Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: The global push into infrastructure, breaking the IPO logjam in text.
Speaker 1: The financial stories that shape.
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Speaker 3: Turmoil Through the eyes of the most influential voices.
Speaker 2: Ten Rogueff Economists of Harvard, former FDIC had Shila Bert
Speaker 2: ge CEO, Larry Coulp, San Francisco FED President, Mary Daily Bloomberg.
Speaker 3: Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: A nation deals with the aftermath of an assassination attempt.
Speaker 2: Republicans gather in Milwaukee to nominate Donald Trump for what
Speaker 2: increasingly looks like may be his second term, and investors
Speaker 2: react to both. This is Bloomberg Wall Street Week. I'm
Speaker 2: David Weston. This week, Laura Tyson of Berkeley on what
Speaker 2: the coming Ai Revolution could mean for the US economy.
Speaker 4: All of the numbers say significant productivity growth.
Speaker 2: Dan Tarullo of Harvard on what's ahead in banking regula.
Speaker 5: There will be a kind of hold on regulation and
Speaker 5: it would await the Trump appointees.
Speaker 2: And Steve Rattner of Will and Advisors on investing in
Speaker 2: the Trump trade.
Speaker 6: Is probability of success is now too close to seventy percent,
Speaker 6: and that has made the market wake up and say, okay,
Speaker 6: so what are we looking at.
Speaker 2: We start with the banking industry and what effect Washington
Speaker 2: has on its future, with the Chair and CEO of
Speaker 2: Bank of America, Brian Winhan. Great to have you back, Brian.
Speaker 2: Let me ask you. You talk to a lot of
Speaker 2: clients across the country of all sorts, what do they
Speaker 2: tell you about Washington and how Washington may be affecting
Speaker 2: their business for good or not so much for good.
Speaker 7: Look, at the end of the day, banks reflect the economy.
Speaker 7: So it's our customers on the commercial side doing something,
Speaker 7: our customers and consumer side doing something, our institutional.
Speaker 1: Customers doing so.
Speaker 7: Our job is to transmit economy back and forth for
Speaker 7: our clients, and we are product of the success in them.
Speaker 7: When you talk to those clients today, they're saying, hey,
Speaker 7: they want they want to win. They are big clients
Speaker 7: that want to win on a global stage of little clients.
Speaker 7: I want to win on a local stage, and they
Speaker 7: want to win. And what they feel is as the
Speaker 7: burdens of the regulation and rules impinge upon that they
Speaker 7: get feedback and the feedback I get from this, they
Speaker 7: feel the balances need to be rebalanced. That's what they
Speaker 7: tell us. Meanwhile, they're still growing their business, they're still investing.
Speaker 7: So you got to a little careful what they say
Speaker 7: they want versus what they're doing. But the roality is
Speaker 7: is they're saying, hey, get we got to swing the
Speaker 7: penallum back a little bit because in the end of
Speaker 7: the day, they are what America thrives on. We have
Speaker 7: one hundred and a million people work in this country.
Speaker 7: The dominant part work for private enterprises. Our success, the
Speaker 7: ability to fund every governmental program, the defense, everything comes
Speaker 7: from the tax is paid by corporations and individuals who
Speaker 7: work for companies, honestly, so that's where the money comes from.
Speaker 7: So if we're going to have a successful country, and
Speaker 7: based on where we are in America in the world
Speaker 7: right now, we can dominate if we let the capital
Speaker 7: system run right, run with right guardrails run.
Speaker 2: How much of Brian is actual the impingement of regulations
Speaker 2: supposed to talk about it because I'll pick on some
Speaker 2: one right now, and I trust something I know about.
Speaker 1: I used to practice that trust law.
Speaker 2: There's a lot of talk about a trust enforcement from
Speaker 2: the current administration, when if we actually look what happened,
Speaker 2: they didn't get a lot of that through the courts.
Speaker 1: How much it was just the perception.
Speaker 2: We're talking about regulation as opposed to actual regulation.
Speaker 7: Well, in that case, if you think about what happened
Speaker 7: with deals over the last couple of years, any deal
Speaker 7: of size of US announced was purported to be challenged
Speaker 7: in a lot of more. And so therefore, if you're
Speaker 7: sitting in a boardroom saying I'm going to expose my
Speaker 7: company as seller to a transaction a public company, and
Speaker 7: I'm going to stabilize it for the period of time
Speaker 7: it takes to get it done, and I feel that
Speaker 7: it's going to have to go through multiple reviews and
Speaker 7: and ultimately a challenge in court, you know what, We'll wait.
Speaker 7: And that just slowed down deals because of all the
Speaker 7: businesses we have in the company that the thing is
Speaker 7: still there's great pipeline, but not coming through the system
Speaker 7: is still the deal, the m and a deal flow.
Speaker 7: We have a strong pipeline, it's ready to go, but
Speaker 7: the feeling has to be and there's no in our industry,
Speaker 7: we can't make an acquisition by law, we can't. But
Speaker 7: the ability to get bank deals done is something you
Speaker 7: here talked about a lot. Our colleagues want to emerge
Speaker 7: and get better so they can compete with us and
Speaker 7: in our the biggest banks and competitors compete on the
Speaker 7: worldwide stage and they're struggling because they can't get the
Speaker 7: deals done.
Speaker 1: It takes so long. So that's the decision. It's not
Speaker 1: necessarily the deal won't get done.
Speaker 7: Is if it takes a year a year and a
Speaker 7: half to get it through, that is just a very
Speaker 7: destabilizing for the cell side of a company, and on
Speaker 7: a buy side, they just want to grow their business
Speaker 7: and be heroken take the competition, and not everybody has
Speaker 7: a staying power to wait two years to say I'm
Speaker 7: going to put on hold everything I do in a
Speaker 7: unit because I'm going to buy a unit to make
Speaker 7: it grow faster and make it more successful and win
Speaker 7: and make my company the best of the world.
Speaker 1: And if it takes me, you know, two years to
Speaker 1: do that, that means I got to slow down the organic.
Speaker 7: Effort because I think it'll be waste of money if
Speaker 7: this comes in. If that took six months, you know,
Speaker 7: then that changes the calculus. It's more about deal flow
Speaker 7: and capabilities as opposed to what you might see actually
Speaker 7: get stopped or not go or inquiries.
Speaker 1: It's just a chill when it comes to regulation. This
Speaker 1: report had quite a term. In this last term.
Speaker 2: There are four different decisions that basically said we're not
Speaker 2: going to defer to the regulatory agencies nearly as much,
Speaker 2: so supposedly taking on the so called administrative state. At
Speaker 2: the same time, that probably means a lot more litigation.
Speaker 2: It's good for lawyers if you're a lawyer, and I
Speaker 2: have nothing against lawyers making money, that's okay. At the
Speaker 2: same time, do you think that's ultimately good for business
Speaker 2: if the courts get more involved in it and take
Speaker 2: some away from the regultary agencies.
Speaker 7: I know you and I both reform lawyers, and so
Speaker 7: you know, at the end of the day, we are
Speaker 7: for good, clear, fair regulation. That's what our industry, That's
Speaker 7: what I'm for, and that's what our industry is for.
Speaker 7: Give us a set of rules, let us go after.
Speaker 7: If you keep changing the rules back and forth based
Speaker 7: on political movements, based on swings, based on personalities, based
Speaker 7: on studies we may think are relevant not relevant, industry
Speaker 7: that just goes on. So something like Basel three has
Speaker 7: been going on for you know, years, and you're saying,
Speaker 7: please just get it done so we can get on
Speaker 7: with life. Figure out adjust the business model, but don't
Speaker 7: be overburdening in it. So I think that's what you're
Speaker 7: feeling with some of this, and I think the court
Speaker 7: system is saying, wait a second. Whether it was a
Speaker 7: you know, the Chevron doctor and all these, whether there
Speaker 7: was a statement that you know, look, we need regulatory
Speaker 7: agents to be able to go.
Speaker 1: And do what they're doing.
Speaker 7: Wait, maybe that's swung too far. There's too much activism
Speaker 7: in the in the regulatory side as opposed to the
Speaker 7: court side. And if you go back and read the
Speaker 7: great civil rights cases, there was extreme activism to right
Speaker 7: the wrongs of the past in the court side.
Speaker 2: Brian, it's always such a great treat to heavy on
Speaker 2: wills ruburgh, Thank you so much. That's Brian moynahan, and
Speaker 2: he's chair and CEO of Bank of America. Bank regulators
Speaker 2: went back to the drawing board on those proposed regulations
Speaker 2: to meet the Basel three requirements, and Terry Powell says
Speaker 2: that the new proposals we're going to see the later
Speaker 2: this year are likely to look somewhat different from what
Speaker 2: we saw the first time around. To take us through
Speaker 2: what we should expect, we welcome back now former Federal
Speaker 2: Reserve Board Governor Dan Trulo of Harvard. So, Dan, thank
Speaker 2: you so much for being back with us. There's a
Speaker 2: lot of speculations they're going to be cutting back.
Speaker 1: In these regulations.
Speaker 2: Let me ask basic question there to comply with Basil three,
Speaker 2: how much leeway is there to cut back and still
Speaker 2: be consistent with the commitments.
Speaker 5: So there's a fair amount of leeway, David, particularly in
Speaker 5: the proposals that the three agencies made last year. On
Speaker 5: the credit side, they went well beyond what Basil three
Speaker 5: had agreed to. There's a little bit less room in
Speaker 5: the other areas, that is operational risk and market risk.
Speaker 5: And actually I would not be surprised if on operational
Speaker 5: risk the agencies depart some from the Basle agreement, because,
Speaker 5: to be perfectly honest, the Basil Agreement on operational risk
Speaker 5: was not especially well done.
Speaker 2: So what do you expect, especially what we'll see when
Speaker 2: the next route of proposal go on. Will they be
Speaker 2: cutting back in the reserve requirements?
Speaker 1: Oh?
Speaker 4: Sure, no question about it.
Speaker 5: I think Chair Powell has made no secret of the
Speaker 5: fact that there'll be substantial changes, which means a significant
Speaker 5: reduction in the required increase in capital. But I do
Speaker 5: expect that the amount of increase will vary quite a
Speaker 5: bit depending on the business.
Speaker 1: Model of the bank.
Speaker 5: I think you can expect to see the banks with
Speaker 5: most market risk it is trading activity, capital markets and
Speaker 5: the like, I think you can expect that their requirements
Speaker 5: will go up more than banks that are straight traditional
Speaker 5: lenders where most of it's traditional loans and deposit taking.
Speaker 5: On the operational risk side, I still fear that we're
Speaker 5: going to have a little bit of a perverse outcome
Speaker 5: where some of the banks that have de risked get
Speaker 5: hit a little bit by the operational risk charges on
Speaker 5: things like wealth management. So I guess I would say,
Speaker 5: if you're a bank with a lot of trading and
Speaker 5: a fair degree of non credit operational risk, you're probably
Speaker 5: going to see your our capital requirements go up more
Speaker 5: than anybody else's. If you're a traditional regional bank, I
Speaker 5: suspect the increase will be very very modest.
Speaker 2: If Donald Trump is in fact elected, how might that
Speaker 2: change the calculus?
Speaker 5: Well, in the first place, David, given the intent to repropose,
Speaker 5: it's very unlikely that a final rule could be done
Speaker 5: before the end of the year, much less before election day.
Speaker 5: And so if past pattern patterns hold, there will be
Speaker 5: a kind of hold on regulation, and it would await
Speaker 5: the Trump appointees, certainly to the FDIIC and the OCC
Speaker 5: to make their own decisions. So that probably means that
Speaker 5: at the very least there'd be a further delay and
Speaker 5: you could quite possibly have additional changes.
Speaker 2: This week we learned who the nominee for Vice President
Speaker 2: of publican side will be as well. Jd Vance, the
Speaker 2: Senator from Ohio, And normally I would say, well, it's
Speaker 2: a vice president, let's not worry about it. But he,
Speaker 2: as I understand it from you, has had some things
Speaker 2: to say about banks.
Speaker 5: Oh sure, he's on the Senate Banking Committee and his
Speaker 5: you know, you can't you wouldn't. You would make a
Speaker 5: mistake if you try to just slot him as you know,
Speaker 5: bank or industry friendly or antagonistic. I think he has
Speaker 5: his own set of views. He's said some things and
Speaker 5: assigned onto some bills that are kind.
Speaker 4: Of pro regulatory.
Speaker 5: He eventd some skepticism about the growth of very large banks.
Speaker 5: On the other hand, obviously in a lot of areas
Speaker 5: he thinks there's been too much regulation, But I would
Speaker 5: say on banking there's at least a chance that that's
Speaker 5: one of the areas because of his service on the
Speaker 5: Banking Committee, in which he takes a real interest if
Speaker 5: they if the Trump Banks ticket should be elected.
Speaker 2: And finally, Dan, let me return to something you and
Speaker 2: I have talked about before, which is the so called
Speaker 2: non banks out there and the difference in the banks
Speaker 2: and the growth of the non banks and what they're doing.
Speaker 2: One of the things you've pointed out is perhaps a
Speaker 2: change is they're becoming frontemies, if I can put it
Speaker 2: that way. They're increasingly cooperating one with the other. And
Speaker 2: I wonder what rapplications that might have for the system,
Speaker 2: particularly not understanding the way you do, whether in fact
Speaker 2: systemic risks could come in through the back door.
Speaker 5: Yeah, I'm not sure I understand it either, David, which
Speaker 5: probably point I understand the scope of it, and I
Speaker 5: think that points to maybe the biggest issue right now,
Speaker 5: which is one of having the data, the information to
Speaker 5: make an evaluation on this. You do the agencies both
Speaker 5: domestically and internationally. Know the degree to which you know
Speaker 5: a hedge fund or a private credit fund has credit relationships,
Speaker 5: contingent funding relationships with banks, the degree to which asset
Speaker 5: funds may take some of the synthetic risk that's being
Speaker 5: transferred by the banks, the derivatives, counterparty real relationships. I
Speaker 5: don't think we've got the kind of information and the
Speaker 5: form that's needed in order to make an assessment there.
Speaker 5: And you know, one doesn't want to be alarmist, but
Speaker 5: obviously the trend towards more interaction between non banks and
Speaker 5: banks has continued, and you know, the Financial Stability Oversight
Speaker 5: Committee and the US the Financial Stability Board internationally, we're
Speaker 5: just going to have to do more to try to
Speaker 5: get their arms around exactly where the risks may arise.
Speaker 2: And it's always so helpful to have you with us.
Speaker 2: Thank you so much for your time. That is Professor
Speaker 2: Dan Tarulo of Harvard. Coming up at the end of
Speaker 2: a week, the odds of Donald Trump being re elected rise.
Speaker 2: We talk with investor Stephen Rattner Wilder Advisors about what
Speaker 2: it could mean for his portfolio. That's an Next Time
Speaker 2: Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from Bloomberg.
Speaker 2: You this is Wall Street Week.
Speaker 1: I'm David Weston.
Speaker 2: The attempted assassination of former President Trump and the tragic
Speaker 2: shooting of innocent bystanders shook a nation already in the
Speaker 2: throes of a tumultuous presidential campaign and added to the
Speaker 2: momentum that mister Trump was already experiencing in the race
Speaker 2: to take us through the market reaction what a second
Speaker 2: term of a Trump presidency could mean for investors. Welcome now,
Speaker 2: Stephen Ratner, chairman of Willed Advisors, which invests the personal
Speaker 2: and philanthropic assets of Michael Bloomberg, our founder and majority shareholder.
Speaker 2: I always a treat to have you here, Steve. Thank
Speaker 2: you for going back.
Speaker 1: Thanks for having me, David.
Speaker 2: So, one of the themes of this week is, so
Speaker 2: this so called Trump trade, given what's going on, apparently
Speaker 2: we don't know about what's going on. Apparently in the
Speaker 2: campaign it seems like at least there's a substantial possibility
Speaker 2: that Donald Trump will be our next president. What is
Speaker 2: in the Trump trade? What are people reacting to in
Speaker 2: the market.
Speaker 1: Well, well, first of.
Speaker 6: All, there's a number of different things going on in
Speaker 6: the market at the moment. There are a lot of
Speaker 6: cross currents and so forth. But if we want to
Speaker 6: just focus on the Trump trade, his probability of success
Speaker 6: is now too close to seventy percent, and that has
Speaker 6: made the market wake up and say, okay, so what
Speaker 6: are we looking at?
Speaker 1: And so it really.
Speaker 6: Spans a huge gamut of things, everything from gun manufacturers,
Speaker 6: for profit education which thinks they're going to benefit if
Speaker 6: he stops us through the loan forgiveness, to the GSS
Speaker 6: Fanny and Freddy because maybe he won't, he won't take
Speaker 6: the dividends sweep anymore, energy stocks, manufacturing companies that might
Speaker 6: benefit from the tariffs, and so investors are rushing around
Speaker 6: looking for all the different places they think they would
Speaker 6: benefit from another Trump presidency.
Speaker 2: One of the things I think we've seen is in
Speaker 2: the bond curve, basically for treasuries, because there's a sense
Speaker 2: that actually there's going to be higher rates out there
Speaker 2: in the long end of the curve, which changes a
Speaker 2: fair number of things. What is the possibility of Trump
Speaker 2: presidency with these economic policies leading to more inflation, therefore
Speaker 2: the Fed babe having to raise rates again.
Speaker 6: Well, the bond trade's a little complicated because we did
Speaker 6: have that good in the sense of being a slightly
Speaker 6: soft jobs number, and the predicted number of FED rate
Speaker 6: cuts is now up to something over too, and therefore
Speaker 6: the ten years started to come down. And now you
Speaker 6: have the Trump piece layering on that, pushing it up
Speaker 6: a little bit, but not hugely. But I don't think
Speaker 6: there's a lot of doubt that his fiscal policies, as
Speaker 6: express would be, would be inflationary and therefore biased toward
Speaker 6: higher interest rates.
Speaker 2: So we talk about that tax Cutting Jobs Act. So
Speaker 2: we had Scott bessin on last week and he said, oh, no,
Speaker 2: don't worry about it.
Speaker 1: We're gonna save a lot of money.
Speaker 2: We're gonna save a trillion dollars a year from the
Speaker 2: basically undoing the Inflation Reduction Act. We're gonna save another
Speaker 2: trillion by redoing Medicare. And now I will note that
Speaker 2: when President Trump had came in the first time, he
Speaker 2: said they were going to get rid of Obamacare. That
Speaker 2: would save us low money. But one of the prospects
Speaker 2: that actually would cut back into of the spending under
Speaker 2: the Bid administration.
Speaker 6: Well, remember that we didn't get rid of Obamacare because
Speaker 6: John McCain and because while he had technically had control
Speaker 6: of both Houses of Congress, he lost a Republican that
Speaker 6: costs him that. So a lot of this is going
Speaker 6: to depend on what happens to Congress. If both Houses
Speaker 6: of Congress scoe Republican, then he's obviously got much more
Speaker 6: scope to do a bunch of stuff.
Speaker 1: Whether he really would do it or not, who knows.
Speaker 6: The record of the first Trump presidency was not good
Speaker 6: from a fiscal point of view. The deficit went up
Speaker 6: by hundreds of billions of dollars before COVID ever arrived,
Speaker 6: in large part because the TCJA never came close to
Speaker 6: paying for itself. It was close to two trillion dollar
Speaker 6: costs with no offsets in spending and no real revenues
Speaker 6: associated with it.
Speaker 2: So that's all on the text. The revenue side is
Speaker 2: that were What about tariffs? The one thing in Prisident
Speaker 2: Trouble has always seemed to enjoy is been imposing tariffs,
Speaker 2: particularly on China, but not only on China. Frankly, he
Speaker 2: likes tariffs. That does, of course increase the cost to
Speaker 2: the consumers, and therefore I guess inflation.
Speaker 6: Sure, And by the way, his last set of tariffs,
Speaker 6: which were far less robust than what he's talking about now.
Speaker 6: Hra he'sed something like thirty billion of revenue. I thought
Speaker 6: you were going to ask about revenue, very little contribution
Speaker 6: to revenue.
Speaker 1: The evidence is overwhelming.
Speaker 6: Many economists have studied this that essentially one hundred percent
Speaker 6: ninety five, one hundred and five percent something in that
Speaker 6: ballpark was paid for by consumers. None of it was
Speaker 6: paid for by child Maybe a little of it came
Speaker 6: out of the companies in terms of profit margins, but
Speaker 6: essentially it was paid for by consumers and was therefore inflationary.
Speaker 6: Now they were very limited tariffs. Start talking about ten
Speaker 6: percent across the board on all imports, you're in a
Speaker 6: different ballgame when we.
Speaker 2: Talk about inflation. One of the things we naturally think
Speaker 2: about is the feder Reserve.
Speaker 1: It's their job. Actually, it has price stability. Right.
Speaker 2: There's a lot of speculation, not necessarily coming from Donald
Speaker 2: Trump himself, it's from people around him like Peter Navarro,
Speaker 2: who's talked about firing J.
Speaker 1: Powell.
Speaker 2: But what are the prospects of really undermining to some
Speaker 2: extent the independence of the Fed.
Speaker 6: That's to me incredibly scary. I think the independence of
Speaker 6: the FED. They don't get everything right. They got inflation wrong.
Speaker 6: Will stipulate to that they got some stuff wrong in
Speaker 6: twenty nineteen. They may have gotten some stuff wrong coming
Speaker 6: out of the GFC, although they did a great job
Speaker 6: generally in the GFC. But let's just stipulate the independence
Speaker 6: of the FED is critical and central to our economic success.
Speaker 6: There's no if sands or butts about that. You would
Speaker 6: not want the Congress or the White House in charge
Speaker 6: of monetary policy. And so any step to undermine the
Speaker 6: FED by any president of either party should be something
Speaker 6: that we all push back as strongly as possible.
Speaker 2: So overall, why do we find so many investors who
Speaker 2: are backing President Trump.
Speaker 6: They have a variety of reasons that I understand their reasons.
Speaker 6: For example, one of the biggest reasons you hear is
Speaker 6: the regulatory stuff. There's no question, and now, in fairness
Speaker 6: to the President, although he appointed these people, they are
Speaker 6: independent regulatory agencies. But nonetheless a lot of what the
Speaker 6: FTC has been trying to do, a lot of what
Speaker 6: the SEC has been trying to do, even the FCC,
Speaker 6: the FDA really has upset business and they simply feel
Speaker 6: that this president is too progressive, and they feel that
Speaker 6: his vice president, should she become president, he's even more progressive,
Speaker 6: and they don't like any of that. And there are
Speaker 6: other reasons, but that's a good example, maybe the main
Speaker 6: example of what they just don't think this is a
Speaker 6: pro business administration. I would say, even though I do
Speaker 6: support the president, attacking businessmen with some regularity is really
Speaker 6: not the way to get their support.
Speaker 1: I don't think. That's not what my mother taught me.
Speaker 2: See, let's talk about the rest of the world as
Speaker 2: it were, and particularly those big tech companies. They have
Speaker 2: been getting so much money with huge I would say,
Speaker 2: huge capital investment about AI.
Speaker 1: Yeah, look, those companies have had a great run.
Speaker 6: Obviously in Vidia we all know about, but Microsoft, Google
Speaker 6: and so forth, Amazon. And the question really is whether
Speaker 6: the market is valuing this situation appropriately. You're talking about
Speaker 6: massive capex by some estimates anywhere from six hundred billion
Speaker 6: to one point two trillion dollars per year on this
Speaker 6: kind of stuff, And the question the market is starting
Speaker 6: to ask itself is are the revenues going to be
Speaker 6: there to offset it? And that cap x is not
Speaker 6: just a cash expense, but it runs through the income
Speaker 6: statement and depreciation and so forth, and so it affects
Speaker 6: their margins. It affects their profits, and you have to
Speaker 6: earn You have to create a huge amount of revenue
Speaker 6: to justify the magnitude of the capex.
Speaker 1: That is going on right as we speak.
Speaker 2: So see back in the olden days, a capsiities for general,
Speaker 2: when I was running budgets, if I had a capital expense,
Speaker 2: I had to show what the projections were about when
Speaker 2: I would save that money back just and we us
Speaker 2: had a rule about a couple of years, maybe two
Speaker 2: and a half years, we had to earn it back.
Speaker 2: Is anybody taking pencil and paper, if they have it anymore,
Speaker 2: and doing that with AI. Is anybody actually thinking about
Speaker 2: where do we really see this in the real economy
Speaker 2: in terms of increased productivity?
Speaker 6: Well, that's exactly what's happening now to some degree, and
Speaker 6: why you're starting to see a bit of a rotation.
Speaker 6: It might be just a mean reversion after a big run.
Speaker 6: It might be people doing what you talk about, but
Speaker 6: people are doing it. And by the way, this is
Speaker 6: a very debated subject. There's not a preponderance of view
Speaker 6: on one side or the other. And I don't even
Speaker 6: frankly have conviction myself. I think you could argue either way,
Speaker 6: although I think the numbers are pretty daunting. But what
Speaker 6: you're starting to see the analysts do is exactly what
Speaker 6: you said. They're starting to pencil into their projections. This
Speaker 6: is the level of capex, This is a level of
Speaker 6: depreciation we're going to be taking for it. This is
Speaker 6: the amount of revenue we have to generate to justify
Speaker 6: that and achieve the kind of paybacks you're talking about.
Speaker 6: And you say to yourself, is this really plausible? Are
Speaker 6: we really going to you know, is Microsoft really going
Speaker 6: to be able to generate thirty billion dollars of revenue
Speaker 6: from AI I think that's actually a roughly right number
Speaker 6: in the next over the two years from now. And
Speaker 6: given that at the moment this stuff is essentially free.
Speaker 6: You might pay ten dollars a month for this or that,
Speaker 6: it's a real open question whether those kind of revenues
Speaker 6: are there.
Speaker 1: Let me just make one other point, which.
Speaker 6: Is that if you think back on the success of Microsoft, Google, Facebook,
Speaker 6: they were essentially software companies. I mean, there were certainly
Speaker 6: some capex involved in that, but nothing on the scale
Speaker 6: of what we're talking about here, and so we're in
Speaker 6: a whole different world, a whole different ballgame for these companies.
Speaker 6: And by the way, it's also a competitive ballgame. Open
Speaker 6: AI is not going to own all of AI. Microsoft
Speaker 6: is not going to own all of AI. It's going
Speaker 6: to be they all have to protect their market share,
Speaker 6: and it's going to be a pretty competitive world.
Speaker 2: When you're looking at this phenomenon, you're looking at the
Speaker 2: videos of this world, and Microsoft and others just take
Speaker 2: off like.
Speaker 1: A rocket ship.
Speaker 2: It must be difficult to stay out of it.
Speaker 6: Yes, this has been a challenge for active investors this
Speaker 6: year because these big companies, Microsoft is something like a
Speaker 6: seven point three or seven point five percent waiting in
Speaker 6: the SMP. Very few money managers have a seven percent
Speaker 6: position in anything, and so it it's when you know,
Speaker 6: you know the numbers, when you disaggregate the magnificent seven
Speaker 6: from the rest of the market, what the differences are,
Speaker 6: And so it's been very tough for active management. That's
Speaker 6: point one point two is, Look, this is no different
Speaker 6: than any other investment. You do your best work, you
Speaker 6: figure it out as best you can, and you make
Speaker 6: a bet and sometimes you're right, sometimes you're wrong. I
Speaker 6: would say we tend to be pretty conservative in our
Speaker 6: view of this stuff, and a little bit of the
Speaker 6: view that we've seen some of these movies before and
Speaker 6: we want to be a little careful about piling in,
Speaker 6: especially late in the game.
Speaker 2: Is there a risk that the enormous success of that
Speaker 2: Magnificent seven what are you going to call them, is
Speaker 2: masking other weakness in stock markets?
Speaker 1: As you say, you look at the rest of.
Speaker 2: The market, it has not done all that well, and
Speaker 2: yet we tend to gloss over that and say.
Speaker 6: A market and the aggregate boys good, great, it's totally
Speaker 6: masking it. If you take the Magnificent seven out and
Speaker 6: you start looking at some sectors, especially things like manufacturing,
Speaker 6: industrial stuff like that. Markets actually had a pretty poor
Speaker 6: run over the last certainly this year and even I
Speaker 6: think last year. And so yes, I think we're starting
Speaker 6: to see when we listen to companies, we listen to
Speaker 6: our managers, we are starting to see signs of softness
Speaker 6: in the economy on the consumer side, on the manufacturing side,
Speaker 6: and so forth. I don't think the economy is falling
Speaker 6: out of bed, but we definitely are in the later
Speaker 6: stages of an expansion.
Speaker 1: Let me ask you.
Speaker 2: About an ancillary part to the AI. If we talk
Speaker 2: about Nvidia and much of things, but the power required
Speaker 2: to drive this general AI is enormous. I mean, I'm
Speaker 2: hearing stories now. There's just really in a lot of
Speaker 2: story and that's really driving a lot of demand for power.
Speaker 2: Is that an investment opportunity?
Speaker 6: We have invested around this opportunity? I would say modestly.
Speaker 6: We were actually kind of early to it. Others have
Speaker 6: now caught on to it. And if you look at
Speaker 6: the stocks, for example, of nuclear utilities that have less
Speaker 6: regulated power and also clean power, which is important to
Speaker 6: these hyperscalers, they've shot up. I think people have woken
Speaker 6: up to the fact that the conventional projections of electricity
Speaker 6: demand over the next five to ten years we're ridiculously
Speaker 6: conservative relative to what's going to happen, and we're going
Speaker 6: to face a major I believe we're going to face
Speaker 6: a significant power crunch in this country unless we do something.
Speaker 6: And so we're running to the conflict between the desire
Speaker 6: to reduce our dependence on fossil fuels and the need
Speaker 6: for power that's right in front of us.
Speaker 2: That's just what I was going to ask because this
Speaker 2: goes right against the need to deal with the climate
Speaker 2: where were trying to give up the fossil fuels, and
Speaker 2: this drives us back into it unless you go, for example,
Speaker 2: to nuclear. Maybe there's small modular reactors.
Speaker 6: As you know, I think you may even talk about
Speaker 6: your show. Bill Gates has a project I think out
Speaker 6: in Wyoming or someplace to build not a small reactor,
Speaker 6: but a new technology that involves less less heat and
Speaker 6: less water and so on and so forth. But it's
Speaker 6: going to be done in twenty thirty. He doesn't have
Speaker 6: a permit for it, so we're a long way. I
Speaker 6: think we're a long way from nuclear happening. It could happen.
Speaker 6: I think the technology is there, whether it's small nuclear
Speaker 6: reactors or different kinds of nuclear technology, but I see
Speaker 6: no support at all from people to do it. And
Speaker 6: so the result is we're going to have probably some
Speaker 6: coal staying around longer than any of us would like,
Speaker 6: probably building more what are called ccgt's natural gas generating
Speaker 6: facilities in order to support the renewables, because obviously the
Speaker 6: sun doesn't always shine, the wind doesn't always blow. We
Speaker 6: all know that, so you have to baseload power, and
Speaker 6: we're going to find that we are doing more with
Speaker 6: fossil fuels than any of us would like.
Speaker 2: Okay, Steve, it is such a treat I have you here.
Speaker 2: Thank you so much that it's Stephen Rattner of will
Speaker 2: It Advisors.
Speaker 1: Coming up.
Speaker 2: An exceptional US economy is driving investments. How long can
Speaker 2: it last? And what could carry it forward or get
Speaker 2: in its way?
Speaker 1: We ask Laura.
Speaker 2: Tyson, have you see Berkeley Hush School of.
Speaker 4: Business promising signals that AI will lead to a significant
Speaker 4: boost in productivity growth.
Speaker 1: That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. The US
Speaker 2: economy continues to outpace.
Speaker 1: Much or all the rest of the world.
Speaker 2: What is driving that economy and can we expect it
Speaker 2: to continue? Welcome back now, Laura Tyson of the UC
Speaker 2: Berkeley Host School of Business. Doctor Tyson served under President
Speaker 2: Clinton as the chair of the Council Black and Equad
Speaker 2: Advisors and then as Director of the National Economic Council.
Speaker 2: So doctor Tyson, thank you so much for being back
Speaker 2: with us. So give us your analysis of why we
Speaker 2: see the American economy so strong a lot of people
Speaker 2: are surprised at how strong it is at this point.
Speaker 4: I think, I want to say that the majority of
Speaker 4: economists are probably surprised, and I think the FED we
Speaker 4: heard today from jerom Pell, I think he's surprised the
Speaker 4: resilience of the economy given that we've had high interest rates.
Speaker 4: We've had them the highest in three decades, we've had
Speaker 4: them for a long time. That should have slowed the
Speaker 4: economy down. It did not. So what is what is
Speaker 4: the driver here? I think the investment strategy that has
Speaker 4: been unleashed by the private sector in response to Biden's
Speaker 4: industrial policy and semiconductors, his industrial policy in overall manufacturing,
Speaker 4: his climate policies, those texts cuts, those text incentives for
Speaker 4: climate investment have unleashed a lot of investment. And so
Speaker 4: if you think about this, this is spending that's investing
Speaker 4: in the productivity of the future. I want to add
Speaker 4: to this AI a lot of investment in AI because
Speaker 4: of the anticipated effects on productivity.
Speaker 2: So let's continue on that if we could. Because in
Speaker 2: the past, you and I've talked about when you were
Speaker 2: in the White House and you saw the internet kick
Speaker 2: in that really affected productivity. Now that we know a
Speaker 2: bit more about AI, do you think we're maybe on
Speaker 2: the threshold of something like that.
Speaker 4: You know, I think we could be. I have done
Speaker 4: some work on this. Look, we don't have a lot
Speaker 4: of evidence right now, but all the evidence we have,
Speaker 4: whether we do it through how does a programer benefit
Speaker 4: from working with AI? How does a call center operator
Speaker 4: benefit from working for AI? All of the numbers say
Speaker 4: significant productivity growth. So I think it's largely anecdotal larger
Speaker 4: case studies. We don't have enough yet, but boy, the
Speaker 4: promising promising signals that AI will lead to a significant
Speaker 4: boost in productivity growth, which is it was the major
Speaker 4: surprise in the nineteen sixties, and it may indeed be
Speaker 4: the major surprise in the next five to ten years.
Speaker 2: So you're an economist at the same time, when you
Speaker 2: were in the West, you had to pay attention to
Speaker 2: the politics as well. Given the fact that you see
Speaker 2: the economy as strong as is, why are so many
Speaker 2: people so dissatisfied, even some of them angry with who
Speaker 2: we are economically?
Speaker 4: You know, there's no simple answer to if you look
Speaker 4: at all of the numbers, The only number that does
Speaker 4: not generate the same kind of benefit for the population.
Speaker 4: Are the inflation numbers. If you look at GDP growth,
Speaker 4: or you look at employment growth, you look at the
Speaker 4: unemployment rate, you look at vacancy rate, you look at
Speaker 4: every end. You look at the rate of growth of
Speaker 4: real wages. Now since January twenty three, those are positive numbers.
Speaker 4: The thing that really gets people, I understand this is
Speaker 4: the prices of things that they need are higher. They
Speaker 4: are higher. They're not inflation is We're not going to disinflate.
Speaker 4: Prices are not going to go down for most things,
Speaker 4: so prices are higher. And I think there you have
Speaker 4: a lot of service prices people people going out to
Speaker 4: restaurants now and realizing that the price includes the price
Speaker 4: is higher service charge. It costibar to do it. I
Speaker 4: would say housing. Housing is a huge national problem, and
Speaker 4: I think we've only recently seen the last quarter quarter
Speaker 4: two of this year we began to see some easing
Speaker 4: in the inflation rate of housing.
Speaker 2: Part of the issue is economy. Part is how you
Speaker 2: communicated about the economy. You worked under somebody that I
Speaker 2: think was a very strong communicator. You can agree with
Speaker 2: President Clinton or disagree, but boy, he was a good communicator,
Speaker 2: and he would explain what's going on in the economy.
Speaker 2: How do we avoid the popular street that we're seeing
Speaker 2: right now, because I think a lot of Americans, whether
Speaker 2: rightly or wrongly, are saying that inflation is linked to
Speaker 2: some of the investments that you.
Speaker 1: Think is a good thing.
Speaker 4: Well, I think we have to you know, again, if
Speaker 4: you listen to and I'm not sure that this is
Speaker 4: a populist message, but if you listen to your own
Speaker 4: pal today, he would say, Okay, look, we had a
Speaker 4: very set of tight supply change as a result of COVID.
Speaker 4: That that's a tightness in the product market, lasted a
Speaker 4: long time, longer than we expected. Okay, But then you
Speaker 4: have that unleashed. You have the prices in good starting
Speaker 4: to slow or even come down somewhat, and that what
Speaker 4: are people spending their money on? They're penned up. Demand
Speaker 4: is on services, is on vacations, it's on going to restaurants,
Speaker 4: it's on having a normal life outside of COVID, and
Speaker 4: those prices go up. I am very concerned by the way,
Speaker 4: and you haven't raised it yet, but I'm going to
Speaker 4: go to immigration here. If you think that there are
Speaker 4: numbers on this. The employment rate of Native born working
Speaker 4: age Americans has been stable. Okay, it's not gone down
Speaker 4: from twenty nineteen. It's not gone up from twenty nineteen.
Speaker 4: What's going on here, The employment the number of working
Speaker 4: age Native Americans is going down. It's going down. So
Speaker 4: all of the employment growth that we've seen over the
Speaker 4: past three years has been non Native born working age
Speaker 4: population immigrants, and they are the ones that are filling
Speaker 4: the service jobs and the manufacturing jobs, and the care
Speaker 4: economy jobs and the restaurant jobs. And if we actually
Speaker 4: dramatically deport millions of immigrants who have some status that
Speaker 4: the President Trump would want to undo, then we are
Speaker 4: going to create a labor market shortage really really fast.
Speaker 4: That is going to be a major slow down variable
Speaker 4: for the US economy.
Speaker 1: Let's talk also about tariffs.
Speaker 2: We could, since we're talking about the possibility of a
Speaker 2: Trump presidency coming up now, tariffs, because there is a
Speaker 2: sense that the so called China Shock was not good
Speaker 2: for portions of the American working public.
Speaker 1: It wasn't across the board, but.
Speaker 2: There were portions that were really hit hard by that
Speaker 2: may have been a mistake, and people are worried about
Speaker 2: a second China shock. Now, what about the popular appeal
Speaker 2: of saying, let's compose some tariffs here.
Speaker 4: Well, I think I would start with the view that
Speaker 4: tariffs are an inflationary tax. Who pays the tariffs? It's not.
Speaker 4: And I heard Trump of the debate say he doesn't
Speaker 4: believe this, but it's just true. China doesn't play the tariffs.
Speaker 4: The foreign country doesn't play the tariffs. The American consumer
Speaker 4: who wants to buy foreign products pays the tariff. And
Speaker 4: there are some very good studies now which indicate that
Speaker 4: at the tariff rates that Trump is proposing, it would
Speaker 4: cost the average family, a typical family in the middle
Speaker 4: of the income distribution, it would cost him about seventeen
Speaker 4: hundred dollars extra a year to buy the goods and
Speaker 4: services they want. So tariffs are inflation a price increasing
Speaker 4: and they are therefore, I think consider it a kind
Speaker 4: of inflationary tax.
Speaker 1: Laura, it's always so helpful to have you on Walshreutig.
Speaker 1: Thank you so very much.
Speaker 2: That's Professor Laura Tyson of the Host School of Business.
Speaker 1: At you See Berkeley.
Speaker 2: We began the week trying to come to terms with
Speaker 2: an attempt to assassinate former President Trump and ended it
Speaker 2: with his being nominated as the Republican presidential candidate. As
Speaker 2: investors focus more intently just what a second Trump term
Speaker 2: could mean for them, So our one more thought this
Speaker 2: week comes from a Republican member of the House Financial
Speaker 2: Services Committee, Congressman French Hill of Arkansas, and how things
Speaker 2: might be different from what we saw during President Trump's
Speaker 2: first term in office.
Speaker 8: I think President Trump comes into this position in a
Speaker 8: tougher economic scenario, but more experienced in the sense that
Speaker 8: he had four years in office and he knows many
Speaker 8: of the challenges that our presidents face and how to
Speaker 8: work with Congress.
Speaker 2: But how does extending the tax cuts from twenty seventeen
Speaker 2: help that situation? Because again CBO is projecting that in fact,
Speaker 2: only twenty percent of those tax cuts actually paid for themselves.
Speaker 1: They did not pay themselves, So.
Speaker 2: How does extending that improve the situation fiscally?
Speaker 8: I think he's going out to work with Congress to
Speaker 8: determine on those that are expiring, how to focus on
Speaker 8: growth and focus on responsibility give the now budget deficit
Speaker 8: unsustainable budget debthics. I think he's inheriting from what would
Speaker 8: be his predecessor. This is a bipartisan challenge. Spending in
Speaker 8: Washington is a bipartisan challenging. Trying to find a way
Speaker 8: to balance the budget is a bipartisan No one.
Speaker 1: Has clean hands here.
Speaker 8: But I am saying he's going to be constrained in
Speaker 8: spending authorities and constrained in picking and choosing and working
Speaker 8: with Congress on how to deal with the tax cuts
Speaker 8: and expiration. I think it's going to be very difficult
Speaker 8: in the first few days. What are some other constraints
Speaker 8: the need for national defense spending. We have never had
Speaker 8: more people challenging US, our allied nations and Western values
Speaker 8: like now. The access of evil that George Bush, George W.
Speaker 8: Bush talked about decades ago now is really infruition and
Speaker 8: in full flower. North Korea, China, Russia, Iran and their
Speaker 8: proxies are actively challenging and actively at war with America
Speaker 8: and American allies at home from a terror threat elevation
Speaker 8: and abroad. So that's a constraint on how to have
Speaker 8: spending priorities. And this is why I argue that we
Speaker 8: need a solid president vice president active, working seven days
Speaker 8: a week, twenty four hours a day, working with Congress
Speaker 8: to face the realities that we have.
Speaker 2: You mentioned trade in tariffs. Some people who are close
Speaker 2: to President Trump say that would be a revenue source,
Speaker 2: so it would be good on the deficit. At the
Speaker 2: same time, a lot of comments are saying it also
Speaker 2: is inflationary because although it does put money in the treasury,
Speaker 2: it doesn't come from China, it doesn't come from foreign countries.
Speaker 2: It comes from US consumers in higher prices. How do
Speaker 2: you both raise tariffs and avoid inflation?
Speaker 1: Smart question. I think there are two.
Speaker 8: Reversals of the global trend that we've witnessed in our
Speaker 8: career over the past three decades. One of them is
Speaker 8: having redundant supply chains, not single source, not just in
Speaker 8: time and reshoring, having those supply chains in maybe safer
Speaker 8: hands than just the lowest cost provider in an Asian
Speaker 8: nation like China, for example. That's going to cost money
Speaker 8: and time. That's an inflationary trend. And you're right.
Speaker 1: Across the board.
Speaker 8: Tariffs, if put in place, in left in place, are inflationary,
Speaker 8: its attacks, and it is borne by the American consumer.
Speaker 8: I think where President Trump demonstrated his ability to negotiate
Speaker 8: was using them, as I said earlier, as a cudgel.
Speaker 1: To bring people to the table for a.
Speaker 8: Positive outcome, not just simply leave them in place. And
Speaker 8: I'm concerned, for example, when I spoke out in general
Speaker 8: opposition to the across the board stealing aluminum tariffs back
Speaker 8: early in the administration when they were imposed the first time, saying,
Speaker 8: demonstrate to me that you actually across the board and
Speaker 8: steal an aluminum domestic product, manufacturing new production as opposed
Speaker 8: to just higher prices. And I still think that's a
Speaker 8: mixed report. And that's why I think you have to
Speaker 8: use tariffs very targeted and obtain the trade benefits. And
Speaker 8: I do believe that former Ambassador lighthauser who advised President Trump,
Speaker 8: did achieve that in several places Japan, China selectively, and
Speaker 8: then they had a big success with redoing the North
Speaker 8: American Free Trade Agreement into the USMCA. So again we
Speaker 8: are cognizant we're in a different situation than we were
Speaker 8: in twenty sixteen from a macroeconomic.
Speaker 1: Point of view.
Speaker 2: That was Republican Representative French Hill of Arkansas.
Speaker 1: That does it.
Speaker 2: For this episode of Wall Street Week, I'm David Weston.
Speaker 1: This is Bloomberg. See you next week.