american sees earnings of just one to five cents a share that's largely below the average estimate of five cents the news sending other airline stocks lower delta reports before the bell tomorrow. What happened? Warren Buffett talks about it all the time. They're uninvestable. We've talked about it on this. They're trading vehicles. Tim Seymour points out Delta. Delta will probably be the other side of the equation, to be honest with you.

20:18They'll probably surprise the upside. But I look at American Airlines and we're approaching levels we haven't seen in two and a half or three years, which is remarkable if you think about it. They've been in a sweet spot over the last year in terms of what they can charge people and capacity and those types of things. With that said, I think you're looking for an opportunity again to trade Delta. I'm more inclined to be long Delta in earnings on the back of this than short. And I'll say that. I think it's a problem because corporate travel has really returned this, even though Jamie Dimon has people reporting to the office now.

20:48Finally, there's a lot of people who are still working remote. So there's no reason to have that corporate travel back. That means big ticket seats are not coming back. Labor costs going up, fuel costs going up. Right. Karen. Well, we were talking on the call today, what are the derivative trades from that? Have the hotels run up so much? I mean, they've had a huge run. I don't know in the airline space for the reason Buffett and Tim's trading vehicle, but just too hard to gauge. They do have all that debt, although they did manage to refinance at decent rates. They bought some time. There's a lot more fast money to come.

21:21Here's what's coming up next. Glamorous games. LVMH surging as China sees a retail rebound. So can this name keep trading in the lap of luxury? Plus, billionaire investor and Houston Rockets owner Tillman Fertitif joins us in just a few. His take on credit, the consumer, and how he's putting money to work. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

21:58Welcome back to Fast Money. Shares of luxury brand LVMH jumping after results. The Louis Vuitton parent reporting a sharp rise in sales driven by a strong rebound in China. The company, though, did note fashion and jewelry sales slowing down here in the United States. Stevie, you said LVMH, very important. Why? Well, it's very important because everyone thought the China reopening was supposed to be taking hold. We got a head fake a couple of times. This actually shows that somewhat they're coming back. which means for energy and everything under the sun, this could be positive. Yeah. Karen? Yeah.

22:32So they've cited in the past Macau is gigantic, and China also huge. But almost in every category except for wine and spirits, it was a giant beat. And the mix was good. And, I mean, there's a lot to love here. It's not crazy expensive at 25 times for a collection of brands that is almost unrivaled. Kerrig is just as good, I think. But I don't know. I love the name. I'm long. I wish I were long more. There's one way to fix that, I suppose. I could go home long tomorrow, I suppose. More long tomorrow. But there's a lot to like here. And I don't know if we'll see all the consumers still ready to spend, right?

23:14We might see this big dichotomy. But the high end is out there. They're ready to spend. Well, that's what's interesting. And now Karen's in my head because I was going to mention the other side of the rainbow. And it's Walmart. Look at Walmart. I mean, Walmart closed at 149. You know, very quietly, Walmart's had a decent few months. I think 157 is the all-time high spring of 21 or 22. And here we are. So the luxury side clearly can do well. But when Walmart starts ticking up like that, you've got to take notice because the people in the middle are going to get squeezed. You know, I know you want to go to Dan, but real quick, Capri, as Karen correctly pronounces it, has 30 percent leverage to China.

23:52Same as LVMH. How did it trade? Nothing. No effect. Why? I don't know. Maybe we're the only smart ones at the table. Not meeting these gentlemen. They don't trade it. But we could be, you know, you look around and you say, maybe I'm the stupidest guy in the room because Capri should have traded higher on the back of LVMH today. Interesting. I'll just say this because I don't know the LVMH story. You know, I probably just drink the stuff and not have it on my shoulder. But stocks at all-time highs, right? Whatever you think the valuation is. As it should be. It's so, the revenue growth is fantastic.