WEBVTT - Bloomberg Wall Street Week March 31, 2023 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:08.360 to the markets this week. USCPI never's reinforcing concerns about inflation, 0:00:08.480 --> 0:00:11.600 the financial stories that cheap our work a really different 0:00:11.600 --> 0:00:14.560 reaction to Mark. It's more indications of just how hot 0:00:14.600 --> 0:00:17.000 the US economy really is. Through the eyes of the 0:00:17.000 --> 0:00:21.440 most influential voices. Larry Summers, the former Treaty Secretary, Katherine Keening, 0:00:21.600 --> 0:00:24.120 CEO of d N y mon Sam's l Sherman Pan, 0:00:24.280 --> 0:00:27.800 founder of Equity Group Investment in Bloomberg wool Street Week 0:00:27.920 --> 0:00:31.920 with David Weston from Bloomberg Radio picking up the pieces. 0:00:32.040 --> 0:00:36.520 After a thunderstorm hit banks from Silicon Valley to Zurich, Congress, 0:00:36.600 --> 0:00:40.680 Central banks and investors try to regain their bearings. This 0:00:40.800 --> 0:00:44.080 is Bloomberg Wall Street Week. I'm David Weston. This week's 0:00:44.080 --> 0:00:47.000 special contributor Larry Summers of Harvard on the effects of 0:00:47.040 --> 0:00:51.320 a shaken banking system on the economy. Either the banking 0:00:51.440 --> 0:00:56.200 crisis will pass without the incident, or we're gonna see 0:00:56.280 --> 0:01:00.800 some kind of real downturn, We're sure. Sharman of Rockefeller 0:01:00.880 --> 0:01:03.680 Capital on whether there's a price we will pay for 0:01:03.720 --> 0:01:07.040 all of that government intervention it's that contradiction that we 0:01:07.160 --> 0:01:10.440 can't seem to handle what we want and what's the outcome. 0:01:11.560 --> 0:01:15.240 And former Treasury and CFTC official Tim Masset on whether 0:01:15.280 --> 0:01:17.959 we should have seen it coming. At the end of 0:01:17.959 --> 0:01:34.600 the day, this really was about bad bank management. The 0:01:34.680 --> 0:01:36.880 month of March is supposed to come in like a 0:01:37.000 --> 0:01:39.880 lion and out like a lamb. But this March entered 0:01:39.920 --> 0:01:42.560 like a lamb and then was savaged by the lion 0:01:42.680 --> 0:01:46.240 of serial banking crises. This was a week for starting 0:01:46.240 --> 0:01:49.400 to sort through the wreckage, with what's left of SVB 0:01:49.720 --> 0:01:53.320 sold to First Citizens Bank Shares. This is a fit 0:01:53.400 --> 0:01:55.600 the bank sentence. I think it gets the right base 0:01:55.640 --> 0:01:57.760 off the hook, gets the fdic of the hook. I 0:01:57.800 --> 0:02:00.440 think everyone's happy with this deal. And Congress is honed 0:02:00.440 --> 0:02:03.800 in on the SVP debacle, with ED Vice chair Michael 0:02:03.840 --> 0:02:06.600 Barr saying there's a lot of blame to go around 0:02:06.840 --> 0:02:10.200 anytime you have a bank failure like this. Bank management 0:02:10.200 --> 0:02:14.000 clearly failed. Supervisors sailed in, our regular choice system failed. 0:02:14.160 --> 0:02:17.120 Over In Zurich, UBS started the process of completing its 0:02:17.120 --> 0:02:21.040 forced marriage to Credit Suis. UBS chair Calm Kellerher announced 0:02:21.040 --> 0:02:23.160 that bankers from Credit Suis would have to be put 0:02:23.200 --> 0:02:26.000 through what he called a cultural filter to make sure 0:02:26.040 --> 0:02:29.160 they fit, and that Sergio Marte would return to take 0:02:29.200 --> 0:02:32.840 over as CEO to make it all work. Integrating two 0:02:33.520 --> 0:02:38.119 systemically important giant banks is really double trouble. And if 0:02:38.120 --> 0:02:41.840 that weren't enough, France's two biggest banks faced what could 0:02:41.880 --> 0:02:44.040 be over a billion dollars in fines as part of 0:02:44.040 --> 0:02:47.680 a government investigation into possible tax fraud and money laundering. 0:02:47.960 --> 0:02:52.800 French banks including BNP, Perry Baugh and Society GENERALIC face 0:02:52.960 --> 0:02:55.680 collective finds of more than a billion euros as part 0:02:55.680 --> 0:02:59.840 of an investigation into tax fraud and money laundering in China. 0:03:00.000 --> 0:03:02.680 Ali Baba announced it would try to avoid the government's 0:03:02.720 --> 0:03:06.360 hostility to big tech by getting smaller, specifically by breaking 0:03:06.440 --> 0:03:10.160 itself into six separate parts. We do believe that if 0:03:10.160 --> 0:03:11.840 you break the pieces up to some of the polits 0:03:11.840 --> 0:03:13.959 a bigger than the whole. And It was another week 0:03:14.000 --> 0:03:17.440 of job cut announcements, with McKenzie adding fourteen hundred and 0:03:17.560 --> 0:03:21.960 Disney seven thousand, which notably included Ike promotter who sold 0:03:22.000 --> 0:03:25.560 Marvel the bob Iger. Disney has begun the first round 0:03:25.680 --> 0:03:28.560 of the seven thousand job cuts that it announced in 0:03:28.639 --> 0:03:31.720 early February and memo that Bob I get the CEO 0:03:31.840 --> 0:03:34.480 has sent to staff. And to top it all off, 0:03:34.560 --> 0:03:37.960 on Thursday, Donald Trump became the first former president in 0:03:38.080 --> 0:03:41.000 US history to be indicted with criminal charges filed in 0:03:41.080 --> 0:03:44.080 Manhattan tied to hush money payments to adult film star 0:03:44.280 --> 0:03:48.080 Stormy Daniels. Donald Trump becoming the first former US president 0:03:48.120 --> 0:03:50.920 to be indicted, the arrangement coming as early as next Tuesday. 0:03:50.920 --> 0:03:55.640 The specific charges, however, are still under sealed. For all 0:03:55.680 --> 0:03:58.200 the drama of the week and the month for that matter, 0:03:58.320 --> 0:04:00.680 the markets in the end pretty much took in stride. 0:04:00.760 --> 0:04:02.520 The S and P five hundred wound up the week 0:04:02.600 --> 0:04:05.400 up a solid three point five percent. The NAZAC was 0:04:05.480 --> 0:04:07.680 up three point four percent, while the yield in the 0:04:07.760 --> 0:04:10.840 ten year added ten basis points but still ended the 0:04:10.840 --> 0:04:13.320 week below the three point five percent threshold at three 0:04:13.360 --> 0:04:15.800 point four six. To take us through it all, we 0:04:15.800 --> 0:04:19.040 welcome now Laurie Calvacina, she's RBC Capital Markets head of 0:04:19.160 --> 0:04:22.720 US Equity Strategy, and Julian Salisbury he is Goldman Sachs 0:04:22.760 --> 0:04:25.760 Asset and Wealth Management Chief Investment Officers. So welcome both 0:04:25.800 --> 0:04:27.279 of you. It's great to have you let me start 0:04:27.279 --> 0:04:29.120 with you on the equity side. At least, I was 0:04:29.160 --> 0:04:31.640 a little surprised that the equities held up so well 0:04:31.680 --> 0:04:34.520 considering all the turmoil. Look, I think there's this view 0:04:34.560 --> 0:04:36.520 out there that equities are out to lunch and are 0:04:36.600 --> 0:04:38.040 kind of asleep at the switch, and I don't think 0:04:38.040 --> 0:04:40.520 that at all. I think the market reaction was pretty rational. 0:04:40.800 --> 0:04:42.280 I think if you look at it from a top 0:04:42.360 --> 0:04:45.440 down perspective, despite everything we've just gone through in the 0:04:45.480 --> 0:04:48.279 month of March, if you look at economic forecasts, if 0:04:48.320 --> 0:04:51.120 you look at earnings forecasts, they're still anticipating the damage 0:04:51.120 --> 0:04:53.440 to be contained in twenty twenty three and twenty twenty 0:04:53.440 --> 0:04:55.240 four to be a recovery year. And we know that 0:04:55.320 --> 0:04:57.480 equity investors are ready to kind of move on from 0:04:57.480 --> 0:04:59.840 twenty twenty three and look ahead. If you look at 0:04:59.839 --> 0:05:02.120 it bottom up in terms of what's actually been doing 0:05:02.120 --> 0:05:05.880 the heavy lifting, it's technology. I think investors are starting 0:05:05.920 --> 0:05:08.760 to think about a sluggish growth environment going forward. Tech 0:05:08.839 --> 0:05:11.440 normally works well then, but I think one thing we 0:05:11.560 --> 0:05:13.520 know is that where whatever you thought the FED was 0:05:13.560 --> 0:05:16.720 going to do prior to SVB, your expectations have been 0:05:16.720 --> 0:05:19.240 pulled in. So I think markets are still trading the pause. 0:05:19.279 --> 0:05:22.800 They're trading the ultimate return of cuts, and technology stocks 0:05:22.839 --> 0:05:24.960 tend to be one of the best performing sectors after 0:05:25.000 --> 0:05:27.960 both of those. So I think it's quite rational. So, Julian, 0:05:28.000 --> 0:05:29.840 you manage an awful lot of assets, say gold and 0:05:29.880 --> 0:05:33.320 sacks and equities, but going well beyond equities, what are 0:05:33.320 --> 0:05:35.880 you seeing If in equities it seemed pretty solid through 0:05:35.880 --> 0:05:37.400 other thing, what are you seeing in bonds? What are 0:05:37.400 --> 0:05:40.480 you talking abou seeing alternative investments? Also on the equity side, 0:05:40.480 --> 0:05:42.080 it is kind of extort. And if you look back 0:05:42.080 --> 0:05:44.279 of the events of the last month, and here weel 0:05:44.320 --> 0:05:46.680 we are ending the month up three or four percents. 0:05:46.720 --> 0:05:48.920 If you know at the beginning of the month are 0:05:48.960 --> 0:05:51.040 like the events that we're getting to unfold, I'm not 0:05:51.080 --> 0:05:53.360 sure you would have predicted that. You know, what we're 0:05:53.400 --> 0:05:57.599 seeing right now is on the alternative side, continued demand, 0:05:57.640 --> 0:05:59.960 an interest in alternative asset classes, you know, given the vaul, 0:06:00.040 --> 0:06:02.960 utility and uncertainty of the environment. So I would say 0:06:03.160 --> 0:06:06.440 private credit, private real estate are still attracting a lot 0:06:06.480 --> 0:06:08.880 of interest. Was still seeing sluggish in US in terms 0:06:08.880 --> 0:06:12.520 of interest in private equity and growth equity. But the 0:06:12.839 --> 0:06:16.360 more kind of yielding income producing assets are attracting people 0:06:16.440 --> 0:06:19.159 because of the higher base rate environment, so the actual 0:06:19.279 --> 0:06:22.240 nominal yields on these asset classes is interesting to investors. 0:06:22.480 --> 0:06:25.440 So to the turmoil on the banks, Julian actually help 0:06:25.520 --> 0:06:27.839 the bonds in the sense that people rushing into barns, 0:06:27.839 --> 0:06:29.320 they wanted to buy more barns because they were so 0:06:29.440 --> 0:06:31.120 uncertain of where we were going. I think there were 0:06:31.160 --> 0:06:34.520 two things. First, the flight to quality generally, see saw 0:06:34.680 --> 0:06:37.720 money moving out of weaker banks into stronger banks. From 0:06:37.960 --> 0:06:42.159 from a deposit perspective, you'ress saw very significant fund flows 0:06:42.240 --> 0:06:44.480 into money market funds. I mean we saw I think 0:06:44.520 --> 0:06:46.840 there's a matter of public record fifty two billion dollars 0:06:46.880 --> 0:06:49.000 of flows into our money market funds in a two 0:06:49.040 --> 0:06:53.720 week period, just example of people looking to really move 0:06:53.800 --> 0:06:56.560 their money out of again weaker banks into more diversified risk. 0:06:56.880 --> 0:07:01.560 Also seeing people moving into bonds and other income producing assets. 0:07:02.760 --> 0:07:07.240 And then I would say, you know, again like pushing 0:07:07.279 --> 0:07:10.160 out a little bit of duration now and expectation that 0:07:10.560 --> 0:07:13.000 wherever I agree with Laurie's point, whatever you thought the 0:07:13.040 --> 0:07:15.600 path of rates was going to be, you know that 0:07:15.920 --> 0:07:19.000 the peak grade and the time horizon in which rates 0:07:19.000 --> 0:07:21.080 starts to roll over. Us probably come in because of 0:07:21.160 --> 0:07:25.280 the dampening effect that this has happened having on the economy. So, Laurie, 0:07:25.320 --> 0:07:28.160 if in fact, in the bond situation, people like this 0:07:28.480 --> 0:07:31.920 safety relative safety of bonds. Is there an equivalent in equities? 0:07:31.960 --> 0:07:33.720 Are you seeing because of some of the certain terminal 0:07:33.840 --> 0:07:36.600 with the banks and still uncertain about the economy. Are 0:07:36.640 --> 0:07:39.320 there's certain equities that people tend to go to when 0:07:39.360 --> 0:07:41.600 they're a little unsure the future. There are and you know, 0:07:41.680 --> 0:07:45.000 things like utilities, healthcare, consumer staples, you know, or tend 0:07:45.080 --> 0:07:47.120 to be where people go big caps in general, so 0:07:47.200 --> 0:07:50.960 we've seen small caps underperform, but technology stocks, interestingly, over 0:07:51.040 --> 0:07:52.760 the last I would say like five or six years, 0:07:52.800 --> 0:07:55.520 have become another safe haven. And we know that areas 0:07:55.600 --> 0:07:58.840 like utilities, consumer staples have been highly overvalued because people 0:07:58.880 --> 0:08:00.760 were really pushing into them last year when they were 0:08:00.800 --> 0:08:02.960 moving out of tech, and so I actually think, you know, 0:08:03.040 --> 0:08:05.760 it's interesting Tech had already been I think largely de 0:08:05.960 --> 0:08:08.920 risked last year, so people feel comfortable now coming back 0:08:08.960 --> 0:08:10.840 to it is more of a safety trade. July. One 0:08:10.840 --> 0:08:12.240 of the things people talk about it is a possible 0:08:12.360 --> 0:08:15.239 credit crunch. You react to actually what happened with the banks? 0:08:16.480 --> 0:08:19.720 Are people providing for that? Are there ways to provide 0:08:19.760 --> 0:08:21.800 for that? Or do you see a credit crunch around 0:08:21.800 --> 0:08:25.320 the corner. Sure, Look, I think that the very acute 0:08:25.400 --> 0:08:27.240 near term issue has been taken off the table. I 0:08:27.280 --> 0:08:30.120 think the policy actions to stabilize the bank the liquidity 0:08:30.120 --> 0:08:33.559 around the banking system has proven to be effective. But 0:08:33.679 --> 0:08:35.800 I do think there are a few things that are 0:08:35.840 --> 0:08:38.880 fairly certain for the sub two hundred and fifty billion 0:08:38.880 --> 0:08:41.240 dollar banks that have been subject to less stringent capital 0:08:41.320 --> 0:08:45.079 and liquidity or requirements, They're going to be required to 0:08:45.160 --> 0:08:47.199 hold more capital, They're going to be required to hold 0:08:47.280 --> 0:08:50.719 more liquidity, The cost of they're going to charge for 0:08:50.720 --> 0:08:53.720 their borrowers is therefore going to go up. They're also 0:08:53.760 --> 0:08:55.920 going to be subject to greater regulation. So I think 0:08:56.080 --> 0:08:59.400 credit availability is going to become tighter. Whatever you thought 0:08:59.440 --> 0:09:01.400 it was going to it's certainly going to become tighter 0:09:01.440 --> 0:09:04.320 result of these actions, and that is going to impact 0:09:04.360 --> 0:09:07.600 certain areas of the economy, particularly I think commercial real estate, 0:09:07.840 --> 0:09:10.400 which was already feeling very very fragile, and this is 0:09:10.520 --> 0:09:14.040 going to be, you know, just further add to the pain. Okay, 0:09:14.160 --> 0:09:16.960 Junior Salisbury and Laurie Cavesino. We'll be staying with us 0:09:17.080 --> 0:09:18.960 as we turn from where we are in the markets 0:09:18.960 --> 0:09:21.160 to where we are headed in the markets, and that's 0:09:21.200 --> 0:09:49.400 coming up next down Wall Street Week on Bloomberg. Yeah, yeah, 0:09:55.200 --> 0:09:59.400 this is Bloomberg Wall Street Week with David Weston from 0:09:59.520 --> 0:10:09.520 Bloomberg Radio. Some quarter, huh heck. The three months in 0:10:09.559 --> 0:10:12.760 the financial world that ended tonight provided at least three 0:10:12.920 --> 0:10:16.679 times the usual thrills and spills, So it wasn't just 0:10:16.800 --> 0:10:20.640 a quarter. It was at least seventy five cents. And 0:10:20.800 --> 0:10:24.120 what did it all mean? By almost anything? You wanted 0:10:24.200 --> 0:10:26.679 it to me and provided you picked the right two bits. 0:10:28.040 --> 0:10:29.600 That was a Lewis recogniser at the end of its 0:10:29.679 --> 0:10:32.920 multuous march back in two thousand. Sounds a lot like today, frankly. 0:10:33.280 --> 0:10:35.520 But then the number one movie in the country was 0:10:35.559 --> 0:10:39.240 Aaron Brockovich starring Julia Roberts, and the number one song, well, 0:10:39.280 --> 0:10:42.480 that was Say My Name by Destiny's Child. Still with 0:10:42.600 --> 0:10:45.720 us or Julian Salisbury of Golden Sacks and Lory Cavesina 0:10:45.960 --> 0:10:48.640 of RBC Capital Markets. So Julian, let's start with you here. 0:10:49.240 --> 0:10:52.199 One of the things we've seen is apparently pulling back 0:10:52.280 --> 0:10:54.920 by the banks in making loans. What does that mean 0:10:55.120 --> 0:10:58.960 as an opportunity potential for private credit? Sure, I mean 0:10:59.280 --> 0:11:01.120 one of the reasons the banks are being forced to 0:11:01.160 --> 0:11:04.120 pull back right now, it's concerns around their own liquidity situation. 0:11:04.920 --> 0:11:08.439 Liquidity kills banks, not solvency generally. You know, you look 0:11:08.440 --> 0:11:10.680 at the private credit market. Somebody was asking me about 0:11:10.720 --> 0:11:12.599 this the other day, you know, what's going on with 0:11:12.640 --> 0:11:14.600 these shadow lenders, and I said, this wasn't a shadow 0:11:14.640 --> 0:11:18.120 banking problem, this was a banking problem, classic asset liability 0:11:18.200 --> 0:11:21.839 mismatch problem. The private credit market very differently. Generally, the 0:11:22.120 --> 0:11:24.959 participants in that market have very long dated liabilities, so 0:11:25.040 --> 0:11:27.880 they have the ability to be consistent and thoughtful about 0:11:27.880 --> 0:11:30.679 the way they deploy capital. They're not subject to redemptions. 0:11:31.040 --> 0:11:34.960 They can be a consistent relationship lender to private equity firms, 0:11:35.200 --> 0:11:37.600 so when they see an opportunity where the markets step 0:11:37.640 --> 0:11:40.040 back capital markets are closed, they can come in and 0:11:40.800 --> 0:11:44.559 be a provider of choice and enable private equity transactions 0:11:44.559 --> 0:11:47.160 to take place. So it's an attractive asset class. It's 0:11:47.200 --> 0:11:49.920 defensive in nature, it's floating rate in nature, and at 0:11:49.960 --> 0:11:53.319 a time like this, you can extract a particularly attractive 0:11:53.600 --> 0:11:57.040 credit and illiquidity premium. Is there any transparency risk in 0:11:57.160 --> 0:11:59.480 road markets those to say, in public markets you sort 0:11:59.520 --> 0:12:02.120 of know where the value is. Private markets you're not 0:12:02.280 --> 0:12:04.720 quite as sure. And right now we've seen some hidden 0:12:04.800 --> 0:12:08.240 liabilities we didn't know we're out there. Look it's it's 0:12:08.280 --> 0:12:10.839 a it's a great question, and I do think the 0:12:11.040 --> 0:12:13.520 discipline of being held to account minute by minute in 0:12:13.559 --> 0:12:16.600 the public markets is a great discipline, but there are 0:12:17.360 --> 0:12:19.439 you know, there are also certain types of businesses that 0:12:19.559 --> 0:12:24.319 benefit from growing and scaling outside the without being subject 0:12:24.440 --> 0:12:27.719 to you know, the day to day scorecard. Essentially. You know, 0:12:27.800 --> 0:12:30.079 certain types of businesses that don't aren't profitable for a 0:12:30.160 --> 0:12:32.760 long period of time sometimes are better off being built 0:12:32.800 --> 0:12:37.360 and compounded in in private market format. So look, it's 0:12:37.360 --> 0:12:39.080 a it's a it's a great question. But I think 0:12:39.120 --> 0:12:41.880 generally what you find is these are large sophisticated investors 0:12:41.960 --> 0:12:45.719 managing this this these pools of money, and you know, 0:12:45.800 --> 0:12:48.240 there's there's upsides to that as well, because you're not 0:12:48.400 --> 0:12:50.800 forced out of the trade, you can carry the trade, 0:12:50.800 --> 0:12:52.840 so you can take a long term view of value 0:12:53.200 --> 0:12:54.920 rather than thinking what's going to happen over the next 0:12:54.960 --> 0:12:57.520 one week, three months, or six months, Laurie, there's some 0:12:57.600 --> 0:12:59.880 debate about whether we should call it's a bank in crisis. 0:13:00.000 --> 0:13:01.880 So it was a crisis for Silicon Valley banks, and 0:13:01.960 --> 0:13:04.360 that clear it's a crisis for the banking industry overall. 0:13:04.440 --> 0:13:06.520 But it certainly was a lot of turmoil. I know 0:13:06.600 --> 0:13:09.040 that you have specifically looked back in the past. It's 0:13:09.080 --> 0:13:13.480 some similar crises or points of turmoil, and you actually 0:13:13.520 --> 0:13:15.480 took a look at the NASTAC one hundred during some 0:13:15.520 --> 0:13:17.800 of this take us through that we have a charter show. Yeah, 0:13:17.880 --> 0:13:20.000 so you know, I'm a great student of history when 0:13:20.040 --> 0:13:22.160 it comes to markets, and I think this is going 0:13:22.200 --> 0:13:23.719 to end up having its own name. It's going to 0:13:23.720 --> 0:13:25.839 be its own unique crisis. But to me, this is 0:13:25.920 --> 0:13:28.240 more like World Com than it was like Barren Lehman. 0:13:28.679 --> 0:13:31.000 And we took notice of the fact that the banks 0:13:31.040 --> 0:13:33.920 were trying to stabilize recently, and so we went back 0:13:33.960 --> 0:13:36.520 and essentially looked at kind of the problem industries in 0:13:36.679 --> 0:13:39.000 both that two thousand and two thousand and three period 0:13:39.080 --> 0:13:41.079 and the financial crisis, and what we found was that 0:13:41.240 --> 0:13:44.319 after both Baron Lehman, you basically saw the banks continue 0:13:44.360 --> 0:13:46.880 to act really really poorly. If you go back though 0:13:46.960 --> 0:13:49.440 to the tech bubble period, we saw that after World 0:13:49.480 --> 0:13:52.760 com NASTAC one hundred actually stabilized and kind of entered 0:13:52.800 --> 0:13:56.000 this very long, lengthy bottoming process. So it wasn't quite 0:13:56.040 --> 0:13:58.520 a clearing event, it was something close to it, but 0:13:58.679 --> 0:14:00.920 it did sort of, you know, sort of cathartic in 0:14:01.000 --> 0:14:03.480 a sense that you know, some of these excesses were 0:14:03.559 --> 0:14:05.439 exposed and dealt with, and then the market you know, 0:14:05.520 --> 0:14:07.480 took some time to heal, but ultimately was able to 0:14:07.559 --> 0:14:09.559 move on. Thank you so very much. It's great to 0:14:09.600 --> 0:14:11.439 have both of you with us, as Julian Salisbury of 0:14:11.520 --> 0:14:16.079 Golden Sacks and Lory Calvacina of RBC Capital Markets. As 0:14:16.120 --> 0:14:18.360 the month of March draws to a close, it looks 0:14:18.440 --> 0:14:21.520 like maybe all of the uncertainty about the banking system 0:14:21.680 --> 0:14:24.520 is starting to quiet down, helped in large part by 0:14:24.600 --> 0:14:27.360 the US government stepping in once again, this time to 0:14:27.600 --> 0:14:31.800 ensure deposits of people in Silicon Valley Bank. Racher Scharmer 0:14:31.800 --> 0:14:34.200 has taken a look at exactly what that might have 0:14:34.520 --> 0:14:37.240 for implications more broadly for the economy and welcome now. 0:14:37.360 --> 0:14:39.880 Rascher Scharmer, of course, is the founder of Breakout Capital 0:14:39.960 --> 0:14:43.600 Partners as well as chairman of Rockefeller International. Racher. Welcome 0:14:43.640 --> 0:14:45.400 back to Wall Street. We great to have you here 0:14:46.000 --> 0:14:48.840 once again. The government rides to the rescue here. That's 0:14:48.920 --> 0:14:51.640 good news for the people being rescued. But what possible 0:14:51.720 --> 0:14:55.000 ramifications might it have more broadly, Yeah, I think David, 0:14:55.040 --> 0:14:57.160 this is a great time to step back and see 0:14:57.200 --> 0:15:00.040 as to how Lord the bar has become now for 0:15:00.160 --> 0:15:03.840 government intervention. Now, of course, the banking sector is always 0:15:03.880 --> 0:15:06.920 a very sensitive sector because of the risk of a contagion. 0:15:07.360 --> 0:15:10.520 But what strikes me here is that how far we 0:15:10.640 --> 0:15:14.800 have come over the past few decades where you get 0:15:14.920 --> 0:15:18.480 more and more stimulus, more and more government intervention, and 0:15:18.880 --> 0:15:22.800 at the same time you have a slump in productivity growth. 0:15:22.880 --> 0:15:25.200 And I think that this is the point that is 0:15:25.360 --> 0:15:29.560 very underappreciated. At the surface, it seems as if the 0:15:29.960 --> 0:15:34.880 economy has once again survived a crisis and here we are. 0:15:35.320 --> 0:15:37.960 But I think what we forget that there's a price 0:15:38.080 --> 0:15:42.080 we are paying for this, that because of this constant 0:15:42.200 --> 0:15:46.760 government intervention, we're keeping alive a lot of zombie companies 0:15:47.240 --> 0:15:50.320 in this country, and the number of startups in fact, 0:15:50.400 --> 0:15:55.200 over time is going down. So why is this happening. 0:15:55.600 --> 0:15:58.040 This is happening because we're keeping a lot of deadhood 0:15:58.360 --> 0:16:02.040 in the system. The number of zombie companies in America 0:16:02.120 --> 0:16:04.880 today is nearly twenty percent of all companies can be 0:16:05.000 --> 0:16:08.360 classified as zombie companies. That number used to be barely 0:16:08.440 --> 0:16:12.080 two percent in the nineteen eighties or so. So that 0:16:12.360 --> 0:16:14.800 is the contradiction here, which is that we do not 0:16:15.040 --> 0:16:18.760 want to any pain, and that's completely justified, and we 0:16:19.000 --> 0:16:22.480 want the government to come to the rescue, but we 0:16:22.720 --> 0:16:25.400 also don't like the economic outcome where we have low 0:16:25.480 --> 0:16:28.880 economic growth, less and less and living standards, and that 0:16:29.120 --> 0:16:31.640 I trace back to the fact if you have low productivity, 0:16:32.000 --> 0:16:34.120 that's what you will get. And the low productivity is 0:16:34.160 --> 0:16:38.560 the direct consequence I think of such expansive government intervention. 0:16:38.840 --> 0:16:40.680 So we'll share, no question, we've had a lot more 0:16:40.760 --> 0:16:44.080 government invention, no doubt about that. But there's another factor 0:16:44.080 --> 0:16:46.880 as well. We've had very very low interest rates, which 0:16:46.920 --> 0:16:49.440 has allowed some of those so called zombie companies, companies 0:16:49.440 --> 0:16:52.840 that basically can't forward to service their own debt survive. 0:16:53.080 --> 0:16:56.120 As the FED has moved to a higher interest rate regime, 0:16:56.560 --> 0:16:59.240 might that help some on the front of zombie companies 0:16:59.280 --> 0:17:03.080 the allocation accoun and therefore maybe ultimately productivity. It could be, 0:17:03.200 --> 0:17:06.639 but so far there's basically evidence of fit. Look at 0:17:06.680 --> 0:17:09.320 the default rates. You know, the default rates are so 0:17:09.520 --> 0:17:12.040 low in the country today now, as you know that 0:17:12.200 --> 0:17:16.399 in capitalism, having some default rates is a very essential 0:17:16.520 --> 0:17:18.760 part of it. So this goes back to what sort 0:17:18.760 --> 0:17:20.800 of system do we want? So the default rates in 0:17:20.880 --> 0:17:24.320 the economy today are very low. Now, all this sounds 0:17:24.440 --> 0:17:27.320 almost a bit masochistic, that do we want more pain? 0:17:27.520 --> 0:17:30.439 Do we want more companies to go bust? Well, if 0:17:30.480 --> 0:17:33.399 you want capitalism, that's what you should be prepared for, 0:17:34.000 --> 0:17:37.600 because a capitalist economy should be a dynamic economy where 0:17:37.640 --> 0:17:41.000 you have much greater company creation. You have a lot 0:17:41.040 --> 0:17:43.639 of the deadwood that dies, and you don't have the 0:17:43.720 --> 0:17:47.440 creation of too many monopolies or very large companies that 0:17:47.640 --> 0:17:50.399 benefit also from very low interest rates as we know. 0:17:51.080 --> 0:17:53.560 So I think that it's that contradiction that we can't 0:17:53.560 --> 0:17:56.760 seem to handle what we want and what's the outcome 0:17:57.080 --> 0:17:59.119 that we're getting, or sure, do you think there might 0:17:59.160 --> 0:18:00.760 be a way to engineer in such a way that 0:18:00.840 --> 0:18:02.760 you take away the worst of the pain and yet 0:18:02.800 --> 0:18:05.000 you still have some discipline the market. And let's take 0:18:05.040 --> 0:18:07.800 then example of Silicon Valley Bank. To be sure, all 0:18:07.880 --> 0:18:11.520 their positors were guaranteed, they were made safe, but the 0:18:11.640 --> 0:18:14.080 bondholders were wiped out, the shareholders were wiped out, the 0:18:14.119 --> 0:18:17.399 management was wiped out. That's not exactly moral hazard, is it. 0:18:18.040 --> 0:18:21.520 But as I said that, looking at each individual instance 0:18:21.720 --> 0:18:25.520 almost seems justified. I'm looking at the cumulative effects here 0:18:25.640 --> 0:18:28.159 that if you have so much government intervention which is 0:18:28.240 --> 0:18:32.359 constantly at hand, then what are the consequences of that? 0:18:32.560 --> 0:18:35.720 So each individual instance it's very hard to argue against 0:18:35.960 --> 0:18:37.800 because no one likes to see that kind of pain. 0:18:38.280 --> 0:18:39.879 But what is it that we have seen. We are 0:18:39.920 --> 0:18:45.399 seeing the size of government stimulus over time having increased massively. 0:18:45.920 --> 0:18:48.520 If you look at each economic downturn, we have seen 0:18:48.600 --> 0:18:51.720 the size of monetary stimulus increase a lot, as we've 0:18:51.760 --> 0:18:55.040 seen every economic downturn, and we've seen lesser and lesser 0:18:55.160 --> 0:18:59.400 defaults because often the government's intervening also in a non 0:18:59.520 --> 0:19:02.000 monetary the non fiscity weed like this sort of did 0:19:02.080 --> 0:19:04.840 just now such a pleasure heavy with this is very illuminating, 0:19:04.840 --> 0:19:06.840 thank you, that's for sure. Charmant he is chairman of 0:19:07.080 --> 0:19:11.680 Rockefeller International. Coming up. We wrap up the week with 0:19:11.720 --> 0:19:14.639 our special contributor, Larry Summers of Harvard. That's next on 0:19:14.800 --> 0:19:26.040 Wall Street Week on Luberg. This is Wall Street Week. 0:19:26.040 --> 0:19:27.800 I'm David Weston. I don't like to say we're back 0:19:27.800 --> 0:19:30.399 with our very special contribute. He's Larry Summers of Harvard. 0:19:30.440 --> 0:19:33.560 So Larry, let's talk about inflation. We got those core 0:19:33.680 --> 0:19:35.840 PC and other PC numbers. Then this week we know 0:19:35.960 --> 0:19:37.920 the Fed pays attention to them. They were a little 0:19:37.960 --> 0:19:40.600 bit better than they had been. Yeah, they were. I 0:19:40.720 --> 0:19:43.639 don't think one should make too much of that. I 0:19:43.800 --> 0:19:51.200 think we are still a substantially unsustainable inflation country unless 0:19:51.320 --> 0:19:55.920 the economy turns down fairly hard in response to the 0:19:56.040 --> 0:20:01.040 credit issues raised by the banking system, and we don't 0:20:01.080 --> 0:20:04.560 know yet whether that's going to happen. So, in a sense, 0:20:04.720 --> 0:20:09.520 the outcomes here are a bit bifurcated. Either the banking 0:20:09.640 --> 0:20:15.360 crisis will pass without incident and without large impact on credit, 0:20:16.000 --> 0:20:19.880 and which case we really do have serious inflation issues 0:20:20.320 --> 0:20:22.640 and the Fed will have to tighten much more than 0:20:22.800 --> 0:20:26.399 is priced in, or we're going to see some kind 0:20:26.600 --> 0:20:35.080 of real downturn here. And I think both are plausible. Outcomes, 0:20:35.200 --> 0:20:39.359 and I recognize that there's a chance we'll skate through 0:20:40.040 --> 0:20:43.600 right in between, but I'd have to say that seems 0:20:43.760 --> 0:20:50.320 very much odds off to me. Soft landings are very hard, 0:20:51.040 --> 0:20:53.520 even in the best environment. So I think I heard 0:20:53.520 --> 0:20:55.040 in your answer We're gonna have to wait to see 0:20:55.160 --> 0:20:58.040 what the aftermath of the banking kerfuffle has been here, 0:20:58.240 --> 0:21:00.080 but gives us a sense of what you're expecting, and 0:21:00.200 --> 0:21:02.480 more important, what you're looking for. When will we know 0:21:02.640 --> 0:21:06.760 where there's a credit crunch. The lesson of financial crisis, 0:21:06.880 --> 0:21:11.680 if you study their history closely, is that it's not 0:21:11.880 --> 0:21:17.760 just all one big downturn. It was six months from 0:21:18.520 --> 0:21:23.000 Bear to Leahman. Even the week in which the Leaman 0:21:23.080 --> 0:21:27.160 events happened, the stock market went up and the FED 0:21:27.280 --> 0:21:31.680 did not cut rates, and the FED statement that week 0:21:31.920 --> 0:21:37.840 was heavily about inflation. So I think it's too early 0:21:38.440 --> 0:21:42.640 to give any kind of all clear sign. I think 0:21:43.080 --> 0:21:47.080 eventually we I think we've gotten to a point where 0:21:47.440 --> 0:21:51.760 I would say it's unlikely that there will be more 0:21:52.040 --> 0:21:57.960