WEBVTT - Bloomberg Wall Street Week - March 10th, 2023 0:00:00.520 --> 0:00:03.720 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:08.320 to the markets this week. USCPI nembers reinforcing concerns about inflation, 0:00:08.440 --> 0:00:11.559 the financial stories that cheap our work, a really different 0:00:11.600 --> 0:00:14.520 reaction to mark its more indications of just how hot 0:00:14.560 --> 0:00:16.959 the US economy really is. Through the eyes of the 0:00:17.000 --> 0:00:21.400 most influential voices Larry Summers, the former Treattery Secretary, Katherine Keening, 0:00:21.560 --> 0:00:24.759 CEO of ny moan Sam's l Shearmon n founder of 0:00:24.760 --> 0:00:28.440 Equatic Group Investment in Bloomberg Wall Street Week with David 0:00:28.480 --> 0:00:33.680 Weston from Bloomberg Radio. Second thoughts about back Wood and Ukraine, 0:00:33.720 --> 0:00:37.040 about Chinese economy, and about where the Fed is heading. 0:00:37.400 --> 0:00:40.400 This is Bloomberg Wall Street Week. I'm David Weston. This 0:00:40.440 --> 0:00:44.000 week special contributor Larry Summers of Harvard on Silicon Valley 0:00:44.000 --> 0:00:48.120 Bank and the risk of contagion. I don't see if 0:00:48.159 --> 0:00:51.280 this is handled reasonably, and I have every reason to 0:00:51.360 --> 0:00:54.120 think it will be that this will be a source 0:00:54.160 --> 0:00:57.480 of systemic wresting. Outsideing Inveashelists of Rock Creek about the 0:00:57.520 --> 0:01:01.560 politics and returns of ESG Investing, and investor Sam Zell 0:01:01.840 --> 0:01:04.800 about what ports to seek when the storms are coming in. 0:01:05.240 --> 0:01:08.440 We're talking about ending free money, but we're not ending 0:01:08.520 --> 0:01:24.160 free money. This week was a time for reconsidering on 0:01:24.240 --> 0:01:26.959 Global Wall Street, as the war in Europe raged on 0:01:27.120 --> 0:01:30.400 and Ukrainian forces fought valiantly to hold on de Bach 0:01:30.520 --> 0:01:34.120 Mood back. Mood Is surrounded on three sides. Reportedly, the 0:01:34.200 --> 0:01:37.800 calculation Celenski's making is that he'll wear down Russian forces, 0:01:38.000 --> 0:01:41.400 which are not very capable, even as leaders like Jamie 0:01:41.440 --> 0:01:44.320 Diamond of JP Morgan warned that the situation there posts 0:01:44.480 --> 0:01:47.120 one of the biggest risks with the global economy. I 0:01:47.120 --> 0:01:50.040 think I worry the most about if is Ukraine soil 0:01:50.160 --> 0:01:53.160 gas fill the leadership of the world, and you know 0:01:53.200 --> 0:01:55.800 our lady with China, I mean that that is much 0:01:55.840 --> 0:01:58.480 more serious though the economic by grazing you'll have to 0:01:58.520 --> 0:02:00.960 deal with on a day to day base. At its 0:02:01.040 --> 0:02:05.280 National People's Congress, China's leadership laid out new war modest projections, 0:02:05.480 --> 0:02:08.680 raising questions not only for China but for global growth. 0:02:09.120 --> 0:02:12.120 If you look at the trends of the GDP taget 0:02:12.240 --> 0:02:16.000 dates set over the years, actually since twenty eighteen, they've 0:02:16.040 --> 0:02:19.120 been gradually lowering the GDP growth. Hagets so I think 0:02:19.120 --> 0:02:22.360 this is also a sign that increasingly the PUS makers 0:02:22.440 --> 0:02:26.840 are increasingly emphasizing on the quality of growth rather than quantity. 0:02:27.120 --> 0:02:29.680 Well fetch Yer J. Powe left a little doubt that 0:02:29.760 --> 0:02:32.840 the continued strengthen the economy makes higher rates more likely 0:02:33.040 --> 0:02:35.880 than lower. The latest economic data have come in stronger 0:02:35.880 --> 0:02:38.880 than expected, which suggests that the ultimate level of interest 0:02:38.960 --> 0:02:43.000 rates is likely to be higher and previously anticipated. If 0:02:43.000 --> 0:02:45.720 the totality of the data were to indicate that faster 0:02:45.800 --> 0:02:48.960 tightening is warranted, we'd be prepared to increase the pace 0:02:49.040 --> 0:02:51.919 of rate heights. And the prospect of those higher rates 0:02:52.000 --> 0:02:55.320 hit tech banking hard as Silicon Valley Bank went from 0:02:55.360 --> 0:02:59.000 panic to receivership in twenty four hours. A SVB bank 0:02:59.080 --> 0:03:02.480 has now failed. The FDIC takes over and has appointed 0:03:02.480 --> 0:03:05.480 a receiver. It is the first insured institution to fail 0:03:05.520 --> 0:03:09.840 so far this year. Jobs numbers out on Friday would 0:03:09.840 --> 0:03:12.840 have been encouraging but for that SVP's failure, with the 0:03:12.919 --> 0:03:16.280 US adding another three hundred eleven thousand jobs while wage 0:03:16.280 --> 0:03:19.280 increases slowed a bit, but all the jobs in the 0:03:19.320 --> 0:03:22.680 world couldn't overcome Chairpile's warnings about higher rates, and then 0:03:22.720 --> 0:03:25.639 the shutter sent through the banking sector, leaving the SMP 0:03:25.760 --> 0:03:28.280 five hundred down over four point five percent of the week, 0:03:28.400 --> 0:03:31.359 while the NAZAC lost four point seven percent. But of course, 0:03:31.400 --> 0:03:34.160 the flight to safety drove investors to bonds, leaving the 0:03:34.200 --> 0:03:37.000 yield on the ten year twenty five basis points lower 0:03:37.080 --> 0:03:39.600 on the week, with almost all of it really coming 0:03:39.640 --> 0:03:42.200 on Friday. Here to help us sort all this out, 0:03:42.280 --> 0:03:46.200 our Sarah Ketder Causeway Capital Management CEO, and Barbara Reinhardt, 0:03:46.560 --> 0:03:50.200 head of Asset Allocation Investment Management. So welcome to both 0:03:50.240 --> 0:03:52.440 of you. Barbara, great to have you here with us. 0:03:52.560 --> 0:03:54.960 So it was quite a back and forth week. We 0:03:55.360 --> 0:03:58.040 had the pile testimony that seemed to inca we go higher, 0:03:58.440 --> 0:04:00.520 we had the jobs numbers, and then we had the 0:04:00.920 --> 0:04:03.800 SVB situation. What do you make of all of it? Look, 0:04:03.800 --> 0:04:06.520 I think that the overwhelming thing that happened this week 0:04:06.720 --> 0:04:10.320 was the receivership of SVB. Right, it's a It's one 0:04:10.360 --> 0:04:12.320 of the largest bank failures that we've had since the 0:04:12.320 --> 0:04:15.320 Financial crisis. It's the sixteenth largest bank in the US. 0:04:15.960 --> 0:04:18.080 I don't think that the issues that you see with 0:04:18.279 --> 0:04:21.120 SBB are systemic. I would agree with what Larry Summers 0:04:21.160 --> 0:04:24.480 has said earlier. However, I do think it was an 0:04:24.480 --> 0:04:26.920 opportunity for everyone in the market to take a very 0:04:26.920 --> 0:04:29.839 big pause today and really think about their positions and 0:04:29.880 --> 0:04:32.120 think about their liquidity, which is why you saw some 0:04:32.200 --> 0:04:35.799 of them. You know, less liquid parts of the market 0:04:35.880 --> 0:04:38.360 really get hit much harder today, like small cap stocks 0:04:38.720 --> 0:04:41.119 and high yeld bonds. Also, we know we're down pretty 0:04:41.160 --> 0:04:44.520 dramatically today. So Sarah, even if it's not systemic, is 0:04:44.520 --> 0:04:46.840 it possibly a canary in the coal mine? Is they 0:04:46.839 --> 0:04:49.680 talk about they although it maybe just SVB and they 0:04:49.720 --> 0:04:53.880 got special situations, the underlying circumstances could be reflected in 0:04:53.960 --> 0:04:56.960 other parts of the of the economy as well as 0:04:57.000 --> 0:05:04.160 frankly financial markets. David one never knows, but but Silicon 0:05:04.240 --> 0:05:08.120 Valley Bank did have a very concentrated corporate deposit base, 0:05:08.320 --> 0:05:11.599 and so there are other regional banks in the US 0:05:11.760 --> 0:05:15.960 their deposit bases in general seem to be much more diversified. 0:05:16.400 --> 0:05:18.640 So that's one of the primary reasons why this may 0:05:18.640 --> 0:05:24.040 not be systematic. But confidence is crucial for banks, and 0:05:25.320 --> 0:05:29.960 there doesn't appear, especially given the likelihood that Silicon Valley 0:05:30.000 --> 0:05:33.440 Bank depositors will be made whole, any reason for this 0:05:33.560 --> 0:05:36.880 to spread through the banking system, which could be a 0:05:36.920 --> 0:05:39.240 reason to be looking at some of the other banks 0:05:39.040 --> 0:05:43.880 as investments, given they're selling off so rapidly. Well, it 0:05:44.000 --> 0:05:47.680 wasn't even I don't think as a practical owner, Sarah. 0:05:47.720 --> 0:05:49.320 By the time it started to sort out, it looked 0:05:49.320 --> 0:05:51.520 like the regional banks were getting hit harder than the 0:05:51.520 --> 0:05:53.720 big money center banks. Does that suggest that some of 0:05:53.760 --> 0:05:57.640 the regional banks maybe opportunities for investors right now? It 0:05:57.680 --> 0:06:01.159 does depend on what they hold. If in their asset 0:06:02.400 --> 0:06:05.239 basis they have a huge amount of commercial real estate, 0:06:05.279 --> 0:06:09.240 particularly office, that could end up being very problematic. What 0:06:09.720 --> 0:06:12.479 we're all really talking about, here's a new era. Interest 0:06:12.560 --> 0:06:17.279 rates are rising, and until they stop rising in full again, 0:06:17.800 --> 0:06:21.000 there's a complete new view on credit. Credit is going 0:06:21.040 --> 0:06:23.480 to be very difficult to obtain. We're in a credit crunch. 0:06:24.240 --> 0:06:26.440 So whether you're a real estate and you have a 0:06:26.440 --> 0:06:32.560 tough time with occupancy or you're a technology banker, this 0:06:33.480 --> 0:06:37.600 is a whole different environment. So be really careful if 0:06:37.600 --> 0:06:39.640 you're looking at regional banks, make sure if they're trading 0:06:39.720 --> 0:06:42.440 down at their tangible book value book less good will, 0:06:42.800 --> 0:06:45.320 but that's really solid ground. There's nothing else you can 0:06:45.360 --> 0:06:48.240 go terribly wrong in their asset side of their balance sheet. Well, 0:06:48.279 --> 0:06:50.520 we're on other parts of the economy and a business 0:06:50.720 --> 0:06:52.760 are interest rates sensitive in the centil Because we've had 0:06:52.800 --> 0:06:56.200 a long regime frankly of pretty low interest rates that 0:06:56.360 --> 0:06:58.800 seems to be gone right. Well, MC who has benefited 0:06:58.839 --> 0:07:01.280 the most from very low inch strates? You know, the 0:07:01.279 --> 0:07:03.880 real estate sector was probably the first one, right, that's 0:07:03.920 --> 0:07:07.240 the single biggest beneficiary of it. You'd have to also 0:07:07.279 --> 0:07:10.200 take a look at the private markets. Private credit, private equity, 0:07:10.200 --> 0:07:13.440 private real estate all benefited from very low rates. So 0:07:13.640 --> 0:07:16.560 you know the fact that you have is drying up liquidity. 0:07:16.600 --> 0:07:19.720 The Federal Reserve has been raising interest rates aggressively for 0:07:19.760 --> 0:07:23.560 the past twelve months. They're trying to slow down the economy. 0:07:23.800 --> 0:07:26.800 And when you slow down the economy, certain things break, 0:07:27.600 --> 0:07:31.800 just like cryptocurrency broke last year. Then you had the 0:07:32.760 --> 0:07:35.760 problems in the guilt market in the UK, and now 0:07:35.800 --> 0:07:38.240 you have a US bank that's just failed try to 0:07:38.240 --> 0:07:41.160 slow down the economy. How much, Barbara, are we going 0:07:41.320 --> 0:07:43.920 into recessions for practic matter? Because the inflation seems to 0:07:43.920 --> 0:07:46.240 be more durable than people thought. Are they going to 0:07:46.280 --> 0:07:47.440 have to stop in the break so hard that we 0:07:47.480 --> 0:07:49.440 have to go into recessions. I don't think there's a 0:07:49.480 --> 0:07:51.360 recession on the horizon over the course of the next 0:07:51.360 --> 0:07:53.960 twelve months. Right, there's a very long lead time between 0:07:54.080 --> 0:07:57.800 policy implementation, when you're raising your interest rates and when 0:07:57.800 --> 0:08:02.280 you would go into recession. The US economy is extremely strong, right. 0:08:02.320 --> 0:08:04.520 You had three hundred and eleven thousand jobs printed this 0:08:04.520 --> 0:08:07.360 past month. While it looks like the labor market is 0:08:07.400 --> 0:08:10.680 starting to ease a bit and weaken a little bit. 0:08:11.200 --> 0:08:13.640 I would say that the US economy is a very 0:08:13.800 --> 0:08:17.920 durable supertanker. It would probably take a seismic shock of 0:08:18.080 --> 0:08:20.320 some sort in order to derail it at this point, 0:08:20.560 --> 0:08:23.520 and I don't think SPB is that shock. Sarah, you 0:08:23.560 --> 0:08:26.680 specialize in equities, in particularly investing in equities. When it 0:08:26.680 --> 0:08:29.800 comes to equities, what is your base case on recession? 0:08:30.040 --> 0:08:33.040 And more importantly, does it matter? Does it really affect 0:08:33.040 --> 0:08:35.040 which equities invest in whether you think there's going to 0:08:35.040 --> 0:08:38.440 be a recession or not. It matters if a stock 0:08:38.480 --> 0:08:41.760 doesn't already price in some slowing. There's no doubt. I mean, 0:08:42.120 --> 0:08:44.680 my colleagues and I really do believe that the FED 0:08:44.800 --> 0:08:47.920 is intent on slowing the US economy and the same 0:08:47.960 --> 0:08:50.040 with the European central banks. Maybe they're a year behind 0:08:50.080 --> 0:08:53.080 the FED, and at some point in time maybe the 0:08:53.160 --> 0:08:56.160 Japanese will tighten monetary policy with a new central bankhead. 0:08:56.200 --> 0:08:58.800 So there's a lot of tightening out there. And the 0:08:58.840 --> 0:09:01.520 other side of that is typical economic slowing. That's what 0:09:01.640 --> 0:09:06.160 brings down inflation, and inflation is the target. So we're 0:09:06.200 --> 0:09:10.760 expecting some element of slowing. It may be severe. It's 0:09:10.800 --> 0:09:13.080 hard to know. But what we do know is what's 0:09:13.080 --> 0:09:16.000 priced into stocks, and not all stocks, but in certain 0:09:16.040 --> 0:09:20.520 areas that many of them have already discounted in economic slowing. 0:09:20.960 --> 0:09:23.960 Not all the cyclicals, for example, but there are sub 0:09:24.040 --> 0:09:28.559 industries that have and that's the opportunity where it's already 0:09:28.559 --> 0:09:30.280 priced and then we can have it. Then then the 0:09:30.280 --> 0:09:32.520 worst can happen and the stock has in nowhere to 0:09:32.559 --> 0:09:35.120 go but up. So Barbara's played the parlor game. What 0:09:35.200 --> 0:09:36.600 do you think the terminal rd's got to be for 0:09:36.600 --> 0:09:38.600 the FED to get inflation down to where one needs 0:09:38.640 --> 0:09:40.560 to go. I don't think it's as high as probably 0:09:40.559 --> 0:09:42.880 what the markets pricing in. I think maybe the foeder 0:09:42.960 --> 0:09:45.800 reserve has to tighten one, maybe two more times if that, 0:09:45.920 --> 0:09:48.040 and then be done. The reason is the way that 0:09:48.080 --> 0:09:50.880 you price in a higher terminal rate is either you 0:09:50.960 --> 0:09:55.000 have a faster labor force growth or a faster productivity growth. 0:09:55.480 --> 0:09:58.480 The US doesn't have any any thought showing of that 0:09:58.600 --> 0:10:00.840 being the case at this point. So for US, we 0:10:00.880 --> 0:10:03.559 do not believe that our star is six percent or 0:10:03.600 --> 0:10:05.280 something above there at this point. I don't think that 0:10:05.320 --> 0:10:08.760 the US economy can grow so fast or it's been 0:10:08.800 --> 0:10:11.160 such a dramatic change that it's been over the past 0:10:11.160 --> 0:10:14.000 twenty years, so we don't think that rates have to 0:10:14.040 --> 0:10:16.839 go much higher at this point. Sarah Header and Barbara 0:10:16.840 --> 0:10:18.720 Reinhardt will be staying with us as we turn to 0:10:18.760 --> 0:10:21.679 what all this means for your portfolio. This is Wall 0:10:21.679 --> 0:10:42.959 Street Week on Bluebird in Darkness Washington. The Reagan administration 0:10:43.080 --> 0:10:46.640 stuck to which proposed six hundred and ninety five billion 0:10:46.640 --> 0:10:50.240 dollars budget, a number of that in Washington is somehow 0:10:50.280 --> 0:10:55.160 regarded as lean and austere, and the Democratic leadership in 0:10:55.160 --> 0:10:57.920 Congress stuck to its view that the budget is, as 0:10:57.920 --> 0:11:02.839 one senator put it, cool, in human, and unfair. To 0:11:02.920 --> 0:11:07.280 an end next week for further non surprises. That was 0:11:07.360 --> 0:11:09.800 Lewis Roguiser back in March of nineteen nine eighty one, 0:11:09.840 --> 0:11:12.160 when the number one movie in the country was Back 0:11:12.280 --> 0:11:14.480 Roads with Sally Fields and Time and Lee Jones, the 0:11:14.600 --> 0:11:17.120 number one song was nine to five with Valley Parton, 0:11:17.320 --> 0:11:20.320 and the proposed federal budget was a whopping six hundred 0:11:20.400 --> 0:11:23.440 ninety five billion dollars instead of the six point nine 0:11:23.600 --> 0:11:27.200 trillion dollars proposed by President Biden just this week, Still 0:11:27.200 --> 0:11:29.920 with us or Barbara Reinhardt of Voya Investment Management and 0:11:30.000 --> 0:11:32.680 Sarah Header of Causeway Capital. So Barbara, let me start 0:11:32.720 --> 0:11:34.360 with you here. We want to turn down of the 0:11:34.440 --> 0:11:36.480 question with the portfolio. This is your job in party 0:11:36.520 --> 0:11:38.880 is to figure out how to allocate portfolios. Given all 0:11:38.880 --> 0:11:41.040 that we've said about where we are in the tightening curve, 0:11:41.320 --> 0:11:44.560 everything we've seen, how do you manage your portfolios these days? 0:11:44.720 --> 0:11:47.240 One thing that we're thinking greatly about, David, is our 0:11:47.320 --> 0:11:50.920 international equity exposure. So when we think about global equities, 0:11:50.960 --> 0:11:52.440 we look around the world and we look for the 0:11:52.440 --> 0:11:55.439 opportunity set. One thing that stands out to us that's 0:11:55.480 --> 0:11:58.239 probably a little bit overextended at this point is international 0:11:58.280 --> 0:12:01.719 developed equities. Over the past one year, the SMP is 0:12:01.760 --> 0:12:05.280 down four percent. International developed equities, you know, Europe in 0:12:05.360 --> 0:12:09.600 Japan are up almost seven percent. That is a very 0:12:09.640 --> 0:12:12.520 big disparity in returns between those two parts of the world. 0:12:12.920 --> 0:12:16.720 For Europe, it had been priced for a very big, 0:12:16.840 --> 0:12:20.320 very bad recession. It didn't transpire. They had much warmer 0:12:20.320 --> 0:12:23.400 weather than it'd been expected. But we don't think that 0:12:23.480 --> 0:12:27.560 all those great things that Europe averted, or the luck 0:12:27.600 --> 0:12:29.719 that Europe had in averting some of that disaster over 0:12:29.760 --> 0:12:32.280 the past year, is likely to be repeated. So we're 0:12:32.280 --> 0:12:34.839 actually keeping our assets closer to home. In the US, 0:12:35.200 --> 0:12:37.040 we think that the FED is one of the first 0:12:37.080 --> 0:12:39.760 central banks or major market central banks that has raised 0:12:39.760 --> 0:12:42.040 interest rates, it's likely to be one of the first 0:12:42.040 --> 0:12:45.760 ones to stop. And we think as the world slows down, 0:12:46.200 --> 0:12:49.319 the dollar is likely to get a little bit stronger 0:12:49.400 --> 0:12:53.079 as a flight to safety and somewhat quality in the US. 0:12:53.120 --> 0:12:54.960 So we're staying a little bit closer to home, but 0:12:54.960 --> 0:12:58.000 we're barbelling it with some exposure to the emerging markets 0:12:58.040 --> 0:12:59.920 because we do realize that there's been a lot of 0:13:00.000 --> 0:13:03.720 stimulas put into the pipeline, and we think that again 0:13:04.320 --> 0:13:07.640 emerging markets are so cheap at this point if you 0:13:07.679 --> 0:13:09.560 can hold them for a three to four to five 0:13:09.640 --> 0:13:12.880 year period, you're likely to be very pleased with your portfolio. Okay, 0:13:12.920 --> 0:13:16.840 so someone said, Barbara's talking your equity bookhare you specialize inequities. 0:13:16.880 --> 0:13:20.360 Where are you in developed market equities these days? Well, 0:13:20.400 --> 0:13:23.600 for developed markets, And Barbara has a point that Europe 0:13:23.640 --> 0:13:27.280 and Japan have outperformed the US. Really more Europe. The 0:13:27.360 --> 0:13:31.240 Eurostocks fifty is up eleven percent year to date in dollars. 0:13:31.280 --> 0:13:34.959 That's not even a full three months. However, that's a 0:13:35.040 --> 0:13:38.959 rather short time period. Non US Developed has vastly underperformed 0:13:38.960 --> 0:13:42.520 the US or less decade. And I've heard this from clients, 0:13:42.559 --> 0:13:46.280 you know, they get very anxious. But so it might 0:13:46.320 --> 0:13:48.560 be quite some time, if you think about it, in 0:13:48.600 --> 0:13:51.840 that longer context, for Non US developed to catch up 0:13:51.880 --> 0:13:55.600 with the US. And there's still a significant valuation discount 0:13:55.920 --> 0:13:59.440 for non US versus US, in part due to the 0:13:59.520 --> 0:14:02.720 different sector weights in the two areas. The US has 0:14:02.840 --> 0:14:05.720 much more in the way of technology, and here today, interestingly, 0:14:06.160 --> 0:14:09.840 in a broad global context, technology has led along with 0:14:09.960 --> 0:14:15.000 consumer discretionary and communication services. So investors are still really 0:14:15.040 --> 0:14:19.120 interested in tech. There's them like I just say, this 0:14:19.200 --> 0:14:22.280 is the environment we're in. It's one of active management. 0:14:22.480 --> 0:14:25.400 With rising rates, just can't buy an index anymore. In 0:14:25.440 --> 0:14:28.080 my opinion, you have to have a manager who can 0:14:28.120 --> 0:14:30.440 sift through and let's say, go to non US developed 0:14:30.440 --> 0:14:33.120 and find the stocks that haven't yet had their earnings 0:14:33.160 --> 0:14:36.600 recovery recognized. Some of them haven't even gone into a downturn. 0:14:36.680 --> 0:14:39.400 I mean, Barbara noted the tightening cycle and I mentioned 0:14:39.400 --> 0:14:41.520 this as well as a little bit lagged in Europe. 0:14:41.720 --> 0:14:44.600 Old all that additional tightening, there may be more casualties. 0:14:44.920 --> 0:14:48.560 So being very careful about price entry point be extremely 0:14:48.640 --> 0:14:51.160 cheap in terms of what you'll pay is a way 0:14:51.160 --> 0:14:53.920 to avoid those pitfalls. It's been really great having both 0:14:53.920 --> 0:14:56.000 of us. Thank you so much to Sarah Header of 0:14:56.040 --> 0:15:00.840 Causeway Capital and to Barbara Reinhardt. A voya. Investing related 0:15:00.880 --> 0:15:04.480 to environmental, social and governance issues so called ESG has 0:15:04.520 --> 0:15:06.880 been on our roller coaster ride. From being all the 0:15:07.000 --> 0:15:09.640 rage and embraced by some of the largest financial institutions 0:15:09.640 --> 0:15:12.040 in the world, it's being scorned and even the subject 0:15:12.040 --> 0:15:14.840 of legislation to limit its use. And through it all, 0:15:14.960 --> 0:15:17.480 it's sometimes hard to sort out how much is investing 0:15:17.480 --> 0:15:20.480 based on social values and how much is just pursuing 0:15:20.600 --> 0:15:24.160 value through taking into account all the risks of Sonny Beschilists, 0:15:24.160 --> 0:15:27.160 CEO of Rock Creek, was an early proponent of ESG investing, 0:15:27.320 --> 0:15:29.720 at least in certain circumstances, and she's back with us 0:15:29.720 --> 0:15:32.160 now on Wall Street Week. It's great to have you here, Sonny, 0:15:32.400 --> 0:15:34.520 great to be with you. Such a treat. So I mean, 0:15:34.680 --> 0:15:37.080 take us to this. Is it a choice between return 0:15:37.120 --> 0:15:38.960 on the one hand and social values on the other, 0:15:38.960 --> 0:15:41.200 because that's the way some people like to put the question. 0:15:41.720 --> 0:15:44.240 You are absolutely right, and I have to tell you 0:15:44.280 --> 0:15:47.320 I don't necessarily like the word ESG just to put 0:15:47.360 --> 0:15:50.640 that on the table right here. But I think what 0:15:50.800 --> 0:15:55.880 is happening right now in Washington, President Biden did vetoed 0:15:55.920 --> 0:15:58.760 the bill that was trying to pass through to allow 0:15:58.880 --> 0:16:03.680 corporate tension plans to consider ESG factors in their investments, 0:16:03.720 --> 0:16:06.760 not to actually necessarily adopt them, but to actually consider them. 0:16:06.760 --> 0:16:10.560 So it was a pretty soft requirement. I think that 0:16:10.840 --> 0:16:14.040 what that is not showing us is what you said, 0:16:14.120 --> 0:16:17.400 which is right now. If you and I were investing 0:16:17.600 --> 0:16:21.320 in let's say, renewable energy, we would have lost this year. 0:16:21.440 --> 0:16:24.680 Just in twenty twenty three one point four percent or so. 0:16:24.720 --> 0:16:28.840 Of course today the markets got pretty murky. But if 0:16:28.840 --> 0:16:30.960 you had invested in oil and gas, we would have 0:16:31.000 --> 0:16:34.160 lost three point eight percent in the last five years. 0:16:34.200 --> 0:16:37.760 We would have made seventeen point four percent in renewable energy, 0:16:37.800 --> 0:16:40.200 and we would have made about seven to ten percent, 0:16:40.240 --> 0:16:44.200 depending on which index you're looking at in oil and gas. Now, 0:16:44.320 --> 0:16:47.640 if you looked at other periods, oil and gas might 0:16:47.760 --> 0:16:50.120 very well be ahead. But what does that mean. It 0:16:50.160 --> 0:16:54.840 means for investors renewable energy is really economic. It has 0:16:54.960 --> 0:16:59.320 now changed the technologies with us such that clean energy 0:16:59.400 --> 0:17:05.280 happens to economic. So when you're looking at purely financial decisions, 0:17:05.320 --> 0:17:07.480 it should certainly be a part of your portfolio. So 0:17:07.520 --> 0:17:08.960 I wonder, if I can put it this way, how 0:17:09.040 --> 0:17:10.840 much that's on the fundamentals, That is to say, you 0:17:10.840 --> 0:17:14.479 can actually make more money by taking head environmental I'll 0:17:14.480 --> 0:17:16.639 just takeing environmentals, so I won't bother with the esp okay, 0:17:16.840 --> 0:17:19.959 And how much is actually just the hydraulic pressure behind 0:17:20.280 --> 0:17:23.480 environmental investing. It's so popular, the money goes there and 0:17:23.520 --> 0:17:26.639 it drives it up rather than actually being on the fundamentals. 0:17:27.080 --> 0:17:30.520 So just purely on the fundamentals, just purely on the 0:17:30.560 --> 0:17:33.840 costs of how much it costs now to produce solar energy. 0:17:34.200 --> 0:17:38.560 If you look at that, it has become totally fundamentally economic. 0:17:38.880 --> 0:17:41.280 If you look at Texas, because we see tis in 0:17:41.280 --> 0:17:44.520 Florida are right in the front of the conversation that 0:17:44.640 --> 0:17:49.120 you mentioned. But Texas is producing fourteen percent of renewable 0:17:49.240 --> 0:17:53.120 energy in America. Do you think you know that would 0:17:53.240 --> 0:17:56.080 be the case if the fundamentals were not there. They're 0:17:56.119 --> 0:18:00.879 just as we speak, building a huge wind farm that 0:18:00.960 --> 0:18:04.640 will produce energy for three million households. I'm siddy. You've 0:18:04.680 --> 0:18:07.400 been in the markets for a good long time, all 0:18:07.400 --> 0:18:09.920 sorts of different positions. Well, the markets sort this out, 0:18:10.000 --> 0:18:11.560 that is to say, if you're right, and in fact, 0:18:11.600 --> 0:18:14.960 you'll get better returns on average over time by taking 0:18:14.960 --> 0:18:19.080 your account environmental concerns. Will that drive people into those investors, 0:18:19.119 --> 0:18:21.439 whether they want to be there or not. I actually 0:18:21.520 --> 0:18:25.359 think people are moving in that direction. So there is 0:18:25.400 --> 0:18:28.160 one thing is the political conversations that are going on. 0:18:28.280 --> 0:18:30.960 But if you look, if you talk to any businessman, again, 0:18:31.119 --> 0:18:33.240 not just in Texas, but all over the country, people 0:18:33.240 --> 0:18:37.720 are investing in an integrated way into into these sources 0:18:37.720 --> 0:18:42.040 of energy. And they'll continue and insurance companies, by the way, 0:18:42.200 --> 0:18:44.480 are looking at the same factors to make sure they 0:18:44.480 --> 0:18:48.760 don't lose money. It's very much it's how the job is, 0:18:48.800 --> 0:18:52.200 how to maximize returns, how do you minimize risk out 0:18:52.240 --> 0:18:55.280 of those are very important for investors. So as I'll 0:18:55.320 --> 0:18:58.080 just again say with climate rather than social and governments 0:18:58.080 --> 0:19:00.000 for their owns. Has it gotten a bad name because 0:19:00.119 --> 0:19:02.200 some people are using it as a marketing different technique. 0:19:02.200 --> 0:19:04.920 It's actually hard to know which companies are actually making 0:19:04.960 --> 0:19:07.159 decisions based on it, as opposed to just saying there 0:19:07.160 --> 0:19:09.920 because everyone wants to say they're environmentally correct. I think 0:19:10.119 --> 0:19:14.160 you're absolutely right. There's the greenwashing. The green bonds led 0:19:14.200 --> 0:19:17.520 to some companies that were even using coal calling themselves green. 0:19:18.200 --> 0:19:21.639 So climate has become not such a positive word, just 0:19:21.760 --> 0:19:25.080 like ESG. But if we just talked about energy transition, 0:19:25.160 --> 0:19:27.760 I don't think many people would disagree. We need to 0:19:27.840 --> 0:19:29.720 use oil and gas. Most people are using them in 0:19:29.760 --> 0:19:35.080 the transition, but we're moving towards cheaper, sustainable energy. I 0:19:35.119 --> 0:19:37.880 think everyone is doing that, whether you're looking at Saudi Arabia, 0:19:38.000 --> 0:19:40.520 UAE or Texas. It's so wonderful to have you here. 0:19:40.560 --> 0:19:43.600 Alfsani always thank you so much as Halfsani Baschelas of 0:19:43.760 --> 0:19:47.680 Rock Creek. Coming up, we wrap up our week with 0:19:47.760 --> 0:19:50.680 special contributor Larry Summers of Harvard at the next on 0:19:50.760 --> 0:20:01.520 Wall Street Week on Bloomberg. This is Wall Street Week. 0:20:01.560 --> 0:20:04.160 I'm David Weston. We welcome now our special Wall Street 0:20:04.200 --> 0:20:06.560 Week contributor Larry Summers of Harvard. Larry, thank you so 0:20:06.680 --> 0:20:09.359 much for joining us here. We have to talk about 0:20:09.359 --> 0:20:12.359 Silicon Valley Bank. It's been developing. Towards the end of 0:20:12.359 --> 0:20:14.679 the week, a lot happened. They pretty quickly went into 0:20:14.720 --> 0:20:18.640 receivorship from the FDIC. What does it tell us more 0:20:18.760 --> 0:20:21.399 broadly about what's going on in the banking sector or 0:20:21.440 --> 0:20:24.679 in the economy. Look, there's still plenty of fog of 0:20:24.760 --> 0:20:28.520 war here and we're still all trying to sort through it. 0:20:29.040 --> 0:20:33.040 There clearly was a big managerial failure. It sure looks 0:20:33.119 --> 0:20:37.440 like regulators were not on the case in the way 0:20:37.480 --> 0:20:41.800 they could have been. Right now, it looks like this 0:20:41.920 --> 0:20:47.920 is not a broad systemic issue. That Silicon Valley Bank 0:20:48.040 --> 0:20:52.560 and perhaps perhaps several other banks, but not many other banks, 0:20:52.600 --> 0:20:58.280 and none of the largest banks, had a mismatch between 0:20:58.440 --> 0:21:02.359 the kind of depots they had and the ways in 0:21:02.400 --> 0:21:07.280 which they had invested their money in longer term bonds, 0:21:07.880 --> 0:21:11.639 and so I don't think this is likely to be 0:21:11.720 --> 0:21:16.639 a broadly systemic problem, but it certainly is going to 0:21:16.760 --> 0:21:23.199 have very substantial consequences for Silicon Valley, for the economy 0:21:23.280 --> 0:21:28.280 of the whole venture sector, which has been dynamic, unless 0:21:30.000 --> 0:21:35.600 the government is able to assure that this situation is 0:21:35.640 --> 0:21:42.760 worked through. Right now, the holders of uninsured deposits have 0:21:42.880 --> 0:21:47.440 been told that those deposits are frozen and camp be withdrawn. 0:21:48.160 --> 0:21:51.880 There are dozens, if not hundreds of startups that we're 0:21:51.920 --> 0:21:55.680 planning to use that cash to meet their payroll next week. 0:21:56.520 --> 0:22:00.600 If that's not able to happen, the consequences will it 0:22:00.680 --> 0:22:05.840 will be quite severe for our innovation system. I suspect 0:22:05.960 --> 0:22:10.240 that ways will be found to at least provide significant 0:22:10.400 --> 0:22:17.719 advances on those deposits to enable the payment of payrolls. 0:22:18.200 --> 0:22:20.600 I think the FDIC is going to have to think 0:22:21.160 --> 0:22:25.880 very hard about how to be maximally creative in using 0:22:26.359 --> 0:22:30.879 its authorities to assure that this doesn't have a set 0:22:30.920 --> 0:22:38.520 of collateral consequences for the innovation economy. I don't think 0:22:38.560 --> 0:22:42.560 this is a time for moral hazard lectures or for 0:22:42.760 --> 0:22:48.600 talk about teaching people lessons. We have enough strains and 0:22:48.800 --> 0:22:56.359