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Speaker 3: Now, are Michael McKee an important conversation with the President
Speaker 3: of the Boston Fed, Susan Collins.
Speaker 4: I'm Michael McKee, the international economics and Policy correspondent for Bloomberg,
Speaker 4: and we are at the Boston Federal Reserve Bank today.
Speaker 5: They're holding their sixty eighth.
Speaker 4: Annual Economics conference, and we're joined by the President of
Speaker 4: the Boston Fed, Susan Collins. Thank you very much for
Speaker 4: being with us today.
Speaker 6: It's delighted to be here. Thanks for being at the
Speaker 6: Boston Fed.
Speaker 5: It's great. We tell everybody. It's a beautiful day. But
Speaker 5: it's thirty nine degrees so winter is finally hit here.
Speaker 6: The seasons are wonderful.
Speaker 4: Oh, speaking of winter, December eighteenth, you have another FED meeting,
Speaker 4: and at this point there seem to be some questions
Speaker 4: about whether or not the Fed will be cutting rates again,
Speaker 4: because this week we got some firm inflation news retail
Speaker 4: sales were okay, but not particularly strong at this point.
Speaker 5: Are you thinking that.
Speaker 4: We should see a cut or is it better to
Speaker 4: pause and wait?
Speaker 6: So I think it's important to say there's no preset path.
Speaker 6: I do see rates as still in the restrictive range,
Speaker 6: which means that over time some amount of easing will
Speaker 6: be appropriate. But you know, the economy is in a
Speaker 6: very good place right now, and inflation's coming back down
Speaker 6: to target. The labor markets are healthy, we're seeing solid growth.
Speaker 5: The goal of policies.
Speaker 6: Really to sustain that healthy set of conditions, recognizing you know,
Speaker 6: there are risks on both sides, and so I think
Speaker 6: we're well positioned. I certainly wouldn't take another ease in
Speaker 6: December off the table, But again we're not in a
Speaker 6: preset path, and so we'll have to look carefully at
Speaker 6: the data and see what makes sense when we get
Speaker 6: to December eighteenth.
Speaker 4: Well, the data this week showed inflation a little bit
Speaker 4: stronger than it had been in the CPI and the PPI,
Speaker 4: and those who do the nerdy calculations for the PCE
Speaker 4: say we're going to see.
Speaker 5: The same thing.
Speaker 4: Should you keep your foot on the brake a little
Speaker 4: more then because inflation is not back down to your target.
Speaker 6: So you know, I don't focus too much on any
Speaker 6: one data point. I think it's really important to look holistically.
Speaker 6: And when I do that, what I see is that,
Speaker 6: first of all, inflation has come down significantly. I focus
Speaker 6: on the you know, a couple of month averages, and
Speaker 6: if you take food, energy, and in particular shelter out,
Speaker 6: the rest of inflation has actually been in the range
Speaker 6: consistent with the two percent, exactly what we'd like to see.
Speaker 6: What's really still elevated as shelter and that is taking
Speaker 6: time to come back down, and a lot of that
Speaker 6: really reflects shocks from the past. I'm not seeing evidence
Speaker 6: of new price pressures, and so I think it's important
Speaker 6: to stay the course. But that analysis of the data
Speaker 6: is part of why I thought it was really appropriate
Speaker 6: for us to begin easing in September, and to be
Speaker 6: in an environment where we are really looking over time methodically,
Speaker 6: perhaps patiently, to be normalizing policy, to maintain those healthy
Speaker 6: conditions that I talked about a moment ago.
Speaker 5: Well, let's look at the other side of the mandate. Employment.
Speaker 4: We had a very strong employment report, and then we
Speaker 4: had a very weak employment report, granted, affected by hurricanes
Speaker 4: and strikes.
Speaker 5: So what's your judgment of.
Speaker 4: Where the labor market is when you look holistically at
Speaker 4: all of the labor data and when I.
Speaker 6: Look at all of the data, and you're absolutely right,
Speaker 6: there have been some stronger readings, there have been some
Speaker 6: readings over time that were a bit weaker, and there are.
Speaker 5: A lot of special factors.
Speaker 6: So looking at averages over time, looking at the range
Speaker 6: of information, what I see is a labor market that
Speaker 6: looks similar to conditions that we've considered full employment, so
Speaker 6: in terms of job openings and quit rates, and the
Speaker 6: fact that wage growth has been coming down and given
Speaker 6: the high productivity we've seen is consistent with the move
Speaker 6: back down to two percent inflation and staying there. And
Speaker 6: unemployment has stayed in a range that is near four
Speaker 6: percent low by historical standards, so yes, higher than a
Speaker 6: year ago. So all of that, to me says healthy
Speaker 6: labor market conditions. Things to watch carefully and don't focus
Speaker 6: too much on any one piece of data.
Speaker 7: Have to look at the whole picture.
Speaker 4: All right, healthy labor market. Inflation's coming down, even if
Speaker 4: it's stalled a little bit, but it's in the twos
Speaker 4: and the economy is stronger than people had forecasts. So
Speaker 4: do you agree with Chairman Powell and saying there is
Speaker 4: nothing telling you you have to cut rates very quickly?
Speaker 6: So I think that I don't. I agree that I
Speaker 6: don't see a big urgency. At the same time, I
Speaker 6: do think that preserving those healthy conditions, right, I mean,
Speaker 6: that's what our mandate really is from Congress. Price stability
Speaker 6: and maximum employment sustained over time, not just at some
Speaker 6: point in time. And so as I said before, I
Speaker 6: do see financial the policy stances being in a restrictive
Speaker 6: place and over time, normalizing that I think is going
Speaker 6: to be important. But we're well positioned to be really
Speaker 6: careful in assessing the data and making decisions about the pace,
Speaker 6: about the timing, and so that you know, that's how
Speaker 6: I think about that.
Speaker 4: Let me ask about the elephant in the room, and
Speaker 4: that is the new President elect of the United States.
Speaker 4: His policies have not been fleshed out. Tremen Pol's made
Speaker 4: it clear you don't know exactly what's going to happen.
Speaker 4: But do you expect that something in whatever his fiscal
Speaker 4: plans are will affect the economy and you will have
Speaker 4: to take another look, say at what your economic projections
Speaker 4: are and what the plot projections are for twenty twenty five.
Speaker 6: Now, as we get information about the economy, certainly that
Speaker 6: includes about fiscal policy. Of course, it's really important to
Speaker 6: factor that in. And there are lots of things we
Speaker 6: look at. Fiscal policies certainly one of them, but I
Speaker 6: don't want to speculate on what policies that haven't been
Speaker 6: enacted or implemented might look like.
Speaker 4: Well, do you think that tariffs as an economic concept
Speaker 4: add to inflation?
Speaker 6: They can, And again we would have to see if
Speaker 6: there are tariffs that are implemented, more about the specifics
Speaker 6: and the dynamics for those.
Speaker 4: Now, if there's a fiscal impulse in whatever the President
Speaker 4: elect chooses to do, is the economy growing too fast
Speaker 4: for that right now? Would that be a danger a worry?
Speaker 6: So again, I think there are lots of things that
Speaker 6: determine how the economy evolves and grows over time. Fiscal
Speaker 6: policy is certainly one of them and certainly does have
Speaker 6: an impact on that, and we'd have to factor that
Speaker 6: in and look through that. You know, I do think,
Speaker 6: and Chair Powell has also said this that you know,
Speaker 6: fiscal policy at the moment is on a path that's
Speaker 6: not sustainable. But again, we when we make our policy
Speaker 6: decisions to focus on our mandate from Congress, it's really
Speaker 6: based on the data that we have available and the
Speaker 6: analysis and the assessments that we can do on that basis.
Speaker 4: As far as I know, President like Trump has never
Speaker 4: threatened to fire you.
Speaker 5: But I wanted to ask.
Speaker 4: What is in your mind the relationship between the Federal
Speaker 4: Reserve and the executive branch.
Speaker 6: So what I would say is that the FED is
Speaker 6: structured by Congress as an independent body, and that that
Speaker 6: is important in terms of the ability for us to
Speaker 6: do our job well. There's a lot of analysis that
Speaker 6: shows that independent central banks are more effective at keeping
Speaker 6: inflation low and stable, and we have really seen how
Speaker 6: important it is to keep inflation low and stable in
Speaker 6: terms of the impact the higher prices past inflation have had.
Speaker 6: And so I think that is a very good structure
Speaker 6: to enable us to do our jobs well.
Speaker 4: So the things that come across social media basically just
Speaker 4: noise in the background to you as a policymaker.
Speaker 6: I am very focused on doing my job and there
Speaker 6: is more than enough to keep me very focused and
Speaker 6: very busy now.
Speaker 5: The people, well you can't see them.
Speaker 4: I could see them out there, all the traders on
Speaker 4: their knees going tell us when you're going to.
Speaker 5: Do this sort of thing.
Speaker 4: Can we basically say, because of the potential changes that
Speaker 4: are coming and the data that we have seen, that
Speaker 4: the dot plot for twenty twenty five and the SEP
Speaker 4: for twenty twenty five, those are kind of out the
Speaker 4: window now and we should really wait until December or
Speaker 4: even later to get a good idea of where you
Speaker 4: think you're going to be and the economy is going
Speaker 4: to be.
Speaker 6: All things I think always evolve, and so in about
Speaker 6: a month or so, we will have a new SEP
Speaker 6: and information from all of the policymakers about what they think.
Speaker 6: And so I think it's always true that you know,
Speaker 6: in the middle of the SEP information you don't want
Speaker 6: to take too much from what might have been written down,
Speaker 6: penciled in. I would say a number of weeks earlier,
Speaker 6: a lot of the data evolves.
Speaker 4: What are the people in these tall buildings around us,
Speaker 4: all the corporate leaders in your district telling you about
Speaker 4: how they see the economy going forward and their plans.
Speaker 6: Yeah, and I appreciate you asking about that. I think
Speaker 6: one of the really important things that I do, that
Speaker 6: my colleagues do is talk to people across the economy
Speaker 6: in lots of different sectors. So being out and about
Speaker 6: throughout New England and what I'm hearing is pretty consistent
Speaker 6: with what I said at the outset that people are
Speaker 6: cautiously optimistic. They see an economy that seems resilient. Labor
Speaker 6: markets have moved into much more normal conditions relative to
Speaker 6: the unsustainable, more overheated conditions from a year or more ago,
Speaker 6: and the price pressures really have abated considerably. So that's
Speaker 6: all very consistent. But of course, you know, the aggregate
Speaker 6: data masks a range of different specifis across individual firms
Speaker 6: and sectors and regions, and it's really I think helpful
Speaker 6: to hear all of that and pull the qualitative information
Speaker 6: together with the statistics.
Speaker 4: One last question at your conference. It's on financial technology
Speaker 4: this year and the Boston Fed's been in the middle
Speaker 4: of financial technology and just coincidentally, coming up at the
Speaker 4: top of the hour, we have our Bloomberg Technology Show.
Speaker 5: So let me ask you.
Speaker 4: A lot of tech talk over the last five, six,
Speaker 4: seven years has been tech talk.
Speaker 5: How fast are we going to see some.
Speaker 4: Sort of impact on the average person from new payment systems.
Speaker 4: I realize you have fed now in place, but how
Speaker 4: fast are people going to say, hey, this is something different?
Speaker 5: And are we going to.
Speaker 4: See any kind of digital currency adoption, whether it's private
Speaker 4: or government in the next few years.
Speaker 6: So, you know, the impacts of technology have many, many dimensions,
Speaker 6: and I think we're already seeing some impacts in terms
Speaker 6: of the roles that fintech are playing across our economy
Speaker 6: in different ways. And the conference today and tomorrow is
Speaker 6: intended to really bring experts together who have knowledge and
Speaker 6: done analysis from different vantage points to see as we
Speaker 6: put together the things we know, what are some of
Speaker 6: the things we don't know and need to know better.
Speaker 6: And so what we're really focusing on is a number
Speaker 6: of different themes, including financial inclusion, what are some of
Speaker 6: the implications of the innovations for access to financial services?
Speaker 6: And then also what are some of the implications of
Speaker 6: technological innovation for the transmission of monetary policy, for our
Speaker 6: supervision and regulation of financial institutions, and also for financial stability.
Speaker 6: So thinking about both the opportunities and the risks, and
Speaker 6: I think we are already seeing some of those implications,
Speaker 6: but it's still unfolding. It's complicated, and it's moving pretty quickly.
Speaker 6: So that's what we're trying to better understand. And again
Speaker 6: we're delighted that you're all here while we're in the
Speaker 6: midst of a conference on an important topic.
Speaker 5: Well, thank you for having us.
Speaker 4: Susan Collins, the President of the Federal Reserve Bank of Boston.
Speaker 5: We'll send it back to you now.
Speaker 8: Hi, Michael McKee, thank you very much. Bloomberg's Michael McKey
Speaker 8: speaking with Boston FED President Susan Collins here in Boston.
Speaker 2: You're listening to the Bloomberg Surveillance podcast. Catch us Live
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Speaker 9: And commute this morning.
Speaker 3: It's very important on radio on Apple car Play and
Speaker 3: Andrew Auto to talk to the number one chart guy
Speaker 3: in the world.
Speaker 9: It really works on radio, maybe works better.
Speaker 3: On YouTube, but we're going to be chart free this
Speaker 3: morn with Uri and Timmer. The title is Director Global
Speaker 3: Macro at Fidelity Management, and you can see the miracle
Speaker 3: of this work on LinkedIn, where he's very very visible.
Speaker 3: Urine Timmer joins us now as he gets ready for
Speaker 3: the charts of the weekend. How do you amend your charts?
Speaker 3: When there was a news bulletin yesterday, the Bloomberg headline
Speaker 3: that there's seven trillion dollars in cash laying out there,
Speaker 3: how does that affect Will dan Off? How does that
Speaker 3: affect Uri and Timmer?
Speaker 10: Well, so that's that's cash shitting in money market accounts.
Speaker 10: Of course, we are the leading provider of money market
Speaker 10: so we're intimately involved with that with that cash. But
Speaker 10: my sense always has been that a lot of that
Speaker 10: cash did not flee the stock market in a flight
Speaker 10: to quality, which is kind of typically what you would expect,
Speaker 10: and then when when people feel more comfortable, they bring
Speaker 10: the cash back in. In this case, the cash came
Speaker 10: out of the banks during the regional bank crisis, you
Speaker 10: know a few years ago, when banks, you know, still
Speaker 10: are paying half a percent on deposits, and they were then,
Speaker 10: and the Fed was raising rates and providing alternatives. So
Speaker 10: I don't quite see this as a powder keg of
Speaker 10: cash waiting to chase stocks. And the metric I look
Speaker 10: at is money market fund access assets as a percentage
Speaker 10: of the market cap in the stock market, and there
Speaker 10: it's more it's more normal, it's more normal. So that
Speaker 10: money came out of the banks, my senses eventually will
Speaker 10: go back into banks, but not necessarily stock.
Speaker 3: We need to go into the crown jewel secrets of fidelity.
Speaker 3: And Abby, thank you so much for listening this morning
Speaker 3: and giving us access to mister Timmer.
Speaker 9: I'm going to cut to the chase.
Speaker 3: What's the elasticity I've yield in money market flows? If
Speaker 3: yields come down two decimal points or one decimal point
Speaker 3: or a big figure, when does Paul get out of
Speaker 3: his money market funds?
Speaker 10: Well, I think the FED is not going to cut
Speaker 10: as much as many people have thought and continue to think.
Speaker 10: So maybe it goes to four, it's at four and
Speaker 10: five eighths. If that's the case, money market yields stay
Speaker 10: around four or so, and I don't think that is
Speaker 10: going to create a tsunami, you know, out of cash
Speaker 10: into other assets, whether it's bombs or equities. So I
Speaker 10: don't think we're going to have another sort of zerb
Speaker 10: era where we go to zero or one and risk
Speaker 10: premia in the bond market. Gets suppressed and then that
Speaker 10: money flees into the risk market. So I don't think
Speaker 10: we're going to get there, but it would be, it
Speaker 10: would It would take you know, more than what we've
Speaker 10: seen so far, for sure.
Speaker 8: You're in What do you make of the move we've
Speaker 8: seen in financial markets since the election, big move of stocks,
Speaker 8: yields pushing higher, dollars, stronger, Bitcoin at ninety thousand per token,
Speaker 8: What do you make of all that?
Speaker 10: Yeah, so the markets are always in price discovery mode. Right,
Speaker 10: Sometimes the new information comes in gradually, slowly, a company
Speaker 10: reports earnings, the stock price adjusts, and sometimes the information
Speaker 10: comes in all at once, as we had with the election. Right,
Speaker 10: you can tell that people were sitting on their hands,
Speaker 10: you know, it was supposedly too close to call, so
Speaker 10: nothing really got done. And the market's brutally efficient in
Speaker 10: discounting new information, and so on November sixth, it had
Speaker 10: a lot of new information to discount, and that's what
Speaker 10: it did. And that's what price discovery is. And so
Speaker 10: the red wave trade right, small caps, less fed cuts
Speaker 10: return of the term premium rotation into financials, energy industrial,
Speaker 10: so broadening.
Speaker 9: That is the trade.
Speaker 10: And I think in twenty sixteen that trade was pretty
Speaker 10: much sort of done by December, right, So it happens
Speaker 10: very quickly. It's not like this is like the first
Speaker 10: bat of the first inning, like it's done instantaneously.
Speaker 3: You have portfolios of Fidelity that are over fifty percent
Speaker 3: in their top ten stocks and they're very mag seventy.
Speaker 9: Et cetera, et cetera. What do you see in your
Speaker 9: chart work on the flows?
Speaker 3: Luisja Motto would say, the distributions in and out of
Speaker 3: MEG seven right now? Are we selling? Are we buying?
Speaker 3: What are we doing well?
Speaker 10: I think the good news for the MAG seven is
Speaker 10: that they're not that expensive, right. I think I take
Speaker 10: a broader brush. I look at the nifty to fifty,
Speaker 10: the top fifty stocks, just because I have a data
Speaker 10: sets all the way back to the sixties and eighteen
Speaker 10: sixty and during the early seventies the original nifty to
Speaker 10: fifty and the late nineties, the dot com era, those
Speaker 10: fifty stocks were trading at twice the valuation multiple as
Speaker 10: the bottom four fifty. Today, the top fifty are trading
Speaker 10: at a twenty five percent premium. So you can't call
Speaker 10: it a bubble if the valuation is not extreme. The
Speaker 10: price movements have been extreme, but not the valuation. So
Speaker 10: what we've seen over the past few months really since
Speaker 10: the FED started cutting rates, is that this has been
Speaker 10: a bullish broadening. So the market has broadened eighty percent
Speaker 10: of stocks are above the two hundred moving average, but
Speaker 10: it's not happening at the expense of the mega growers,
Speaker 10: and in that sense, this cycle in a way has
Speaker 10: kind of gone in reverse. It's like a Benjamin Button cycle,
Speaker 10: where you know, usually a bull market starts very broad right,
Speaker 10: because the junkie low price stocks that are obliterated in
Speaker 10: the bear market come bouncing back, and then as the
Speaker 10: cycle matures, it gets more narrow and the blue chips
Speaker 10: are left standing at the end and you get those
Speaker 10: breath divergences. This time, it's been the opposite. It started
Speaker 10: with the Mac seven and then even during the rate
Speaker 10: hiking cycle, those were the safe stocks to be in
Speaker 10: because they were immune to the FED because they had
Speaker 10: so much cash. And now they're holding their absolute performance.
Speaker 10: But the market has broadened really since a year ago,
Speaker 10: and so it's kind of the best that you can
Speaker 10: hope for. Like are a more disorderly version of that
Speaker 10: would be that the mag seven or the nifty to
Speaker 10: fifty decline because money is moving from those stocks to
Speaker 10: the broader market. Then the index, the S and P
Speaker 10: would have trouble staying up just because of the weight
Speaker 10: of those seven stocks. But we're not seeing that yet.
Speaker 8: Your titles director of Global Macro. Where do you see
Speaker 8: the US versus non US right now?
Speaker 10: Well, so US, you know, excellence, you know has been
Speaker 10: in place for a decade. And it's interesting, you know,
Speaker 10: because we're always debating, you know, do we go outside
Speaker 10: the US? I mean the US trading at twenty two x,
Speaker 10: US is trading at fifteen PE, So the US is
Speaker 10: sixty percent more expensive than the rest of the world,
Speaker 10: whether it's em or EFA, you know, Japan, Europe. But
Speaker 10: you need a catalyst, right, Evaluation is not alone. You
Speaker 10: need relative earnings. Like if you go across the street
Speaker 10: and you're in the halls of fidelity, there is price
Speaker 10: follows earnings and relative price or relative performance follows relative earnings.
Speaker 10: And so that is missing with between the US and
Speaker 10: the rest of the world because US earnings continue to dominate.
Speaker 3: Price follows earning. Sounds like Bettina Dalton nineteen eighty. Okay,
Speaker 3: let's go there. I got an election. I got a
Speaker 3: belief nominal GDP's gonna pop. Do you, within the research
Speaker 3: of the fundamental animals at Fidelity and what you're doing
Speaker 3: with charts, agree that nominal is gonna pop. Revenues are
Speaker 3: gonna pop, and that's earnings will sustain.
Speaker 10: Yes, So we are one year into an earning cycle.
Speaker 10: Trailer earnings are up eight percent this year. Forward earnings
Speaker 10: are off about twelve or so. The expectation is that
Speaker 10: earnings will continue to grow next year. And if we
Speaker 10: do get this nominal GDP pop and earnings are a
Speaker 10: nominal thing, the earning cycle can continue. But the thing
Speaker 10: I worry about is the return of the of the
Speaker 10: fed model, you know, back in the green span in
Speaker 10: days of the eighties. Bond yields kind of you know,
Speaker 10: are causing indigestion again the rockvigilantes, And we've seen that
Speaker 10: now repeatedly over the last few years, and I think
Speaker 10: that is a risk for twenty twenty five.
Speaker 9: You gonna be in New York soon, I will be please.
Speaker 3: You got to come in because we got to talk
Speaker 3: about Babson the global ranking.
Speaker 10: They just got yes, And while while you have me
Speaker 10: on the air, I don't know what your schedule is,
Speaker 10: but I would be like to invite you to come
Speaker 10: look at our chart room after the show.
Speaker 9: Or it's like the Vatican, folks. You've got the golf
Speaker 9: stream right, Oh, sure you can go over you're in.
Speaker 9: I don't think I can do it. I think I
Speaker 9: have to race to the airport.
Speaker 3: Okay, I'm sorry, but Paul's got the golf stone, so
Speaker 3: we'll do it next time.
Speaker 11: You're in.
Speaker 3: Timmor, thank you so much with Fidelity there, and we're
Speaker 3: efforting a number of their managers as well to talk
Speaker 3: about this spectacular year we've seen in the markets world.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 3: Joining us now Gotamcunda Yale University with other parchment along
Speaker 3: the Charles River as well. He's given us such good
Speaker 3: help here with the election. I want to talk and
Speaker 3: this is a fancy technology seminary. Everybody here knows how
Speaker 3: to use a cell phone a computer.
Speaker 9: They're back. They're using Fortran here at the boss.
Speaker 3: Okah, gout them as simple as this is a ludite
Speaker 3: America where there's a huge in our polarization. There's a
Speaker 3: huge body of people that just aren't in taking advantage
Speaker 3: of technology and are almost anti technology.
Speaker 11: I mean, I think certainly there's a huge anti technology push,
Speaker 11: but it's striking that some of the most deleite protect
Speaker 11: people in the world.
Speaker 3: That's my second question. I got Elon Musk. As part
Speaker 3: of the new administration, he defines entrepreneurship in technology, and
Speaker 3: you got it. I got partially a ludeied America.
Speaker 9: Yeah.
Speaker 11: So you have sort of this icon of entrepretion technology
Speaker 11: on the Musk, and you also have RFA Junior, possibly
Speaker 11: the most anti science person in America, and apparently they're
Speaker 11: going to be serving in the same administration. So it's
Speaker 11: quite a contrast. And technology shocks, like China shocks, have
Speaker 11: had big impacts on the labor market. We know that
Speaker 11: they seem to be affecting people in lots of different ways.
Speaker 11: We've seen the decrease in manufacturing employment at times, and
Speaker 11: all of these things added up to create a level
Speaker 11: of social ferment in this country that we're just starting
Speaker 11: to see the implications of. But the flip side of
Speaker 11: that is a lot of parties that have won landslide
Speaker 11: that will won big election. So this was a decisive
Speaker 11: victory by the Repobulmans, but not a landslide. I didn't
Speaker 11: look anything on like two thousand and eight, for example,
Speaker 11: had interpreted that as gigantic sweeping mandates for all of
Speaker 11: their policies and found out that actually people were voting
Speaker 11: on one issue and that was and in this case
Speaker 11: almost certainly inflation. And they've then sort of leaned into
Speaker 11: the overinterpreted their victory. How much of this anti technology
Speaker 11: thing that you're talking about is a product of people
Speaker 11: starting to overinterpret the victory And we don't know yet,
Speaker 11: but it's pretty striking when we see this, and Paul.
Speaker 3: You see this with the technology reports we see like
Speaker 3: Apple or Microsoft or in the video, it's like two
Speaker 3: planets it is.
Speaker 8: It's just extraordinary. Galtem, I mean, we're these cabinet picture
Speaker 8: coming fast and furious from President elect Trump and his campaign.
Speaker 8: What's your takeaway so far?
Speaker 11: So in the first century AD, the mad Roman emperor
Speaker 11: Caligulam decided to make his horse encinitatis a console of Rome.
Speaker 11: That horse was still a better pick than Matt Gates
Speaker 11: Attorney general. You know, you sort of see Republicans Democrats
Speaker 11: we expect recall, but you can see Republicans recoiling that
Speaker 11: in general. What does not expect that the Attorney general's
Speaker 11: closest contact with the Justice Department before they get the
Speaker 11: job is being investigated by the Justice Department for sexual
Speaker 11: like that. That seems out of the ordinary.
Speaker 8: So it talk to us the role that Congress will
Speaker 8: play in the confirmation process for some of these appointees.
Speaker 11: As large as they choose it to be. I think
Speaker 11: of the set of appointees, they're the sort of the
Speaker 11: normal appointees Burtom, Marco Rubio, who are going to get
Speaker 11: the most Democrats will vote just you know, say thank
Speaker 11: god we got him in fine. Stephanic at the UN
Speaker 11: will probably get something some a little like that. But
Speaker 11: the flip side is clearly Democrats are going to go
Speaker 11: insane over the idea of the sort of Hegseth Tulsie
Speaker 11: Gabbard at d and I that's the one that people
Speaker 11: in the internet, and I'll say in the in the
Speaker 11: in the National security community. People are simply going in
Speaker 11: like that. They don't even know how to process that prospect,
Speaker 11: you know, or if k Junior or at HHS, I don't.
Speaker 11: I think people don't quite realize you. HHS has a
Speaker 11: budget of almost two trillion dollars. So the scale of
Speaker 11: what we're talking about wowing him there is just unimaginable.
Speaker 11: And this is someone who, when he is running for president,
Speaker 11: proposed that one of the things he wanted to do
Speaker 11: was just stop all research and development on you drugs. So,
Speaker 11: I mean, you know, four years no R and D
Speaker 11: in the life sciences. I think people could probably object
Speaker 11: to that.
Speaker 8: So what's the realistic of you in Washington? Just about
Speaker 8: to what extent was some of these Republican senators in
Speaker 8: effect go against their president by blocking some of these appointees.
Speaker 11: I think people are starting to think not that much.
Speaker 11: It wouldn't shock me if Gates doesn't get confirmed, just
Speaker 11: because he's made so many enemies in the Congress that
Speaker 11: they might there'll be a reaction. But the others, I
Speaker 11: think the betting is that the level of patronage that
Speaker 11: Trump has and the level of sway he has over
Speaker 11: the party he ran ahead of all of these people, right,
Speaker 11: he got more votes than most of these people. In Michigan,
Speaker 11: the Democrats held the Senate seat because tens of thousands
Speaker 11: of people came in voted for Donald Trump and left
Speaker 11: the rest of the ballot blank, yep, and so and so.
Speaker 8: Maybe if you're a Trump supporter, I think a lot
Speaker 8: of those folks felt like he's doing exactly what we
Speaker 8: wanted him to do, which is to be unconventional, you know,
Speaker 8: kind of drain the swamp, to use a term from
Speaker 8: the past cycle. Maybe there is public support for this.
Speaker 11: So I think there is certainly a base of Trump
Speaker 11: supporters for whom this is exactly what they wanted, and
Speaker 11: this is this is sort of they're extremely enthusiastic about that.
Speaker 11: But my strong suspicion is that base is not fifty
Speaker 11: percent of the country, and it's not anything close to
Speaker 11: fifty percent of the country, And there are a lot
Speaker 11: of people who probably did not vote to find out that,
Speaker 11: you know, we're not going to be inventing new vaccines
Speaker 11: for the next few years. And note it's not just
Speaker 11: a four year problem.
Speaker 3: Right.
Speaker 11: When you eliminate these capabilities, you can't wave a magic
Speaker 11: want and bring them back. It takes generations to build
Speaker 11: the sort of scientific establishment that we have, and that
Speaker 11: is now at RESK.
Speaker 9: This is going to be in your lectures.
Speaker 3: Yeah, it is Tom Nichols of Naval War College, all
Speaker 3: of his work. Three times in the last two days
Speaker 3: people have sent me Death of Expertise Tom Nichols book
Speaker 3: that I interviewed him four years ago, The Death of Expertise?
Speaker 3: Is it as grim now as it's ever been?
Speaker 11: Tom's great and I would say it might be grimmer
Speaker 11: than even then. I think that even he expected. You know,
Speaker 11: going into the election, you would talk to Democrats and Republicans,
Speaker 11: and Democrats, even the ones, the ones who are really scared,
Speaker 11: would talk about these sorts of appointments and you know,
Speaker 11: you'd say, like, what.
Speaker 9: Did it not do?
Speaker 11: Get the worst case? Yeah, And Republicans would say, well,
Speaker 11: you know, we'll just have a normal Trump, a normal
Speaker 11: Republican administration with a guy who makes sense mean tweets.
Speaker 11: So when you think about the spectrum of where people
Speaker 11: thought they were going to end up, these appointments are
Speaker 11: sort of the worst fears of Democrats, except not even that.
Speaker 11: Nobody was saw that Matt Gate's coming. So yeah, there's
Speaker 11: a profound death of expertise problem. But let's back out
Speaker 11: from that. I think we we all as a society,
Speaker 11: just haven't thought through. Let's back up for a second.
Speaker 11: A lot of this is about new communication technology. We
Speaker 11: talk about social media, things like that which make the
Speaker 11: world more transparent. So we see that the experts were
Speaker 11: never as great as they thought they as we thought
Speaker 11: they were in their failures. That doesn't mean they're useless.
Speaker 11: There's there're convenience stakes. When the printing press was invented, right,
Speaker 11: the big foreign part, the big consequence of that that
Speaker 11: historians go back is they say the Thirty Years War,
Speaker 11: the worst war of europe history, that killed a third
Speaker 11: of the population of Germany, was directly driven by the
Speaker 11: event of the printing We're.
Speaker 3: Going to continue this discussion in New York, as I'm
Speaker 3: sure we will with got him Conda. He's with Yale University.
Speaker 10: Here.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Bloomberg terminal.
Speaker 8: Dearn Morse Conference keynote speaker and professor at UC Berkeley's
Speaker 8: up Business School out there. Thanks so much for joining
Speaker 8: us here. You're a keynote speaker here today. What are
Speaker 8: you going to be talking about.
Speaker 1: I'm gonna be talking about AI and the use in credit.
Speaker 1: So thinking about not just in understanding AI, in terms
Speaker 1: of deploying and getting better, better precise underwriting and.
Speaker 7: Knowing people's risk and this sort of stuff.
Speaker 1: That there's a general landscape of using AI for all
Speaker 1: kinds of provision of lending to people, and then there's
Speaker 1: some red flags, right, and so kind of putting the
Speaker 1: landscape out there, we need to think about both sides.
Speaker 1: We need to inform not just policy makers we're here
Speaker 1: at the FED, but also the providers, right, so they
Speaker 1: can think about things that they need to step up
Speaker 1: and understand.
Speaker 8: We were back last time I was up here in Boston.
Speaker 8: We were doing some work with the Boston Consulting Group
Speaker 8: and they were saying, is they talked to their clients
Speaker 8: across all industries about the use of AI. They want
Speaker 8: to get a commitment that they will do it in
Speaker 8: the correct way, you know, and really, because AI is
Speaker 8: so powerful that you want to make sure that whoever
Speaker 8: they're talking to, that they make a commitment to doing
Speaker 8: it in the right way, the sustainable way. How does
Speaker 8: that apply to finance?
Speaker 7: Right?
Speaker 1: So the problem is there's so many different aspects of
Speaker 1: what correct means.
Speaker 7: Right.
Speaker 1: So if we think about AI, where where it's going
Speaker 1: to be deployed, right, it's not just you know, it's
Speaker 1: understanding credit risk and reaching more of the population in
Speaker 1: ways that biases are hindering.
Speaker 7: So that's great.
Speaker 1: There's also targeting and marketing, there's monitoring, there's chatbots to
Speaker 1: get information, authenticating fraud, right, all these sort of uses.
Speaker 1: Along the other side, though, we have to think about
Speaker 1: things like there's been research that finds it AI teaches
Speaker 1: itself itself how to collude, right, which has all kinds
Speaker 1: of your mind goes crazy when you start thinking about that.
Speaker 1: And then AI can be deceptive and conveyance to get
Speaker 1: an outcome at once.
Speaker 9: So this is a sequel to the matrix too or something.
Speaker 3: I mean, really, that's what reef shows up, right, right,
Speaker 3: Paul can play Reeves. I can't play Reeves. Come on,
Speaker 3: most of the public is scared stiff of this. Let's
Speaker 3: begin with the timeline. Are you looking out to two
Speaker 3: thousand and thirty or are you looking out to two
Speaker 3: thousand and forty.
Speaker 7: Or twenty twenty five? Right?
Speaker 1: I mean AI is already being you Are we ready
Speaker 1: for this? We're We're not ready, nor are the providers ready?
Speaker 9: Right?
Speaker 1: The providers themselves are concerned about the You know, there's
Speaker 1: startups left and right right, and whether the startup's doing
Speaker 1: and what inputs are we using? Do we let AI
Speaker 1: go on all the data that's available about someone to profile?
Speaker 9: Heay?
Speaker 3: But do you flying to Park Avenue and you're gonna
Speaker 3: talk to James Diamond and his team at JP Morgan.
Speaker 9: You're gonna bring Keen Green.
Speaker 3: Of Berkeley along just to impress everybody, and they're going
Speaker 3: to go we need to trust this process. What's the
Speaker 3: trust factor at this conference in Boston? To people trust AI?
Speaker 1: I think I don't. I don't know the answer to
Speaker 1: do they trust? I don't think they know one way
Speaker 1: or the other. I think where we are is that
Speaker 1: right now? If we understand what inputs AI is using,
Speaker 1: so you can control that right where where it's going,
Speaker 1: what information it's using to make decisions. If you control
Speaker 1: the inputs, you're able to put a bound on what
Speaker 1: it can do. Right, You can tell it not to lie,
Speaker 1: you can tell it only to use these days these
Speaker 1: certain inputs that are non discriminatory and other things. Right now,
Speaker 1: what the how that input use is getting deployed is
Speaker 1: a black box?
Speaker 8: How from your research talking to providers of credit, how
Speaker 8: are they using AI yet? Are they using AI? Or
Speaker 8: is it still the loan officer that I got to
Speaker 8: convince I'm a good credit.
Speaker 7: No?
Speaker 1: No, definitely they are using AI, right, I mean from
Speaker 1: the you know, the simple way the chatbots right getting
Speaker 1: information in right that that is, those are AI driven,
Speaker 1: but also the processing and understanding under general parameters right
Speaker 1: under you know, how would you maximize for for profitably
Speaker 1: lending or how would you for profitably marketing new new.
Speaker 7: Products to people?
Speaker 8: Right?
Speaker 1: They are using there? Are they deploying underwriting at a
Speaker 1: full scale using AI?
Speaker 8: No?
Speaker 7: Probably not. There are some exceptions to that.
Speaker 1: But but we're using it little bits here and there,
Speaker 1: and it pretty soon the whole arena changes.
Speaker 3: Is America behind on this or are we leading the way? Ah?
Speaker 7: Probably leading? Leading?
Speaker 1: Is not you know the the there are other countries
Speaker 1: that are also deploying.
Speaker 7: China's deploying.
Speaker 1: There's there's a whole movement in Europe and a law
Speaker 1: in Europe regarding some of these things, and so it's
Speaker 1: we are ahead, but we are with others in that
Speaker 1: that lead.
Speaker 3: So Paul I got a credit rating of one hundred,
Speaker 3: it's like so low. You know, they don't even talk
Speaker 3: to me and I get email all the time. We'll
Speaker 3: give you forty five thousand, We'll give you ten thousand.
Speaker 3: Is that AI driven? Is it your fault?
Speaker 7: I don't know the answer to that question.
Speaker 1: But but that's where we are, right, that's where we
Speaker 1: you know, there there are people that are you know,
Speaker 1: they have credits course that maybe those credits course are
Speaker 1: not right, and maybe AI helps right and and so,
Speaker 1: and then there are other people that you know.
Speaker 8: Well, here's my concern is that small community banks, they're
Speaker 8: not going to be able to make the technology investments.
Speaker 8: Therefore that whatever benefits may be out there, and I
Speaker 8: don't know if there are, bye by the way, you
Speaker 8: have to convince me. I'm afraid that they're not going
Speaker 8: to have the same capabilities to say a JP Morgan Chase.
Speaker 1: So I'm I'm a big fan of having a community
Speaker 1: financial architecture. Banks, the lenders the CDFI's right, and the
Speaker 1: reason it's so important is because in downturns, these the
Speaker 1: research shows that these these local community facing lenders and banks,
Speaker 1: they they're able to stick with their customers and when
Speaker 1: they them the most. So so far, technology has not
Speaker 1: replicated that. Now, whether AI becomes a localized lender because
Speaker 1: its ability to act local is a question.
Speaker 7: We don't know.
Speaker 1: And how what does that mean for the financial architecture
Speaker 1: of the United States is a complete unknown.
Speaker 8: So I mean, at the end of the day, if
Speaker 8: I'm providing credit, I want to just I want a
Speaker 8: good credit environment where I get paid back, where I'm
Speaker 8: able to diverse, you know, distribute you know, debt into
Speaker 8: my marketplace. But I want to get paid back. I
Speaker 8: don't want to take undw credit risk. Ideally AI will
Speaker 8: help me do that better.
Speaker 1: Ideally it will help you do that better, and also
Speaker 1: to manage new products and new services for customers to
Speaker 1: figure out where they might be exposed to risk or
Speaker 1: where they might be evolving in their business or household.
Speaker 3: Thirty second question, We don't enough time. It's unfair Type
Speaker 3: one Type two construct. Is AI in banking going to
Speaker 3: help banks or help them not lose money.
Speaker 7: It's going to help them grow their business.
Speaker 8: That's kind of what they want to that's what they
Speaker 8: want to hear at. Dear Morse, thank you so much
Speaker 8: for joining us.
Speaker 5: A deare Moorese.
Speaker 8: She's professor of finance at the University of California at Berkeley.
Speaker 2: This is the Bloomberg Surveillance podcast, available on Apple, Spotify,
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