WEBVTT - Stage is Set for Powell’s Hawkish Message 0:00:01.320 --> 0:00:05.680 This is Bloomberg business Week inside from the reporters and 0:00:05.840 --> 0:00:09.400 editors who bring you America's most trusted business magazine, plus 0:00:09.480 --> 0:00:13.640 global business, finance and tech news. The Bloomberg Business Week 0:00:13.680 --> 0:00:18.600 Podcast with Carol Manser and Tim Stinebec from Bloomberg Radio. 0:00:18.840 --> 0:00:20.599 The first fo EB Scene meeting of the year kicks 0:00:20.600 --> 0:00:23.320 off tomorrow. The decision comes on Wednesday. We'll also hear 0:00:23.320 --> 0:00:25.919 from J. Powell that afternoon. Ahead of that, our own 0:00:25.920 --> 0:00:28.440 Steve Matthews notes that FED Chief J. Powell and Wall 0:00:28.480 --> 0:00:31.200 Street are headed for another face off this week. This 0:00:31.320 --> 0:00:33.720 is the US Central Bank seeks to slow its inflation 0:00:33.760 --> 0:00:37.440 fighting campaign without signaling a readiness to stop f O 0:00:37.600 --> 0:00:40.160 m C policy and reading the Fed tea leaves both 0:00:40.280 --> 0:00:42.800 and are not easy. With more on his most read 0:00:42.800 --> 0:00:45.680 We've got Bloomberg News Economics reporter Steve Matthews. He's in 0:00:45.680 --> 0:00:52.000 our Atlanta Bureau. Steve, financial conditions very important thing for 0:00:52.040 --> 0:00:55.840 the Federal Reserve, obviously with the Fed raising rates so 0:00:56.000 --> 0:00:58.600 much and FED policy started to make its way throughout 0:00:58.600 --> 0:01:01.639 this system off I conditions are just really tight right now, 0:01:01.720 --> 0:01:09.360 right not at all surprisingly, the financial conditions if you 0:01:09.400 --> 0:01:12.760 look at the Bloomberg Financial Conditions index. They are the 0:01:12.800 --> 0:01:16.960 easiest since last February. They're easier than before the Fed 0:01:17.080 --> 0:01:20.240 started raising rates. And the Fed is not gonna be 0:01:20.280 --> 0:01:25.320 happy about this. Uh. Monetary policy works through financial conditions, 0:01:25.360 --> 0:01:28.639 meaning you know what's happening to mortgage rates, what's happening 0:01:28.680 --> 0:01:32.480 to corporate lending rates, what's happening stock and bond prices, 0:01:32.560 --> 0:01:35.680 that what's happening with the dollar. And when you have 0:01:35.760 --> 0:01:40.520 easier conditions, that supports growth. The FED is trying to 0:01:40.600 --> 0:01:45.200 achieve below trend growth, which is going to ease, in 0:01:45.280 --> 0:01:48.440 their view, ease pressures on the labor market and therefore 0:01:48.520 --> 0:01:53.040 ease and inflationary pressures. They are not getting it. And 0:01:53.240 --> 0:01:56.040 so while they have pretty well signaled that you're gonna 0:01:56.040 --> 0:02:00.160 get a twenty five basis point hike on Wednesday, UH, 0:02:00.200 --> 0:02:05.280 the tone of Chair Palell's comments and potentially of the 0:02:05.360 --> 0:02:10.359 statement are going to be hawkish. Yeah, it ain't tricky, 0:02:10.800 --> 0:02:12.799 or it isn't easy being the Fed. We know that, 0:02:13.440 --> 0:02:15.600 or maybe it is because you're saying the same thing 0:02:15.600 --> 0:02:17.640 over and over again. It's not easy being an investor 0:02:17.639 --> 0:02:21.000 who thinks that you know financial conditions, you know, markets 0:02:21.040 --> 0:02:22.600 doing what the FED wants It to do. No, it's 0:02:22.600 --> 0:02:25.720 a good point. And I do wonder though, right Steve, 0:02:25.880 --> 0:02:28.880 if the FED is going to have to be harder 0:02:29.360 --> 0:02:32.280 either in the press conference J Powell to kind of 0:02:32.480 --> 0:02:35.480 really make sure investors don't get to ahead of themselves. 0:02:35.520 --> 0:02:37.240 This is the managing it has to do. Right. It 0:02:37.280 --> 0:02:40.280 doesn't want too much enthusiasm to come back um and 0:02:40.320 --> 0:02:43.600 think about you know, financial conditions staying easy because they 0:02:43.639 --> 0:02:45.679 want things to slow down. They don't want them to 0:02:45.720 --> 0:02:49.280 pick up again. That is exactly right. And and in fact, 0:02:49.639 --> 0:02:51.120 you know, if you go back and look at the 0:02:51.200 --> 0:02:54.919 last several meetings, this will be the first basis point hike, 0:02:55.320 --> 0:02:59.399 and I think you know after six six hikes of 0:02:59.400 --> 0:03:02.920 of larger than that. And what they're afraid of is 0:03:03.280 --> 0:03:05.600 if you go back to meetings, we had seventy basis 0:03:05.639 --> 0:03:09.200 points last meeting, we had fifty basis points. This meeting, 0:03:09.200 --> 0:03:11.840 we're gonna have a quarter point. And you know, if 0:03:11.880 --> 0:03:13.760 you just kind of do a straight line, that would 0:03:13.800 --> 0:03:17.240 suggest to the next meeting we pause. And that is 0:03:17.280 --> 0:03:19.440 not the message they want to send. They want to 0:03:19.440 --> 0:03:21.960 send the message that they're going to be continuing to 0:03:22.040 --> 0:03:24.760 raise rates and that they're going to be more important 0:03:24.800 --> 0:03:27.560 than that that they're going to keep rights high for longer. 0:03:28.320 --> 0:03:31.640 And so you know that will be the message. You know, 0:03:32.120 --> 0:03:35.760 they go into all these press conferences with talking points, 0:03:35.840 --> 0:03:38.040 and you can be sure that that's going to be 0:03:38.120 --> 0:03:41.480 one of the talking points that chere Paw comes out with. 0:03:42.240 --> 0:03:47.280 Why is this so unclear to Wall Street? Well, Street's like, 0:03:47.320 --> 0:03:50.240 we got it, Jake, Joe, you know, I mean, well, 0:03:51.880 --> 0:03:55.600 the tricky thing is that Wall Street is reacting to 0:03:56.000 --> 0:03:59.560 legitimately good news. We have had good news on inflation, 0:04:00.280 --> 0:04:02.400 and you know, Chair Powell is going to have to 0:04:02.440 --> 0:04:05.280 acknowledge there has been some good news, as much as 0:04:05.280 --> 0:04:09.320 he may not want to highlight it. Uh So, you 0:04:09.360 --> 0:04:13.720 know they're gonna have to hit the right balance that, yes, inflation, 0:04:13.840 --> 0:04:16.400 the outlook looks better than they thought, you know, the 0:04:16.520 --> 0:04:20.560 last meeting which is in December, but still it's not 0:04:20.720 --> 0:04:23.080 headed to two percent and the goal is to get 0:04:23.120 --> 0:04:26.480 inflation down to two percent, and they believe there's not 0:04:26.600 --> 0:04:31.280 enough tightness and Wall Street legitimately just has trouble understanding 0:04:31.320 --> 0:04:32.960 what the Fed is saying. I mean, you saw this 0:04:33.040 --> 0:04:37.400 in July when Powell made some comments and everybody said, pivot, 0:04:37.400 --> 0:04:40.120 We're on a pivot. Well, there was no pivot, and 0:04:40.320 --> 0:04:43.360 uh so, you know, the Fed can be a little 0:04:43.360 --> 0:04:48.239 bit mysterious to understand, and Wall Street sometimes gets it wrong. 0:04:48.680 --> 0:04:51.600 I mean, the tricky point is if the Fed continues 0:04:51.640 --> 0:04:55.080 steve to stick to getting inflation down to two percent, 0:04:55.160 --> 0:04:56.880 then it's got to ways to go. Folks wake up 0:04:56.920 --> 0:05:00.080 and smell the coffee, right. But if the Street and 0:05:00.080 --> 0:05:02.760 everybody says NAT's more like four or five percent and 0:05:02.760 --> 0:05:06.679 we're just gonna settle there, then the Feed is done. 0:05:06.760 --> 0:05:10.039 So that's a big part of the disconnect. Yeah, I 0:05:10.080 --> 0:05:12.359 think that's that is a big part of the disconnect. 0:05:12.440 --> 0:05:16.040 But also part of it is that the FED believes 0:05:16.160 --> 0:05:18.280 that the economy is resilient. I mean, we had three 0:05:18.320 --> 0:05:21.719 percent growth in the fourth quarter. Uh, you know, we're 0:05:21.760 --> 0:05:25.360 likely to have some significant growth in the first quarter. 0:05:26.200 --> 0:05:29.400 The much of Wall Street, two thirds of Wall Street 0:05:29.440 --> 0:05:32.640 maybe more than that, is predicting a recession this year. 0:05:33.400 --> 0:05:35.840 The Feed is not predicting a recession this year. If 0:05:35.839 --> 0:05:39.200 the economy holds up better than expected, that implies that 0:05:39.320 --> 0:05:42.160 rates are going to be higher than the Wall Street expects. 0:05:42.160 --> 0:05:45.240 So it's like, if your forecast is we're headed to 0:05:45.320 --> 0:05:49.680 recession sometime soon, you know that's not how the Fed 0:05:49.800 --> 0:05:52.480 is looking at the world. Hey, one thing I want 0:05:52.480 --> 0:05:54.320 to ask you. We've got some new Fed mint members 0:05:54.400 --> 0:05:58.320 right actually voting this year. Does that potentially change how 0:05:58.320 --> 0:06:02.600 it all plays out? Yeah, it is a slightly more 0:06:02.720 --> 0:06:08.080 dubbish Fed this year. You'll you'll have googlesby the new 0:06:08.160 --> 0:06:13.119 Chicago Fed president voting. Bullard was voting last year, who's 0:06:13.200 --> 0:06:17.560 kind of a notable hawk and he's gone. Esther George, 0:06:17.560 --> 0:06:21.840 who's largely regarded as being hawkish, is gone. You had 0:06:21.880 --> 0:06:25.839 a couple of new appointees from the Biden administration who 0:06:25.839 --> 0:06:28.960 are who are viewed to be kind of centrist. So 0:06:29.240 --> 0:06:33.159 you know, incrementally you're going to have a slightly more 0:06:34.120 --> 0:06:37.800 dovish voting rotation. Although the interesting thing is, if you 0:06:37.839 --> 0:06:41.200 go back to the December dot plot, seventeen of the 0:06:41.320 --> 0:06:46.400 nineteen f o MC participants, we're predicting rates over five percent, 0:06:46.480 --> 0:06:48.880 which is more than what Wall Street is predicting right now. 0:06:49.080 --> 0:06:54.279 Fifteen of the seventeen seven, I think, seventeen of nineteen. Okay, 0:06:54.320 --> 0:06:57.680 that's pretty hawkish, right, that is hawkish. That is not 0:06:57.720 --> 0:06:59.960 where Wall Street is. Okay, Steve, give us your best 0:07:00.040 --> 0:07:03.600 prediction for a we hear from j Powell on Wednesday. Uh, 0:07:03.960 --> 0:07:06.560 I think we're going to hear that rights are going 0:07:06.600 --> 0:07:10.240 to be higher for longer. That he said in December 0:07:10.640 --> 0:07:12.960 that there would be no cuts this year. I think 0:07:13.040 --> 0:07:16.040 he will repeat that in the statement. I think the 0:07:16.160 --> 0:07:20.320 key question is ongoing. They've been saying, we're in the 0:07:20.320 --> 0:07:23.760 statement we're going to see ongoing increases, And there's a 0:07:23.800 --> 0:07:26.960 big debate on Wall Street. Does that change to say 0:07:27.320 --> 0:07:30.360 further tightening, which would at least open the door for 0:07:30.400 --> 0:07:33.160 the possibility of a pause and you know, later this 0:07:33.320 --> 0:07:36.480 spring and if they keep on going, that says they're 0:07:36.520 --> 0:07:38.000 going to do at least two more hikes. I love 0:07:38.040 --> 0:07:42.000 when we obsess about one word ongoing, hashtag ongoing. Steve Matthews, 0:07:42.000 --> 0:07:43.640 we will be looking for your coverage. I know you'll 0:07:43.640 --> 0:07:46.239 be part of our our live blog and looking forward 0:07:46.240 --> 0:07:49.880 to your analysis after Steve Matthews, Economics reporter at Bloomberg News. 0:07:50.400 --> 0:07:53.960 You're listening to the Bloomberg Business Week podcast. Catch us 0:07:54.000 --> 0:07:56.640 live weekdays from two to five pm East here on 0:07:56.760 --> 0:08:00.480 Bloomberg Radio, the Bloomberg Business Avan. You do. You can 0:08:00.520 --> 0:08:03.840 also listen live to our flagship New York station Just 0:08:03.920 --> 0:08:09.480 say Alexa Play Bloomberg E Love and Dirty with three 0:08:09.720 --> 0:08:11.920 D seventy five billion dollars give or take a little 0:08:11.960 --> 0:08:14.920 bit in assets. It is the biggest exchange traded fund 0:08:15.080 --> 0:08:17.720 on the planet. We are talking about State Streets, Spider 0:08:17.840 --> 0:08:20.320 s and P five fund that has changed the game 0:08:20.400 --> 0:08:23.040 of investing. And you know what, now it's facing a 0:08:23.080 --> 0:08:25.400 lot of competition. It's not the only game in town. 0:08:25.440 --> 0:08:28.320 This story in the upcoming new issue of Bloomberg Business Week. 0:08:28.320 --> 0:08:29.760 It's out on news stands later this week on the 0:08:29.800 --> 0:08:32.400 Bloomberg and online at Bloomberg dot com. Let's get to 0:08:32.440 --> 0:08:35.080 it with Katie Greifeld, Bloomberg New Senior Market supporter here 0:08:35.080 --> 0:08:38.000 in our Bloomberg Interactive Broker Studio, along with the editor 0:08:38.040 --> 0:08:43.320 of Business Week, Joel Weber. Joel, Happy birthday. Why yeah, 0:08:43.480 --> 0:08:47.720 thirty years old. It's the biggest E t F I 0:08:47.760 --> 0:08:51.040 know more about this than I, uh is probably would 0:08:51.040 --> 0:08:54.360 make sense, But because I co pilot the podcast Trillions, 0:08:54.360 --> 0:08:56.760 which is all about E t f s, and I've 0:08:56.840 --> 0:08:58.640 gotten a long on the history of et F so 0:08:58.679 --> 0:09:01.640 I know I know a lot um But but Kate 0:09:01.760 --> 0:09:05.240 Raifeld wrote this story, and um, Katie, what I really 0:09:05.280 --> 0:09:08.400 want to know is how many birthdays can one em 0:09:08.960 --> 0:09:11.440 because yes, we're talking about it right now, but lots 0:09:11.480 --> 0:09:13.280 of people we are talking about it on the twenty second, 0:09:13.400 --> 0:09:15.720 So like, how many birthdays can spy half? It's a 0:09:15.720 --> 0:09:19.360 great question. Actually, Bloomberg Intelligence wrote about this recently in 0:09:19.400 --> 0:09:22.160 a research piece that you're probably not going to see 0:09:22.200 --> 0:09:25.320 many other thirtieth birthdays for E t F. Spy in 0:09:25.400 --> 0:09:29.080 so many ways stands alone. Obviously, it is the oldest 0:09:29.200 --> 0:09:31.360 E t F out there. This is a much more 0:09:31.800 --> 0:09:35.200 saturated market. The boom and bus cycles of new products 0:09:35.200 --> 0:09:38.680 has shortened a lot, but Spy obviously has stood the 0:09:38.679 --> 0:09:43.120 test of time. So this industry that it helped create 0:09:43.400 --> 0:09:48.160 um is coming for it also, right so why could 0:09:48.200 --> 0:09:52.440 it potentially lose this lead that it's had since it 0:09:52.559 --> 0:09:54.400 since the very beginning. So that's the thing I mean 0:09:54.440 --> 0:09:57.599 when you're talking about Spy, it has so many accolades 0:09:57.600 --> 0:09:59.040 that you need to mention. But you also have to 0:09:59.080 --> 0:10:01.760 mention the fact that what we have three hundred eight 0:10:01.960 --> 0:10:05.079 billion dollars in assets that's currently the biggest. But if 0:10:05.080 --> 0:10:08.319 you look at products from I shares, you look at Vanguard, 0:10:08.320 --> 0:10:11.040 and those are the industry leaders in terms of overall assets, 0:10:11.400 --> 0:10:14.440 their SMP five hundred funds are within a hundred billion 0:10:14.480 --> 0:10:17.960 dollars of spy, and that, honestly in the scheme of 0:10:18.000 --> 0:10:21.199 E T F S is not and the other thing 0:10:21.200 --> 0:10:22.440 that they have going for it if you look at 0:10:22.440 --> 0:10:26.320 the cheaper yes, exactly, so spy it costs what ten 0:10:26.360 --> 0:10:29.559 basis points. If you round up I, V V and 0:10:29.880 --> 0:10:33.600 VOO they cost three basis points and talk initials to me, 0:10:33.880 --> 0:10:37.000 you know, if there's a lot of leathers. But it's 0:10:37.000 --> 0:10:39.560 not just all about the expense ratio. It's not just 0:10:39.600 --> 0:10:42.679 about fees, which I was surprised to learn in this story, Katie. 0:10:42.720 --> 0:10:45.200 It's it's also you know, that might be what long 0:10:45.320 --> 0:10:47.840 term buy and hold investors care about and that's why 0:10:47.880 --> 0:10:50.400 they might choose one over another. But if you're looking 0:10:50.400 --> 0:10:52.679 to get it in out quickly, spy is what you do. 0:10:52.960 --> 0:10:54.719 That's right. So I mean, if you are a buy 0:10:54.760 --> 0:10:57.440 and hold investor, you know, someone investing their retirement money, 0:10:57.480 --> 0:11:00.200 you're going to be there for a few decades. Do 0:11:00.240 --> 0:11:03.400 you really care about six spaces points that six basis 0:11:03.440 --> 0:11:07.240 points difference. But the big advantage that SPY has is 0:11:07.280 --> 0:11:12.720 for institutions because it has such this liquid market built 0:11:12.760 --> 0:11:14.280 up around it. You think about the lending, you think 0:11:14.280 --> 0:11:17.160 about the options market built up around Spy. They don't 0:11:17.200 --> 0:11:20.959 care about the annual expense ratio. They don't ever touch that. 0:11:20.960 --> 0:11:23.320 What they care about is how easy it is to 0:11:23.360 --> 0:11:26.320 trade this thing, how cheap it is. That obviously feeds 0:11:26.320 --> 0:11:29.559 in upon itself. So the fact that Spy is liquid 0:11:29.640 --> 0:11:32.280 means that Spy is going to continue to be liquid. 0:11:32.760 --> 0:11:39.439 So why can't Spy match its competitors with in press. 0:11:39.559 --> 0:11:42.199 It's it's like one of those things that from the 0:11:42.240 --> 0:11:45.000 outside you're like, well, just lower the basis points, make 0:11:45.000 --> 0:11:47.800 it cheaper. State Street like, why can't they do that? 0:11:47.960 --> 0:11:50.480 So I don't think they want to, is the thing. 0:11:50.600 --> 0:11:53.160 They're not the correct answer, but they don't mean they 0:11:53.200 --> 0:11:56.120 don't need to because they're earning a ton of money 0:11:56.200 --> 0:11:59.920 charging ten basis points versus three basis points from investor 0:12:00.040 --> 0:12:02.760 is that don't super care. And again the Wall Street 0:12:02.800 --> 0:12:07.560 traders who have really it's become this existentially important product, 0:12:07.840 --> 0:12:09.760 they don't need it to be cheaper. So there's not 0:12:09.800 --> 0:12:11.920 really a lot of fee pressure on State Street here. 0:12:12.080 --> 0:12:17.320 I feel like it's a trust right, so that the 0:12:17.360 --> 0:12:20.600 structure that created the E T F. This trust thing, 0:12:21.400 --> 0:12:24.920 uh was basically cast aside at some point, and the 0:12:24.920 --> 0:12:28.080 trust structure is not predominant anymore in e t s, 0:12:28.120 --> 0:12:31.320 but it was basically as a proof of concept that 0:12:31.360 --> 0:12:34.720 was what was used. But that's also what inhibits its 0:12:34.760 --> 0:12:39.200 ability to get any lower. So the Vanguard product, the 0:12:39.240 --> 0:12:42.559 black Rock products, those aren't trusts right, so there they 0:12:42.559 --> 0:12:44.960 can shave away a couple of basis points that that 0:12:45.080 --> 0:12:47.199 spy can't get any lower. I do want to put 0:12:47.240 --> 0:12:49.559 something on your calendar right now. You're talking about trust. 0:12:49.640 --> 0:12:51.840 Reminded me that if you look at the queues, that's 0:12:51.840 --> 0:12:57.480 a trust as well that was born in So I 0:12:57.480 --> 0:12:58.960 guess we're going to have to gear up for that 0:12:59.040 --> 0:13:03.280 profile best go QQQ. Yeah, it's I mean it's also 0:13:03.400 --> 0:13:06.679 huge also has a really deep market built around it 0:13:06.960 --> 0:13:08.679 as well. Do we have to be worried as we 0:13:08.800 --> 0:13:13.520 talk increasingly about actively managed DTF versus the passive form 0:13:13.559 --> 0:13:16.280 of investing such as this one, I don't feel worried. 0:13:16.360 --> 0:13:19.560 I think that if you are a new entrant to 0:13:19.760 --> 0:13:21.959 the e t F market, a new issuer, and you're 0:13:21.960 --> 0:13:24.800 trying to launch a product, you're maybe a little bit 0:13:24.800 --> 0:13:27.559 worried because you look at the sort of passive index 0:13:28.120 --> 0:13:31.120 part of the market, and there's no white space. I mean, 0:13:31.280 --> 0:13:34.520 at this point, thirty years into the game, everything under 0:13:34.520 --> 0:13:37.480 the sun exists. So that might force you to become 0:13:37.480 --> 0:13:39.480 a little bit more active if you're talking about a 0:13:39.520 --> 0:13:44.720 market structure perspective. I mean sometimes Eric Felt hates this, 0:13:44.800 --> 0:13:46.640 but people will say that, you know, e t f 0:13:46.720 --> 0:13:49.160 s are distorting the market. They're all buying the same thing, 0:13:49.440 --> 0:13:52.079 the rise of passes and investor. Isn't he right when 0:13:52.080 --> 0:14:00.240 you think about these massive ones don't ever as a 0:14:00.280 --> 0:14:02.319 component of the trade. Well, I think, Look, I think 0:14:02.360 --> 0:14:06.480 the thing that when we've written this as Bloomberg News 0:14:06.559 --> 0:14:09.640 a lot is you know what is passive? What is active? 0:14:09.640 --> 0:14:11.600 At this point? I mean you put five hundred stocks 0:14:11.640 --> 0:14:13.640 in an index, that's a choice that's been made. That's 0:14:13.640 --> 0:14:17.000 an active decision. Like sure it's five hundred, but like 0:14:17.120 --> 0:14:19.720 it's still it was an active decision about how to 0:14:20.000 --> 0:14:23.040 Why Tesla wasn't included in that for a long time, right, 0:14:23.080 --> 0:14:26.560 Like so that there is inherent decision making that goes 0:14:26.600 --> 0:14:29.320 into this. And didn't we interview David Blitzer together? He 0:14:29.400 --> 0:14:31.400 was he was part of that committee. But I will 0:14:31.440 --> 0:14:34.800 also say he did. It was on trillions. I would add, though, 0:14:34.880 --> 0:14:37.960 that a lot of these passive ETFs are being used 0:14:38.000 --> 0:14:41.200 for very active purposes. People will use them as building 0:14:41.280 --> 0:14:44.520 blocks in their actively managed portfolios, just as a way 0:14:44.600 --> 0:14:48.760 to get exposure in a cheap, tax efficient way. So Trivia, 0:14:49.640 --> 0:14:54.000 uh the other birthday that I would excited, I just 0:14:54.120 --> 0:14:58.320 know more than his normal I think. So we're talking 0:14:58.320 --> 0:15:02.080 about the thirtieth anniversary. There was an event that preceded 0:15:02.120 --> 0:15:06.680 the birth of the E t F. Anybody, anybody, anybody know? 0:15:06.840 --> 0:15:10.680 It was an event. You're going, okay, black Monday. Black 0:15:10.720 --> 0:15:13.560 Monday happened, and that in response to that, the SEC 0:15:13.840 --> 0:15:17.480 did this white paper and effectively there's a paragraph tucked 0:15:17.520 --> 0:15:20.520 inside that paper. In this paper is like massive phone book, 0:15:20.920 --> 0:15:23.880 multiple phone books, and they basically said, black Monday may 0:15:23.960 --> 0:15:26.360 not have happened if we if we had a product 0:15:26.440 --> 0:15:28.720 that could do X, Y and Z. And the people 0:15:28.760 --> 0:15:31.840 who created Spy basically read that passage and reverse engineered it. 0:15:32.040 --> 0:15:34.480 It took them a while to get approved. But yeah, 0:15:34.520 --> 0:15:38.520 you can listen more on trillions. We re redropped. Do 0:15:38.560 --> 0:15:40.960 you know a lot about it? We we re dropped 0:15:41.320 --> 0:15:43.520 the et F story, which is six episodes about the 0:15:43.600 --> 0:15:45.280 history of the ETF. That's right. Be sure to check 0:15:45.280 --> 0:15:48.440 out the Trillions podcast hosted by Joel and Eric Bautunist. 0:15:48.560 --> 0:15:50.880 The latest episode the e t F Story six part 0:15:50.960 --> 0:15:54.240 series Very cool Stuff, Very cool stuff. As always from 0:15:54.280 --> 0:15:55.680 Katie gray Felt. This story is going to be in 0:15:55.720 --> 0:15:57.880 the upcoming new issue or thanks to Joel as well. 0:15:58.560 --> 0:16:01.880 You're listening to the bloom Bird Business Week podcast. Catch 0:16:01.960 --> 0:16:04.520 us live week days from two to five pm Eastern 0:16:04.720 --> 0:16:08.360 on Bloomberg Radio the Bloomberg Business Band you Doo. You 0:16:08.480 --> 0:16:11.400 can also listen live to our flagship New York station, 0:16:11.840 --> 0:16:17.200 Just Say Alexa Play Bloomberg E Love and Dirty. Something 0:16:17.240 --> 0:16:19.040 else that we've been talking about as of late, and 0:16:19.200 --> 0:16:24.560 that is the world increasingly pushing back stronger if you will, 0:16:24.600 --> 0:16:28.720 against China. That includes uh, the Japanese, that includes the 0:16:28.800 --> 0:16:30.840 United States, I mean a lot of them are pushing 0:16:30.880 --> 0:16:34.280 back at this point, banning advanced chip technology exports to China. 0:16:35.440 --> 0:16:37.520 This is China continues to move ahead with it's Made 0:16:37.520 --> 0:16:41.720 in China program to dominate key technology such as semiconductors 0:16:41.760 --> 0:16:44.880 and AI and more with US now and back with 0:16:45.040 --> 0:16:48.200 us is Bloomberg New Economy Editorial Director Eric Shatzker here 0:16:48.240 --> 0:16:51.080 in our Bloomberg Interactive Broker's studio. Eric, good to have 0:16:51.200 --> 0:16:54.960 you with us. Welcome back to back. So it's not 0:16:55.080 --> 0:16:56.960 just the U. S And China anymore, It's not the 0:16:57.080 --> 0:17:00.200 US versus China anymore. This is starting to broaden out, 0:17:00.600 --> 0:17:05.119 oh very much so. And I want to say first 0:17:05.200 --> 0:17:08.960 off that there is Carol just for you at chat 0:17:09.040 --> 0:17:14.200 GBT angle to this story. As you may recall, back 0:17:14.240 --> 0:17:17.399 in October, the United States the Commerce Department moved to 0:17:17.520 --> 0:17:22.160 ban exports of advanced chip making technology to China. Why 0:17:22.880 --> 0:17:28.639 ostensibly to slow the development of Chinese military capabilities, especially 0:17:29.640 --> 0:17:33.560 in artificial intelligence, which is now the vanguard of modern warfare. 0:17:34.119 --> 0:17:36.280 And of course this is true. The United States does 0:17:36.400 --> 0:17:41.240 want to constrain the Chinese military. But now, as of Friday, 0:17:41.280 --> 0:17:44.320 the United States has an agreement with the Dutch and 0:17:44.440 --> 0:17:50.440 the Japanese to join this coalition if you will, and 0:17:50.640 --> 0:17:56.000 so the Netherlands and Japan also will ban the export 0:17:56.040 --> 0:18:01.960 of advanced chipmaking technology to China. It's important to mention 0:18:02.119 --> 0:18:05.920 that three of the world's most important chip making equipment 0:18:06.240 --> 0:18:12.640 suppliers are one Dutch a s mL and to Nikon 0:18:12.880 --> 0:18:16.680 and Tokyo electron, both of which are Japanese. People tend 0:18:16.720 --> 0:18:19.880 to think that this is an industry dominated by American companies. 0:18:19.880 --> 0:18:24.320 Into a large degree, it is, but no one would 0:18:24.320 --> 0:18:27.000 be able to make the world's most powerful chips without 0:18:27.119 --> 0:18:30.200 the photo lithography equipment that comes from those three companies 0:18:30.280 --> 0:18:33.720 that I just mentioned. So yes, on the surface, this 0:18:33.920 --> 0:18:38.480 is about a military battleground. Quite possibly, and I know 0:18:38.640 --> 0:18:42.680 that this is hard to process given what's going on 0:18:42.720 --> 0:18:48.119 in Ukraine, but quite possibly the most important military battleground 0:18:48.480 --> 0:18:52.920 in the world. But practically speaking, this coalition of the 0:18:53.000 --> 0:18:56.240 United States, the Netherlands, and Japan banning the export of 0:18:56.240 --> 0:18:59.159 advanced ship making technology to China is going to accomplish 0:18:59.480 --> 0:19:03.800 three others. One, it's going to preserve the West's dominance 0:19:04.000 --> 0:19:07.920 of this critical enabling technology it underpins almost every aspect 0:19:08.400 --> 0:19:11.920 of modern life, to keep certain sectors of Chinese industry 0:19:11.960 --> 0:19:14.920 from posing a competitive threat to the West. And three, 0:19:15.960 --> 0:19:19.879 by forcing the Chinese to enter this arms race and 0:19:20.000 --> 0:19:24.679 try to match Western capabilities, it will divert important human 0:19:25.119 --> 0:19:29.440 and financial resources to that endeavor that might otherwise be 0:19:29.560 --> 0:19:33.240 employed in competing with the West. So it's a multi 0:19:33.440 --> 0:19:37.280 pronged strategy. All you'll hear from the White House and 0:19:37.400 --> 0:19:39.919 from other authorities that this is all about national security, 0:19:39.960 --> 0:19:41.520 and again, to a large degree, it is, but it 0:19:41.720 --> 0:19:44.919 is very much economic and commercial. At the same time, 0:19:44.960 --> 0:19:47.480 I wrote some notes to myself making chips equals arms race. 0:19:47.640 --> 0:19:51.040 It's the new arms race, right in terms of you know, 0:19:51.119 --> 0:19:53.719 we look at the world, chips are in everything. Right, 0:19:53.800 --> 0:19:57.960 this is so important that hard, right, it's hard to 0:19:58.000 --> 0:20:00.040 persuade the Dutch and hard to persuade the JAB and 0:20:00.119 --> 0:20:04.040 needs to join the Americans in this effort. Why because 0:20:04.119 --> 0:20:07.120 they sell so much of this stuff to China. It's 0:20:07.119 --> 0:20:10.440 an it's an immensely important market and you know the 0:20:10.760 --> 0:20:14.119 kind of it's like cutting off your arm, right, so 0:20:14.240 --> 0:20:18.000 much potential revenue is being sacrificed in this effort. But 0:20:19.200 --> 0:20:22.320 if we which is to say, the West, don't do this, 0:20:23.359 --> 0:20:28.119 it threatens dominance in smartphones. It's threatens dominance in the 0:20:28.200 --> 0:20:30.879 ability to predict things like climate change, for example, it 0:20:30.960 --> 0:20:35.040 threatens our dominance in self driving cars, and it threatens 0:20:35.080 --> 0:20:41.840 our dominance in artificial intelligence like chat, GBT. There it is, Carol, 0:20:42.200 --> 0:20:43.920 I know you're waiting for that angle. Well, if we 0:20:43.960 --> 0:20:46.760 continue this idea that it's it's an arms race. And 0:20:46.960 --> 0:20:50.360 if we continue with that sort of historical parallel here, Eric, 0:20:50.480 --> 0:20:53.320 is it fair to say that, given what the stakes are, 0:20:54.160 --> 0:20:58.280 we could have some sort of I don't know, way 0:20:58.359 --> 0:21:01.920 to keep everyone safe from war, given that it could 0:21:01.920 --> 0:21:05.440 be mutually assured destruction if the supply chains get taken out, 0:21:07.560 --> 0:21:09.720 taken out in which way, if there is some sort 0:21:09.760 --> 0:21:13.960 of skirmish, if there is some sort of conflict. Let's 0:21:13.960 --> 0:21:17.760 hope there's no skirmish in the short run, because if 0:21:17.880 --> 0:21:20.080 there were, and what we're really talking about here, I 0:21:20.160 --> 0:21:22.439 think is an invasion of Taiwan. If the Chinese were 0:21:22.520 --> 0:21:26.040 to invade Taiwan, that doesn't mean that they all of 0:21:26.119 --> 0:21:30.680 a sudden get this stuff. These are chip making at 0:21:30.720 --> 0:21:36.360 this level is the single most complicated, demanding engineering undertaking 0:21:38.160 --> 0:21:42.119 in human history. Nothing more complicated. And there's only one company, 0:21:42.200 --> 0:21:47.080 t SMC Taiwan Semi Conductor Manufacturing Corporation, that has perfected 0:21:47.119 --> 0:21:50.600 the process, and the perfection of that process has taken 0:21:50.640 --> 0:21:53.080 place only in Taiwan. So all of the world's most 0:21:53.119 --> 0:21:56.000 advanced simic conductors are made in Taiwan. And yes, if 0:21:56.040 --> 0:21:59.040 the Chinese were to invade Taiwan, the world would lose 0:21:59.119 --> 0:22:02.760 access to those chips and that technology for the time being, 0:22:03.520 --> 0:22:06.160 but so would the Chinese. They don't have the engineers 0:22:06.200 --> 0:22:09.680 to run these factories. One can assume, I mean, what 0:22:09.800 --> 0:22:12.720 is an undred ten miles from mainland China to Taiwan 0:22:12.840 --> 0:22:16.640 that there would be some warning and that the engineers 0:22:16.680 --> 0:22:18.880 would be able to escape. The question is to where 0:22:19.240 --> 0:22:21.639 if they make it to say the United States or Europe, 0:22:21.880 --> 0:22:25.640 are there fabs ready to employ them? No, they're underway. 0:22:25.680 --> 0:22:28.640 I mean Brown has been broken in Phoenix, and America 0:22:28.680 --> 0:22:30.440 and Europe are fast trying to catch up. But this 0:22:30.560 --> 0:22:32.720 is a very important point that you raised. There is 0:22:32.840 --> 0:22:39.439 this period between now and whenever again. America Europe very 0:22:39.520 --> 0:22:46.159 badly want to replicate, duplicate, uh, you know, not make redundant, 0:22:46.240 --> 0:22:49.040 but at least create some redundancy in the supply chain system, 0:22:49.160 --> 0:22:52.480 so that if there were even an earthquake in Taiwan 0:22:52.560 --> 0:22:54.560 and those fabs were to be taken out, there would 0:22:54.560 --> 0:22:57.359 be something to replace them. Because without those chips, all 0:22:57.440 --> 0:23:00.280