1 00:00:00,240 --> 00:00:05,000 Speaker 1: This is Bloomberg Wall Street Week. Market shruggle, higher consumer prizes. 2 00:00:05,040 --> 00:00:07,400 Speaker 1: The economy is in the process of rebounding. Will the 3 00:00:07,480 --> 00:00:10,479 Speaker 1: utter reserve have its own digital currency? The financial stories 4 00:00:10,520 --> 00:00:12,879 Speaker 1: that cheap hard work. Many people think the eels are 5 00:00:12,880 --> 00:00:15,080 Speaker 1: just going to keep marching up. We have more spending 6 00:00:15,120 --> 00:00:17,200 Speaker 1: coming out of Congress. One of the big questions I 7 00:00:17,200 --> 00:00:19,880 Speaker 1: think on investor's minds inflation through the eyes of the 8 00:00:19,920 --> 00:00:23,880 Speaker 1: most influential voices, Larry Summers, the former Treasury Secretary, Bryan 9 00:00:23,920 --> 00:00:27,240 Speaker 1: wynhand back of America, Will Smart, CEO of Charlie Sharp. 10 00:00:27,360 --> 00:00:31,560 Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Radio. 11 00:00:31,920 --> 00:00:34,839 Speaker 1: In a battle between a hot new electric vehicle company 12 00:00:34,960 --> 00:00:39,000 Speaker 1: and hot new inflation numbers. I'm afraid inflation numbers win. 13 00:00:39,920 --> 00:00:43,400 Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. We 14 00:00:43,440 --> 00:00:45,800 Speaker 1: started the week pretty sure of where we were going. 15 00:00:45,880 --> 00:00:49,479 Speaker 1: Earnings were up at least basically, equities were reaching up 16 00:00:49,479 --> 00:00:52,479 Speaker 1: to new highs, bonds were tamed, and we had a 17 00:00:52,520 --> 00:00:56,040 Speaker 1: new infrastructure package. All was right with the world. But 18 00:00:56,120 --> 00:01:00,000 Speaker 1: then Wednesday hit and consumer inflation numbers came in high 19 00:01:00,000 --> 00:01:03,760 Speaker 1: oiger than anyone really expected. An annualized increase of six 20 00:01:03,840 --> 00:01:08,160 Speaker 1: point two that's the highest in nearly thirty years. Austin 21 00:01:08,160 --> 00:01:10,880 Speaker 1: Gouldsby of the Chicago Boost School said it's not going 22 00:01:10,920 --> 00:01:15,720 Speaker 1: away anytime soon. Look, it's a big number. And whether 23 00:01:15,800 --> 00:01:20,360 Speaker 1: you're team permanent or team temporary, everybody agrees it's it's 24 00:01:20,360 --> 00:01:24,360 Speaker 1: gonna be months of this before you see any relief. 25 00:01:25,120 --> 00:01:28,200 Speaker 1: And San Francico Fed president Mary Daily, while saying it 26 00:01:28,240 --> 00:01:31,080 Speaker 1: was too soon to change course, admitted that the inflation 27 00:01:31,160 --> 00:01:35,039 Speaker 1: numbers really did get her attention. Inflation is high, higher, 28 00:01:35,080 --> 00:01:38,520 Speaker 1: it's eye popping. This is a transitory period. That's what 29 00:01:38,560 --> 00:01:40,640 Speaker 1: we believe. That's what I think when I look out 30 00:01:40,640 --> 00:01:43,480 Speaker 1: at the data. But it's directly related to COVID, and 31 00:01:43,520 --> 00:01:45,880 Speaker 1: a's quicker we get through COVID, the better off we're 32 00:01:45,880 --> 00:01:48,520 Speaker 1: going to be as an economy. But the week wasn't 33 00:01:48,520 --> 00:01:51,720 Speaker 1: over yet, as electric vehicle maker Ryvian went to market 34 00:01:51,920 --> 00:01:54,280 Speaker 1: and blew past the price set for the I p O. 35 00:01:54,640 --> 00:01:57,000 Speaker 1: The results of what the Rivian CEO said was a 36 00:01:57,040 --> 00:02:00,880 Speaker 1: true team effort. She spent years is putting this together, 37 00:02:00,920 --> 00:02:03,880 Speaker 1: and really what's so exciting is seeing such a diverse 38 00:02:03,920 --> 00:02:07,760 Speaker 1: group of people with diverse backgrounds and interest really coming 39 00:02:07,800 --> 00:02:10,840 Speaker 1: together to create these products. And and you know, standing 40 00:02:10,880 --> 00:02:12,919 Speaker 1: there looking out at the teams as we're hang the bell, 41 00:02:13,639 --> 00:02:15,880 Speaker 1: it was quite emotional, you know, seeing seeing so many 42 00:02:15,880 --> 00:02:18,919 Speaker 1: passionate faces. It was it was really powerful. And three 43 00:02:18,960 --> 00:02:23,240 Speaker 1: corporate giants GE Johnson and Johnson Antoshiba all decided to 44 00:02:23,240 --> 00:02:26,360 Speaker 1: break themselves up, with g E CEO Larry Colpe saying 45 00:02:26,360 --> 00:02:30,920 Speaker 1: it was all about focus. These businesses will be more focused, 46 00:02:31,200 --> 00:02:34,680 Speaker 1: There'll be a higher, greater level of accountability, we should 47 00:02:34,680 --> 00:02:38,440 Speaker 1: have sharper capital allocation, more strategic flexibility, and frankly, I 48 00:02:38,440 --> 00:02:39,919 Speaker 1: think it's gonna be good for the team as well. 49 00:02:39,960 --> 00:02:44,080 Speaker 1: I think we'll end up with investor basis focused on 50 00:02:44,120 --> 00:02:46,840 Speaker 1: these pure plays, investors that are probably under invested in 51 00:02:46,840 --> 00:02:49,600 Speaker 1: g E today. You put all that together, it's clear 52 00:02:49,680 --> 00:02:52,840 Speaker 1: this is the best path for us to unlock and 53 00:02:52,919 --> 00:02:56,639 Speaker 1: create value going forward. And when the dust settled from 54 00:02:56,760 --> 00:02:59,799 Speaker 1: what is fairly called a wild week, it left equities 55 00:02:59,800 --> 00:03:02,000 Speaker 1: down for the first time since early October, though not 56 00:03:02,160 --> 00:03:04,920 Speaker 1: as much because of a Friday rally, with the SPI 57 00:03:05,360 --> 00:03:07,360 Speaker 1: off about three tents of a percent in the NASAC 58 00:03:07,440 --> 00:03:10,000 Speaker 1: down seven tenths, but really much of the action was 59 00:03:10,040 --> 00:03:12,320 Speaker 1: over the bond side, with the ten year yield up 60 00:03:12,320 --> 00:03:15,840 Speaker 1: to well over one and inflation concerns driving the ten 61 00:03:15,919 --> 00:03:18,600 Speaker 1: year tips up to over two point seven percent. To 62 00:03:18,639 --> 00:03:20,760 Speaker 1: take us through the week and what it taught us, 63 00:03:20,800 --> 00:03:22,840 Speaker 1: we welcome now Greg Peters co c I O of 64 00:03:22,880 --> 00:03:27,600 Speaker 1: PJAM Fixed Income and Sarah Kett CEO of Causeway Capital Management. 65 00:03:27,600 --> 00:03:30,600 Speaker 1: So let's start on the equity side. Welcome Sarah. Give 66 00:03:30,639 --> 00:03:32,400 Speaker 1: us a sense of the equities, because we started the 67 00:03:33,200 --> 00:03:36,360 Speaker 1: week really at record levels and then the inflation overs hit, 68 00:03:36,560 --> 00:03:37,760 Speaker 1: but then they came back up at the end of 69 00:03:37,800 --> 00:03:42,880 Speaker 1: the week, Yes they did. The inflation genie seems to 70 00:03:42,920 --> 00:03:46,040 Speaker 1: be out of the bottle and markets have to digest that. 71 00:03:46,920 --> 00:03:49,839 Speaker 1: The technology stocks, many of them, seemed to have such 72 00:03:49,960 --> 00:03:53,720 Speaker 1: significant market shares or competitive positioning, the market is giving 73 00:03:53,760 --> 00:03:57,840 Speaker 1: them credit for being able to price this inflation pass 74 00:03:57,880 --> 00:04:02,280 Speaker 1: it on to consumers. But there are many in both 75 00:04:02,320 --> 00:04:06,040 Speaker 1: industries and sectors according to our team, where that won't 76 00:04:06,040 --> 00:04:08,840 Speaker 1: necessarily be the case. And that's really the job of 77 00:04:08,960 --> 00:04:12,240 Speaker 1: the fundamental research analysts is to determine whether or not 78 00:04:12,280 --> 00:04:16,760 Speaker 1: a business, say it's consumer staples and food beverage, can 79 00:04:16,839 --> 00:04:21,200 Speaker 1: they pass on their increased costs of raw materials into 80 00:04:21,240 --> 00:04:25,000 Speaker 1: their final product, because if they can't, that means margin squeeze, 81 00:04:25,040 --> 00:04:28,480 Speaker 1: and that means earnings will all other things being equal, 82 00:04:28,520 --> 00:04:31,320 Speaker 1: will decline, which is not good for markets so quick 83 00:04:31,360 --> 00:04:34,440 Speaker 1: when we see inflation numbers like this, we automatically think 84 00:04:34,480 --> 00:04:36,640 Speaker 1: about what it does it bonds and perhaps most important, 85 00:04:36,680 --> 00:04:38,760 Speaker 1: what it says to the FED and how they might react. 86 00:04:39,000 --> 00:04:40,840 Speaker 1: What did you make of this week? I think that's 87 00:04:40,839 --> 00:04:43,839 Speaker 1: the story, what it makes, what it tells you about 88 00:04:43,839 --> 00:04:46,880 Speaker 1: the Fed and central bank action ultimately, And so there's 89 00:04:46,920 --> 00:04:51,480 Speaker 1: been this this response in the bond market really before 90 00:04:51,520 --> 00:04:56,440 Speaker 1: the CPI print that inflation is picking up, and more importantly, 91 00:04:56,760 --> 00:04:59,400 Speaker 1: that the FED is going to be much more aggressive 92 00:04:59,440 --> 00:05:04,560 Speaker 1: and central as globally much more aggressive than initially anticipated. 93 00:05:04,640 --> 00:05:07,200 Speaker 1: So I think that is the story in the marketplace, 94 00:05:07,320 --> 00:05:11,599 Speaker 1: the two year yield UH and then equally, I mean 95 00:05:11,920 --> 00:05:14,960 Speaker 1: this is a volatile market in fixed income that has 96 00:05:15,000 --> 00:05:18,719 Speaker 1: been largely isolated in fixed income. So what you're seeing 97 00:05:18,839 --> 00:05:23,920 Speaker 1: is this disconnect and volatility in fixed income and equities. 98 00:05:23,960 --> 00:05:26,360 Speaker 1: And yes, it does make some sense for sure as 99 00:05:26,440 --> 00:05:29,800 Speaker 1: the as the earnings coming out are quite strong, margins 100 00:05:29,800 --> 00:05:34,200 Speaker 1: all time high, the micro story is quite supportive, but 101 00:05:35,240 --> 00:05:38,680 Speaker 1: at some point the volatility that we're seeing in fixed 102 00:05:38,720 --> 00:05:42,400 Speaker 1: income markets have to start to infiltrate other markets and 103 00:05:42,520 --> 00:05:45,720 Speaker 1: risk markets. Um, if it doesn't settle down. Look at 104 00:05:45,720 --> 00:05:47,200 Speaker 1: the same time, how much is the FED sort of 105 00:05:47,200 --> 00:05:49,520 Speaker 1: putting a blanket on that volatil you even given what 106 00:05:49,560 --> 00:05:52,280 Speaker 1: we've seen, Because certainly they've made it pretty clear they're 107 00:05:52,320 --> 00:05:54,200 Speaker 1: not in a rush to change course. You just heard 108 00:05:54,279 --> 00:05:55,880 Speaker 1: very daily say well, we're not going to change course 109 00:05:55,960 --> 00:06:00,800 Speaker 1: right away. Yeah, but they've changed their rhetoric quite substantially 110 00:06:00,880 --> 00:06:03,600 Speaker 1: since the summer. And if you look at the bond market, 111 00:06:03,680 --> 00:06:08,160 Speaker 1: yield into two year and even inflation, uh, it's been 112 00:06:08,200 --> 00:06:12,000 Speaker 1: commensurate with the change in FED tone. So I don't know. 113 00:06:12,600 --> 00:06:16,640 Speaker 1: I I'm really worrying about the FED here moving too 114 00:06:16,680 --> 00:06:20,000 Speaker 1: fast too soon, particularly when you think about the construct 115 00:06:20,040 --> 00:06:23,560 Speaker 1: of inflation that it's largely outside of the FED control. 116 00:06:23,760 --> 00:06:28,320 Speaker 1: So the Fed raising rates isn't going to help offset 117 00:06:28,360 --> 00:06:32,039 Speaker 1: the supply chain issues. It's not going to have those 118 00:06:32,160 --> 00:06:34,680 Speaker 1: kind of facts like it normally does. Okay, thank you 119 00:06:34,720 --> 00:06:36,560 Speaker 1: so very much for being with us. That's Greg Peters. 120 00:06:36,800 --> 00:06:39,719 Speaker 1: He is close c IO of PIGAM. Sarah Cader Causeway 121 00:06:39,720 --> 00:06:41,520 Speaker 1: Capital is gonna be sticking with us as we turn 122 00:06:41,560 --> 00:06:44,440 Speaker 1: our attention to all those big corporate breakups this week. 123 00:06:44,800 --> 00:06:54,680 Speaker 1: That's next on Wall Street Week on Bloomberg. This is 124 00:06:54,720 --> 00:06:59,080 Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 125 00:06:59,360 --> 00:07:01,520 Speaker 1: It was a week of breaking up, at least when 126 00:07:01,520 --> 00:07:04,160 Speaker 1: it came to some very big corporations like Toshiba and 127 00:07:04,240 --> 00:07:06,800 Speaker 1: Johnson and Johnson and General Electric and Gene Chairman and 128 00:07:06,880 --> 00:07:09,400 Speaker 1: CEO Larry Kulp said in the end, it was a 129 00:07:09,440 --> 00:07:13,560 Speaker 1: clear choice of focus over synergy. The GE team has 130 00:07:13,560 --> 00:07:15,840 Speaker 1: heard from me for the last three years that I 131 00:07:15,880 --> 00:07:20,480 Speaker 1: will bet on the benefits of focus every day, far 132 00:07:20,560 --> 00:07:24,240 Speaker 1: more than the often illusory benefits that come from synergies. Now, 133 00:07:24,280 --> 00:07:27,360 Speaker 1: we certainly enjoy those synergies today in certain places, but 134 00:07:27,480 --> 00:07:29,680 Speaker 1: more and more we've been running the company on a 135 00:07:29,760 --> 00:07:33,000 Speaker 1: decentralized basis, not as one GE, not as even the 136 00:07:33,000 --> 00:07:35,760 Speaker 1: four reporting segments, but the thirty p m l's that 137 00:07:35,840 --> 00:07:39,840 Speaker 1: deal with customers that compete in the markets every single day. 138 00:07:39,880 --> 00:07:42,480 Speaker 1: So if there are synergies that we enjoy today, will 139 00:07:42,520 --> 00:07:46,040 Speaker 1: work to continue those, of course, but the vast majority 140 00:07:46,040 --> 00:07:49,560 Speaker 1: of the benefits here will come from focus. Sarah Keeder 141 00:07:49,680 --> 00:07:52,600 Speaker 1: Causeway Capital Management is still with Sarah. I want to 142 00:07:52,600 --> 00:07:54,760 Speaker 1: talk to you as an investor because you own g E. 143 00:07:55,120 --> 00:07:56,600 Speaker 1: We talked to Larry Colp and he said, part of 144 00:07:56,640 --> 00:07:59,040 Speaker 1: the benefits for investors so they can focus as well 145 00:07:59,240 --> 00:08:01,520 Speaker 1: on which line today to be invested. As you look 146 00:08:01,560 --> 00:08:04,400 Speaker 1: at this breaking up of g how do you analyze it? Well, 147 00:08:04,440 --> 00:08:06,440 Speaker 1: I just want to set the stage that we may 148 00:08:06,440 --> 00:08:08,680 Speaker 1: be one of the few who are analyzing it. He's 149 00:08:08,720 --> 00:08:13,160 Speaker 1: absolutely hated by investors because of the damage they've done. 150 00:08:13,320 --> 00:08:16,760 Speaker 1: If you think about it, David to today to go 151 00:08:16,800 --> 00:08:19,840 Speaker 1: back and so the last five years, the annualized performance 152 00:08:19,840 --> 00:08:24,760 Speaker 1: of the SMPI has been twenty percent per annum on average, 153 00:08:25,080 --> 00:08:30,800 Speaker 1: the comparable number for Geez Mayet a disaster. So Larry 154 00:08:30,840 --> 00:08:34,160 Speaker 1: Colp's arrival in October of eighteen, he had his work 155 00:08:34,200 --> 00:08:36,720 Speaker 1: cut out for him, and he's very incentivized financially to 156 00:08:36,760 --> 00:08:40,880 Speaker 1: get it done. But they're there're two great businesses. There 157 00:08:40,880 --> 00:08:43,880 Speaker 1: were aviation and healthcare, and then power renewables and digital 158 00:08:43,880 --> 00:08:47,439 Speaker 1: weren't quite as good, and the key was to set 159 00:08:47,440 --> 00:08:50,640 Speaker 1: them free. There were some codependency because not only did 160 00:08:50,679 --> 00:08:53,880 Speaker 1: power and renewables have some serious problems but then we 161 00:08:53,920 --> 00:08:58,240 Speaker 1: had COVID. So then what happens to the aviation business. 162 00:08:58,280 --> 00:09:02,720 Speaker 1: You know, this is aircraft engines, avionics systems. It give 163 00:09:02,800 --> 00:09:06,679 Speaker 1: grinds to a halt, so free cash flow collapses and 164 00:09:06,760 --> 00:09:10,240 Speaker 1: therefore the health care business had to support the other two. 165 00:09:10,600 --> 00:09:14,320 Speaker 1: So what makes this announcement so interesting is that it 166 00:09:14,400 --> 00:09:17,520 Speaker 1: may be signaling that is getting beyond its problems. It 167 00:09:17,559 --> 00:09:22,360 Speaker 1: will actually coming back into blue skies where the long 168 00:09:22,480 --> 00:09:26,440 Speaker 1: term care business that the company has that is supposed 169 00:09:26,480 --> 00:09:31,000 Speaker 1: to pay people for nursing care and end of life assistance, 170 00:09:31,520 --> 00:09:35,280 Speaker 1: that was it h G stopped writing those policies in 171 00:09:35,320 --> 00:09:37,200 Speaker 1: two thousand and six, but it's been a huge financial 172 00:09:37,200 --> 00:09:40,199 Speaker 1: burden for the company. Under reserving has been a chronic problem. 173 00:09:40,760 --> 00:09:44,000 Speaker 1: So this breakup, as it may, as Larry Coulton noted, 174 00:09:44,040 --> 00:09:47,600 Speaker 1: allow these three areas to shine on their own. It 175 00:09:47,640 --> 00:09:51,280 Speaker 1: may be signaling, according to our industrial analysts, that g 176 00:09:51,480 --> 00:09:53,920 Speaker 1: E is not worried any longer about long term care 177 00:09:54,200 --> 00:09:56,520 Speaker 1: because and that means we shouldn't. Does investors be worried? 178 00:09:56,559 --> 00:09:58,800 Speaker 1: And that is a very good thing. Yeah, it's given 179 00:09:58,800 --> 00:10:01,120 Speaker 1: the history there. But let's take those three lines of 180 00:10:01,120 --> 00:10:02,880 Speaker 1: business because they're not bringing it all up at once. 181 00:10:02,920 --> 00:10:04,839 Speaker 1: I thought that that was important. I mean, the first 182 00:10:04,840 --> 00:10:07,000 Speaker 1: they spin off healthcare, what you said, that's the strongest 183 00:10:07,000 --> 00:10:09,040 Speaker 1: one anyway, that's ready to go on its own. They're 184 00:10:09,040 --> 00:10:11,280 Speaker 1: going to take another year on power to sort of 185 00:10:11,280 --> 00:10:12,840 Speaker 1: get that up and running. It may need a little 186 00:10:12,840 --> 00:10:14,720 Speaker 1: more help. And then you have aviation at the end. 187 00:10:14,960 --> 00:10:18,280 Speaker 1: Talk about those three lines of business in their futures. Well, 188 00:10:18,440 --> 00:10:21,200 Speaker 1: the healthcare business is in very good shape and it 189 00:10:21,240 --> 00:10:24,880 Speaker 1: intends to retain nineteen point nine percent of that business. 190 00:10:25,400 --> 00:10:28,079 Speaker 1: Ultimately that may be sold, that will end up if 191 00:10:28,920 --> 00:10:32,319 Speaker 1: if this process continues to its fruition in the aviation 192 00:10:32,360 --> 00:10:37,120 Speaker 1: business at stake. But the that that's so here we 193 00:10:37,160 --> 00:10:40,960 Speaker 1: are this is a bit of a waiting time and 194 00:10:41,000 --> 00:10:44,360 Speaker 1: that means the stock may be volatile or it could 195 00:10:44,400 --> 00:10:48,800 Speaker 1: be down. Who knows. Investors hate waiting, but it takes 196 00:10:48,960 --> 00:10:52,040 Speaker 1: some time to do these tax free spinoffs. And also 197 00:10:52,160 --> 00:10:54,840 Speaker 1: g is determined and this was part of the announcement 198 00:10:55,280 --> 00:10:59,440 Speaker 1: to set these three areas off on their own at 199 00:11:00,400 --> 00:11:03,559 Speaker 1: much lower levels of financial leverage. And that's really where 200 00:11:03,640 --> 00:11:06,080 Speaker 1: the cash flow is so important. How much can the 201 00:11:06,120 --> 00:11:09,520 Speaker 1: company generate to be to get invest great credit ratings 202 00:11:09,520 --> 00:11:11,640 Speaker 1: for all three is going to be a real that's 203 00:11:11,679 --> 00:11:14,600 Speaker 1: the serious effort ahead. So that's why they need time. 204 00:11:14,800 --> 00:11:20,520 Speaker 1: There's three and then for power and renewables, so we 205 00:11:20,559 --> 00:11:23,880 Speaker 1: are we await all that information. But but there's really 206 00:11:24,000 --> 00:11:27,800 Speaker 1: positive signaling happening here. Otherwise, why would announce Why would 207 00:11:27,800 --> 00:11:30,000 Speaker 1: they announce it now? They would just continue to work 208 00:11:30,040 --> 00:11:32,439 Speaker 1: on it and not let us know. Larry kept emphasizing 209 00:11:32,640 --> 00:11:36,080 Speaker 1: three publican trade investment grade companies. He's very proud of 210 00:11:36,080 --> 00:11:38,040 Speaker 1: that that they will be all the investment grade from 211 00:11:38,080 --> 00:11:40,040 Speaker 1: his point of view. At least talk about power, which 212 00:11:40,080 --> 00:11:42,400 Speaker 1: has also struggled, had a lot of problems, some residual 213 00:11:42,440 --> 00:11:46,160 Speaker 1: problems with some maintenance contracts and things. What about keeping 214 00:11:46,240 --> 00:11:49,280 Speaker 1: traditional power together with renewables evens in a different way 215 00:11:49,559 --> 00:11:51,439 Speaker 1: they let renewables go off on its own, maybe a 216 00:11:51,480 --> 00:11:53,320 Speaker 1: bigger growth thing. Do you think that makes sense as 217 00:11:53,360 --> 00:11:55,160 Speaker 1: an investor? Do you look at that and say, yeah, 218 00:11:55,200 --> 00:11:58,120 Speaker 1: that's sensible. It is given the mix that g has. 219 00:11:59,160 --> 00:12:02,080 Speaker 1: Renewables ault only, as we all assume, will be the 220 00:12:02,120 --> 00:12:05,200 Speaker 1: business that sustains in the future, But it was never 221 00:12:05,240 --> 00:12:08,280 Speaker 1: really are preferred of their businesses, and we're glad to 222 00:12:08,320 --> 00:12:13,400 Speaker 1: see it set aside and spun off again. The aviation 223 00:12:13,440 --> 00:12:16,440 Speaker 1: and the healthcare business of far superior to free cash 224 00:12:16,480 --> 00:12:22,240 Speaker 1: flow generation. Aviation almost and generate almost none in the downturn, 225 00:12:22,320 --> 00:12:25,040 Speaker 1: and now is coming back. We think there's a normalized 226 00:12:26,120 --> 00:12:29,200 Speaker 1: four billion dollars of free cash just that business. And 227 00:12:29,240 --> 00:12:32,120 Speaker 1: if you wrap the whole all of it up together 228 00:12:32,160 --> 00:12:35,319 Speaker 1: and you think about it today, there might be normalized 229 00:12:35,320 --> 00:12:37,800 Speaker 1: seven to eight billion dollars of free cash flow coming 230 00:12:37,840 --> 00:12:42,640 Speaker 1: from the sum of the three parts. That's something that no, 231 00:12:42,800 --> 00:12:46,280 Speaker 1: I don't think he's delivered for a very very long time. 232 00:12:46,760 --> 00:12:48,600 Speaker 1: And so I come back to you as an investor 233 00:12:48,640 --> 00:12:51,120 Speaker 1: because I say, Larry kept emphasizing that allows an investor 234 00:12:51,160 --> 00:12:53,520 Speaker 1: to side which, if any of these lines they want 235 00:12:53,520 --> 00:12:55,360 Speaker 1: to play in. Is it more valuable to be able 236 00:12:55,400 --> 00:12:59,240 Speaker 1: to pick and choose among health and power and aviation 237 00:12:59,360 --> 00:13:01,040 Speaker 1: than to have all umping together have to buy the 238 00:13:01,040 --> 00:13:05,960 Speaker 1: whole package. Very definitely, We as investors prefer that, And 239 00:13:06,000 --> 00:13:09,480 Speaker 1: then we think about them. You want the senior managements 240 00:13:09,480 --> 00:13:13,000 Speaker 1: of each, and they're not. Larry's, according to our industrial allowance, 241 00:13:13,080 --> 00:13:16,120 Speaker 1: is the best industrial CEO in the country. So there's 242 00:13:16,120 --> 00:13:19,600 Speaker 1: a lot right there. Him running aviation without a distraction 243 00:13:19,640 --> 00:13:22,160 Speaker 1: is fantastic. And then there are two very skilled individuals 244 00:13:22,200 --> 00:13:25,400 Speaker 1: will be the CEOs of the power and of healthcare business. 245 00:13:25,640 --> 00:13:28,280 Speaker 1: But think about it, they and there and their team 246 00:13:28,320 --> 00:13:32,679 Speaker 1: can be compensated on their own efforts without the distractions 247 00:13:33,040 --> 00:13:35,160 Speaker 1: and or delution of any other parts of the business. 248 00:13:35,160 --> 00:13:37,760 Speaker 1: They can really focus. They'll have each have their own 249 00:13:37,800 --> 00:13:41,840 Speaker 1: individual boards of directors who can focus on that business. So, yes, 250 00:13:41,960 --> 00:13:46,160 Speaker 1: this is given. There weren't synergies. This makes perfect sense 251 00:13:46,720 --> 00:13:51,360 Speaker 1: and we expect the stock price to ultimately reflect this 252 00:13:51,640 --> 00:13:55,760 Speaker 1: and be a very significant return for our clients very quickly. 253 00:13:55,760 --> 00:13:58,480 Speaker 1: With you and Sarah's this the end of conglomerates, You know, 254 00:13:58,559 --> 00:14:02,520 Speaker 1: I hard to say that. I think they will continue. 255 00:14:02,520 --> 00:14:05,439 Speaker 1: There are plenty of them in Japan, for example, and 256 00:14:06,040 --> 00:14:09,079 Speaker 1: unless they're desperate like Toshiba, they don't. They don't break up. 257 00:14:09,720 --> 00:14:14,080 Speaker 1: But but we're not patient as investors, and this is 258 00:14:14,080 --> 00:14:18,040 Speaker 1: true globally, and when we see a company who's who, 259 00:14:18,160 --> 00:14:21,080 Speaker 1: for example, if it's multiple being suppressed, we want them 260 00:14:21,080 --> 00:14:22,680 Speaker 1: to fix it. Yeah. And by the way, so she 261 00:14:22,840 --> 00:14:25,080 Speaker 1: was a little nudge, as I recall from some activists. 262 00:14:26,200 --> 00:14:28,120 Speaker 1: Thank you so much there. It's always great having you 263 00:14:28,160 --> 00:14:31,800 Speaker 1: with us. That's Sarah Header, she's CEO of Causeway Capital 264 00:14:31,920 --> 00:14:36,400 Speaker 1: Management coming up. It was nice while a lasted, but 265 00:14:36,480 --> 00:14:39,000 Speaker 1: it is the longest bull market in history about to 266 00:14:39,000 --> 00:14:42,000 Speaker 1: come to an ugly end. We talked with famed investor 267 00:14:42,080 --> 00:14:46,080 Speaker 1: Jeremy Grantham of g m O. When the decline comes, 268 00:14:46,680 --> 00:14:51,640 Speaker 1: it will be yeah, perhaps bigger invested than anything previously 269 00:14:51,800 --> 00:14:56,560 Speaker 1: in US history. This is Wall Street Week on Bloomberg. 270 00:14:58,480 --> 00:15:02,440 Speaker 1: This is Bloomberg All Street Week with David Weston from 271 00:15:02,560 --> 00:15:08,720 Speaker 1: Bloomberg Radio. Asset bubbles they're the one thing every investor 272 00:15:08,840 --> 00:15:12,400 Speaker 1: wants to avoid, from the tulip frenzy of seventeenth century 273 00:15:12,440 --> 00:15:16,720 Speaker 1: Netherlands to Wall Street in to the tech bubble of 274 00:15:16,760 --> 00:15:19,760 Speaker 1: two thousand. The problem is knowing when you're in a 275 00:15:19,840 --> 00:15:23,040 Speaker 1: bubble and when it will end. FED Chair J. Pale 276 00:15:23,160 --> 00:15:26,800 Speaker 1: has recognized since last spring that asset values are stretched. 277 00:15:27,040 --> 00:15:30,520 Speaker 1: You look at asset valuations, um you can say that 278 00:15:31,080 --> 00:15:34,880 Speaker 1: by some measures, some asset valuations are elevated compared to history. 279 00:15:35,120 --> 00:15:38,040 Speaker 1: I think that's clear, while others like Cathy would of 280 00:15:38,240 --> 00:15:41,400 Speaker 1: ARC say we're just getting started that. In fact, the 281 00:15:41,440 --> 00:15:44,440 Speaker 1: market has been broadening and getting healthier. There has been 282 00:15:44,440 --> 00:15:48,760 Speaker 1: a rotation into value as a style as fears of 283 00:15:48,800 --> 00:15:53,640 Speaker 1: inflation and interest rates increasing picked up, and therefore there's 284 00:15:53,680 --> 00:15:57,120 Speaker 1: been a broadening out of this bull market. All right, 285 00:15:57,240 --> 00:15:59,960 Speaker 1: we are in a very strong bull market. And then 286 00:16:00,080 --> 00:16:02,280 Speaker 1: of Tesla, which some people say is a bubble in 287 00:16:02,440 --> 00:16:05,480 Speaker 1: and of itself, skyrocketing to a market cap of over 288 00:16:05,560 --> 00:16:08,560 Speaker 1: a trillion dollars or roughly twenty times what it was 289 00:16:08,720 --> 00:16:11,720 Speaker 1: just four years ago. Well, others see Tesla and not 290 00:16:11,800 --> 00:16:14,520 Speaker 1: as a bubble, but as the exception that proves the rule, 291 00:16:14,960 --> 00:16:18,200 Speaker 1: changing the entire face of the automobile industry. That's the 292 00:16:18,280 --> 00:16:21,280 Speaker 1: view of Star quarterback Tom Brady as he talked about 293 00:16:21,320 --> 00:16:24,280 Speaker 1: Hurt's decision to include Tesla's in its fleet. Had a 294 00:16:24,320 --> 00:16:28,520 Speaker 1: Tesla for about four years, and again, I think it's uh, 295 00:16:29,280 --> 00:16:31,160 Speaker 1: it's kind of the direction that the world is heading. 296 00:16:31,160 --> 00:16:33,040 Speaker 1: And I think for me, it was about being really 297 00:16:33,040 --> 00:16:36,160 Speaker 1: conscious about the impact that we all have on on 298 00:16:36,200 --> 00:16:42,520 Speaker 1: our planet, whether it is Tesla or tech or markets overall. 299 00:16:42,680 --> 00:16:45,120 Speaker 1: No one has been more outspoken about the possibility of 300 00:16:45,120 --> 00:16:47,920 Speaker 1: bubbles than Jeremy Grantham. He is co founder of GMO 301 00:16:48,280 --> 00:16:51,160 Speaker 1: and really a student through the history of markets that 302 00:16:51,160 --> 00:16:53,520 Speaker 1: are overheated, and we welcome him now to Wall Street Week. 303 00:16:53,600 --> 00:16:55,360 Speaker 1: Mr Grantham, thank you so much for being with us. 304 00:16:55,880 --> 00:16:57,960 Speaker 1: Let's talk about bubbles. But let's come in if we 305 00:16:58,000 --> 00:17:01,040 Speaker 1: can through Tesla, because you've talked self Tesla in the past. 306 00:17:01,320 --> 00:17:02,640 Speaker 1: I mean the last time I checked, I think the 307 00:17:02,680 --> 00:17:05,760 Speaker 1: market cap is something like forty times what it was 308 00:17:05,840 --> 00:17:10,080 Speaker 1: four years ago. Is Tesla bubble? Yes, that's pretty easy. 309 00:17:10,680 --> 00:17:13,760 Speaker 1: And having said that, I'm the proud owner of a 310 00:17:13,800 --> 00:17:18,560 Speaker 1: Model three and I do think they're magnificent vehicles, and 311 00:17:18,640 --> 00:17:21,919 Speaker 1: I think Tesla has done extraordinarily well. But if you 312 00:17:21,960 --> 00:17:25,800 Speaker 1: go back into the life cycle of the Fangs, Tesla 313 00:17:26,240 --> 00:17:30,240 Speaker 1: is many multiples of the price to sales ratio that 314 00:17:30,400 --> 00:17:33,200 Speaker 1: they were at this stage in their lives, and they 315 00:17:33,240 --> 00:17:39,080 Speaker 1: have been brilliantly successful. So Tesla is a assuming it 316 00:17:39,119 --> 00:17:42,719 Speaker 1: will be brilliantly successful, and be assuming it will be, 317 00:17:42,840 --> 00:17:48,760 Speaker 1: in addition to that, multiples as successful as the other Fangs, 318 00:17:49,240 --> 00:17:51,399 Speaker 1: and they are some of the great companies in the 319 00:17:51,480 --> 00:17:54,159 Speaker 1: history of capitalism. Yeah, I'm always reluctant to say it 320 00:17:54,200 --> 00:17:56,360 Speaker 1: might be different this time, but let me ask that question, 321 00:17:56,600 --> 00:17:58,080 Speaker 1: could it be different this time when it comes to 322 00:17:58,119 --> 00:18:00,879 Speaker 1: Tesla because it is at their us here's of a 323 00:18:00,880 --> 00:18:05,080 Speaker 1: fundable technological transformation to electric vehicles and a real fight 324 00:18:05,160 --> 00:18:08,560 Speaker 1: for the climate globally an important part of that. So 325 00:18:08,720 --> 00:18:11,359 Speaker 1: is it possible that is different. There's a major transformation 326 00:18:11,400 --> 00:18:13,399 Speaker 1: going on here that's bigger than what we've seen before. 327 00:18:14,040 --> 00:18:17,080 Speaker 1: I think if you were defending the fangs, you would 328 00:18:17,119 --> 00:18:20,520 Speaker 1: say in each case that they represented, like Amazon, a 329 00:18:21,240 --> 00:18:25,479 Speaker 1: crucial fork in the road on retailing, if you were 330 00:18:25,480 --> 00:18:30,720 Speaker 1: looking at Facebook and Netflix, all all of them represent 331 00:18:30,840 --> 00:18:37,800 Speaker 1: these breakout, major changes, disruptive changes. And I'm very grateful 332 00:18:37,920 --> 00:18:42,320 Speaker 1: for Tesla as a dedicated green that they have pioneered 333 00:18:43,160 --> 00:18:47,879 Speaker 1: e vs. But now in phase two, every every great 334 00:18:48,080 --> 00:18:52,600 Speaker 1: automobile company, all the Mercedes and and the BMW's and 335 00:18:52,640 --> 00:18:55,720 Speaker 1: so on, and and the v ws are all gearing 336 00:18:55,840 --> 00:18:59,239 Speaker 1: up to go electric. And we that that owes a 337 00:18:59,240 --> 00:19:02,560 Speaker 1: lot to Tesla, But now in phase two they're going 338 00:19:02,600 --> 00:19:05,960 Speaker 1: to have to have some serious competition and and to 339 00:19:06,240 --> 00:19:12,080 Speaker 1: live up to the expectations of the price will be impossible. So, 340 00:19:12,119 --> 00:19:14,680 Speaker 1: speaking more broadly, you've said that we're in something. I 341 00:19:14,720 --> 00:19:17,359 Speaker 1: think you're called it an epic bubble. Right now, I 342 00:19:17,359 --> 00:19:19,320 Speaker 1: think you've been very carefusy. I'm not going to predict 343 00:19:19,480 --> 00:19:22,040 Speaker 1: when it ends. I'm just gonna say that it does end. 344 00:19:22,080 --> 00:19:23,879 Speaker 1: What's going to bring it to an end. The thing 345 00:19:23,920 --> 00:19:28,080 Speaker 1: about the Great Bubble Japan, no, no one knows after 346 00:19:28,160 --> 00:19:33,480 Speaker 1: all these years, exactly why the bubble peaked. You can 347 00:19:33,520 --> 00:19:36,439 Speaker 1: say with hindsight it peaked at the point, of course 348 00:19:36,600 --> 00:19:42,240 Speaker 1: of maximum euphoria, so there was no hint of darkness 349 00:19:42,320 --> 00:19:46,879 Speaker 1: at the end of the tunnel. Everything looked absolutely splendid 350 00:19:47,000 --> 00:19:49,879 Speaker 1: as the market peaked, and of course, as long as 351 00:19:49,880 --> 00:19:54,600 Speaker 1: it looks absolutely splendid, everybody is happy. The thing about 352 00:19:54,680 --> 00:20:00,159 Speaker 1: the great bubbles is how intensely to people buying to 353 00:20:00,240 --> 00:20:03,880 Speaker 1: the idea that it can never break, that prices will 354 00:20:03,920 --> 00:20:07,960 Speaker 1: never decline. The housing bubble of two thousand and five 355 00:20:08,119 --> 00:20:11,439 Speaker 1: two thousand and six in America was a brilliant bubble. 356 00:20:11,480 --> 00:20:14,359 Speaker 1: In that description, you had people going out and buying 357 00:20:14,440 --> 00:20:18,320 Speaker 1: a second house to rent because house prices never decline. Indeed, 358 00:20:18,440 --> 00:20:21,680 Speaker 1: Ben Banankee said, US house prices have never declined. Of course, 359 00:20:21,760 --> 00:20:24,399 Speaker 1: then they promptly did. But that is power for the course, 360 00:20:24,840 --> 00:20:28,280 Speaker 1: for the Federal Reserve. Thank you so much. As Jeremy Grantham, 361 00:20:28,280 --> 00:20:33,119 Speaker 1: he is co founder of GMO. Coming up, we wrap 362 00:20:33,160 --> 00:20:36,040 Speaker 1: up the week as always with our special contributor Larry 363 00:20:36,119 --> 00:20:41,040 Speaker 1: Summers of Harvard. This is Wall Street Week on Bloomberg. 364 00:20:42,480 --> 00:20:46,440 Speaker 1: This is Bloomberg Wall Street Week with David Weston from 365 00:20:46,560 --> 00:20:49,439 Speaker 1: Bloomberg Radio. This is Wall Street Week. I'm David Weston 366 00:20:49,440 --> 00:20:51,440 Speaker 1: and we're joined once again by our very special contributor 367 00:20:51,520 --> 00:20:54,480 Speaker 1: Larry Summers of Harvard. So, Larry, you had quite a week, 368 00:20:54,520 --> 00:20:56,159 Speaker 1: if I can put it that way, because you've been 369 00:20:56,160 --> 00:20:59,440 Speaker 1: warning on this program and otherwise again and again week 370 00:20:59,480 --> 00:21:01,600 Speaker 1: after week of on inflation, and boy, this week we 371 00:21:01,720 --> 00:21:05,000 Speaker 1: got at six point two on the headline number on CPI. 372 00:21:05,080 --> 00:21:07,440 Speaker 1: Shocking and awful lot of people. I guess I start 373 00:21:07,480 --> 00:21:09,359 Speaker 1: out with why did you get it right? And so 374 00:21:09,400 --> 00:21:11,960 Speaker 1: many economists, including the Federal Reserve and for that man 375 00:21:12,040 --> 00:21:14,439 Speaker 1: of the White House, why did they get it wrong? David? 376 00:21:14,520 --> 00:21:17,760 Speaker 1: You know I did. It seemed to me apply a 377 00:21:17,800 --> 00:21:22,560 Speaker 1: fairly basic economic model to the magnitude of the demand stimulus, 378 00:21:22,600 --> 00:21:25,879 Speaker 1: and it seemed to me had predicted that we get 379 00:21:26,440 --> 00:21:31,040 Speaker 1: certainly a significant rise in inflation. And then there were 380 00:21:31,040 --> 00:21:34,360 Speaker 1: some other things that came along on the supply side 381 00:21:34,800 --> 00:21:38,640 Speaker 1: that I didn't foresee, that others didn't foresee that made 382 00:21:38,640 --> 00:21:43,400 Speaker 1: it even worse. Uh than I had expected. I think 383 00:21:43,400 --> 00:21:47,760 Speaker 1: there are a couple of lessons from this episode. One 384 00:21:47,920 --> 00:21:52,919 Speaker 1: is that it's always important to avoid excessive certainty. The 385 00:21:53,040 --> 00:21:56,639 Speaker 1: policymakers and economics who go work go wrong the most 386 00:21:57,160 --> 00:22:01,440 Speaker 1: are the ones who are most confident of a single model. 387 00:22:02,160 --> 00:22:04,800 Speaker 1: You've always got to recognize that there are a wide 388 00:22:04,920 --> 00:22:08,280 Speaker 1: range of possibilities. You know, on your show, I always 389 00:22:08,400 --> 00:22:12,000 Speaker 1: said that I thought this was the risk and the 390 00:22:12,040 --> 00:22:14,320 Speaker 1: most likely thing, but there was a one in three 391 00:22:14,440 --> 00:22:19,240 Speaker 1: chance that this would all work out terrifically and that 392 00:22:19,359 --> 00:22:25,240 Speaker 1: I'd be entirely wrong. I think more recognition of all 393 00:22:25,320 --> 00:22:29,560 Speaker 1: the range of possibilities is a good discipline for policy makers. 394 00:22:30,160 --> 00:22:34,000 Speaker 1: I also think and and economists. I also think that 395 00:22:34,240 --> 00:22:38,200 Speaker 1: we have a problem, and it's a pretty broad problem 396 00:22:38,359 --> 00:22:43,679 Speaker 1: with what I call motivated belief. People really wanted to 397 00:22:43,800 --> 00:22:50,960 Speaker 1: engage for all sorts of reasons humanitarian, uh political, related 398 00:22:51,040 --> 00:22:54,880 Speaker 1: to momentum at the beginning of an administration in a 399 00:22:55,000 --> 00:22:59,840 Speaker 1: very very large stimulus program, and so they convinced them 400 00:23:00,040 --> 00:23:06,720 Speaker 1: else that it wouldn't be inflationary because they really wanted 401 00:23:06,720 --> 00:23:11,720 Speaker 1: it to uh not be inflationary. And I think that 402 00:23:12,280 --> 00:23:18,399 Speaker 1: something we need to do is be much more attentive 403 00:23:19,000 --> 00:23:22,199 Speaker 1: to the fact that the world is as it is, 404 00:23:23,000 --> 00:23:27,440 Speaker 1: not always as we prefer it to be. We can 405 00:23:27,840 --> 00:23:31,880 Speaker 1: want very much to be out of Afghanistan and believe 406 00:23:32,000 --> 00:23:36,080 Speaker 1: deeply that it's best to be out of Afghanistan without 407 00:23:36,280 --> 00:23:41,119 Speaker 1: that making us confident that it can take place in 408 00:23:41,320 --> 00:23:48,159 Speaker 1: a efficient and uh complete UH way. We can want 409 00:23:48,440 --> 00:23:53,960 Speaker 1: very badly for it to be true that improving the 410 00:23:54,119 --> 00:24:00,399 Speaker 1: UH climate change problem can be accomplished without raising UH 411 00:24:00,640 --> 00:24:05,399 Speaker 1: carbon prices in ways that middle class people UH don't want. 412 00:24:05,960 --> 00:24:11,280 Speaker 1: But that doesn't mean that it's necessarily true, UH that 413 00:24:11,280 --> 00:24:13,920 Speaker 1: that is the case. Yeah, we have a problem with inflation. 414 00:24:13,960 --> 00:24:15,639 Speaker 1: I think everyone at this point agrees with you. We 415 00:24:15,680 --> 00:24:17,280 Speaker 1: have a problem. But the question is how big a 416 00:24:17,320 --> 00:24:20,080 Speaker 1: problem for how long? Because we had Paul Kirkman you've 417 00:24:20,119 --> 00:24:23,440 Speaker 1: identified earlier as a friend of yours and a former classmate, 418 00:24:23,480 --> 00:24:25,960 Speaker 1: I believe Hillary, and he came out this week in 419 00:24:26,000 --> 00:24:27,639 Speaker 1: New York Times and said, you know, this is not 420 00:24:27,640 --> 00:24:31,719 Speaker 1: like the seventies. It's like when people came back from 421 00:24:31,760 --> 00:24:34,159 Speaker 1: the war. There was a big uptaking demand. Supply had 422 00:24:34,160 --> 00:24:36,080 Speaker 1: to catch up, and the worst thing we could do 423 00:24:36,280 --> 00:24:38,480 Speaker 1: would be to tighten because back then they did tighten 424 00:24:38,600 --> 00:24:40,199 Speaker 1: and led to a recession. What do you say to 425 00:24:40,280 --> 00:24:43,920 Speaker 1: that analysis. Paul's examples have been have sort of been 426 00:24:43,960 --> 00:24:47,440 Speaker 1: bouncing around a bit. I think the most obvious example 427 00:24:47,960 --> 00:24:52,600 Speaker 1: continues to be uh the Vietnam War. The other obvious 428 00:24:52,680 --> 00:24:57,400 Speaker 1: example is the nineteen seventies, where people were saying temporary 429 00:24:57,560 --> 00:25:01,680 Speaker 1: due to specific factors all the time. I guess I 430 00:25:01,720 --> 00:25:09,720 Speaker 1: don't really uh hear uh the music on uh Paul's thing. Uh. 431 00:25:09,840 --> 00:25:14,280 Speaker 1: We had price controls, major price controls, and we took 432 00:25:14,320 --> 00:25:17,639 Speaker 1: them off. You'd expect when you took off a major 433 00:25:17,680 --> 00:25:23,199 Speaker 1: price control, a big transitory increase as prices returned to 434 00:25:23,240 --> 00:25:28,880 Speaker 1: their level no price controls. Uh. This time, we had 435 00:25:29,040 --> 00:25:36,480 Speaker 1: a extraordinary demobilization of vast amounts of production of tanks 436 00:25:36,560 --> 00:25:43,160 Speaker 1: and other things that were uh taken that we're taken off. Uh. 437 00:25:43,200 --> 00:25:49,400 Speaker 1: That didn't happen either, you know. So far, the um 438 00:25:50,240 --> 00:25:56,120 Speaker 1: the lesson has been uh. That used to be uh 439 00:25:56,200 --> 00:26:01,560 Speaker 1: that Neil Ferguson and others drew that fears that the 440 00:26:01,600 --> 00:26:05,520 Speaker 1: economy would go into depression, We're wrong because those kinds 441 00:26:05,560 --> 00:26:09,280 Speaker 1: of fears existed during the Second World War. I just 442 00:26:09,320 --> 00:26:15,399 Speaker 1: think it was a different, uh, different time and UH 443 00:26:15,640 --> 00:26:20,160 Speaker 1: the Phillips curve had not yet been invented. It says 444 00:26:20,240 --> 00:26:25,520 Speaker 1: something about the psychology of that moment that if you 445 00:26:26,080 --> 00:26:30,199 Speaker 1: looked in the first edition of the Samuelson textbook, it 446 00:26:30,280 --> 00:26:33,240 Speaker 1: didn't have a graph of the inflation rate. It had 447 00:26:33,280 --> 00:26:36,479 Speaker 1: a graph of the price level because people fought off. 448 00:26:36,520 --> 00:26:39,600 Speaker 1: Prices is going up and down rather than rates of 449 00:26:39,640 --> 00:26:45,160 Speaker 1: inflation going UH up and down. Larry from monetary policy, 450 00:26:45,160 --> 00:26:48,080 Speaker 1: it's a restructuring corporations. We've had a space this week 451 00:26:48,160 --> 00:26:51,360 Speaker 1: have large corporations breaking themselves up, first General Electric going 452 00:26:51,359 --> 00:26:53,040 Speaker 1: into three parts. Then at the end of the week 453 00:26:53,040 --> 00:26:55,000 Speaker 1: we have Johnson and Johnson bringing into two parts, and 454 00:26:55,040 --> 00:26:58,000 Speaker 1: over UH in Asia we have Toshiba breaking into a 455 00:26:58,000 --> 00:27:00,639 Speaker 1: couple of major component parts as well. Is there something 456 00:27:00,680 --> 00:27:05,320 Speaker 1: more fundamental underlying this? What is driving this increasing emphasis 457 00:27:05,400 --> 00:27:09,439 Speaker 1: on focus rather than synergy? David? I think this is 458 00:27:09,480 --> 00:27:13,520 Speaker 1: a broadly positive thing. I think in most cases these 459 00:27:13,520 --> 00:27:20,040 Speaker 1: splits probably have come later than UH would have been ideal. 460 00:27:20,800 --> 00:27:24,040 Speaker 1: And I think those who don't like markets and don't 461 00:27:24,080 --> 00:27:27,919 Speaker 1: like activists should be given a little pause by this 462 00:27:28,119 --> 00:27:33,160 Speaker 1: kind of UH development. I think it's two things UH. 463 00:27:33,280 --> 00:27:38,280 Speaker 1: The first is that in an increasingly complicated world. It's 464 00:27:38,280 --> 00:27:42,919 Speaker 1: the essence of strategy to compensate, to build on strength 465 00:27:43,480 --> 00:27:46,560 Speaker 1: rather than to compensate for weakness. And all of us 466 00:27:46,600 --> 00:27:50,680 Speaker 1: are better off specializing a bit on what our distinctive 467 00:27:50,720 --> 00:27:54,320 Speaker 1: talent is or what it is that is our strength. 468 00:27:54,680 --> 00:27:59,520 Speaker 1: I think that's true for companies as well. Second, investors, 469 00:28:00,080 --> 00:28:05,199 Speaker 1: through their investments, express beliefs. Some people believe in prescription 470 00:28:05,280 --> 00:28:10,160 Speaker 1: drugs and biotech. Others believe that consumer products are going 471 00:28:10,200 --> 00:28:13,679 Speaker 1: to be uh the best way forward. Some people believe 472 00:28:13,760 --> 00:28:17,199 Speaker 1: that the aviation business is good. Other people believe the 473 00:28:17,200 --> 00:28:19,920 Speaker 1: health care business is going to be good. Not many 474 00:28:20,000 --> 00:28:26,400 Speaker 1: people believe in particular sandwiches that were put together decades ago. 475 00:28:27,240 --> 00:28:32,920 Speaker 1: And so by splitting companies up, people give investors an 476 00:28:32,920 --> 00:28:37,160 Speaker 1: opportunity to express the kinds of beliefs that investors are 477 00:28:37,200 --> 00:28:41,960 Speaker 1: likely to have, rather than to bat on somewhat oddly 478 00:28:42,000 --> 00:28:45,920 Speaker 1: and historically constructed sandwiches. That's what I think this is about, 479 00:28:46,000 --> 00:28:47,800 Speaker 1: and I think for the most part it's a good thing. 480 00:28:48,280 --> 00:28:50,440 Speaker 1: Thank you so very much. That's our special Wall Street 481 00:28:50,480 --> 00:28:54,760 Speaker 1: we contributor. It's Larry Summers of Harvard. Finally, one more thought. 482 00:28:55,160 --> 00:28:58,160 Speaker 1: The last of the conglomerates There was a time not 483 00:28:58,240 --> 00:29:01,440 Speaker 1: so terribly long ago when conglomerates were all the rage. 484 00:29:01,520 --> 00:29:04,040 Speaker 1: Think Harold Jannine of I. T. T. Goulf and Western 485 00:29:04,080 --> 00:29:07,840 Speaker 1: Lytton industries, many of which grew up and then died away. 486 00:29:07,880 --> 00:29:10,479 Speaker 1: But then there was Ge, the biggest of them all. 487 00:29:10,560 --> 00:29:14,040 Speaker 1: It lasted the longest when we had Jack Welch take 488 00:29:14,080 --> 00:29:16,600 Speaker 1: what was a light bulb company founded by Thomas Alva 489 00:29:16,720 --> 00:29:20,520 Speaker 1: Edison in the nineteenth century and expanded, expanded into television 490 00:29:20,520 --> 00:29:24,200 Speaker 1: and motion pictures, and most of all, into finance. He 491 00:29:24,280 --> 00:29:26,880 Speaker 1: took a company that had revenues about twenty six billion 492 00:29:26,880 --> 00:29:29,000 Speaker 1: dollars a year to a hundred and thirty billion dollars 493 00:29:29,000 --> 00:29:31,440 Speaker 1: a year. The market cap went up over four hundred 494 00:29:31,440 --> 00:29:34,040 Speaker 1: and fifty billion dollars. It was the largest in the 495 00:29:34,080 --> 00:29:37,240 Speaker 1: world at the time. But trees don't grow to the sky, 496 00:29:37,560 --> 00:29:41,200 Speaker 1: and neither did Ge. Jack Walsh moved on. We had 497 00:29:41,320 --> 00:29:44,120 Speaker 1: Jeff Emil take his place, and during his tenure we 498 00:29:44,160 --> 00:29:46,800 Speaker 1: took what had been the gold standard for corporate America 499 00:29:47,160 --> 00:29:49,800 Speaker 1: and turned it into something of a turnaround. And in 500 00:29:49,880 --> 00:29:52,480 Speaker 1: the end even Jeff M. L couldn't quite explain why 501 00:29:52,520 --> 00:29:57,280 Speaker 1: that had happened. We had through multiple receptions. We had 502 00:29:58,080 --> 00:30:01,680 Speaker 1: really generated record earnings and cash flow. We had good businesses, 503 00:30:01,760 --> 00:30:04,680 Speaker 1: good people, good initiatives, but at the end of the 504 00:30:04,760 --> 00:30:07,040 Speaker 1: day the stock price lagged. So three and a hap 505 00:30:07,200 --> 00:30:09,880 Speaker 1: years ago, the g board turned to Larry Colp, the 506 00:30:09,880 --> 00:30:12,160 Speaker 1: former CEO of Dan and Herd, to sort things out. 507 00:30:12,440 --> 00:30:14,560 Speaker 1: Larry came in and pretty much throughout the playbook of 508 00:30:14,640 --> 00:30:17,840 Speaker 1: Jack Welch, he pruned. He focused on cash flow and 509 00:30:17,880 --> 00:30:21,680 Speaker 1: debt reduction and just playing focused overall. It all came 510 00:30:21,720 --> 00:30:24,240 Speaker 1: to a head this week when Larry Colp announced that 511 00:30:24,280 --> 00:30:27,120 Speaker 1: he would break up the company to three parts, healthcare, 512 00:30:27,320 --> 00:30:31,680 Speaker 1: power and aviation. These businesses will be more focused, they'll 513 00:30:31,720 --> 00:30:35,000 Speaker 1: be a higher, greater level of accountability. We should have 514 00:30:35,080 --> 00:30:38,800 Speaker 1: sharper capital allocation, more strategic flexibility, and frankly, I think 515 00:30:38,800 --> 00:30:40,440 Speaker 1: he's gonna be good for the team as well. So 516 00:30:40,600 --> 00:30:43,480 Speaker 1: is this the end of conglomerates. Nicholas Hayman of William 517 00:30:43,520 --> 00:30:46,479 Speaker 1: Blair echoed Larry Colp, who said, it really is more 518 00:30:46,520 --> 00:30:49,560 Speaker 1: important to focus today rather than go for those synergies 519 00:30:49,600 --> 00:30:53,479 Speaker 1: across different businesses. It's much more important to have uh 520 00:30:54,280 --> 00:30:59,240 Speaker 1: really percent focus on one end market instead of customers 521 00:30:59,280 --> 00:31:03,360 Speaker 1: because things are changing so structurally and so rapidly that 522 00:31:04,360 --> 00:31:08,200 Speaker 1: you really can't be burdened by having to wait for 523 00:31:08,240 --> 00:31:11,040 Speaker 1: another part of the company to come around. Well, Jerry 524 00:31:11,120 --> 00:31:13,640 Speaker 1: Davis of Michigan Ross School thinks that there may still 525 00:31:13,680 --> 00:31:16,440 Speaker 1: be room for conglomerates when it comes to tech. Anybody 526 00:31:16,520 --> 00:31:19,640 Speaker 1: think of Amazon. I think that there is a future 527 00:31:19,680 --> 00:31:22,600 Speaker 1: for conglomerates, but it's in the I T sector. If 528 00:31:22,680 --> 00:31:27,320 Speaker 1: you look at big tech companies like Alphabet, UH, like Facebook, 529 00:31:27,520 --> 00:31:31,440 Speaker 1: they really are conglomerates in some sense. They are hearkening 530 00:31:31,480 --> 00:31:34,320 Speaker 1: back to the conglomerate that g E was at its birth. 531 00:31:34,600 --> 00:31:37,400 Speaker 1: But if you listen to Larry Culp himself, it's not 532 00:31:37,520 --> 00:31:40,160 Speaker 1: about the form. It's not whether it's a conglomerate or 533 00:31:40,200 --> 00:31:42,840 Speaker 1: not a conglomerate. In the end, it's about getting the 534 00:31:42,920 --> 00:31:46,640 Speaker 1: job done. It's ultimately about performance, right I've I've been 535 00:31:46,640 --> 00:31:49,080 Speaker 1: in companies where we did a number of things under 536 00:31:49,120 --> 00:31:51,360 Speaker 1: one roof, so I've seen it from a number of 537 00:31:51,360 --> 00:31:54,840 Speaker 1: different angles. But ultimately it's all about looking forward and 538 00:31:54,880 --> 00:31:56,520 Speaker 1: being in a position to perform. And I think for 539 00:31:56,640 --> 00:32:00,840 Speaker 1: Ge today on three separate bottoms will be at our best. 540 00:32:01,000 --> 00:32:02,640 Speaker 1: That does it. For this episode of Wall Street week, 541 00:32:02,680 --> 00:32:06,440 Speaker 1: I'm David Weston. This is Bloomberg. See you next week, 542 00:32:09,440 --> 00:32:09,880 Speaker 1: m hm.