1 00:00:00,520 --> 00:00:03,720 Speaker 1: This is Bloomberg Wall Street Week. We turn our attention 2 00:00:03,880 --> 00:00:08,320 Speaker 1: to the markets this week. USCPI nembers reinforcing concerns about inflation, 3 00:00:08,440 --> 00:00:11,559 Speaker 1: the financial stories that cheap our work, a really different 4 00:00:11,600 --> 00:00:14,520 Speaker 1: reaction to mark its more indications of just how hot 5 00:00:14,560 --> 00:00:16,959 Speaker 1: the US economy really is. Through the eyes of the 6 00:00:17,000 --> 00:00:21,400 Speaker 1: most influential voices Larry Summers, the former Treattery Secretary, Katherine Keening, 7 00:00:21,560 --> 00:00:24,759 Speaker 1: CEO of ny moan Sam's l Shearmon n founder of 8 00:00:24,760 --> 00:00:28,440 Speaker 1: Equatic Group Investment in Bloomberg Wall Street Week with David 9 00:00:28,480 --> 00:00:33,680 Speaker 1: Weston from Bloomberg Radio. Second thoughts about back Wood and Ukraine, 10 00:00:33,720 --> 00:00:37,040 Speaker 1: about Chinese economy, and about where the Fed is heading. 11 00:00:37,400 --> 00:00:40,400 Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. This 12 00:00:40,440 --> 00:00:44,000 Speaker 1: week special contributor Larry Summers of Harvard on Silicon Valley 13 00:00:44,000 --> 00:00:48,120 Speaker 1: Bank and the risk of contagion. I don't see if 14 00:00:48,159 --> 00:00:51,280 Speaker 1: this is handled reasonably, and I have every reason to 15 00:00:51,360 --> 00:00:54,120 Speaker 1: think it will be that this will be a source 16 00:00:54,160 --> 00:00:57,480 Speaker 1: of systemic wresting. Outsideing Inveashelists of Rock Creek about the 17 00:00:57,520 --> 00:01:01,560 Speaker 1: politics and returns of ESG Investing, and investor Sam Zell 18 00:01:01,840 --> 00:01:04,800 Speaker 1: about what ports to seek when the storms are coming in. 19 00:01:05,240 --> 00:01:08,440 Speaker 1: We're talking about ending free money, but we're not ending 20 00:01:08,520 --> 00:01:24,160 Speaker 1: free money. This week was a time for reconsidering on 21 00:01:24,240 --> 00:01:26,959 Speaker 1: Global Wall Street, as the war in Europe raged on 22 00:01:27,120 --> 00:01:30,400 Speaker 1: and Ukrainian forces fought valiantly to hold on de Bach 23 00:01:30,520 --> 00:01:34,120 Speaker 1: Mood back. Mood Is surrounded on three sides. Reportedly, the 24 00:01:34,200 --> 00:01:37,800 Speaker 1: calculation Celenski's making is that he'll wear down Russian forces, 25 00:01:38,000 --> 00:01:41,400 Speaker 1: which are not very capable, even as leaders like Jamie 26 00:01:41,440 --> 00:01:44,320 Speaker 1: Diamond of JP Morgan warned that the situation there posts 27 00:01:44,480 --> 00:01:47,120 Speaker 1: one of the biggest risks with the global economy. I 28 00:01:47,120 --> 00:01:50,040 Speaker 1: think I worry the most about if is Ukraine soil 29 00:01:50,160 --> 00:01:53,160 Speaker 1: gas fill the leadership of the world, and you know 30 00:01:53,200 --> 00:01:55,800 Speaker 1: our lady with China, I mean that that is much 31 00:01:55,840 --> 00:01:58,480 Speaker 1: more serious though the economic by grazing you'll have to 32 00:01:58,520 --> 00:02:00,960 Speaker 1: deal with on a day to day base. At its 33 00:02:01,040 --> 00:02:05,280 Speaker 1: National People's Congress, China's leadership laid out new war modest projections, 34 00:02:05,480 --> 00:02:08,680 Speaker 1: raising questions not only for China but for global growth. 35 00:02:09,120 --> 00:02:12,120 Speaker 1: If you look at the trends of the GDP taget 36 00:02:12,240 --> 00:02:16,000 Speaker 1: dates set over the years, actually since twenty eighteen, they've 37 00:02:16,040 --> 00:02:19,120 Speaker 1: been gradually lowering the GDP growth. Hagets so I think 38 00:02:19,120 --> 00:02:22,360 Speaker 1: this is also a sign that increasingly the PUS makers 39 00:02:22,440 --> 00:02:26,840 Speaker 1: are increasingly emphasizing on the quality of growth rather than quantity. 40 00:02:27,120 --> 00:02:29,680 Speaker 1: Well fetch Yer J. Powe left a little doubt that 41 00:02:29,760 --> 00:02:32,840 Speaker 1: the continued strengthen the economy makes higher rates more likely 42 00:02:33,040 --> 00:02:35,880 Speaker 1: than lower. The latest economic data have come in stronger 43 00:02:35,880 --> 00:02:38,880 Speaker 1: than expected, which suggests that the ultimate level of interest 44 00:02:38,960 --> 00:02:43,000 Speaker 1: rates is likely to be higher and previously anticipated. If 45 00:02:43,000 --> 00:02:45,720 Speaker 1: the totality of the data were to indicate that faster 46 00:02:45,800 --> 00:02:48,960 Speaker 1: tightening is warranted, we'd be prepared to increase the pace 47 00:02:49,040 --> 00:02:51,919 Speaker 1: of rate heights. And the prospect of those higher rates 48 00:02:52,000 --> 00:02:55,320 Speaker 1: hit tech banking hard as Silicon Valley Bank went from 49 00:02:55,360 --> 00:02:59,000 Speaker 1: panic to receivership in twenty four hours. A SVB bank 50 00:02:59,080 --> 00:03:02,480 Speaker 1: has now failed. The FDIC takes over and has appointed 51 00:03:02,480 --> 00:03:05,480 Speaker 1: a receiver. It is the first insured institution to fail 52 00:03:05,520 --> 00:03:09,840 Speaker 1: so far this year. Jobs numbers out on Friday would 53 00:03:09,840 --> 00:03:12,840 Speaker 1: have been encouraging but for that SVP's failure, with the 54 00:03:12,919 --> 00:03:16,280 Speaker 1: US adding another three hundred eleven thousand jobs while wage 55 00:03:16,280 --> 00:03:19,280 Speaker 1: increases slowed a bit, but all the jobs in the 56 00:03:19,320 --> 00:03:22,680 Speaker 1: world couldn't overcome Chairpile's warnings about higher rates, and then 57 00:03:22,720 --> 00:03:25,639 Speaker 1: the shutter sent through the banking sector, leaving the SMP 58 00:03:25,760 --> 00:03:28,280 Speaker 1: five hundred down over four point five percent of the week, 59 00:03:28,400 --> 00:03:31,359 Speaker 1: while the NAZAC lost four point seven percent. But of course, 60 00:03:31,400 --> 00:03:34,160 Speaker 1: the flight to safety drove investors to bonds, leaving the 61 00:03:34,200 --> 00:03:37,000 Speaker 1: yield on the ten year twenty five basis points lower 62 00:03:37,080 --> 00:03:39,600 Speaker 1: on the week, with almost all of it really coming 63 00:03:39,640 --> 00:03:42,200 Speaker 1: on Friday. Here to help us sort all this out, 64 00:03:42,280 --> 00:03:46,200 Speaker 1: our Sarah Ketder Causeway Capital Management CEO, and Barbara Reinhardt, 65 00:03:46,560 --> 00:03:50,200 Speaker 1: head of Asset Allocation Investment Management. So welcome to both 66 00:03:50,240 --> 00:03:52,440 Speaker 1: of you. Barbara, great to have you here with us. 67 00:03:52,560 --> 00:03:54,960 Speaker 1: So it was quite a back and forth week. We 68 00:03:55,360 --> 00:03:58,040 Speaker 1: had the pile testimony that seemed to inca we go higher, 69 00:03:58,440 --> 00:04:00,520 Speaker 1: we had the jobs numbers, and then we had the 70 00:04:00,920 --> 00:04:03,800 Speaker 1: SVB situation. What do you make of all of it? Look, 71 00:04:03,800 --> 00:04:06,520 Speaker 1: I think that the overwhelming thing that happened this week 72 00:04:06,720 --> 00:04:10,320 Speaker 1: was the receivership of SVB. Right, it's a It's one 73 00:04:10,360 --> 00:04:12,320 Speaker 1: of the largest bank failures that we've had since the 74 00:04:12,320 --> 00:04:15,320 Speaker 1: Financial crisis. It's the sixteenth largest bank in the US. 75 00:04:15,960 --> 00:04:18,080 Speaker 1: I don't think that the issues that you see with 76 00:04:18,279 --> 00:04:21,120 Speaker 1: SBB are systemic. I would agree with what Larry Summers 77 00:04:21,160 --> 00:04:24,480 Speaker 1: has said earlier. However, I do think it was an 78 00:04:24,480 --> 00:04:26,920 Speaker 1: opportunity for everyone in the market to take a very 79 00:04:26,920 --> 00:04:29,839 Speaker 1: big pause today and really think about their positions and 80 00:04:29,880 --> 00:04:32,120 Speaker 1: think about their liquidity, which is why you saw some 81 00:04:32,200 --> 00:04:35,799 Speaker 1: of them. You know, less liquid parts of the market 82 00:04:35,880 --> 00:04:38,360 Speaker 1: really get hit much harder today, like small cap stocks 83 00:04:38,720 --> 00:04:41,119 Speaker 1: and high yeld bonds. Also, we know we're down pretty 84 00:04:41,160 --> 00:04:44,520 Speaker 1: dramatically today. So Sarah, even if it's not systemic, is 85 00:04:44,520 --> 00:04:46,840 Speaker 1: it possibly a canary in the coal mine? Is they 86 00:04:46,839 --> 00:04:49,680 Speaker 1: talk about they although it maybe just SVB and they 87 00:04:49,720 --> 00:04:53,880 Speaker 1: got special situations, the underlying circumstances could be reflected in 88 00:04:53,960 --> 00:04:56,960 Speaker 1: other parts of the of the economy as well as 89 00:04:57,000 --> 00:05:04,160 Speaker 1: frankly financial markets. David one never knows, but but Silicon 90 00:05:04,240 --> 00:05:08,120 Speaker 1: Valley Bank did have a very concentrated corporate deposit base, 91 00:05:08,320 --> 00:05:11,599 Speaker 1: and so there are other regional banks in the US 92 00:05:11,760 --> 00:05:15,960 Speaker 1: their deposit bases in general seem to be much more diversified. 93 00:05:16,400 --> 00:05:18,640 Speaker 1: So that's one of the primary reasons why this may 94 00:05:18,640 --> 00:05:24,040 Speaker 1: not be systematic. But confidence is crucial for banks, and 95 00:05:25,320 --> 00:05:29,960 Speaker 1: there doesn't appear, especially given the likelihood that Silicon Valley 96 00:05:30,000 --> 00:05:33,440 Speaker 1: Bank depositors will be made whole, any reason for this 97 00:05:33,560 --> 00:05:36,880 Speaker 1: to spread through the banking system, which could be a 98 00:05:36,920 --> 00:05:39,240 Speaker 1: reason to be looking at some of the other banks 99 00:05:39,040 --> 00:05:43,880 Speaker 1: as investments, given they're selling off so rapidly. Well, it 100 00:05:44,000 --> 00:05:47,680 Speaker 1: wasn't even I don't think as a practical owner, Sarah. 101 00:05:47,720 --> 00:05:49,320 Speaker 1: By the time it started to sort out, it looked 102 00:05:49,320 --> 00:05:51,520 Speaker 1: like the regional banks were getting hit harder than the 103 00:05:51,520 --> 00:05:53,720 Speaker 1: big money center banks. Does that suggest that some of 104 00:05:53,760 --> 00:05:57,640 Speaker 1: the regional banks maybe opportunities for investors right now? It 105 00:05:57,680 --> 00:06:01,159 Speaker 1: does depend on what they hold. If in their asset 106 00:06:02,400 --> 00:06:05,239 Speaker 1: basis they have a huge amount of commercial real estate, 107 00:06:05,279 --> 00:06:09,240 Speaker 1: particularly office, that could end up being very problematic. What 108 00:06:09,720 --> 00:06:12,479 Speaker 1: we're all really talking about, here's a new era. Interest 109 00:06:12,560 --> 00:06:17,279 Speaker 1: rates are rising, and until they stop rising in full again, 110 00:06:17,800 --> 00:06:21,000 Speaker 1: there's a complete new view on credit. Credit is going 111 00:06:21,040 --> 00:06:23,480 Speaker 1: to be very difficult to obtain. We're in a credit crunch. 112 00:06:24,240 --> 00:06:26,440 Speaker 1: So whether you're a real estate and you have a 113 00:06:26,440 --> 00:06:32,560 Speaker 1: tough time with occupancy or you're a technology banker, this 114 00:06:33,480 --> 00:06:37,600 Speaker 1: is a whole different environment. So be really careful if 115 00:06:37,600 --> 00:06:39,640 Speaker 1: you're looking at regional banks, make sure if they're trading 116 00:06:39,720 --> 00:06:42,440 Speaker 1: down at their tangible book value book less good will, 117 00:06:42,800 --> 00:06:45,320 Speaker 1: but that's really solid ground. There's nothing else you can 118 00:06:45,360 --> 00:06:48,240 Speaker 1: go terribly wrong in their asset side of their balance sheet. Well, 119 00:06:48,279 --> 00:06:50,520 Speaker 1: we're on other parts of the economy and a business 120 00:06:50,720 --> 00:06:52,760 Speaker 1: are interest rates sensitive in the centil Because we've had 121 00:06:52,800 --> 00:06:56,200 Speaker 1: a long regime frankly of pretty low interest rates that 122 00:06:56,360 --> 00:06:58,800 Speaker 1: seems to be gone right. Well, MC who has benefited 123 00:06:58,839 --> 00:07:01,280 Speaker 1: the most from very low inch strates? You know, the 124 00:07:01,279 --> 00:07:03,880 Speaker 1: real estate sector was probably the first one, right, that's 125 00:07:03,920 --> 00:07:07,240 Speaker 1: the single biggest beneficiary of it. You'd have to also 126 00:07:07,279 --> 00:07:10,200 Speaker 1: take a look at the private markets. Private credit, private equity, 127 00:07:10,200 --> 00:07:13,440 Speaker 1: private real estate all benefited from very low rates. So 128 00:07:13,640 --> 00:07:16,560 Speaker 1: you know the fact that you have is drying up liquidity. 129 00:07:16,600 --> 00:07:19,720 Speaker 1: The Federal Reserve has been raising interest rates aggressively for 130 00:07:19,760 --> 00:07:23,560 Speaker 1: the past twelve months. They're trying to slow down the economy. 131 00:07:23,800 --> 00:07:26,800 Speaker 1: And when you slow down the economy, certain things break, 132 00:07:27,600 --> 00:07:31,800 Speaker 1: just like cryptocurrency broke last year. Then you had the 133 00:07:32,760 --> 00:07:35,760 Speaker 1: problems in the guilt market in the UK, and now 134 00:07:35,800 --> 00:07:38,240 Speaker 1: you have a US bank that's just failed try to 135 00:07:38,240 --> 00:07:41,160 Speaker 1: slow down the economy. How much, Barbara, are we going 136 00:07:41,320 --> 00:07:43,920 Speaker 1: into recessions for practic matter? Because the inflation seems to 137 00:07:43,920 --> 00:07:46,240 Speaker 1: be more durable than people thought. Are they going to 138 00:07:46,280 --> 00:07:47,440 Speaker 1: have to stop in the break so hard that we 139 00:07:47,480 --> 00:07:49,440 Speaker 1: have to go into recessions. I don't think there's a 140 00:07:49,480 --> 00:07:51,360 Speaker 1: recession on the horizon over the course of the next 141 00:07:51,360 --> 00:07:53,960 Speaker 1: twelve months. Right, there's a very long lead time between 142 00:07:54,080 --> 00:07:57,800 Speaker 1: policy implementation, when you're raising your interest rates and when 143 00:07:57,800 --> 00:08:02,280 Speaker 1: you would go into recession. The US economy is extremely strong, right. 144 00:08:02,320 --> 00:08:04,520 Speaker 1: You had three hundred and eleven thousand jobs printed this 145 00:08:04,520 --> 00:08:07,360 Speaker 1: past month. While it looks like the labor market is 146 00:08:07,400 --> 00:08:10,680 Speaker 1: starting to ease a bit and weaken a little bit. 147 00:08:11,200 --> 00:08:13,640 Speaker 1: I would say that the US economy is a very 148 00:08:13,800 --> 00:08:17,920 Speaker 1: durable supertanker. It would probably take a seismic shock of 149 00:08:18,080 --> 00:08:20,320 Speaker 1: some sort in order to derail it at this point, 150 00:08:20,560 --> 00:08:23,520 Speaker 1: and I don't think SPB is that shock. Sarah, you 151 00:08:23,560 --> 00:08:26,680 Speaker 1: specialize in equities, in particularly investing in equities. When it 152 00:08:26,680 --> 00:08:29,800 Speaker 1: comes to equities, what is your base case on recession? 153 00:08:30,040 --> 00:08:33,040 Speaker 1: And more importantly, does it matter? Does it really affect 154 00:08:33,040 --> 00:08:35,040 Speaker 1: which equities invest in whether you think there's going to 155 00:08:35,040 --> 00:08:38,440 Speaker 1: be a recession or not. It matters if a stock 156 00:08:38,480 --> 00:08:41,760 Speaker 1: doesn't already price in some slowing. There's no doubt. I mean, 157 00:08:42,120 --> 00:08:44,680 Speaker 1: my colleagues and I really do believe that the FED 158 00:08:44,800 --> 00:08:47,920 Speaker 1: is intent on slowing the US economy and the same 159 00:08:47,960 --> 00:08:50,040 Speaker 1: with the European central banks. Maybe they're a year behind 160 00:08:50,080 --> 00:08:53,080 Speaker 1: the FED, and at some point in time maybe the 161 00:08:53,160 --> 00:08:56,160 Speaker 1: Japanese will tighten monetary policy with a new central bankhead. 162 00:08:56,200 --> 00:08:58,800 Speaker 1: So there's a lot of tightening out there. And the 163 00:08:58,840 --> 00:09:01,520 Speaker 1: other side of that is typical economic slowing. That's what 164 00:09:01,640 --> 00:09:06,160 Speaker 1: brings down inflation, and inflation is the target. So we're 165 00:09:06,200 --> 00:09:10,760 Speaker 1: expecting some element of slowing. It may be severe. It's 166 00:09:10,800 --> 00:09:13,080 Speaker 1: hard to know. But what we do know is what's 167 00:09:13,080 --> 00:09:16,000 Speaker 1: priced into stocks, and not all stocks, but in certain 168 00:09:16,040 --> 00:09:20,520 Speaker 1: areas that many of them have already discounted in economic slowing. 169 00:09:20,960 --> 00:09:23,960 Speaker 1: Not all the cyclicals, for example, but there are sub 170 00:09:24,040 --> 00:09:28,559 Speaker 1: industries that have and that's the opportunity where it's already 171 00:09:28,559 --> 00:09:30,280 Speaker 1: priced and then we can have it. Then then the 172 00:09:30,280 --> 00:09:32,520 Speaker 1: worst can happen and the stock has in nowhere to 173 00:09:32,559 --> 00:09:35,120 Speaker 1: go but up. So Barbara's played the parlor game. What 174 00:09:35,200 --> 00:09:36,600 Speaker 1: do you think the terminal rd's got to be for 175 00:09:36,600 --> 00:09:38,600 Speaker 1: the FED to get inflation down to where one needs 176 00:09:38,640 --> 00:09:40,560 Speaker 1: to go. I don't think it's as high as probably 177 00:09:40,559 --> 00:09:42,880 Speaker 1: what the markets pricing in. I think maybe the foeder 178 00:09:42,960 --> 00:09:45,800 Speaker 1: reserve has to tighten one, maybe two more times if that, 179 00:09:45,920 --> 00:09:48,040 Speaker 1: and then be done. The reason is the way that 180 00:09:48,080 --> 00:09:50,880 Speaker 1: you price in a higher terminal rate is either you 181 00:09:50,960 --> 00:09:55,000 Speaker 1: have a faster labor force growth or a faster productivity growth. 182 00:09:55,480 --> 00:09:58,480 Speaker 1: The US doesn't have any any thought showing of that 183 00:09:58,600 --> 00:10:00,840 Speaker 1: being the case at this point. So for US, we 184 00:10:00,880 --> 00:10:03,559 Speaker 1: do not believe that our star is six percent or 185 00:10:03,600 --> 00:10:05,280 Speaker 1: something above there at this point. I don't think that 186 00:10:05,320 --> 00:10:08,760 Speaker 1: the US economy can grow so fast or it's been 187 00:10:08,800 --> 00:10:11,160 Speaker 1: such a dramatic change that it's been over the past 188 00:10:11,160 --> 00:10:14,000 Speaker 1: twenty years, so we don't think that rates have to 189 00:10:14,040 --> 00:10:16,839 Speaker 1: go much higher at this point. Sarah Header and Barbara 190 00:10:16,840 --> 00:10:18,720 Speaker 1: Reinhardt will be staying with us as we turn to 191 00:10:18,760 --> 00:10:21,679 Speaker 1: what all this means for your portfolio. This is Wall 192 00:10:21,679 --> 00:10:42,959 Speaker 1: Street Week on Bluebird in Darkness Washington. The Reagan administration 193 00:10:43,080 --> 00:10:46,640 Speaker 1: stuck to which proposed six hundred and ninety five billion 194 00:10:46,640 --> 00:10:50,240 Speaker 1: dollars budget, a number of that in Washington is somehow 195 00:10:50,280 --> 00:10:55,160 Speaker 1: regarded as lean and austere, and the Democratic leadership in 196 00:10:55,160 --> 00:10:57,920 Speaker 1: Congress stuck to its view that the budget is, as 197 00:10:57,920 --> 00:11:02,839 Speaker 1: one senator put it, cool, in human, and unfair. To 198 00:11:02,920 --> 00:11:07,280 Speaker 1: an end next week for further non surprises. That was 199 00:11:07,360 --> 00:11:09,800 Speaker 1: Lewis Roguiser back in March of nineteen nine eighty one, 200 00:11:09,840 --> 00:11:12,160 Speaker 1: when the number one movie in the country was Back 201 00:11:12,280 --> 00:11:14,480 Speaker 1: Roads with Sally Fields and Time and Lee Jones, the 202 00:11:14,600 --> 00:11:17,120 Speaker 1: number one song was nine to five with Valley Parton, 203 00:11:17,320 --> 00:11:20,320 Speaker 1: and the proposed federal budget was a whopping six hundred 204 00:11:20,400 --> 00:11:23,440 Speaker 1: ninety five billion dollars instead of the six point nine 205 00:11:23,600 --> 00:11:27,200 Speaker 1: trillion dollars proposed by President Biden just this week, Still 206 00:11:27,200 --> 00:11:29,920 Speaker 1: with us or Barbara Reinhardt of Voya Investment Management and 207 00:11:30,000 --> 00:11:32,680 Speaker 1: Sarah Header of Causeway Capital. So Barbara, let me start 208 00:11:32,720 --> 00:11:34,360 Speaker 1: with you here. We want to turn down of the 209 00:11:34,440 --> 00:11:36,480 Speaker 1: question with the portfolio. This is your job in party 210 00:11:36,520 --> 00:11:38,880 Speaker 1: is to figure out how to allocate portfolios. Given all 211 00:11:38,880 --> 00:11:41,040 Speaker 1: that we've said about where we are in the tightening curve, 212 00:11:41,320 --> 00:11:44,560 Speaker 1: everything we've seen, how do you manage your portfolios these days? 213 00:11:44,720 --> 00:11:47,240 Speaker 1: One thing that we're thinking greatly about, David, is our 214 00:11:47,320 --> 00:11:50,920 Speaker 1: international equity exposure. So when we think about global equities, 215 00:11:50,960 --> 00:11:52,440 Speaker 1: we look around the world and we look for the 216 00:11:52,440 --> 00:11:55,439 Speaker 1: opportunity set. One thing that stands out to us that's 217 00:11:55,480 --> 00:11:58,239 Speaker 1: probably a little bit overextended at this point is international 218 00:11:58,280 --> 00:12:01,719 Speaker 1: developed equities. Over the past one year, the SMP is 219 00:12:01,760 --> 00:12:05,280 Speaker 1: down four percent. International developed equities, you know, Europe in 220 00:12:05,360 --> 00:12:09,600 Speaker 1: Japan are up almost seven percent. That is a very 221 00:12:09,640 --> 00:12:12,520 Speaker 1: big disparity in returns between those two parts of the world. 222 00:12:12,920 --> 00:12:16,720 Speaker 1: For Europe, it had been priced for a very big, 223 00:12:16,840 --> 00:12:20,320 Speaker 1: very bad recession. It didn't transpire. They had much warmer 224 00:12:20,320 --> 00:12:23,400 Speaker 1: weather than it'd been expected. But we don't think that 225 00:12:23,480 --> 00:12:27,560 Speaker 1: all those great things that Europe averted, or the luck 226 00:12:27,600 --> 00:12:29,719 Speaker 1: that Europe had in averting some of that disaster over 227 00:12:29,760 --> 00:12:32,280 Speaker 1: the past year, is likely to be repeated. So we're 228 00:12:32,280 --> 00:12:34,839 Speaker 1: actually keeping our assets closer to home. In the US, 229 00:12:35,200 --> 00:12:37,040 Speaker 1: we think that the FED is one of the first 230 00:12:37,080 --> 00:12:39,760 Speaker 1: central banks or major market central banks that has raised 231 00:12:39,760 --> 00:12:42,040 Speaker 1: interest rates, it's likely to be one of the first 232 00:12:42,040 --> 00:12:45,760 Speaker 1: ones to stop. And we think as the world slows down, 233 00:12:46,200 --> 00:12:49,319 Speaker 1: the dollar is likely to get a little bit stronger 234 00:12:49,400 --> 00:12:53,079 Speaker 1: as a flight to safety and somewhat quality in the US. 235 00:12:53,120 --> 00:12:54,960 Speaker 1: So we're staying a little bit closer to home, but 236 00:12:54,960 --> 00:12:58,000 Speaker 1: we're barbelling it with some exposure to the emerging markets 237 00:12:58,040 --> 00:12:59,920 Speaker 1: because we do realize that there's been a lot of 238 00:13:00,000 --> 00:13:03,720 Speaker 1: stimulas put into the pipeline, and we think that again 239 00:13:04,320 --> 00:13:07,640 Speaker 1: emerging markets are so cheap at this point if you 240 00:13:07,679 --> 00:13:09,560 Speaker 1: can hold them for a three to four to five 241 00:13:09,640 --> 00:13:12,880 Speaker 1: year period, you're likely to be very pleased with your portfolio. Okay, 242 00:13:12,920 --> 00:13:16,840 Speaker 1: so someone said, Barbara's talking your equity bookhare you specialize inequities. 243 00:13:16,880 --> 00:13:20,360 Speaker 1: Where are you in developed market equities these days? Well, 244 00:13:20,400 --> 00:13:23,600 Speaker 1: for developed markets, And Barbara has a point that Europe 245 00:13:23,640 --> 00:13:27,280 Speaker 1: and Japan have outperformed the US. Really more Europe. The 246 00:13:27,360 --> 00:13:31,240 Speaker 1: Eurostocks fifty is up eleven percent year to date in dollars. 247 00:13:31,280 --> 00:13:34,959 Speaker 1: That's not even a full three months. However, that's a 248 00:13:35,040 --> 00:13:38,959 Speaker 1: rather short time period. Non US Developed has vastly underperformed 249 00:13:38,960 --> 00:13:42,520 Speaker 1: the US or less decade. And I've heard this from clients, 250 00:13:42,559 --> 00:13:46,280 Speaker 1: you know, they get very anxious. But so it might 251 00:13:46,320 --> 00:13:48,560 Speaker 1: be quite some time, if you think about it, in 252 00:13:48,600 --> 00:13:51,840 Speaker 1: that longer context, for Non US developed to catch up 253 00:13:51,880 --> 00:13:55,600 Speaker 1: with the US. And there's still a significant valuation discount 254 00:13:55,920 --> 00:13:59,440 Speaker 1: for non US versus US, in part due to the 255 00:13:59,520 --> 00:14:02,720 Speaker 1: different sector weights in the two areas. The US has 256 00:14:02,840 --> 00:14:05,720 Speaker 1: much more in the way of technology, and here today, interestingly, 257 00:14:06,160 --> 00:14:09,840 Speaker 1: in a broad global context, technology has led along with 258 00:14:09,960 --> 00:14:15,000 Speaker 1: consumer discretionary and communication services. So investors are still really 259 00:14:15,040 --> 00:14:19,120 Speaker 1: interested in tech. There's them like I just say, this 260 00:14:19,200 --> 00:14:22,280 Speaker 1: is the environment we're in. It's one of active management. 261 00:14:22,480 --> 00:14:25,400 Speaker 1: With rising rates, just can't buy an index anymore. In 262 00:14:25,440 --> 00:14:28,080 Speaker 1: my opinion, you have to have a manager who can 263 00:14:28,120 --> 00:14:30,440 Speaker 1: sift through and let's say, go to non US developed 264 00:14:30,440 --> 00:14:33,120 Speaker 1: and find the stocks that haven't yet had their earnings 265 00:14:33,160 --> 00:14:36,600 Speaker 1: recovery recognized. Some of them haven't even gone into a downturn. 266 00:14:36,680 --> 00:14:39,400 Speaker 1: I mean, Barbara noted the tightening cycle and I mentioned 267 00:14:39,400 --> 00:14:41,520 Speaker 1: this as well as a little bit lagged in Europe. 268 00:14:41,720 --> 00:14:44,600 Speaker 1: Old all that additional tightening, there may be more casualties. 269 00:14:44,920 --> 00:14:48,560 Speaker 1: So being very careful about price entry point be extremely 270 00:14:48,640 --> 00:14:51,160 Speaker 1: cheap in terms of what you'll pay is a way 271 00:14:51,160 --> 00:14:53,920 Speaker 1: to avoid those pitfalls. It's been really great having both 272 00:14:53,920 --> 00:14:56,000 Speaker 1: of us. Thank you so much to Sarah Header of 273 00:14:56,040 --> 00:15:00,840 Speaker 1: Causeway Capital and to Barbara Reinhardt. A voya. Investing related 274 00:15:00,880 --> 00:15:04,480 Speaker 1: to environmental, social and governance issues so called ESG has 275 00:15:04,520 --> 00:15:06,880 Speaker 1: been on our roller coaster ride. From being all the 276 00:15:07,000 --> 00:15:09,640 Speaker 1: rage and embraced by some of the largest financial institutions 277 00:15:09,640 --> 00:15:12,040 Speaker 1: in the world, it's being scorned and even the subject 278 00:15:12,040 --> 00:15:14,840 Speaker 1: of legislation to limit its use. And through it all, 279 00:15:14,960 --> 00:15:17,480 Speaker 1: it's sometimes hard to sort out how much is investing 280 00:15:17,480 --> 00:15:20,480 Speaker 1: based on social values and how much is just pursuing 281 00:15:20,600 --> 00:15:24,160 Speaker 1: value through taking into account all the risks of Sonny Beschilists, 282 00:15:24,160 --> 00:15:27,160 Speaker 1: CEO of Rock Creek, was an early proponent of ESG investing, 283 00:15:27,320 --> 00:15:29,720 Speaker 1: at least in certain circumstances, and she's back with us 284 00:15:29,720 --> 00:15:32,160 Speaker 1: now on Wall Street Week. It's great to have you here, Sonny, 285 00:15:32,400 --> 00:15:34,520 Speaker 1: great to be with you. Such a treat. So I mean, 286 00:15:34,680 --> 00:15:37,080 Speaker 1: take us to this. Is it a choice between return 287 00:15:37,120 --> 00:15:38,960 Speaker 1: on the one hand and social values on the other, 288 00:15:38,960 --> 00:15:41,200 Speaker 1: because that's the way some people like to put the question. 289 00:15:41,720 --> 00:15:44,240 Speaker 1: You are absolutely right, and I have to tell you 290 00:15:44,280 --> 00:15:47,320 Speaker 1: I don't necessarily like the word ESG just to put 291 00:15:47,360 --> 00:15:50,640 Speaker 1: that on the table right here. But I think what 292 00:15:50,800 --> 00:15:55,880 Speaker 1: is happening right now in Washington, President Biden did vetoed 293 00:15:55,920 --> 00:15:58,760 Speaker 1: the bill that was trying to pass through to allow 294 00:15:58,880 --> 00:16:03,680 Speaker 1: corporate tension plans to consider ESG factors in their investments, 295 00:16:03,720 --> 00:16:06,760 Speaker 1: not to actually necessarily adopt them, but to actually consider them. 296 00:16:06,760 --> 00:16:10,560 Speaker 1: So it was a pretty soft requirement. I think that 297 00:16:10,840 --> 00:16:14,040 Speaker 1: what that is not showing us is what you said, 298 00:16:14,120 --> 00:16:17,400 Speaker 1: which is right now. If you and I were investing 299 00:16:17,600 --> 00:16:21,320 Speaker 1: in let's say, renewable energy, we would have lost this year. 300 00:16:21,440 --> 00:16:24,680 Speaker 1: Just in twenty twenty three one point four percent or so. 301 00:16:24,720 --> 00:16:28,840 Speaker 1: Of course today the markets got pretty murky. But if 302 00:16:28,840 --> 00:16:30,960 Speaker 1: you had invested in oil and gas, we would have 303 00:16:31,000 --> 00:16:34,160 Speaker 1: lost three point eight percent in the last five years. 304 00:16:34,200 --> 00:16:37,760 Speaker 1: We would have made seventeen point four percent in renewable energy, 305 00:16:37,800 --> 00:16:40,200 Speaker 1: and we would have made about seven to ten percent, 306 00:16:40,240 --> 00:16:44,200 Speaker 1: depending on which index you're looking at in oil and gas. Now, 307 00:16:44,320 --> 00:16:47,640 Speaker 1: if you looked at other periods, oil and gas might 308 00:16:47,760 --> 00:16:50,120 Speaker 1: very well be ahead. But what does that mean. It 309 00:16:50,160 --> 00:16:54,840 Speaker 1: means for investors renewable energy is really economic. It has 310 00:16:54,960 --> 00:16:59,320 Speaker 1: now changed the technologies with us such that clean energy 311 00:16:59,400 --> 00:17:05,280 Speaker 1: happens to economic. So when you're looking at purely financial decisions, 312 00:17:05,320 --> 00:17:07,480 Speaker 1: it should certainly be a part of your portfolio. So 313 00:17:07,520 --> 00:17:08,960 Speaker 1: I wonder, if I can put it this way, how 314 00:17:09,040 --> 00:17:10,840 Speaker 1: much that's on the fundamentals, That is to say, you 315 00:17:10,840 --> 00:17:14,479 Speaker 1: can actually make more money by taking head environmental I'll 316 00:17:14,480 --> 00:17:16,639 Speaker 1: just takeing environmentals, so I won't bother with the esp okay, 317 00:17:16,840 --> 00:17:19,959 Speaker 1: And how much is actually just the hydraulic pressure behind 318 00:17:20,280 --> 00:17:23,480 Speaker 1: environmental investing. It's so popular, the money goes there and 319 00:17:23,520 --> 00:17:26,639 Speaker 1: it drives it up rather than actually being on the fundamentals. 320 00:17:27,080 --> 00:17:30,520 Speaker 1: So just purely on the fundamentals, just purely on the 321 00:17:30,560 --> 00:17:33,840 Speaker 1: costs of how much it costs now to produce solar energy. 322 00:17:34,200 --> 00:17:38,560 Speaker 1: If you look at that, it has become totally fundamentally economic. 323 00:17:38,880 --> 00:17:41,280 Speaker 1: If you look at Texas, because we see tis in 324 00:17:41,280 --> 00:17:44,520 Speaker 1: Florida are right in the front of the conversation that 325 00:17:44,640 --> 00:17:49,120 Speaker 1: you mentioned. But Texas is producing fourteen percent of renewable 326 00:17:49,240 --> 00:17:53,120 Speaker 1: energy in America. Do you think you know that would 327 00:17:53,240 --> 00:17:56,080 Speaker 1: be the case if the fundamentals were not there. They're 328 00:17:56,119 --> 00:18:00,879 Speaker 1: just as we speak, building a huge wind farm that 329 00:18:00,960 --> 00:18:04,640 Speaker 1: will produce energy for three million households. I'm siddy. You've 330 00:18:04,680 --> 00:18:07,400 Speaker 1: been in the markets for a good long time, all 331 00:18:07,400 --> 00:18:09,920 Speaker 1: sorts of different positions. Well, the markets sort this out, 332 00:18:10,000 --> 00:18:11,560 Speaker 1: that is to say, if you're right, and in fact, 333 00:18:11,600 --> 00:18:14,960 Speaker 1: you'll get better returns on average over time by taking 334 00:18:14,960 --> 00:18:19,080 Speaker 1: your account environmental concerns. Will that drive people into those investors, 335 00:18:19,119 --> 00:18:21,439 Speaker 1: whether they want to be there or not. I actually 336 00:18:21,520 --> 00:18:25,359 Speaker 1: think people are moving in that direction. So there is 337 00:18:25,400 --> 00:18:28,160 Speaker 1: one thing is the political conversations that are going on. 338 00:18:28,280 --> 00:18:30,960 Speaker 1: But if you look, if you talk to any businessman, again, 339 00:18:31,119 --> 00:18:33,240 Speaker 1: not just in Texas, but all over the country, people 340 00:18:33,240 --> 00:18:37,720 Speaker 1: are investing in an integrated way into into these sources 341 00:18:37,720 --> 00:18:42,040 Speaker 1: of energy. And they'll continue and insurance companies, by the way, 342 00:18:42,200 --> 00:18:44,480 Speaker 1: are looking at the same factors to make sure they 343 00:18:44,480 --> 00:18:48,760 Speaker 1: don't lose money. It's very much it's how the job is, 344 00:18:48,800 --> 00:18:52,200 Speaker 1: how to maximize returns, how do you minimize risk out 345 00:18:52,240 --> 00:18:55,280 Speaker 1: of those are very important for investors. So as I'll 346 00:18:55,320 --> 00:18:58,080 Speaker 1: just again say with climate rather than social and governments 347 00:18:58,080 --> 00:19:00,000 Speaker 1: for their owns. Has it gotten a bad name because 348 00:19:00,119 --> 00:19:02,200 Speaker 1: some people are using it as a marketing different technique. 349 00:19:02,200 --> 00:19:04,920 Speaker 1: It's actually hard to know which companies are actually making 350 00:19:04,960 --> 00:19:07,159 Speaker 1: decisions based on it, as opposed to just saying there 351 00:19:07,160 --> 00:19:09,920 Speaker 1: because everyone wants to say they're environmentally correct. I think 352 00:19:10,119 --> 00:19:14,160 Speaker 1: you're absolutely right. There's the greenwashing. The green bonds led 353 00:19:14,200 --> 00:19:17,520 Speaker 1: to some companies that were even using coal calling themselves green. 354 00:19:18,200 --> 00:19:21,639 Speaker 1: So climate has become not such a positive word, just 355 00:19:21,760 --> 00:19:25,080 Speaker 1: like ESG. But if we just talked about energy transition, 356 00:19:25,160 --> 00:19:27,760 Speaker 1: I don't think many people would disagree. We need to 357 00:19:27,840 --> 00:19:29,720 Speaker 1: use oil and gas. Most people are using them in 358 00:19:29,760 --> 00:19:35,080 Speaker 1: the transition, but we're moving towards cheaper, sustainable energy. I 359 00:19:35,119 --> 00:19:37,880 Speaker 1: think everyone is doing that, whether you're looking at Saudi Arabia, 360 00:19:38,000 --> 00:19:40,520 Speaker 1: UAE or Texas. It's so wonderful to have you here. 361 00:19:40,560 --> 00:19:43,600 Speaker 1: Alfsani always thank you so much as Halfsani Baschelas of 362 00:19:43,760 --> 00:19:47,680 Speaker 1: Rock Creek. Coming up, we wrap up our week with 363 00:19:47,760 --> 00:19:50,680 Speaker 1: special contributor Larry Summers of Harvard at the next on 364 00:19:50,760 --> 00:20:01,520 Speaker 1: Wall Street Week on Bloomberg. This is Wall Street Week. 365 00:20:01,560 --> 00:20:04,160 Speaker 1: I'm David Weston. We welcome now our special Wall Street 366 00:20:04,200 --> 00:20:06,560 Speaker 1: Week contributor Larry Summers of Harvard. Larry, thank you so 367 00:20:06,680 --> 00:20:09,359 Speaker 1: much for joining us here. We have to talk about 368 00:20:09,359 --> 00:20:12,359 Speaker 1: Silicon Valley Bank. It's been developing. Towards the end of 369 00:20:12,359 --> 00:20:14,679 Speaker 1: the week, a lot happened. They pretty quickly went into 370 00:20:14,720 --> 00:20:18,640 Speaker 1: receivorship from the FDIC. What does it tell us more 371 00:20:18,760 --> 00:20:21,399 Speaker 1: broadly about what's going on in the banking sector or 372 00:20:21,440 --> 00:20:24,679 Speaker 1: in the economy. Look, there's still plenty of fog of 373 00:20:24,760 --> 00:20:28,520 Speaker 1: war here and we're still all trying to sort through it. 374 00:20:29,040 --> 00:20:33,040 Speaker 1: There clearly was a big managerial failure. It sure looks 375 00:20:33,119 --> 00:20:37,440 Speaker 1: like regulators were not on the case in the way 376 00:20:37,480 --> 00:20:41,800 Speaker 1: they could have been. Right now, it looks like this 377 00:20:41,920 --> 00:20:47,920 Speaker 1: is not a broad systemic issue. That Silicon Valley Bank 378 00:20:48,040 --> 00:20:52,560 Speaker 1: and perhaps perhaps several other banks, but not many other banks, 379 00:20:52,600 --> 00:20:58,280 Speaker 1: and none of the largest banks, had a mismatch between 380 00:20:58,440 --> 00:21:02,359 Speaker 1: the kind of depots they had and the ways in 381 00:21:02,400 --> 00:21:07,280 Speaker 1: which they had invested their money in longer term bonds, 382 00:21:07,880 --> 00:21:11,639 Speaker 1: and so I don't think this is likely to be 383 00:21:11,720 --> 00:21:16,639 Speaker 1: a broadly systemic problem, but it certainly is going to 384 00:21:16,760 --> 00:21:23,199 Speaker 1: have very substantial consequences for Silicon Valley, for the economy 385 00:21:23,280 --> 00:21:28,280 Speaker 1: of the whole venture sector, which has been dynamic, unless 386 00:21:30,000 --> 00:21:35,600 Speaker 1: the government is able to assure that this situation is 387 00:21:35,640 --> 00:21:42,760 Speaker 1: worked through. Right now, the holders of uninsured deposits have 388 00:21:42,880 --> 00:21:47,440 Speaker 1: been told that those deposits are frozen and camp be withdrawn. 389 00:21:48,160 --> 00:21:51,880 Speaker 1: There are dozens, if not hundreds of startups that we're 390 00:21:51,920 --> 00:21:55,680 Speaker 1: planning to use that cash to meet their payroll next week. 391 00:21:56,520 --> 00:22:00,600 Speaker 1: If that's not able to happen, the consequences will it 392 00:22:00,680 --> 00:22:05,840 Speaker 1: will be quite severe for our innovation system. I suspect 393 00:22:05,960 --> 00:22:10,240 Speaker 1: that ways will be found to at least provide significant 394 00:22:10,400 --> 00:22:17,719 Speaker 1: advances on those deposits to enable the payment of payrolls. 395 00:22:18,200 --> 00:22:20,600 Speaker 1: I think the FDIC is going to have to think 396 00:22:21,160 --> 00:22:25,880 Speaker 1: very hard about how to be maximally creative in using 397 00:22:26,359 --> 00:22:30,879 Speaker 1: its authorities to assure that this doesn't have a set 398 00:22:30,920 --> 00:22:38,520 Speaker 1: of collateral consequences for the innovation economy. I don't think 399 00:22:38,560 --> 00:22:42,560 Speaker 1: this is a time for moral hazard lectures or for 400 00:22:42,760 --> 00:22:48,600 Speaker 1: talk about teaching people lessons. We have enough strains and 401 00:22:48,800 --> 00:22:56,359 Speaker 1: challenges in the economy without adding the collateral consequences of 402 00:22:57,760 --> 00:23:04,040 Speaker 1: a breakdown in an important sector of the economy. So 403 00:23:04,080 --> 00:23:07,639 Speaker 1: I hope that they will in the short run be 404 00:23:07,760 --> 00:23:14,000 Speaker 1: aggressive about containing the problem and containing possible contagion, and 405 00:23:14,040 --> 00:23:16,960 Speaker 1: then over the medium term, I think there are important 406 00:23:17,040 --> 00:23:20,840 Speaker 1: lessons for how we regulate what roles we use for 407 00:23:20,960 --> 00:23:28,240 Speaker 1: market values in regulation that need to be learned from 408 00:23:28,240 --> 00:23:33,000 Speaker 1: this experience. I think we have tended to have a 409 00:23:33,040 --> 00:23:37,080 Speaker 1: bit of a romance with the community bank relative to 410 00:23:37,119 --> 00:23:41,280 Speaker 1: the larger banks, and we're going to have to figure 411 00:23:41,320 --> 00:23:48,200 Speaker 1: out how to maintain banking services for communities while moving 412 00:23:49,240 --> 00:23:53,800 Speaker 1: to also pay attention to making sure that we've got 413 00:23:53,800 --> 00:23:57,119 Speaker 1: as much financial stability as we possibly can. Whenever we 414 00:23:57,119 --> 00:24:00,200 Speaker 1: talk about financial stability, we are reassured that the banking 415 00:24:00,240 --> 00:24:02,879 Speaker 1: system is so much stronger than it was before twenty eight, 416 00:24:02,920 --> 00:24:05,600 Speaker 1: two thousand and nine, so many reforms. Is there some 417 00:24:05,680 --> 00:24:07,919 Speaker 1: question now about whether that's exactly right? And let me 418 00:24:07,960 --> 00:24:10,200 Speaker 1: be very specific, what about the stress tests? Why didn't 419 00:24:10,200 --> 00:24:13,160 Speaker 1: they kick this out? Look? I think I have written 420 00:24:13,920 --> 00:24:19,160 Speaker 1: that there are a lot of concerns about the stress 421 00:24:19,240 --> 00:24:23,560 Speaker 1: tests I do not believe the stress tests give an 422 00:24:23,560 --> 00:24:29,280 Speaker 1: accurate picture of the resilience of the banking system. I 423 00:24:29,320 --> 00:24:34,280 Speaker 1: think they are far too optimistic in thinking about what 424 00:24:34,320 --> 00:24:41,000 Speaker 1: would happen in a catastrophic kind of scenario. That's said, 425 00:24:41,480 --> 00:24:47,439 Speaker 1: I think any fair minded observer has to think that 426 00:24:47,760 --> 00:24:54,520 Speaker 1: banks are better protected than they were before the two 427 00:24:54,560 --> 00:24:58,480 Speaker 1: thousand and eight financial crisis. Though I think we have 428 00:24:58,520 --> 00:25:02,879 Speaker 1: to recognize that a large part of the lending in 429 00:25:02,920 --> 00:25:06,720 Speaker 1: the country, and lending to businesses is now done by 430 00:25:06,800 --> 00:25:10,840 Speaker 1: institutions that are not banks, and so there are important 431 00:25:10,840 --> 00:25:16,879 Speaker 1: issues in the shadow banking system. So this certainly should 432 00:25:17,359 --> 00:25:25,160 Speaker 1: come as a reminder that rational financial regulation is hugely 433 00:25:25,200 --> 00:25:29,359 Speaker 1: important to the success of the American economy. Larry also 434 00:25:29,400 --> 00:25:32,000 Speaker 1: got jobs numbers out on Friday this week, and they 435 00:25:32,080 --> 00:25:35,200 Speaker 1: were more robust, once again than expected, three eleven thousand 436 00:25:35,240 --> 00:25:38,840 Speaker 1: new jobs. At the same time, the rate of wage 437 00:25:38,840 --> 00:25:41,240 Speaker 1: increase actually came down just a little bit. What did 438 00:25:41,240 --> 00:25:43,639 Speaker 1: those tell you about the strength the economy and, for 439 00:25:43,640 --> 00:25:46,200 Speaker 1: that matter, where we're headed with inflation. I think that 440 00:25:46,359 --> 00:25:51,720 Speaker 1: most of us probably have a kind of now more 441 00:25:51,760 --> 00:25:56,040 Speaker 1: than ever view after these numbers. If you were a 442 00:25:56,080 --> 00:26:00,040 Speaker 1: person who is very worried about inflation, you focus on 443 00:26:00,280 --> 00:26:04,919 Speaker 1: the strength in the economy and the seemingly ever tighter 444 00:26:05,720 --> 00:26:10,119 Speaker 1: labor market. If you're a person who is less concerned 445 00:26:10,119 --> 00:26:14,080 Speaker 1: about inflation, you probably take heart from the lower wage 446 00:26:14,960 --> 00:26:21,080 Speaker 1: inflation number. So I doubt these numbers changed too many minds. 447 00:26:21,320 --> 00:26:26,120 Speaker 1: I'm gonna be watching for the CPI number next week. 448 00:26:26,320 --> 00:26:29,960 Speaker 1: But I think more broadly, it seems to me that 449 00:26:31,280 --> 00:26:35,000 Speaker 1: we don't have a lot of evidence of a basic 450 00:26:35,119 --> 00:26:40,280 Speaker 1: downwards trend in inflation. It looks to me more like 451 00:26:40,440 --> 00:26:46,280 Speaker 1: the inflation story is fluctuation around an underlying inflation rate 452 00:26:46,280 --> 00:26:49,560 Speaker 1: of four and a half or five and if that's 453 00:26:49,640 --> 00:26:52,800 Speaker 1: close to right, it suggests that the FED has considerably 454 00:26:52,880 --> 00:26:56,439 Speaker 1: more work to do. Well. That's exactly my question. What 455 00:26:56,480 --> 00:26:58,400 Speaker 1: does it mean for monetary policy? What do you think 456 00:26:58,400 --> 00:27:00,239 Speaker 1: the FED should take away from these numbers? What does 457 00:27:00,240 --> 00:27:02,560 Speaker 1: that mean they should do? For example, on terminal rate, 458 00:27:02,880 --> 00:27:06,120 Speaker 1: I suspect that there's a quite good chance that we're 459 00:27:06,119 --> 00:27:09,960 Speaker 1: going to need to get to a terminal rate near six. 460 00:27:10,560 --> 00:27:16,840 Speaker 1: After all, we have inflation running it close to five percent, 461 00:27:17,600 --> 00:27:21,959 Speaker 1: and we have interest rates at about five percent, and 462 00:27:22,040 --> 00:27:26,720 Speaker 1: so interest rates and inflation in the same range doesn't 463 00:27:26,760 --> 00:27:31,919 Speaker 1: point to a lot of pressure to bring inflation down. 464 00:27:32,520 --> 00:27:37,000 Speaker 1: So I'm very much open to changing my mind, and 465 00:27:37,040 --> 00:27:42,720 Speaker 1: I think confident pronouncements about these things are a mistake. 466 00:27:42,840 --> 00:27:47,320 Speaker 1: If we get a strong CPI number on Tuesday, I 467 00:27:47,359 --> 00:27:50,639 Speaker 1: think the right thing to do will quite likely be 468 00:27:50,880 --> 00:27:56,000 Speaker 1: to increase rates by fifty basis points in March, because 469 00:27:56,320 --> 00:27:59,679 Speaker 1: if we're pretty confident that rate increases of that magnitude 470 00:27:59,760 --> 00:28:03,040 Speaker 1: or necessary, I don't see much reason not to get 471 00:28:03,080 --> 00:28:06,440 Speaker 1: on not to get on with it. If the CPI 472 00:28:06,600 --> 00:28:09,119 Speaker 1: number is more moderate, then I think it's a or 473 00:28:09,400 --> 00:28:12,680 Speaker 1: comes in surprisingly low, then I think it's a very 474 00:28:12,720 --> 00:28:19,760 Speaker 1: different kind of judgment that needs to be reached. In general, 475 00:28:20,320 --> 00:28:24,560 Speaker 1: I think there is more risk of underreacting to the 476 00:28:24,600 --> 00:28:28,760 Speaker 1: inflation concern than of overreacting. Larry, Finally, and briefly, if 477 00:28:28,800 --> 00:28:30,600 Speaker 1: we can what about the budget that we saw out 478 00:28:30,600 --> 00:28:32,800 Speaker 1: of the White House this week as six point nine 479 00:28:32,840 --> 00:28:34,920 Speaker 1: trillion dollars spending an awful lot more on a lot 480 00:28:34,920 --> 00:28:37,560 Speaker 1: of things. Are we having a serious discussion about the 481 00:28:37,560 --> 00:28:40,200 Speaker 1: federal budget on either the Democrats or the Repulican side 482 00:28:40,200 --> 00:28:41,800 Speaker 1: at this point? And if not, how do we get 483 00:28:41,840 --> 00:28:44,440 Speaker 1: to one? A lot of good ideas in the budget. 484 00:28:44,480 --> 00:28:48,840 Speaker 1: But I think for a variety of reasons, the deficit 485 00:28:48,920 --> 00:28:52,560 Speaker 1: path is likely to end up greater than the administration 486 00:28:52,640 --> 00:28:57,520 Speaker 1: imagines unless there are substantial policy actions. And I think 487 00:28:57,520 --> 00:29:01,560 Speaker 1: we're getting back into a phase as interest rates rise, 488 00:29:02,200 --> 00:29:05,520 Speaker 1: where it's going to be very important to think about 489 00:29:04,960 --> 00:29:09,920 Speaker 1: the long run behavior of budget deficits. In many ways, 490 00:29:10,680 --> 00:29:14,400 Speaker 1: the picture is more adverse than it was a decade 491 00:29:14,440 --> 00:29:20,760 Speaker 1: ago when the Simpson Bowls process was launched. So I 492 00:29:20,840 --> 00:29:25,760 Speaker 1: do think we need to have that as a bipartisan conversation. 493 00:29:25,920 --> 00:29:32,040 Speaker 1: I welcome the President's providing his budgetary blueprint and asking 494 00:29:32,080 --> 00:29:37,040 Speaker 1: the Republicans to provide their political blueprint as a basis 495 00:29:37,040 --> 00:29:43,720 Speaker 1: for conversation and dialogue. I am glad to see rising 496 00:29:43,800 --> 00:29:48,000 Speaker 1: focus on containing healthcare costs, because that's probably the single 497 00:29:48,040 --> 00:29:51,680 Speaker 1: most important issue in thinking about the budget over the 498 00:29:51,760 --> 00:29:55,240 Speaker 1: longer term. Though I'd have to say that my judgment 499 00:29:55,440 --> 00:30:00,520 Speaker 1: is that the ultimately necessary expenditures on national security are 500 00:30:00,640 --> 00:30:03,720 Speaker 1: going to be substantially greater than the President's budget. Larry, 501 00:30:03,720 --> 00:30:06,200 Speaker 1: thank you so much. As Larry Summers of Harvard coming up, 502 00:30:06,280 --> 00:30:08,760 Speaker 1: whatever you think of chat GPT, maybe it can help 503 00:30:08,840 --> 00:30:10,720 Speaker 1: us get rid of some of those pesky lawyers. That's 504 00:30:10,760 --> 00:30:18,920 Speaker 1: next on Wall Street Week on Bloomberg. Finally, one more thought. 505 00:30:19,400 --> 00:30:22,720 Speaker 1: The first thing we do, let's kill all the lawyers. Well, 506 00:30:22,760 --> 00:30:26,560 Speaker 1: that wasn't really my idea. Shakespeare had his character Dick 507 00:30:26,680 --> 00:30:28,960 Speaker 1: the Butcher say it in Hendry the Sixth, Part two, 508 00:30:29,440 --> 00:30:32,360 Speaker 1: but it's something we've heard often repeated, even by some 509 00:30:32,440 --> 00:30:35,720 Speaker 1: lawyers like me. Now for the first time, it may 510 00:30:35,800 --> 00:30:38,680 Speaker 1: just be possible, maybe not to kill the lawyers, but 511 00:30:38,760 --> 00:30:41,560 Speaker 1: to make them a little less necessary. It's a use 512 00:30:41,560 --> 00:30:45,160 Speaker 1: case for artificial intelligence and all those chatbots we're hearing 513 00:30:45,200 --> 00:30:48,840 Speaker 1: so much about. This is chat gpt. It is routing 514 00:30:48,880 --> 00:30:52,719 Speaker 1: out an AI chat bought service. Is chat gpt. Feva 515 00:30:52,760 --> 00:30:55,560 Speaker 1: suits the world. It's way too early to say where 516 00:30:55,600 --> 00:30:58,320 Speaker 1: AI will lead us, but it's hard to find anyone 517 00:30:58,360 --> 00:31:01,280 Speaker 1: denying that it's going to be. This could be the 518 00:31:01,320 --> 00:31:07,320 Speaker 1: most important generals technology since the wheel or fire, with 519 00:31:07,440 --> 00:31:11,080 Speaker 1: the potential to transform everything from banking. As Jamie Diamond 520 00:31:11,080 --> 00:31:14,080 Speaker 1: told us this week, AI is real. This is not 521 00:31:14,360 --> 00:31:17,600 Speaker 1: no crypt tongue, that's not crypt done. This is a 522 00:31:17,640 --> 00:31:22,120 Speaker 1: technology which is staggering, and we're fully engaged to hedge funds. 523 00:31:22,160 --> 00:31:25,800 Speaker 1: According to Ken Griffin of Citadel. This branch of AI 524 00:31:26,040 --> 00:31:29,480 Speaker 1: will be game changing for the economy and like most 525 00:31:29,560 --> 00:31:33,040 Speaker 1: changes in technology, with clear winners and losers to it, 526 00:31:33,720 --> 00:31:37,480 Speaker 1: with HPE CEO Narry pointing to AI for his company's 527 00:31:37,520 --> 00:31:40,840 Speaker 1: growth prospects, a no AI is total mind for people 528 00:31:40,880 --> 00:31:43,440 Speaker 1: today and that's where it has a big opportunity for 529 00:31:43,520 --> 00:31:46,560 Speaker 1: us as a company. And now chatbots are stepping up 530 00:31:46,560 --> 00:31:49,360 Speaker 1: to the bar, the legal bar, that is, with reports 531 00:31:49,400 --> 00:31:52,480 Speaker 1: that chat GPT scored a passing C plus on a 532 00:31:52,560 --> 00:31:55,760 Speaker 1: standard law school exam at the University of Minnesota. Now 533 00:31:55,760 --> 00:31:57,600 Speaker 1: that's not good enough to make a law review, but 534 00:31:57,680 --> 00:32:00,880 Speaker 1: a passing grade it is, nonetheless, and that may just 535 00:32:00,960 --> 00:32:04,440 Speaker 1: be good enough for routine contracts and memoranda. At global 536 00:32:04,480 --> 00:32:06,960 Speaker 1: law firm Allen and Ovary, which has been using its 537 00:32:06,960 --> 00:32:11,320 Speaker 1: own chatbot dubbed Harvey eerily similar to the half of 538 00:32:11,400 --> 00:32:14,760 Speaker 1: two thousand and one a space odyssey, and I want 539 00:32:14,840 --> 00:32:18,440 Speaker 1: to help you not to be outdone. Major international law 540 00:32:18,480 --> 00:32:21,240 Speaker 1: firm DLA Piper said this week it has hired a 541 00:32:21,280 --> 00:32:24,640 Speaker 1: new chief Data Scientists to oversee ten as what they 542 00:32:24,680 --> 00:32:28,880 Speaker 1: call top tier data scientists for its new artificial intelligence 543 00:32:28,960 --> 00:32:33,240 Speaker 1: and data analytics practice, but for all the anticipation of 544 00:32:33,240 --> 00:32:35,640 Speaker 1: a brave new world. It's a little hard to imagine 545 00:32:35,680 --> 00:32:38,840 Speaker 1: a chatbot, no matter how smart, taking the place of 546 00:32:38,880 --> 00:32:42,640 Speaker 1: a good old country lawyer. I've been appointed to defend 547 00:32:42,680 --> 00:32:45,520 Speaker 1: Tom Robinson now that has been charged. That's what I 548 00:32:45,560 --> 00:32:47,760 Speaker 1: intend to do. That does it for this episode of 549 00:32:47,760 --> 00:32:50,400 Speaker 1: Wall Street Week. I'm David Weston. This is Bloomberg. C 550 00:32:50,560 --> 00:32:51,120 Speaker 1: you next week.