Speaker 1: This is Bloomberg Wall Street Week. Market shruggle, higher consumer prizes.
Speaker 1: The economy is in the process of rebounding. Will the
Speaker 1: utter reserve have its own digital currency? The financial stories
Speaker 1: that cheap hard work. Many people think the eels are
Speaker 1: just going to keep marching up. We have more spending
Speaker 1: coming out of Congress. One of the big questions I
Speaker 1: think on investor's minds inflation through the eyes of the
Speaker 1: most influential voices, Larry Summers, the former Treasury Secretary, Bryan
Speaker 1: wynhand back of America, Will Smart, CEO of Charlie Sharp.
Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Radio.
Speaker 1: In a battle between a hot new electric vehicle company
Speaker 1: and hot new inflation numbers. I'm afraid inflation numbers win.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. We
Speaker 1: started the week pretty sure of where we were going.
Speaker 1: Earnings were up at least basically, equities were reaching up
Speaker 1: to new highs, bonds were tamed, and we had a
Speaker 1: new infrastructure package. All was right with the world. But
Speaker 1: then Wednesday hit and consumer inflation numbers came in high
Speaker 1: oiger than anyone really expected. An annualized increase of six
Speaker 1: point two that's the highest in nearly thirty years. Austin
Speaker 1: Gouldsby of the Chicago Boost School said it's not going
Speaker 1: away anytime soon. Look, it's a big number. And whether
Speaker 1: you're team permanent or team temporary, everybody agrees it's it's
Speaker 1: gonna be months of this before you see any relief.
Speaker 1: And San Francico Fed president Mary Daily, while saying it
Speaker 1: was too soon to change course, admitted that the inflation
Speaker 1: numbers really did get her attention. Inflation is high, higher,
Speaker 1: it's eye popping. This is a transitory period. That's what
Speaker 1: we believe. That's what I think when I look out
Speaker 1: at the data. But it's directly related to COVID, and
Speaker 1: a's quicker we get through COVID, the better off we're
Speaker 1: going to be as an economy. But the week wasn't
Speaker 1: over yet, as electric vehicle maker Ryvian went to market
Speaker 1: and blew past the price set for the I p O.
Speaker 1: The results of what the Rivian CEO said was a
Speaker 1: true team effort. She spent years is putting this together,
Speaker 1: and really what's so exciting is seeing such a diverse
Speaker 1: group of people with diverse backgrounds and interest really coming
Speaker 1: together to create these products. And and you know, standing
Speaker 1: there looking out at the teams as we're hang the bell,
Speaker 1: it was quite emotional, you know, seeing seeing so many
Speaker 1: passionate faces. It was it was really powerful. And three
Speaker 1: corporate giants GE Johnson and Johnson Antoshiba all decided to
Speaker 1: break themselves up, with g E CEO Larry Colpe saying
Speaker 1: it was all about focus. These businesses will be more focused,
Speaker 1: There'll be a higher, greater level of accountability, we should
Speaker 1: have sharper capital allocation, more strategic flexibility, and frankly, I
Speaker 1: think it's gonna be good for the team as well.
Speaker 1: I think we'll end up with investor basis focused on
Speaker 1: these pure plays, investors that are probably under invested in
Speaker 1: g E today. You put all that together, it's clear
Speaker 1: this is the best path for us to unlock and
Speaker 1: create value going forward. And when the dust settled from
Speaker 1: what is fairly called a wild week, it left equities
Speaker 1: down for the first time since early October, though not
Speaker 1: as much because of a Friday rally, with the SPI
Speaker 1: off about three tents of a percent in the NASAC
Speaker 1: down seven tenths, but really much of the action was
Speaker 1: over the bond side, with the ten year yield up
Speaker 1: to well over one and inflation concerns driving the ten
Speaker 1: year tips up to over two point seven percent. To
Speaker 1: take us through the week and what it taught us,
Speaker 1: we welcome now Greg Peters co c I O of
Speaker 1: PJAM Fixed Income and Sarah Kett CEO of Causeway Capital Management.
Speaker 1: So let's start on the equity side. Welcome Sarah. Give
Speaker 1: us a sense of the equities, because we started the
Speaker 1: week really at record levels and then the inflation overs hit,
Speaker 1: but then they came back up at the end of
Speaker 1: the week, Yes they did. The inflation genie seems to
Speaker 1: be out of the bottle and markets have to digest that.
Speaker 1: The technology stocks, many of them, seemed to have such
Speaker 1: significant market shares or competitive positioning, the market is giving
Speaker 1: them credit for being able to price this inflation pass
Speaker 1: it on to consumers. But there are many in both
Speaker 1: industries and sectors according to our team, where that won't
Speaker 1: necessarily be the case. And that's really the job of
Speaker 1: the fundamental research analysts is to determine whether or not
Speaker 1: a business, say it's consumer staples and food beverage, can
Speaker 1: they pass on their increased costs of raw materials into
Speaker 1: their final product, because if they can't, that means margin squeeze,
Speaker 1: and that means earnings will all other things being equal,
Speaker 1: will decline, which is not good for markets so quick
Speaker 1: when we see inflation numbers like this, we automatically think
Speaker 1: about what it does it bonds and perhaps most important,
Speaker 1: what it says to the FED and how they might react.
Speaker 1: What did you make of this week? I think that's
Speaker 1: the story, what it makes, what it tells you about
Speaker 1: the Fed and central bank action ultimately, And so there's
Speaker 1: been this this response in the bond market really before
Speaker 1: the CPI print that inflation is picking up, and more importantly,
Speaker 1: that the FED is going to be much more aggressive
Speaker 1: and central as globally much more aggressive than initially anticipated.
Speaker 1: So I think that is the story in the marketplace,
Speaker 1: the two year yield UH and then equally, I mean
Speaker 1: this is a volatile market in fixed income that has
Speaker 1: been largely isolated in fixed income. So what you're seeing
Speaker 1: is this disconnect and volatility in fixed income and equities.
Speaker 1: And yes, it does make some sense for sure as
Speaker 1: the as the earnings coming out are quite strong, margins
Speaker 1: all time high, the micro story is quite supportive, but
Speaker 1: at some point the volatility that we're seeing in fixed
Speaker 1: income markets have to start to infiltrate other markets and
Speaker 1: risk markets. Um, if it doesn't settle down. Look at
Speaker 1: the same time, how much is the FED sort of
Speaker 1: putting a blanket on that volatil you even given what
Speaker 1: we've seen, Because certainly they've made it pretty clear they're
Speaker 1: not in a rush to change course. You just heard
Speaker 1: very daily say well, we're not going to change course
Speaker 1: right away. Yeah, but they've changed their rhetoric quite substantially
Speaker 1: since the summer. And if you look at the bond market,
Speaker 1: yield into two year and even inflation, uh, it's been
Speaker 1: commensurate with the change in FED tone. So I don't know.
Speaker 1: I I'm really worrying about the FED here moving too
Speaker 1: fast too soon, particularly when you think about the construct
Speaker 1: of inflation that it's largely outside of the FED control.
Speaker 1: So the Fed raising rates isn't going to help offset
Speaker 1: the supply chain issues. It's not going to have those
Speaker 1: kind of facts like it normally does. Okay, thank you
Speaker 1: so very much for being with us. That's Greg Peters.
Speaker 1: He is close c IO of PIGAM. Sarah Cader Causeway
Speaker 1: Capital is gonna be sticking with us as we turn
Speaker 1: our attention to all those big corporate breakups this week.
Speaker 1: That's next on Wall Street Week on Bloomberg. This is
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: It was a week of breaking up, at least when
Speaker 1: it came to some very big corporations like Toshiba and
Speaker 1: Johnson and Johnson and General Electric and Gene Chairman and
Speaker 1: CEO Larry Kulp said in the end, it was a
Speaker 1: clear choice of focus over synergy. The GE team has
Speaker 1: heard from me for the last three years that I
Speaker 1: will bet on the benefits of focus every day, far
Speaker 1: more than the often illusory benefits that come from synergies. Now,
Speaker 1: we certainly enjoy those synergies today in certain places, but
Speaker 1: more and more we've been running the company on a
Speaker 1: decentralized basis, not as one GE, not as even the
Speaker 1: four reporting segments, but the thirty p m l's that
Speaker 1: deal with customers that compete in the markets every single day.
Speaker 1: So if there are synergies that we enjoy today, will
Speaker 1: work to continue those, of course, but the vast majority
Speaker 1: of the benefits here will come from focus. Sarah Keeder
Speaker 1: Causeway Capital Management is still with Sarah. I want to
Speaker 1: talk to you as an investor because you own g E.
Speaker 1: We talked to Larry Colp and he said, part of
Speaker 1: the benefits for investors so they can focus as well
Speaker 1: on which line today to be invested. As you look
Speaker 1: at this breaking up of g how do you analyze it? Well,
Speaker 1: I just want to set the stage that we may
Speaker 1: be one of the few who are analyzing it. He's
Speaker 1: absolutely hated by investors because of the damage they've done.
Speaker 1: If you think about it, David to today to go
Speaker 1: back and so the last five years, the annualized performance
Speaker 1: of the SMPI has been twenty percent per annum on average,
Speaker 1: the comparable number for Geez Mayet a disaster. So Larry
Speaker 1: Colp's arrival in October of eighteen, he had his work
Speaker 1: cut out for him, and he's very incentivized financially to
Speaker 1: get it done. But they're there're two great businesses. There
Speaker 1: were aviation and healthcare, and then power renewables and digital
Speaker 1: weren't quite as good, and the key was to set
Speaker 1: them free. There were some codependency because not only did
Speaker 1: power and renewables have some serious problems but then we
Speaker 1: had COVID. So then what happens to the aviation business.
Speaker 1: You know, this is aircraft engines, avionics systems. It give
Speaker 1: grinds to a halt, so free cash flow collapses and
Speaker 1: therefore the health care business had to support the other two.
Speaker 1: So what makes this announcement so interesting is that it
Speaker 1: may be signaling that is getting beyond its problems. It
Speaker 1: will actually coming back into blue skies where the long
Speaker 1: term care business that the company has that is supposed
Speaker 1: to pay people for nursing care and end of life assistance,
Speaker 1: that was it h G stopped writing those policies in
Speaker 1: two thousand and six, but it's been a huge financial
Speaker 1: burden for the company. Under reserving has been a chronic problem.
Speaker 1: So this breakup, as it may, as Larry Coulton noted,
Speaker 1: allow these three areas to shine on their own. It
Speaker 1: may be signaling, according to our industrial analysts, that g
Speaker 1: E is not worried any longer about long term care
Speaker 1: because and that means we shouldn't. Does investors be worried?
Speaker 1: And that is a very good thing. Yeah, it's given
Speaker 1: the history there. But let's take those three lines of
Speaker 1: business because they're not bringing it all up at once.
Speaker 1: I thought that that was important. I mean, the first
Speaker 1: they spin off healthcare, what you said, that's the strongest
Speaker 1: one anyway, that's ready to go on its own. They're
Speaker 1: going to take another year on power to sort of
Speaker 1: get that up and running. It may need a little
Speaker 1: more help. And then you have aviation at the end.
Speaker 1: Talk about those three lines of business in their futures. Well,
Speaker 1: the healthcare business is in very good shape and it
Speaker 1: intends to retain nineteen point nine percent of that business.
Speaker 1: Ultimately that may be sold, that will end up if
Speaker 1: if this process continues to its fruition in the aviation
Speaker 1: business at stake. But the that that's so here we
Speaker 1: are this is a bit of a waiting time and
Speaker 1: that means the stock may be volatile or it could
Speaker 1: be down. Who knows. Investors hate waiting, but it takes
Speaker 1: some time to do these tax free spinoffs. And also
Speaker 1: g is determined and this was part of the announcement
Speaker 1: to set these three areas off on their own at
Speaker 1: much lower levels of financial leverage. And that's really where
Speaker 1: the cash flow is so important. How much can the
Speaker 1: company generate to be to get invest great credit ratings
Speaker 1: for all three is going to be a real that's
Speaker 1: the serious effort ahead. So that's why they need time.
Speaker 1: There's three and then for power and renewables, so we
Speaker 1: are we await all that information. But but there's really
Speaker 1: positive signaling happening here. Otherwise, why would announce Why would
Speaker 1: they announce it now? They would just continue to work
Speaker 1: on it and not let us know. Larry kept emphasizing
Speaker 1: three publican trade investment grade companies. He's very proud of
Speaker 1: that that they will be all the investment grade from
Speaker 1: his point of view. At least talk about power, which
Speaker 1: has also struggled, had a lot of problems, some residual
Speaker 1: problems with some maintenance contracts and things. What about keeping
Speaker 1: traditional power together with renewables evens in a different way
Speaker 1: they let renewables go off on its own, maybe a
Speaker 1: bigger growth thing. Do you think that makes sense as
Speaker 1: an investor? Do you look at that and say, yeah,
Speaker 1: that's sensible. It is given the mix that g has.
Speaker 1: Renewables ault only, as we all assume, will be the
Speaker 1: business that sustains in the future, But it was never
Speaker 1: really are preferred of their businesses, and we're glad to
Speaker 1: see it set aside and spun off again. The aviation
Speaker 1: and the healthcare business of far superior to free cash
Speaker 1: flow generation. Aviation almost and generate almost none in the downturn,
Speaker 1: and now is coming back. We think there's a normalized
Speaker 1: four billion dollars of free cash just that business. And
Speaker 1: if you wrap the whole all of it up together
Speaker 1: and you think about it today, there might be normalized
Speaker 1: seven to eight billion dollars of free cash flow coming
Speaker 1: from the sum of the three parts. That's something that no,
Speaker 1: I don't think he's delivered for a very very long time.
Speaker 1: And so I come back to you as an investor
Speaker 1: because I say, Larry kept emphasizing that allows an investor
Speaker 1: to side which, if any of these lines they want
Speaker 1: to play in. Is it more valuable to be able
Speaker 1: to pick and choose among health and power and aviation
Speaker 1: than to have all umping together have to buy the
Speaker 1: whole package. Very definitely, We as investors prefer that, And
Speaker 1: then we think about them. You want the senior managements
Speaker 1: of each, and they're not. Larry's, according to our industrial allowance,
Speaker 1: is the best industrial CEO in the country. So there's
Speaker 1: a lot right there. Him running aviation without a distraction
Speaker 1: is fantastic. And then there are two very skilled individuals
Speaker 1: will be the CEOs of the power and of healthcare business.
Speaker 1: But think about it, they and there and their team
Speaker 1: can be compensated on their own efforts without the distractions
Speaker 1: and or delution of any other parts of the business.
Speaker 1: They can really focus. They'll have each have their own
Speaker 1: individual boards of directors who can focus on that business. So, yes,
Speaker 1: this is given. There weren't synergies. This makes perfect sense
Speaker 1: and we expect the stock price to ultimately reflect this
Speaker 1: and be a very significant return for our clients very quickly.
Speaker 1: With you and Sarah's this the end of conglomerates, You know,
Speaker 1: I hard to say that. I think they will continue.
Speaker 1: There are plenty of them in Japan, for example, and
Speaker 1: unless they're desperate like Toshiba, they don't. They don't break up.
Speaker 1: But but we're not patient as investors, and this is
Speaker 1: true globally, and when we see a company who's who,
Speaker 1: for example, if it's multiple being suppressed, we want them
Speaker 1: to fix it. Yeah. And by the way, so she
Speaker 1: was a little nudge, as I recall from some activists.
Speaker 1: Thank you so much there. It's always great having you
Speaker 1: with us. That's Sarah Header, she's CEO of Causeway Capital
Speaker 1: Management coming up. It was nice while a lasted, but
Speaker 1: it is the longest bull market in history about to
Speaker 1: come to an ugly end. We talked with famed investor
Speaker 1: Jeremy Grantham of g m O. When the decline comes,
Speaker 1: it will be yeah, perhaps bigger invested than anything previously
Speaker 1: in US history. This is Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg All Street Week with David Weston from
Speaker 1: Bloomberg Radio. Asset bubbles they're the one thing every investor
Speaker 1: wants to avoid, from the tulip frenzy of seventeenth century
Speaker 1: Netherlands to Wall Street in to the tech bubble of
Speaker 1: two thousand. The problem is knowing when you're in a
Speaker 1: bubble and when it will end. FED Chair J. Pale
Speaker 1: has recognized since last spring that asset values are stretched.
Speaker 1: You look at asset valuations, um you can say that
Speaker 1: by some measures, some asset valuations are elevated compared to history.
Speaker 1: I think that's clear, while others like Cathy would of
Speaker 1: ARC say we're just getting started that. In fact, the
Speaker 1: market has been broadening and getting healthier. There has been
Speaker 1: a rotation into value as a style as fears of
Speaker 1: inflation and interest rates increasing picked up, and therefore there's
Speaker 1: been a broadening out of this bull market. All right,
Speaker 1: we are in a very strong bull market. And then
Speaker 1: of Tesla, which some people say is a bubble in
Speaker 1: and of itself, skyrocketing to a market cap of over
Speaker 1: a trillion dollars or roughly twenty times what it was
Speaker 1: just four years ago. Well, others see Tesla and not
Speaker 1: as a bubble, but as the exception that proves the rule,
Speaker 1: changing the entire face of the automobile industry. That's the
Speaker 1: view of Star quarterback Tom Brady as he talked about
Speaker 1: Hurt's decision to include Tesla's in its fleet. Had a
Speaker 1: Tesla for about four years, and again, I think it's uh,
Speaker 1: it's kind of the direction that the world is heading.
Speaker 1: And I think for me, it was about being really
Speaker 1: conscious about the impact that we all have on on
Speaker 1: our planet, whether it is Tesla or tech or markets overall.
Speaker 1: No one has been more outspoken about the possibility of
Speaker 1: bubbles than Jeremy Grantham. He is co founder of GMO
Speaker 1: and really a student through the history of markets that
Speaker 1: are overheated, and we welcome him now to Wall Street Week.
Speaker 1: Mr Grantham, thank you so much for being with us.
Speaker 1: Let's talk about bubbles. But let's come in if we
Speaker 1: can through Tesla, because you've talked self Tesla in the past.
Speaker 1: I mean the last time I checked, I think the
Speaker 1: market cap is something like forty times what it was
Speaker 1: four years ago. Is Tesla bubble? Yes, that's pretty easy.
Speaker 1: And having said that, I'm the proud owner of a
Speaker 1: Model three and I do think they're magnificent vehicles, and
Speaker 1: I think Tesla has done extraordinarily well. But if you
Speaker 1: go back into the life cycle of the Fangs, Tesla
Speaker 1: is many multiples of the price to sales ratio that
Speaker 1: they were at this stage in their lives, and they
Speaker 1: have been brilliantly successful. So Tesla is a assuming it
Speaker 1: will be brilliantly successful, and be assuming it will be,
Speaker 1: in addition to that, multiples as successful as the other Fangs,
Speaker 1: and they are some of the great companies in the
Speaker 1: history of capitalism. Yeah, I'm always reluctant to say it
Speaker 1: might be different this time, but let me ask that question,
Speaker 1: could it be different this time when it comes to
Speaker 1: Tesla because it is at their us here's of a
Speaker 1: fundable technological transformation to electric vehicles and a real fight
Speaker 1: for the climate globally an important part of that. So
Speaker 1: is it possible that is different. There's a major transformation
Speaker 1: going on here that's bigger than what we've seen before.
Speaker 1: I think if you were defending the fangs, you would
Speaker 1: say in each case that they represented, like Amazon, a
Speaker 1: crucial fork in the road on retailing, if you were
Speaker 1: looking at Facebook and Netflix, all all of them represent
Speaker 1: these breakout, major changes, disruptive changes. And I'm very grateful
Speaker 1: for Tesla as a dedicated green that they have pioneered
Speaker 1: e vs. But now in phase two, every every great
Speaker 1: automobile company, all the Mercedes and and the BMW's and
Speaker 1: so on, and and the v ws are all gearing
Speaker 1: up to go electric. And we that that owes a
Speaker 1: lot to Tesla, But now in phase two they're going
Speaker 1: to have to have some serious competition and and to
Speaker 1: live up to the expectations of the price will be impossible. So,
Speaker 1: speaking more broadly, you've said that we're in something. I
Speaker 1: think you're called it an epic bubble. Right now, I
Speaker 1: think you've been very carefusy. I'm not going to predict
Speaker 1: when it ends. I'm just gonna say that it does end.
Speaker 1: What's going to bring it to an end. The thing
Speaker 1: about the Great Bubble Japan, no, no one knows after
Speaker 1: all these years, exactly why the bubble peaked. You can
Speaker 1: say with hindsight it peaked at the point, of course
Speaker 1: of maximum euphoria, so there was no hint of darkness
Speaker 1: at the end of the tunnel. Everything looked absolutely splendid
Speaker 1: as the market peaked, and of course, as long as
Speaker 1: it looks absolutely splendid, everybody is happy. The thing about
Speaker 1: the great bubbles is how intensely to people buying to
Speaker 1: the idea that it can never break, that prices will
Speaker 1: never decline. The housing bubble of two thousand and five
Speaker 1: two thousand and six in America was a brilliant bubble.
Speaker 1: In that description, you had people going out and buying
Speaker 1: a second house to rent because house prices never decline. Indeed,
Speaker 1: Ben Banankee said, US house prices have never declined. Of course,
Speaker 1: then they promptly did. But that is power for the course,
Speaker 1: for the Federal Reserve. Thank you so much. As Jeremy Grantham,
Speaker 1: he is co founder of GMO. Coming up, we wrap
Speaker 1: up the week as always with our special contributor Larry
Speaker 1: Summers of Harvard. This is Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio. This is Wall Street Week. I'm David Weston
Speaker 1: and we're joined once again by our very special contributor
Speaker 1: Larry Summers of Harvard. So, Larry, you had quite a week,
Speaker 1: if I can put it that way, because you've been
Speaker 1: warning on this program and otherwise again and again week
Speaker 1: after week of on inflation, and boy, this week we
Speaker 1: got at six point two on the headline number on CPI.
Speaker 1: Shocking and awful lot of people. I guess I start
Speaker 1: out with why did you get it right? And so
Speaker 1: many economists, including the Federal Reserve and for that man
Speaker 1: of the White House, why did they get it wrong? David?
Speaker 1: You know I did. It seemed to me apply a
Speaker 1: fairly basic economic model to the magnitude of the demand stimulus,
Speaker 1: and it seemed to me had predicted that we get
Speaker 1: certainly a significant rise in inflation. And then there were
Speaker 1: some other things that came along on the supply side
Speaker 1: that I didn't foresee, that others didn't foresee that made
Speaker 1: it even worse. Uh than I had expected. I think
Speaker 1: there are a couple of lessons from this episode. One
Speaker 1: is that it's always important to avoid excessive certainty. The
Speaker 1: policymakers and economics who go work go wrong the most
Speaker 1: are the ones who are most confident of a single model.
Speaker 1: You've always got to recognize that there are a wide
Speaker 1: range of possibilities. You know, on your show, I always
Speaker 1: said that I thought this was the risk and the
Speaker 1: most likely thing, but there was a one in three
Speaker 1: chance that this would all work out terrifically and that
Speaker 1: I'd be entirely wrong. I think more recognition of all
Speaker 1: the range of possibilities is a good discipline for policy makers.
Speaker 1: I also think and and economists. I also think that
Speaker 1: we have a problem, and it's a pretty broad problem
Speaker 1: with what I call motivated belief. People really wanted to
Speaker 1: engage for all sorts of reasons humanitarian, uh political, related
Speaker 1: to momentum at the beginning of an administration in a
Speaker 1: very very large stimulus program, and so they convinced them
Speaker 1: else that it wouldn't be inflationary because they really wanted
Speaker 1: it to uh not be inflationary. And I think that
Speaker 1: something we need to do is be much more attentive
Speaker 1: to the fact that the world is as it is,
Speaker 1: not always as we prefer it to be. We can
Speaker 1: want very much to be out of Afghanistan and believe
Speaker 1: deeply that it's best to be out of Afghanistan without
Speaker 1: that making us confident that it can take place in
Speaker 1: a efficient and uh complete UH way. We can want
Speaker 1: very badly for it to be true that improving the
Speaker 1: UH climate change problem can be accomplished without raising UH
Speaker 1: carbon prices in ways that middle class people UH don't want.
Speaker 1: But that doesn't mean that it's necessarily true, UH that
Speaker 1: that is the case. Yeah, we have a problem with inflation.
Speaker 1: I think everyone at this point agrees with you. We
Speaker 1: have a problem. But the question is how big a
Speaker 1: problem for how long? Because we had Paul Kirkman you've
Speaker 1: identified earlier as a friend of yours and a former classmate,
Speaker 1: I believe Hillary, and he came out this week in
Speaker 1: New York Times and said, you know, this is not
Speaker 1: like the seventies. It's like when people came back from
Speaker 1: the war. There was a big uptaking demand. Supply had
Speaker 1: to catch up, and the worst thing we could do
Speaker 1: would be to tighten because back then they did tighten
Speaker 1: and led to a recession. What do you say to
Speaker 1: that analysis. Paul's examples have been have sort of been
Speaker 1: bouncing around a bit. I think the most obvious example
Speaker 1: continues to be uh the Vietnam War. The other obvious
Speaker 1: example is the nineteen seventies, where people were saying temporary
Speaker 1: due to specific factors all the time. I guess I
Speaker 1: don't really uh hear uh the music on uh Paul's thing. Uh.
Speaker 1: We had price controls, major price controls, and we took
Speaker 1: them off. You'd expect when you took off a major
Speaker 1: price control, a big transitory increase as prices returned to
Speaker 1: their level no price controls. Uh. This time, we had
Speaker 1: a extraordinary demobilization of vast amounts of production of tanks
Speaker 1: and other things that were uh taken that we're taken off. Uh.
Speaker 1: That didn't happen either, you know. So far, the um
Speaker 1: the lesson has been uh. That used to be uh
Speaker 1: that Neil Ferguson and others drew that fears that the
Speaker 1: economy would go into depression, We're wrong because those kinds
Speaker 1: of fears existed during the Second World War. I just
Speaker 1: think it was a different, uh, different time and UH
Speaker 1: the Phillips curve had not yet been invented. It says
Speaker 1: something about the psychology of that moment that if you
Speaker 1: looked in the first edition of the Samuelson textbook, it
Speaker 1: didn't have a graph of the inflation rate. It had
Speaker 1: a graph of the price level because people fought off.
Speaker 1: Prices is going up and down rather than rates of
Speaker 1: inflation going UH up and down. Larry from monetary policy,
Speaker 1: it's a restructuring corporations. We've had a space this week
Speaker 1: have large corporations breaking themselves up, first General Electric going
Speaker 1: into three parts. Then at the end of the week
Speaker 1: we have Johnson and Johnson bringing into two parts, and
Speaker 1: over UH in Asia we have Toshiba breaking into a
Speaker 1: couple of major component parts as well. Is there something
Speaker 1: more fundamental underlying this? What is driving this increasing emphasis
Speaker 1: on focus rather than synergy? David? I think this is
Speaker 1: a broadly positive thing. I think in most cases these
Speaker 1: splits probably have come later than UH would have been ideal.
Speaker 1: And I think those who don't like markets and don't
Speaker 1: like activists should be given a little pause by this
Speaker 1: kind of UH development. I think it's two things UH.
Speaker 1: The first is that in an increasingly complicated world. It's
Speaker 1: the essence of strategy to compensate, to build on strength
Speaker 1: rather than to compensate for weakness. And all of us
Speaker 1: are better off specializing a bit on what our distinctive
Speaker 1: talent is or what it is that is our strength.
Speaker 1: I think that's true for companies as well. Second, investors,
Speaker 1: through their investments, express beliefs. Some people believe in prescription
Speaker 1: drugs and biotech. Others believe that consumer products are going
Speaker 1: to be uh the best way forward. Some people believe
Speaker 1: that the aviation business is good. Other people believe the
Speaker 1: health care business is going to be good. Not many
Speaker 1: people believe in particular sandwiches that were put together decades ago.
Speaker 1: And so by splitting companies up, people give investors an
Speaker 1: opportunity to express the kinds of beliefs that investors are
Speaker 1: likely to have, rather than to bat on somewhat oddly
Speaker 1: and historically constructed sandwiches. That's what I think this is about,
Speaker 1: and I think for the most part it's a good thing.
Speaker 1: Thank you so very much. That's our special Wall Street
Speaker 1: we contributor. It's Larry Summers of Harvard. Finally, one more thought.
Speaker 1: The last of the conglomerates There was a time not
Speaker 1: so terribly long ago when conglomerates were all the rage.
Speaker 1: Think Harold Jannine of I. T. T. Goulf and Western
Speaker 1: Lytton industries, many of which grew up and then died away.
Speaker 1: But then there was Ge, the biggest of them all.
Speaker 1: It lasted the longest when we had Jack Welch take
Speaker 1: what was a light bulb company founded by Thomas Alva
Speaker 1: Edison in the nineteenth century and expanded, expanded into television
Speaker 1: and motion pictures, and most of all, into finance. He
Speaker 1: took a company that had revenues about twenty six billion
Speaker 1: dollars a year to a hundred and thirty billion dollars
Speaker 1: a year. The market cap went up over four hundred
Speaker 1: and fifty billion dollars. It was the largest in the
Speaker 1: world at the time. But trees don't grow to the sky,
Speaker 1: and neither did Ge. Jack Walsh moved on. We had
Speaker 1: Jeff Emil take his place, and during his tenure we
Speaker 1: took what had been the gold standard for corporate America
Speaker 1: and turned it into something of a turnaround. And in
Speaker 1: the end even Jeff M. L couldn't quite explain why
Speaker 1: that had happened. We had through multiple receptions. We had
Speaker 1: really generated record earnings and cash flow. We had good businesses,
Speaker 1: good people, good initiatives, but at the end of the
Speaker 1: day the stock price lagged. So three and a hap
Speaker 1: years ago, the g board turned to Larry Colp, the
Speaker 1: former CEO of Dan and Herd, to sort things out.
Speaker 1: Larry came in and pretty much throughout the playbook of
Speaker 1: Jack Welch, he pruned. He focused on cash flow and
Speaker 1: debt reduction and just playing focused overall. It all came
Speaker 1: to a head this week when Larry Colp announced that
Speaker 1: he would break up the company to three parts, healthcare,
Speaker 1: power and aviation. These businesses will be more focused, they'll
Speaker 1: be a higher, greater level of accountability. We should have
Speaker 1: sharper capital allocation, more strategic flexibility, and frankly, I think
Speaker 1: he's gonna be good for the team as well. So
Speaker 1: is this the end of conglomerates. Nicholas Hayman of William
Speaker 1: Blair echoed Larry Colp, who said, it really is more
Speaker 1: important to focus today rather than go for those synergies
Speaker 1: across different businesses. It's much more important to have uh
Speaker 1: really percent focus on one end market instead of customers
Speaker 1: because things are changing so structurally and so rapidly that
Speaker 1: you really can't be burdened by having to wait for
Speaker 1: another part of the company to come around. Well, Jerry
Speaker 1: Davis of Michigan Ross School thinks that there may still
Speaker 1: be room for conglomerates when it comes to tech. Anybody
Speaker 1: think of Amazon. I think that there is a future
Speaker 1: for conglomerates, but it's in the I T sector. If
Speaker 1: you look at big tech companies like Alphabet, UH, like Facebook,
Speaker 1: they really are conglomerates in some sense. They are hearkening
Speaker 1: back to the conglomerate that g E was at its birth.
Speaker 1: But if you listen to Larry Culp himself, it's not
Speaker 1: about the form. It's not whether it's a conglomerate or
Speaker 1: not a conglomerate. In the end, it's about getting the
Speaker 1: job done. It's ultimately about performance, right I've I've been
Speaker 1: in companies where we did a number of things under
Speaker 1: one roof, so I've seen it from a number of
Speaker 1: different angles. But ultimately it's all about looking forward and
Speaker 1: being in a position to perform. And I think for
Speaker 1: Ge today on three separate bottoms will be at our best.
Speaker 1: That does it. For this episode of Wall Street week,
Speaker 1: I'm David Weston. This is Bloomberg. See you next week,
Speaker 1: m hm.