Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, we're having
Speaker 2: a rolling recession. To conye, roll looks pretty strongly. It
Speaker 2: is when it comes to jobs. The financial stories that
Speaker 2: shape our world. Three major regional bank failures send shockwaves
Speaker 2: through the banking system. We're all trying to figure out
Speaker 2: what to make of generative AI.
Speaker 1: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: A tale of two cities. As the bricks meet in
Speaker 2: Johannesburg and the central bankers and Jackson Hole, while race
Speaker 2: just keep going up all around the world. This is
Speaker 2: Wall Street Week. I'm David Weston. This week, I'm Sonny
Speaker 2: Bechelists of Rock Creek. On the bricks searching for a
Speaker 2: new engine for economic growth.
Speaker 3: These new countries that got added the accounts for very
Speaker 3: little in terms of economic clouds.
Speaker 2: Dan Trulo of Harvard on new limits on the banks.
Speaker 4: These banks really they are facing, I think a real
Speaker 4: challenge to their business model over the medium term.
Speaker 2: And Eric Canter of Molus on what all the new
Speaker 2: issuance is doing to yield on government bonds.
Speaker 5: At some point you will reach a mark in which
Speaker 5: you know investors say, well, how much more are you
Speaker 5: going to pay me to keep borrowing like this?
Speaker 2: This week Global Wall Street had to keep an eye
Speaker 2: on two very different events some ten thousand miles apart.
Speaker 2: In Johannesburg, the so called Bricks countries held their annual summit,
Speaker 2: seeking to reinject some economic growth through a range of initiatives.
Speaker 6: Are we need to fully leverage the role of the
Speaker 6: new development banks, push forward reform of the international financial
Speaker 6: and the monetary systems, and past the representation and voice
Speaker 6: of developing countries.
Speaker 2: And while the Bricks were searching for growth, Chair Powell
Speaker 2: led central bankers out to Jackson Hall, Wyoming in search
Speaker 2: of some clarity, maybe even steadiness, in the quest to
Speaker 2: keep growth going but still get inflation under control.
Speaker 7: We are prepared to raise rates further if appropriate, and
Speaker 7: intend to hold policy at a restrictive level until we
Speaker 7: are confident that inflation is moving sustainably down toward our objective.
Speaker 8: Regularities are no longer regular, and we have more irregularities
Speaker 8: than regularities. We cannot exclusively rely on inflation OUTLUK as
Speaker 8: determined by models.
Speaker 2: But there was also a lot going on in between
Speaker 2: Johannesburg and Jackson Hole, as reports came in midweek that
Speaker 2: mister Progosian's private plane had gone down northwest of Moscow
Speaker 2: and what just happened to be the two month anniversary
Speaker 2: of his mutiny against President put in Washington, the SEC
Speaker 2: came out with its new disclosure rules for hedge funds
Speaker 2: and private equity.
Speaker 4: Firms, increased fee disclosure for hedge funds and private equity firms.
Speaker 4: This is a seventeen trillion dollar industry and all across
Speaker 4: the country.
Speaker 2: People took a hard look at mortgage rates over seven
Speaker 2: point three percent and decided they could wait, as mortgage
Speaker 2: applications fell to their lowest since nineteen ninety five. On
Speaker 2: the other hand, owners of Nvidia didn't have to worry
Speaker 2: much about high mortgage payments as they saw the AI
Speaker 2: chip maker come out with yet another gangbuster set of
Speaker 2: numbers and predictions on just how high the sky might be.
Speaker 9: This was a historic guidance that we saw from the
Speaker 9: godfather of Ai, Jensten Nvidia.
Speaker 2: And although Tech gave up some of the Nvidia gains
Speaker 2: on Thursday, the Nasdaq by the end of the week
Speaker 2: was up a robust two point twenty six percent. The
Speaker 2: S and P five hundred didn't do quite as well,
Speaker 2: adding eight ten percent, ending the week at forty four
Speaker 2: or five. That's just over one hundred points above the
Speaker 2: median number our Bloomberg L's project for the end of
Speaker 2: the year, and the yield on the ten year stayed
Speaker 2: reasonably flat, adding just over two basis points, leaving it
Speaker 2: at four point two three percent. Take us through the
Speaker 2: news in the markets this week. We welcome now Scott Kronert,
Speaker 2: He's City US equity strategist, and Laurie Capacina, RBC Capital Markets,
Speaker 2: head of US equity strategy. Welcome to both of you.
Speaker 2: Great Ja you Lauria. Let me start with you first
Speaker 2: of all, what were the big stories in the markets
Speaker 2: this week from your point of view?
Speaker 4: So look, I think it was big tech earnings. I
Speaker 4: was out marketing seeing clients this week. I couldn't get
Speaker 4: out of a meeting without having a debate over a
Speaker 4: certain company and then also, I think jackson Hole was
Speaker 4: the other one, and I would say, look, with jackson Hole,
Speaker 4: I don't think there were any big surprises there, but
Speaker 4: I do think it was good to get that event
Speaker 4: out of the way.
Speaker 2: What about Jackson Hole from your perspective, Scott, did you
Speaker 2: hear anything that surprised you to anything that might change
Speaker 2: where the markets are headed? Well?
Speaker 10: I think what Sherman and Paul gave us was a
Speaker 10: continuation of an ongoing theme that he's going to stay
Speaker 10: the course on his focus on inflation and wants to
Speaker 10: see the path to two percent very clearly. In the meantime,
Speaker 10: I think the question that continues to come up with
Speaker 10: many clients and investors as so, how do I think
Speaker 10: about interest rates breaking through ten percent of the ten
Speaker 10: year and moving through four point two percent or higher?
Speaker 10: And so they're the discussion very quickly goes from Okay,
Speaker 10: we get it, fed funds probably higher for longer. How
Speaker 10: do I think about longer term interest rate trends and
Speaker 10: how does that affect the valuation paradigm on US equity skin.
Speaker 2: I think one of the things we've heard from Jaypowe
Speaker 2: on Friday was we're not sure where we're going, as
Speaker 2: they say, data dependent. It depends on how the numbers
Speaker 2: come in. So what do you advise clients. On the
Speaker 2: one hand, it's four point five percent yield on the
Speaker 2: ten year versus three point five percent. I mean, that's
Speaker 2: one percent, but it could make a real difference in
Speaker 2: the value of stocks.
Speaker 10: The easy answer for me is that we look for
Speaker 10: pullbacks to be more opportunistic getting long US equities going
Speaker 10: into a fairly robust target for the end of this
Speaker 10: year at forty six hundred and our midyear target for
Speaker 10: next year five thousand. So we're looking at any market
Speaker 10: pullback is a function of valuation compression around the rate
Speaker 10: discussion as ultimately a buying opportunity. As we think under
Speaker 10: the surface, the S and P five hundred is probably
Speaker 10: less connected to the aggregate US economy the most expect
Speaker 10: and in that regard, earning has become a more important driver.
Speaker 10: And there were table pounding bullish in terms of how
Speaker 10: corporate America is contending with the macro influences.
Speaker 2: Right now, Laurier, we have a rare opportunity here tonight
Speaker 2: because we have not one but two bloomberg Ols President
Speaker 2: you and Scott and he just mentioned he's at forty
Speaker 2: six hundred year end this year, you're at forty two
Speaker 2: to fifty, right and the forty three hundreds the median.
Speaker 2: Is there very much difference between forty six hundred and
Speaker 2: forty two to fifty in what might push you to
Speaker 2: the lower number.
Speaker 4: So we're basically at the median right now. And that's
Speaker 4: also basically the average of six different models that we run,
Speaker 4: and our most bullish model gets us up to forty
Speaker 4: eight hundred on the S and P. That's looking at
Speaker 4: where we think valuations could be and our earnings forecast.
Speaker 4: But the real drag on our model, I would say,
Speaker 4: is actually our cross asset indicators, which look at stocks
Speaker 4: relative to bonds. Now, that was a reason to be
Speaker 4: bearish at the beginning of the year, but we did
Speaker 4: see some improvement on those models in the second quarter.
Speaker 4: What we've seen recently with this move up in bond
Speaker 4: yields is that those models are rapidly getting more or
Speaker 4: less favorable for equities, more of a pressure point, and
Speaker 4: we are actually starting to see money flows come out
Speaker 4: of the US equity.
Speaker 11: Market as well.
Speaker 2: That was just my question because you've always, Laurie been
Speaker 2: telling us you know, we really need to be in equities.
Speaker 2: People are underrating equities, but are you starting to see flows?
Speaker 2: It is substantial right now as the bonds become more
Speaker 2: attractive with those yields.
Speaker 4: So what's interesting is that to start the year everyone said, okay,
Speaker 4: bonds are more attractive than equities, and we did see
Speaker 4: money flow go into bonds, and then we actually saw
Speaker 4: in the second quarter money come back into US equities
Speaker 4: as it was being pulled out of Europe. So there
Speaker 4: was an international dynamic that helped the US equity market.
Speaker 4: But what we are seeing now is that we're getting
Speaker 4: to a point in the year where these flow trends
Speaker 4: tend to fade a bit. You're seeing those European equity
Speaker 4: flows stabilize and that money is actually coming specifically out
Speaker 4: of the growth part of the market, and that's pulling
Speaker 4: the overall US equity flows down.
Speaker 2: Scott, one of the things that make people into equities
Speaker 2: is earnings. Where are you on earnings right now? What
Speaker 2: do you think about the seasons we've just been through,
Speaker 2: and what are you looking at in twenty twenty four.
Speaker 10: So the change with Q two earnings was that in
Speaker 10: comparison to Q one we saw earnings for the four
Speaker 10: yer move higher posts Q one, but you didn't see
Speaker 10: too much in the out quarter side of the equation.
Speaker 10: With Q two, we began to see an upper revision
Speaker 10: bias to Q three and Q four. We think at
Speaker 10: this point the twenty three earnings and around two twenty
Speaker 10: are more or less dialed in.
Speaker 12: But where we think.
Speaker 10: This is headed is that as we work through either
Speaker 10: economic slowing or mild recession, the path is still for
Speaker 10: higher earnings as we move into twenty twenty four, and
Speaker 10: we're on the more bullish side of the outlook for
Speaker 10: twenty twenty four looking for roughly two forty five of earnings.
Speaker 10: There's some sector differences in here that influence the way
Speaker 10: this year versus next year play out, and so we're
Speaker 10: looking for let's call it less disperse sector setup as
Speaker 10: an underlying driver of an earnings acceleration into twenty twenty four.
Speaker 2: Lord, do you see some sector differences as you look
Speaker 2: into twenty twenty four.
Speaker 4: So what we've seen for next year is that if
Speaker 4: you look at the change in anticipating growth rates on earnings,
Speaker 4: I believe it's healthcare and energy are the two that
Speaker 4: have actually seen some upward revisions recently to that year specifically,
Speaker 4: and those have actually been two of the better performing
Speaker 4: sectors in August in the US equity market for the
Speaker 4: SMP specifically, so you are seeing investors pay attention to
Speaker 4: that kind of issue. I think the other thing though,
Speaker 4: to keep in the back of your mind on twenty
Speaker 4: twenty four earnings is that inflation is anticipated to moderate.
Speaker 4: I think this will affect energy and healthcare less. But
Speaker 4: as that happens, our model actually shows it's a drag
Speaker 4: on revenue. So we think there could be some earnings
Speaker 4: pressures people need to get prepared for.
Speaker 2: Inflation may moderate, but we've heard Scott say there maybe
Speaker 2: a slowdown or even a recession in twenty twenty four.
Speaker 2: That's still a possibility. Did you think earnings will hold
Speaker 2: up in that situation.
Speaker 4: I think there are a lot of cross currents. But
Speaker 4: we have found that revenues in SMP earnings are really
Speaker 4: dictated by two things, inflation and GDP trends. So I
Speaker 4: do think it would be tough if we do see
Speaker 4: sort of the session just pushed into twenty twenty four.
Speaker 4: I think that ends up being another challenge to earnings.
Speaker 4: It's hard to get around.
Speaker 2: Scott, how much attention do you pay to the GDP,
Speaker 2: because you know, though GP numbers coming in, some of
Speaker 2: the numbers are really extraordinary for five plus percent at
Speaker 2: this point, do you believe those numbers? And how much
Speaker 2: does that affect your advice?
Speaker 10: I think that the correlation of earnings to GDP is
Speaker 10: certainly high and an impoortant element. I think we have
Speaker 10: to look at correlation alongside leverage or beta to GDP,
Speaker 10: and there I'd be a little bit differentiated. In terms
Speaker 10: of the way we break the SMP down, it's essentially
Speaker 10: in the three clusters, growth, cyclicals, and defensives. Our growth
Speaker 10: cluster is roughly forty percent of the SMP, so almost
Speaker 10: by definition it should be less economic sensitive. Defensives we
Speaker 10: know are defensive for a reason, they're less economic sensitive.
Speaker 2: So that leaves your thirty.
Speaker 10: Percent of the market that we characterize as cyclicals that
Speaker 10: ought to be more exposed and leveraged to GDP.
Speaker 2: Okay, Laur Kalacina and Scott Krohnitt will be staying with
Speaker 2: us as we turn to new paradigms for the markets
Speaker 2: in the wake of the Great Financial Crisis, and by
Speaker 2: the way, that pandemic. That's next on Wall Street Week
Speaker 2: on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street. I'm David Weston. Central bankers gathered
Speaker 2: in Jackson Hole this week to take a broader and
Speaker 2: longer term look at the economy and their approaches to
Speaker 2: monetary policy. Which rains is the question whether overall we're
Speaker 2: facing something of a paradigm shift after the traumas of
Speaker 2: the Great Financial Crisis and then the pandemic. It's got
Speaker 2: cornative city and Lori Calvacina of RBC Capital Markets have
Speaker 2: stayed with us to give us the markets perspective on
Speaker 2: where we may be headed. So Scott, let me start
Speaker 2: with you on this paradigm shift. Overturn used term, but
Speaker 2: it may well apply here. We've had the paradigm since
Speaker 2: the Great Financial Crisis and then we had to respond
Speaker 2: to the pandemic. Where are we headed next?
Speaker 10: Well, I want to focus on two elements of this, David,
Speaker 10: So I think first is regarding interest rates, which is
Speaker 10: continues to be elephant in the room, and we've talked
Speaker 10: about this in the context of valuations. But what we
Speaker 10: have to remember is that, Yes, we've been in a
Speaker 10: certain interest rate regime in the post GFC timeframe, but
Speaker 10: when you go back to look historically, it's fascinating the
Speaker 10: correlation between nominal and ten yure yields and SMP performance
Speaker 10: has varied by decade, going back to the sixties. So
Speaker 10: we do have to be all eyes open that as
Speaker 10: we move forward from here, higher for longer rates may
Speaker 10: be part of the investment landscape. And that's just an
Speaker 10: important element to keep a focus on. Is we look
Speaker 10: for the impact of rates on equity valuations. Now, the
Speaker 10: offset of that is growth drivers, and we do have
Speaker 10: a new sheriff in town, if you will, with AI.
Speaker 10: Over the past decade, we've had focus on areas such
Speaker 10: as cloud computing as a driver of productivity. Going forward
Speaker 10: enter AI. We definitely think there are going to be
Speaker 10: companies within the S and P five hundred that have
Speaker 10: a very real revenue and earnings benefit from AI. But
Speaker 10: more broadly and perhaps more important is under the surface.
Speaker 10: We think the productivity enhancement that can come to the
Speaker 10: broader industry economy is really fascinating to us. It has
Speaker 10: us structurally overweight industrials and it has us very focused
Speaker 10: on this notion that as corporate America is better able
Speaker 10: to real time manage their business models courtesy of technology,
Speaker 10: you may implicitly lower the economic sense at a bias
Speaker 10: to the underlying index.
Speaker 2: So Scott and Laura, I must say you have something
Speaker 2: of an ally here in Larry Summers, the former Treasury
Speaker 2: secretary wh's a special contributor here. I talked to him
Speaker 2: earlier today and one of the things he emphasized was
Speaker 2: possible a paradigm shift in the Fed fund rates and
Speaker 2: exactly what's going on with the interest rates. This is
Speaker 2: part we had to say.
Speaker 12: You may see the Fed funds rate have to go
Speaker 12: up once or even more than thatch over the next
Speaker 12: few few months. I think that there is an underappreciation
Speaker 12: in general of the fact that substantially enlarged government budget
Speaker 12: deaths means substantially more absorption of saving, means substantially more demand,
Speaker 12: and all of that means that the neutral interest rate
Speaker 12: is increased and is increase now and in the future.
Speaker 2: So Laurie, let me turn to you. To what extent
Speaker 2: do you agree with Larry, and if so, what does
Speaker 2: it mean for your clients?
Speaker 4: So I would say, on you know, the issue of
Speaker 4: the neutral rate. One of the things our Rate Strategies
Speaker 4: pointed out today that was that powising to kind of
Speaker 4: punt on that issue and say we don't really know
Speaker 4: what it is and kind of squirm out of it
Speaker 4: a little bit. I have some sympathy for that, but
Speaker 4: I will say, as I talk to investors, I'm not
Speaker 4: quite so sure. I think this notion is completely unappreciated.
Speaker 4: I talk to mostly equity folks, and I think they
Speaker 4: are very much of the opinion that we do have
Speaker 4: to brace ourselves for higher interest rates, you know, not
Speaker 4: a FED sitting at zero essentially propping everything up with
Speaker 4: the balance sheet, and also associated with that, frankly, they're
Speaker 4: looking for, you know, a higher run rate on inflation.
Speaker 4: So I was also struck today by chairmpin Powell's comments
Speaker 4: of really, you know, kind of reinforcing the idea of
Speaker 4: the two percent target, because frankly, a lot of the
Speaker 4: equity folks I talk to think maybe it should be
Speaker 4: a little bit higher.
Speaker 2: In a word, is AI going to bail us out?
Speaker 2: Scott thinks it may help us.
Speaker 4: Look, I think that AI is a positive driver. I
Speaker 4: agree with what a lot of what he said I
Speaker 4: view it as another productivity enhancing tool, not necessarily something
Speaker 4: that's going to completely change things, but I do think,
Speaker 4: you know, it's an important component of the idea that
Speaker 4: we do need to get used to a new world,
Speaker 4: and whether that's more technological innovation or reinvigorating the old economy.
Speaker 4: The reindustrialization theme, I think is another paradigm shift we're
Speaker 4: going through, really reversing globalization. I think it's all part
Speaker 4: of the same ball of wax.
Speaker 2: And there's the question when it comes when we get
Speaker 2: that productivity gain. Many thanks to Lori Calvasena of RBC
Speaker 2: Capital Markets and Scott Kroner of City. Higher rates for
Speaker 2: longer seems to be the order of the day. But
Speaker 2: how much higher and for how much longer? And what
Speaker 2: will these higher rates mean for things like deal making,
Speaker 2: which was all already struggling to come back. For some
Speaker 2: answers to these questions. Welcome now back Eric Canter. He's
Speaker 2: a vice chairman at Molison Company. Mister Canter earlier served
Speaker 2: from Virginia in the US Congress, including as House Majority
Speaker 2: of Leaders. So Eric, thank you so much for being
Speaker 2: a Wall Street We really appreciate it.
Speaker 5: David's a pleasure to be here.
Speaker 2: So now you're on Wall Street having been back down
Speaker 2: on the Capitol, give us a sense of where the
Speaker 2: rates are and where they're headed.
Speaker 5: Well, I mean, listen, I think many would say that
Speaker 5: the days of free money are over and that we
Speaker 5: are no longer going to see sort of the benefit
Speaker 5: of that and perhaps be paying the price for that.
Speaker 5: But there's no question that now we are seeing real
Speaker 5: interest rights now exists, and the cost for borrowing has
Speaker 5: gone up. And you know, from a deal making perspective,
Speaker 5: I think what we would like to see from Molas's
Speaker 5: perspective is a little bit more certainty. You know, you know,
Speaker 5: people projectble. Is there going to be a soft landing,
Speaker 5: is there going to be a recession? I mean, from
Speaker 5: our standpoint, it's about the Fed reaching a point where
Speaker 5: you can gain some certainty with the rate hikes.
Speaker 2: And the thing keep saying their data dependent depends on
Speaker 2: what the data are. It comes in what they're going
Speaker 2: to do. One point of data that seems not to
Speaker 2: be up for debate is how much money the US
Speaker 2: governments have to borrow the issuance of treasuries, because that
Speaker 2: certainly is a factor on what happens to the rates.
Speaker 2: The more we have to issue, the more interest you
Speaker 2: have to pay.
Speaker 5: Well, there's no question, and as we know, we went
Speaker 5: right up the country went right up to the edge
Speaker 5: in terms of the debt ceiling, which caused the coffers
Speaker 5: to really empty out, which has now caused the federal
Speaker 5: government to have to incur an incredible amount over twenty
Speaker 5: dollars of issuances. I think since that sort of standoff
Speaker 5: in Washington, So you know, look, David, I think that
Speaker 5: certainly you could look at some of the auctions that
Speaker 5: have taken place. Some haven't gone as well as expected,
Speaker 5: but most by far have gone very well.
Speaker 2: I don't think the.
Speaker 5: Federal government has a problem in borrowing right now, but
Speaker 5: at some point you will reach a mark in which,
Speaker 5: you know, investors say, well, you know, is how much
Speaker 5: more are you going to pay me to keep barring
Speaker 5: like this? And that's the point you don't want to
Speaker 5: get to. And I think from a deal making perspective, again,
Speaker 5: it gets back to the point of certainty. When are
Speaker 5: we going to see the ability for this country to
Speaker 5: have policies in place to grow at a quicker rate
Speaker 5: than the debt is growing. And that's ultimately the goal.
Speaker 2: Right now, we're seeing projections, for example, coming out of
Speaker 2: the Congressional Budget Office suggesting that because of just the
Speaker 2: increase we've already seen in the rates, our interest payments
Speaker 2: are going to be much much higher. It's going to
Speaker 2: add a fair amount to that debt that we have
Speaker 2: to service at some point starts to crowd out other
Speaker 2: things that we will be doing with the money.
Speaker 5: So I think this is the accurate statistics that the
Speaker 5: interest cost has gone up over thirty five percent over
Speaker 5: the past year. We are going to reach a point,
Speaker 5: maybe in fiscal year twenty four or twenty five, that
Speaker 5: the federal government and it's interest bill will be as
Speaker 5: much as what the federal government funds the Pentagon with.
Speaker 5: I mean, that's a really dawning thought, and so we
Speaker 5: can't sustain that. You know, there's a great sort of
Speaker 5: stat in history when you look at the interest bill
Speaker 5: for the federal government on an annual basis, When you
Speaker 5: look at it in two thousand, it was two hundred
Speaker 5: and twenty three billion dollars. If you look at it
Speaker 5: in twenty fifteen, it was two hundred and twenty three
Speaker 5: billion dollars, And you have to sort of ask yourself
Speaker 5: why is that, Because in fact, during that period of
Speaker 5: time there was nine point seven trillion dollars of additional
Speaker 5: debt incurred. How in the world are you paying the
Speaker 5: same amount of interest? It's because rates have been so
Speaker 5: low and so again that's not sustainable. And that's when
Speaker 5: I say again, we're going to have to do something
Speaker 5: about this. And that's why I think the markets too
Speaker 5: are now looking to see longer term while the ten
Speaker 5: year has gone up so much erictually.
Speaker 2: Really great to have you on, Thank you so much
Speaker 2: of the time. That is Eric of Molus and Company
Speaker 2: coming up, the group that was supposed to challenge the
Speaker 2: economic supremacy of the G seven nations. We'll talk about
Speaker 2: Sunny Bachelors of Rock Creek, about the Bricks meeting in
Speaker 2: Johannesburg this week and what we learned.
Speaker 3: She really really needed a major breakthrough this week.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: The Bricks Brazil, Russia, India, China and South Africa, a
Speaker 2: group of countries with fast growing economies that are expected
Speaker 2: to dominate the world by twenty fifty.
Speaker 4: It is a club of you know, nations that have
Speaker 4: the same outlook in terms of how the world should
Speaker 4: look in terms of mutelectural operations.
Speaker 2: And they have grown fast. Accounting for just over twenty
Speaker 2: percent of global GDP when first discussed back in two
Speaker 2: thousand and one, they've shot up to over a third
Speaker 2: and are projected to be over forty percent by twenty forty,
Speaker 2: while the G seven has gone the other way, from
Speaker 2: over forty percent down to thirty percent today. What started
Speaker 2: out is simply a way of thinking about investments has
Speaker 2: turned into a more formal arrangement among governments holding annual
Speaker 2: summits this year in Johannesburg, where they decided to expand
Speaker 2: their membership from five to eleven.
Speaker 13: We have decided to invite the Argentine Republic, the Arab
Speaker 13: Republic of Egypt, the Federal Democratic Republic of Ethiopia, the
Speaker 13: Islamic Republic, ran, the Kingdom of Saudi Arabia, and the
Speaker 13: United Arab Emirates to become.
Speaker 2: Full of bigs. But as much as they may consider
Speaker 2: themselves a group, the five countries in the bricks are
Speaker 2: pursuing very different economic paths, with China being the outstanding
Speaker 2: growth leader over the last twenty years, as observed this
Speaker 2: week by Jim O'Neil, the person at Goldman behind the
Speaker 2: original idea of the Bricks.
Speaker 13: Economically, the only reason why the group is that interesting, frankly,
Speaker 13: is because of course China.
Speaker 2: Though China shows signs of giving up its economic leadership,
Speaker 2: the second big problem they have is Ji.
Speaker 10: Who has reasserted control of the economy, who many of
Speaker 10: our investors that we talked to their field doesn't even
Speaker 10: even understand economics.
Speaker 2: While Russia and South Africa have fallen behind, the first
Speaker 2: in the aftermath of the war in Ukraine and the
Speaker 2: second facing a wide range of problems. President Ramafosa has
Speaker 2: been in lots of international meetings looking for ways to
Speaker 2: pull the country forward, leaving it largely to India to
Speaker 2: drive the bricks forward. Despite some disappointment in the past.
Speaker 14: A line that I've always repeated without India is that
Speaker 14: this is a country that has consistently disappointed the optimists
Speaker 14: in the pessimists. So the last few years it has
Speaker 14: clearly disappointed the pessimists because it's done much better than
Speaker 14: what the worst forecasts were. Now, I think that we
Speaker 14: just have to be careful that India doesn't follow its
Speaker 14: past pattern and disappoint the optimists as well.
Speaker 2: When it comes to emerging markets, particularly the bricks, there's
Speaker 2: nobody who knows it quite as well as of Sunny
Speaker 2: pecialist of Rock Creeky Walk or back now to ostri Rica, Sonny,
Speaker 2: thanks so much for being back with us. So it
Speaker 2: turned out to be a fairly eventful meeting in Johannesburg
Speaker 2: as they decided to go from five members to eleven members.
Speaker 2: Were you surprised and what do you think brought this about?
Speaker 3: So, David, I think President she really really needed.
Speaker 11: A major breakthrough this week.
Speaker 3: And with everything that we saw that is going on,
Speaker 3: almost ten billion leaving UH, leaving the markets in China
Speaker 3: over just the last few weeks. You have consumers not
Speaker 3: not really buying into consuming in China. You have the
Speaker 3: real estate problems, you have growth rates down, you have
Speaker 3: youth unemployment.
Speaker 11: He had everything going wrong.
Speaker 3: So this meeting could not have been at the worst time,
Speaker 3: and he really worked hard to convince the other members,
Speaker 3: including Modi and Brazil to UH to agree to this extension, and.
Speaker 11: It seems like the timing was good for India.
Speaker 3: You know, India did manage to UH to be the
Speaker 3: fourth country that's landed on Moon this week, while Russia
Speaker 3: actually could not land on Moon, even though it had
Speaker 3: been an early early UH player in space. So so
Speaker 3: I think India felt comfortable that it may not necessarily
Speaker 3: be in a weak position in this grouping. So that's
Speaker 3: I think how the various leaders got to agree to
Speaker 3: have these six new countries, which are a rather mismatch
Speaker 3: of countries to join the new groupings.
Speaker 2: Well, let me ask about that mismatch. Let me ask
Speaker 2: about the mismatch, because I don't know, by the way,
Speaker 2: what they're going to call it when they admit these countries,
Speaker 2: assuming that they do. There's some formalities or things. But
Speaker 2: when it was created back by Jim O'Neil at Goldman Sachs,
Speaker 2: it was a way of looking at the fastest growing
Speaker 2: economies a group of them there were four originally later
Speaker 2: at five as an investment matter, where to invest What
Speaker 2: is this new entity now, because as you say, it
Speaker 2: is a mismatch. It doesn't fit together the way when
Speaker 2: Jim O'Neil created it.
Speaker 3: Absolutely, and I think Jim, you know, in two thousand
Speaker 3: and one, when he created it.
Speaker 11: He was absolutely right. These countries were growing.
Speaker 3: So fast they were really changing directions. Usually, we saw
Speaker 3: poverty go down in China, we saw poverty go down
Speaker 3: a little bit in India. We saw a major major
Speaker 3: change among the largest economies, which was sort of the
Speaker 3: brick and then the S got added to bricks with
Speaker 3: South Africa.
Speaker 11: And if you look at.
Speaker 3: Actual market terms, I think the S and P was
Speaker 3: up about four hundred and twenty percent. If we go
Speaker 3: back to two thousand and one when he coined the term,
Speaker 3: and EM was up maybe around four hundred and three percent,
Speaker 3: so you know, pretty much in line with the.
Speaker 11: Rest of the market.
Speaker 3: Things changed a lot by the time that the actual
Speaker 3: organization got set up in two thousand and six, and
Speaker 3: then really started going downhill, particularly because of China, Russia
Speaker 3: and South Africa's returns being so negative. So now you know,
Speaker 3: you went from a group that had some cohesion in
Speaker 3: terms of economic growth to a group even before the
Speaker 3: six got added, that have really.
Speaker 11: Very little to do with each other economically.
Speaker 3: And this countries that got added include three oil producers,
Speaker 3: and then you have Egypt, you have Ethiopia, and and
Speaker 3: you know these are countries that are in Argentina. Again,
Speaker 3: countries that do not necessarily have very much in common
Speaker 3: with each other except maybe grievance against the West.
Speaker 11: In some form or other. And moving forward, like you said,
Speaker 11: it will be interesting to see what name they come
Speaker 11: up with.
Speaker 3: But it's much more of a geopolitical group versus what
Speaker 3: Jim really was talking about, which was an economic block.
Speaker 2: Well, let's focus on what Jim were resiltually focusing on.
Speaker 2: With the addition of these new countries. Does it make
Speaker 2: the countries, any of them, more investable? Does it address
Speaker 2: some of the issues you've already mentioned For President g
Speaker 2: does it make his economy stronger at all to have
Speaker 2: this expanded bricks.
Speaker 3: First of all, you know you're going from a group
Speaker 3: of countries. This five account for close to about third
Speaker 3: of the world's purchasing power parity, if you know, we
Speaker 3: go with PPP, they account for about a third of.
Speaker 11: Global PPP.
Speaker 3: But if you look at these new countries that got added,
Speaker 3: they account for very little in terms of economic power,
Speaker 3: so they're not really bringing in They're bringing in a
Speaker 3: lot of population, but again not the largest countries necessarily
Speaker 3: in terms of population and consumers. You know, one country,
Speaker 3: namely Iran has its own sanctions and troubles, and what
Speaker 3: we saw already with Russia being part of this entity,
Speaker 3: the Brick Bank that is trying to lend kind of
Speaker 3: anemically to the block was not able to.
Speaker 11: Help Russia in its time of need. So it is not.
Speaker 3: Clear that this grouping is really functioning very well Economicallysani.
Speaker 2: As you suggest, Most economists I've heard from are skeptical
Speaker 2: about the US dollar losing its position as a reserve currency.
Speaker 2: But is there something other than that there might be
Speaker 2: almost as a trading currency, that this sort of conglomeration
Speaker 2: of countries could move toward that they would trade in
Speaker 2: their own currencies. I guess that's one of the things
Speaker 2: they're studying, right, to have a common currency.
Speaker 3: I think they certainly are looking at the common currency,
Speaker 3: digital currency.
Speaker 11: A number of different options.
Speaker 3: I think that if we look at it very carefully,
Speaker 3: these countries are so disparate from each other, there is
Speaker 3: I see very little likelihood that India would want to
Speaker 3: have a common currency with China. For example, India is
Speaker 3: setting up one of the most sophisticated payment systems inside
Speaker 3: of India. In fact, some countries are working with India
Speaker 3: because it's AI generated payment systems are extending even to
Speaker 3: its own rural population.
Speaker 11: The question of.
Speaker 3: India moving away to give that sort of power up
Speaker 3: to have one common currency with this group, I think
Speaker 3: is very unlikely.
Speaker 2: Sunny, It's always so good to have you on. Really
Speaker 2: appreciate your time as a Sony bachcialist of Rock Creek
Speaker 2: Coming up. Students may be having trouble covering the cost
Speaker 2: of tuition, but what about the twenty thousand dollars they
Speaker 2: may need for their sorority rush out fit. That's next
Speaker 2: on Wall Street League on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: Wall Street Week notes the passing this week of one
Speaker 2: of its stalwarts, Loslo Beinie. He was one of the
Speaker 2: program's chief alves for years, earning him a place in
Speaker 2: the Wall Street Week Hall of Fame for his stock predictions,
Speaker 2: something in which he took great pride.
Speaker 9: As of today, we have the ninth best year in history,
Speaker 9: and you know, I think that no one would have
Speaker 9: expected this year to be there in top ten, So
Speaker 9: I think we've got a.
Speaker 2: Pretty good year. And Lewis Ruckheiser showed his appreciation on
Speaker 2: the program whenever Laslo Barini joined him on the air.
Speaker 9: As it happens, we have with us tonight one of
Speaker 9: only two of our chief elves who are still bullish
Speaker 9: on this market, meaning that they expect the DOO six
Speaker 9: months from now to be at least one hundred points
Speaker 9: higher than it is tonight. He's Laslow Berni. And the
Speaker 9: operative question is why is this man smiling?
Speaker 2: We lost a Wall Street Week legend this week who
Speaker 2: had Lazoborini died at the age of seventy nine. Finally,
Speaker 2: one more thought. An investment in knowledge always pays the
Speaker 2: best interest, so wrote Benjamin Franklin in The Way to
Speaker 2: Wealth in seventeen fifty eight. And these days it better
Speaker 2: pay a pretty good rate of interest, given the amount
Speaker 2: of investments some schools are asking for. We all know
Speaker 2: about the level of student debt, something President Biden tried
Speaker 2: to address with a debt forgiveness plan struck down by
Speaker 2: the Supreme Court.
Speaker 5: I know there are millions of Americans, millions of Americans
Speaker 5: this country who feel disappointed and discouraged or even a
Speaker 5: little bit angry with the course decision today.
Speaker 9: One student did, but.
Speaker 2: As much trouble as some middle class students may have
Speaker 2: paying for their college, there are others who don't appear
Speaker 2: to need much help at all, even for high school. Take,
Speaker 2: for example, students at the prestigious Deerfield Academy in Massachusetts,
Speaker 2: who will soon enjoy a new dining hall built just
Speaker 2: for them for a mere eighty nine million dollars, financed
Speaker 2: conveniently with minicial bonds. But then again, Deerfield students pay
Speaker 2: a mere seventy thousand dollars a year to attend, more
Speaker 2: than one hundred grand less than the students at the
Speaker 2: ultra exclusive Institute alf dem Rosenberg in Switzerland, for which
Speaker 2: you will pay one hundred and seventy five thousand dollars
Speaker 2: a year, with meals prepared by chefs from Michelin starred restaurants,
Speaker 2: physical therapists on call, and a fleet of Audietrons to drive.
Speaker 2: As Town and Country reports, the head of the school
Speaker 2: justifies the tuition simply saying we like excellence and that
Speaker 2: comes at a price. Not clear whether that price includes
Speaker 2: using cell.
Speaker 11: Phones Ernie Love mobiles on weekends.
Speaker 2: Thomas supposed to call my therapist. It isn't just the
Speaker 2: elite prep schools attracting all that money. These days, we
Speaker 2: sort of expect that the Harvards and the Yales attract
Speaker 2: big contributions from alums, though former Harvard president Larry Summers
Speaker 2: told us that wasn't the reason he's opposed to so
Speaker 2: called legacy admissions.
Speaker 12: MIT has long been without legacy admissions, and it seems
Speaker 12: to do very well financially.
Speaker 2: But the big bucks aren't just going to the ivys anymore.
Speaker 2: McPherson College in McPherson, Kansas may have just eight hundred students,
Speaker 2: but it just got a one billion dollar anonymous donation,
Speaker 2: and I'll tell you I for one am a big fan.
Speaker 2: McPherson offers the only four year Bachelor of Science degree
Speaker 2: in the country in restoring classic cars like this nineteen
Speaker 2: fifty three Mercedes Benz three hundred s that students restored
Speaker 2: for the Pebble Beach Concord Delegon. And not all the
Speaker 2: money being spent on students these days is going for
Speaker 2: what you'd call traditional education. There's a good deal being
Speaker 2: invested in the phenomenon known as the sorority rush. Most
Speaker 2: particularly the rush has experienced at the University of Alabama.
Speaker 2: Now there's nothing new about the ritual of rushing fraternities
Speaker 2: and sororities. But what is new is pledges at BAMA
Speaker 2: have taken to TikTok to show off their outfits for
Speaker 2: the big event, including brand details that lets one TikToker
Speaker 2: provide us all with a detailed accounting of how much
Speaker 2: these young co eds are spending, like this.
Speaker 11: One Menichus's David German.
Speaker 4: These are Eniton, David Gruman and David German.
Speaker 2: That outfit including accessories, tools, up to just under six
Speaker 2: thousand dollars, way below some others which reach up to
Speaker 2: over twenty grand, which may cause some of us to
Speaker 2: ask where all that money is coming from.
Speaker 7: Maybe these Bama, these students are are not the aspiracial consumer.
Speaker 4: Maybe they're you know, their parents are paying for a
Speaker 4: hundred Oh gosh, I I hope so yeah. I mean,
Speaker 4: if I'm mainteening can get a twenty thousand cardier like
Speaker 4: rock On.
Speaker 2: That does it For this episode of Wall Street Week,
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.