Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. USCPI nembers reinforcing concerns about inflation,
Speaker 1: the financial stories that cheap our work, a really different
Speaker 1: reaction to mark its more indications of just how hot
Speaker 1: the US economy really is. Through the eyes of the
Speaker 1: most influential voices Larry Summers, the former Treattery Secretary, Katherine Keening,
Speaker 1: CEO of ny moan Sam's l Shearmon n founder of
Speaker 1: Equatic Group Investment in Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. Second thoughts about back Wood and Ukraine,
Speaker 1: about Chinese economy, and about where the Fed is heading.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. This
Speaker 1: week special contributor Larry Summers of Harvard on Silicon Valley
Speaker 1: Bank and the risk of contagion. I don't see if
Speaker 1: this is handled reasonably, and I have every reason to
Speaker 1: think it will be that this will be a source
Speaker 1: of systemic wresting. Outsideing Inveashelists of Rock Creek about the
Speaker 1: politics and returns of ESG Investing, and investor Sam Zell
Speaker 1: about what ports to seek when the storms are coming in.
Speaker 1: We're talking about ending free money, but we're not ending
Speaker 1: free money. This week was a time for reconsidering on
Speaker 1: Global Wall Street, as the war in Europe raged on
Speaker 1: and Ukrainian forces fought valiantly to hold on de Bach
Speaker 1: Mood back. Mood Is surrounded on three sides. Reportedly, the
Speaker 1: calculation Celenski's making is that he'll wear down Russian forces,
Speaker 1: which are not very capable, even as leaders like Jamie
Speaker 1: Diamond of JP Morgan warned that the situation there posts
Speaker 1: one of the biggest risks with the global economy. I
Speaker 1: think I worry the most about if is Ukraine soil
Speaker 1: gas fill the leadership of the world, and you know
Speaker 1: our lady with China, I mean that that is much
Speaker 1: more serious though the economic by grazing you'll have to
Speaker 1: deal with on a day to day base. At its
Speaker 1: National People's Congress, China's leadership laid out new war modest projections,
Speaker 1: raising questions not only for China but for global growth.
Speaker 1: If you look at the trends of the GDP taget
Speaker 1: dates set over the years, actually since twenty eighteen, they've
Speaker 1: been gradually lowering the GDP growth. Hagets so I think
Speaker 1: this is also a sign that increasingly the PUS makers
Speaker 1: are increasingly emphasizing on the quality of growth rather than quantity.
Speaker 1: Well fetch Yer J. Powe left a little doubt that
Speaker 1: the continued strengthen the economy makes higher rates more likely
Speaker 1: than lower. The latest economic data have come in stronger
Speaker 1: than expected, which suggests that the ultimate level of interest
Speaker 1: rates is likely to be higher and previously anticipated. If
Speaker 1: the totality of the data were to indicate that faster
Speaker 1: tightening is warranted, we'd be prepared to increase the pace
Speaker 1: of rate heights. And the prospect of those higher rates
Speaker 1: hit tech banking hard as Silicon Valley Bank went from
Speaker 1: panic to receivership in twenty four hours. A SVB bank
Speaker 1: has now failed. The FDIC takes over and has appointed
Speaker 1: a receiver. It is the first insured institution to fail
Speaker 1: so far this year. Jobs numbers out on Friday would
Speaker 1: have been encouraging but for that SVP's failure, with the
Speaker 1: US adding another three hundred eleven thousand jobs while wage
Speaker 1: increases slowed a bit, but all the jobs in the
Speaker 1: world couldn't overcome Chairpile's warnings about higher rates, and then
Speaker 1: the shutter sent through the banking sector, leaving the SMP
Speaker 1: five hundred down over four point five percent of the week,
Speaker 1: while the NAZAC lost four point seven percent. But of course,
Speaker 1: the flight to safety drove investors to bonds, leaving the
Speaker 1: yield on the ten year twenty five basis points lower
Speaker 1: on the week, with almost all of it really coming
Speaker 1: on Friday. Here to help us sort all this out,
Speaker 1: our Sarah Ketder Causeway Capital Management CEO, and Barbara Reinhardt,
Speaker 1: head of Asset Allocation Investment Management. So welcome to both
Speaker 1: of you. Barbara, great to have you here with us.
Speaker 1: So it was quite a back and forth week. We
Speaker 1: had the pile testimony that seemed to inca we go higher,
Speaker 1: we had the jobs numbers, and then we had the
Speaker 1: SVB situation. What do you make of all of it? Look,
Speaker 1: I think that the overwhelming thing that happened this week
Speaker 1: was the receivership of SVB. Right, it's a It's one
Speaker 1: of the largest bank failures that we've had since the
Speaker 1: Financial crisis. It's the sixteenth largest bank in the US.
Speaker 1: I don't think that the issues that you see with
Speaker 1: SBB are systemic. I would agree with what Larry Summers
Speaker 1: has said earlier. However, I do think it was an
Speaker 1: opportunity for everyone in the market to take a very
Speaker 1: big pause today and really think about their positions and
Speaker 1: think about their liquidity, which is why you saw some
Speaker 1: of them. You know, less liquid parts of the market
Speaker 1: really get hit much harder today, like small cap stocks
Speaker 1: and high yeld bonds. Also, we know we're down pretty
Speaker 1: dramatically today. So Sarah, even if it's not systemic, is
Speaker 1: it possibly a canary in the coal mine? Is they
Speaker 1: talk about they although it maybe just SVB and they
Speaker 1: got special situations, the underlying circumstances could be reflected in
Speaker 1: other parts of the of the economy as well as
Speaker 1: frankly financial markets. David one never knows, but but Silicon
Speaker 1: Valley Bank did have a very concentrated corporate deposit base,
Speaker 1: and so there are other regional banks in the US
Speaker 1: their deposit bases in general seem to be much more diversified.
Speaker 1: So that's one of the primary reasons why this may
Speaker 1: not be systematic. But confidence is crucial for banks, and
Speaker 1: there doesn't appear, especially given the likelihood that Silicon Valley
Speaker 1: Bank depositors will be made whole, any reason for this
Speaker 1: to spread through the banking system, which could be a
Speaker 1: reason to be looking at some of the other banks
Speaker 1: as investments, given they're selling off so rapidly. Well, it
Speaker 1: wasn't even I don't think as a practical owner, Sarah.
Speaker 1: By the time it started to sort out, it looked
Speaker 1: like the regional banks were getting hit harder than the
Speaker 1: big money center banks. Does that suggest that some of
Speaker 1: the regional banks maybe opportunities for investors right now? It
Speaker 1: does depend on what they hold. If in their asset
Speaker 1: basis they have a huge amount of commercial real estate,
Speaker 1: particularly office, that could end up being very problematic. What
Speaker 1: we're all really talking about, here's a new era. Interest
Speaker 1: rates are rising, and until they stop rising in full again,
Speaker 1: there's a complete new view on credit. Credit is going
Speaker 1: to be very difficult to obtain. We're in a credit crunch.
Speaker 1: So whether you're a real estate and you have a
Speaker 1: tough time with occupancy or you're a technology banker, this
Speaker 1: is a whole different environment. So be really careful if
Speaker 1: you're looking at regional banks, make sure if they're trading
Speaker 1: down at their tangible book value book less good will,
Speaker 1: but that's really solid ground. There's nothing else you can
Speaker 1: go terribly wrong in their asset side of their balance sheet. Well,
Speaker 1: we're on other parts of the economy and a business
Speaker 1: are interest rates sensitive in the centil Because we've had
Speaker 1: a long regime frankly of pretty low interest rates that
Speaker 1: seems to be gone right. Well, MC who has benefited
Speaker 1: the most from very low inch strates? You know, the
Speaker 1: real estate sector was probably the first one, right, that's
Speaker 1: the single biggest beneficiary of it. You'd have to also
Speaker 1: take a look at the private markets. Private credit, private equity,
Speaker 1: private real estate all benefited from very low rates. So
Speaker 1: you know the fact that you have is drying up liquidity.
Speaker 1: The Federal Reserve has been raising interest rates aggressively for
Speaker 1: the past twelve months. They're trying to slow down the economy.
Speaker 1: And when you slow down the economy, certain things break,
Speaker 1: just like cryptocurrency broke last year. Then you had the
Speaker 1: problems in the guilt market in the UK, and now
Speaker 1: you have a US bank that's just failed try to
Speaker 1: slow down the economy. How much, Barbara, are we going
Speaker 1: into recessions for practic matter? Because the inflation seems to
Speaker 1: be more durable than people thought. Are they going to
Speaker 1: have to stop in the break so hard that we
Speaker 1: have to go into recessions. I don't think there's a
Speaker 1: recession on the horizon over the course of the next
Speaker 1: twelve months. Right, there's a very long lead time between
Speaker 1: policy implementation, when you're raising your interest rates and when
Speaker 1: you would go into recession. The US economy is extremely strong, right.
Speaker 1: You had three hundred and eleven thousand jobs printed this
Speaker 1: past month. While it looks like the labor market is
Speaker 1: starting to ease a bit and weaken a little bit.
Speaker 1: I would say that the US economy is a very
Speaker 1: durable supertanker. It would probably take a seismic shock of
Speaker 1: some sort in order to derail it at this point,
Speaker 1: and I don't think SPB is that shock. Sarah, you
Speaker 1: specialize in equities, in particularly investing in equities. When it
Speaker 1: comes to equities, what is your base case on recession?
Speaker 1: And more importantly, does it matter? Does it really affect
Speaker 1: which equities invest in whether you think there's going to
Speaker 1: be a recession or not. It matters if a stock
Speaker 1: doesn't already price in some slowing. There's no doubt. I mean,
Speaker 1: my colleagues and I really do believe that the FED
Speaker 1: is intent on slowing the US economy and the same
Speaker 1: with the European central banks. Maybe they're a year behind
Speaker 1: the FED, and at some point in time maybe the
Speaker 1: Japanese will tighten monetary policy with a new central bankhead.
Speaker 1: So there's a lot of tightening out there. And the
Speaker 1: other side of that is typical economic slowing. That's what
Speaker 1: brings down inflation, and inflation is the target. So we're
Speaker 1: expecting some element of slowing. It may be severe. It's
Speaker 1: hard to know. But what we do know is what's
Speaker 1: priced into stocks, and not all stocks, but in certain
Speaker 1: areas that many of them have already discounted in economic slowing.
Speaker 1: Not all the cyclicals, for example, but there are sub
Speaker 1: industries that have and that's the opportunity where it's already
Speaker 1: priced and then we can have it. Then then the
Speaker 1: worst can happen and the stock has in nowhere to
Speaker 1: go but up. So Barbara's played the parlor game. What
Speaker 1: do you think the terminal rd's got to be for
Speaker 1: the FED to get inflation down to where one needs
Speaker 1: to go. I don't think it's as high as probably
Speaker 1: what the markets pricing in. I think maybe the foeder
Speaker 1: reserve has to tighten one, maybe two more times if that,
Speaker 1: and then be done. The reason is the way that
Speaker 1: you price in a higher terminal rate is either you
Speaker 1: have a faster labor force growth or a faster productivity growth.
Speaker 1: The US doesn't have any any thought showing of that
Speaker 1: being the case at this point. So for US, we
Speaker 1: do not believe that our star is six percent or
Speaker 1: something above there at this point. I don't think that
Speaker 1: the US economy can grow so fast or it's been
Speaker 1: such a dramatic change that it's been over the past
Speaker 1: twenty years, so we don't think that rates have to
Speaker 1: go much higher at this point. Sarah Header and Barbara
Speaker 1: Reinhardt will be staying with us as we turn to
Speaker 1: what all this means for your portfolio. This is Wall
Speaker 1: Street Week on Bluebird in Darkness Washington. The Reagan administration
Speaker 1: stuck to which proposed six hundred and ninety five billion
Speaker 1: dollars budget, a number of that in Washington is somehow
Speaker 1: regarded as lean and austere, and the Democratic leadership in
Speaker 1: Congress stuck to its view that the budget is, as
Speaker 1: one senator put it, cool, in human, and unfair. To
Speaker 1: an end next week for further non surprises. That was
Speaker 1: Lewis Roguiser back in March of nineteen nine eighty one,
Speaker 1: when the number one movie in the country was Back
Speaker 1: Roads with Sally Fields and Time and Lee Jones, the
Speaker 1: number one song was nine to five with Valley Parton,
Speaker 1: and the proposed federal budget was a whopping six hundred
Speaker 1: ninety five billion dollars instead of the six point nine
Speaker 1: trillion dollars proposed by President Biden just this week, Still
Speaker 1: with us or Barbara Reinhardt of Voya Investment Management and
Speaker 1: Sarah Header of Causeway Capital. So Barbara, let me start
Speaker 1: with you here. We want to turn down of the
Speaker 1: question with the portfolio. This is your job in party
Speaker 1: is to figure out how to allocate portfolios. Given all
Speaker 1: that we've said about where we are in the tightening curve,
Speaker 1: everything we've seen, how do you manage your portfolios these days?
Speaker 1: One thing that we're thinking greatly about, David, is our
Speaker 1: international equity exposure. So when we think about global equities,
Speaker 1: we look around the world and we look for the
Speaker 1: opportunity set. One thing that stands out to us that's
Speaker 1: probably a little bit overextended at this point is international
Speaker 1: developed equities. Over the past one year, the SMP is
Speaker 1: down four percent. International developed equities, you know, Europe in
Speaker 1: Japan are up almost seven percent. That is a very
Speaker 1: big disparity in returns between those two parts of the world.
Speaker 1: For Europe, it had been priced for a very big,
Speaker 1: very bad recession. It didn't transpire. They had much warmer
Speaker 1: weather than it'd been expected. But we don't think that
Speaker 1: all those great things that Europe averted, or the luck
Speaker 1: that Europe had in averting some of that disaster over
Speaker 1: the past year, is likely to be repeated. So we're
Speaker 1: actually keeping our assets closer to home. In the US,
Speaker 1: we think that the FED is one of the first
Speaker 1: central banks or major market central banks that has raised
Speaker 1: interest rates, it's likely to be one of the first
Speaker 1: ones to stop. And we think as the world slows down,
Speaker 1: the dollar is likely to get a little bit stronger
Speaker 1: as a flight to safety and somewhat quality in the US.
Speaker 1: So we're staying a little bit closer to home, but
Speaker 1: we're barbelling it with some exposure to the emerging markets
Speaker 1: because we do realize that there's been a lot of
Speaker 1: stimulas put into the pipeline, and we think that again
Speaker 1: emerging markets are so cheap at this point if you
Speaker 1: can hold them for a three to four to five
Speaker 1: year period, you're likely to be very pleased with your portfolio. Okay,
Speaker 1: so someone said, Barbara's talking your equity bookhare you specialize inequities.
Speaker 1: Where are you in developed market equities these days? Well,
Speaker 1: for developed markets, And Barbara has a point that Europe
Speaker 1: and Japan have outperformed the US. Really more Europe. The
Speaker 1: Eurostocks fifty is up eleven percent year to date in dollars.
Speaker 1: That's not even a full three months. However, that's a
Speaker 1: rather short time period. Non US Developed has vastly underperformed
Speaker 1: the US or less decade. And I've heard this from clients,
Speaker 1: you know, they get very anxious. But so it might
Speaker 1: be quite some time, if you think about it, in
Speaker 1: that longer context, for Non US developed to catch up
Speaker 1: with the US. And there's still a significant valuation discount
Speaker 1: for non US versus US, in part due to the
Speaker 1: different sector weights in the two areas. The US has
Speaker 1: much more in the way of technology, and here today, interestingly,
Speaker 1: in a broad global context, technology has led along with
Speaker 1: consumer discretionary and communication services. So investors are still really
Speaker 1: interested in tech. There's them like I just say, this
Speaker 1: is the environment we're in. It's one of active management.
Speaker 1: With rising rates, just can't buy an index anymore. In
Speaker 1: my opinion, you have to have a manager who can
Speaker 1: sift through and let's say, go to non US developed
Speaker 1: and find the stocks that haven't yet had their earnings
Speaker 1: recovery recognized. Some of them haven't even gone into a downturn.
Speaker 1: I mean, Barbara noted the tightening cycle and I mentioned
Speaker 1: this as well as a little bit lagged in Europe.
Speaker 1: Old all that additional tightening, there may be more casualties.
Speaker 1: So being very careful about price entry point be extremely
Speaker 1: cheap in terms of what you'll pay is a way
Speaker 1: to avoid those pitfalls. It's been really great having both
Speaker 1: of us. Thank you so much to Sarah Header of
Speaker 1: Causeway Capital and to Barbara Reinhardt. A voya. Investing related
Speaker 1: to environmental, social and governance issues so called ESG has
Speaker 1: been on our roller coaster ride. From being all the
Speaker 1: rage and embraced by some of the largest financial institutions
Speaker 1: in the world, it's being scorned and even the subject
Speaker 1: of legislation to limit its use. And through it all,
Speaker 1: it's sometimes hard to sort out how much is investing
Speaker 1: based on social values and how much is just pursuing
Speaker 1: value through taking into account all the risks of Sonny Beschilists,
Speaker 1: CEO of Rock Creek, was an early proponent of ESG investing,
Speaker 1: at least in certain circumstances, and she's back with us
Speaker 1: now on Wall Street Week. It's great to have you here, Sonny,
Speaker 1: great to be with you. Such a treat. So I mean,
Speaker 1: take us to this. Is it a choice between return
Speaker 1: on the one hand and social values on the other,
Speaker 1: because that's the way some people like to put the question.
Speaker 1: You are absolutely right, and I have to tell you
Speaker 1: I don't necessarily like the word ESG just to put
Speaker 1: that on the table right here. But I think what
Speaker 1: is happening right now in Washington, President Biden did vetoed
Speaker 1: the bill that was trying to pass through to allow
Speaker 1: corporate tension plans to consider ESG factors in their investments,
Speaker 1: not to actually necessarily adopt them, but to actually consider them.
Speaker 1: So it was a pretty soft requirement. I think that
Speaker 1: what that is not showing us is what you said,
Speaker 1: which is right now. If you and I were investing
Speaker 1: in let's say, renewable energy, we would have lost this year.
Speaker 1: Just in twenty twenty three one point four percent or so.
Speaker 1: Of course today the markets got pretty murky. But if
Speaker 1: you had invested in oil and gas, we would have
Speaker 1: lost three point eight percent in the last five years.
Speaker 1: We would have made seventeen point four percent in renewable energy,
Speaker 1: and we would have made about seven to ten percent,
Speaker 1: depending on which index you're looking at in oil and gas. Now,
Speaker 1: if you looked at other periods, oil and gas might
Speaker 1: very well be ahead. But what does that mean. It
Speaker 1: means for investors renewable energy is really economic. It has
Speaker 1: now changed the technologies with us such that clean energy
Speaker 1: happens to economic. So when you're looking at purely financial decisions,
Speaker 1: it should certainly be a part of your portfolio. So
Speaker 1: I wonder, if I can put it this way, how
Speaker 1: much that's on the fundamentals, That is to say, you
Speaker 1: can actually make more money by taking head environmental I'll
Speaker 1: just takeing environmentals, so I won't bother with the esp okay,
Speaker 1: And how much is actually just the hydraulic pressure behind
Speaker 1: environmental investing. It's so popular, the money goes there and
Speaker 1: it drives it up rather than actually being on the fundamentals.
Speaker 1: So just purely on the fundamentals, just purely on the
Speaker 1: costs of how much it costs now to produce solar energy.
Speaker 1: If you look at that, it has become totally fundamentally economic.
Speaker 1: If you look at Texas, because we see tis in
Speaker 1: Florida are right in the front of the conversation that
Speaker 1: you mentioned. But Texas is producing fourteen percent of renewable
Speaker 1: energy in America. Do you think you know that would
Speaker 1: be the case if the fundamentals were not there. They're
Speaker 1: just as we speak, building a huge wind farm that
Speaker 1: will produce energy for three million households. I'm siddy. You've
Speaker 1: been in the markets for a good long time, all
Speaker 1: sorts of different positions. Well, the markets sort this out,
Speaker 1: that is to say, if you're right, and in fact,
Speaker 1: you'll get better returns on average over time by taking
Speaker 1: your account environmental concerns. Will that drive people into those investors,
Speaker 1: whether they want to be there or not. I actually
Speaker 1: think people are moving in that direction. So there is
Speaker 1: one thing is the political conversations that are going on.
Speaker 1: But if you look, if you talk to any businessman, again,
Speaker 1: not just in Texas, but all over the country, people
Speaker 1: are investing in an integrated way into into these sources
Speaker 1: of energy. And they'll continue and insurance companies, by the way,
Speaker 1: are looking at the same factors to make sure they
Speaker 1: don't lose money. It's very much it's how the job is,
Speaker 1: how to maximize returns, how do you minimize risk out
Speaker 1: of those are very important for investors. So as I'll
Speaker 1: just again say with climate rather than social and governments
Speaker 1: for their owns. Has it gotten a bad name because
Speaker 1: some people are using it as a marketing different technique.
Speaker 1: It's actually hard to know which companies are actually making
Speaker 1: decisions based on it, as opposed to just saying there
Speaker 1: because everyone wants to say they're environmentally correct. I think
Speaker 1: you're absolutely right. There's the greenwashing. The green bonds led
Speaker 1: to some companies that were even using coal calling themselves green.
Speaker 1: So climate has become not such a positive word, just
Speaker 1: like ESG. But if we just talked about energy transition,
Speaker 1: I don't think many people would disagree. We need to
Speaker 1: use oil and gas. Most people are using them in
Speaker 1: the transition, but we're moving towards cheaper, sustainable energy. I
Speaker 1: think everyone is doing that, whether you're looking at Saudi Arabia,
Speaker 1: UAE or Texas. It's so wonderful to have you here.
Speaker 1: Alfsani always thank you so much as Halfsani Baschelas of
Speaker 1: Rock Creek. Coming up, we wrap up our week with
Speaker 1: special contributor Larry Summers of Harvard at the next on
Speaker 1: Wall Street Week on Bloomberg. This is Wall Street Week.
Speaker 1: I'm David Weston. We welcome now our special Wall Street
Speaker 1: Week contributor Larry Summers of Harvard. Larry, thank you so
Speaker 1: much for joining us here. We have to talk about
Speaker 1: Silicon Valley Bank. It's been developing. Towards the end of
Speaker 1: the week, a lot happened. They pretty quickly went into
Speaker 1: receivorship from the FDIC. What does it tell us more
Speaker 1: broadly about what's going on in the banking sector or
Speaker 1: in the economy. Look, there's still plenty of fog of
Speaker 1: war here and we're still all trying to sort through it.
Speaker 1: There clearly was a big managerial failure. It sure looks
Speaker 1: like regulators were not on the case in the way
Speaker 1: they could have been. Right now, it looks like this
Speaker 1: is not a broad systemic issue. That Silicon Valley Bank
Speaker 1: and perhaps perhaps several other banks, but not many other banks,
Speaker 1: and none of the largest banks, had a mismatch between
Speaker 1: the kind of depots they had and the ways in
Speaker 1: which they had invested their money in longer term bonds,
Speaker 1: and so I don't think this is likely to be
Speaker 1: a broadly systemic problem, but it certainly is going to
Speaker 1: have very substantial consequences for Silicon Valley, for the economy
Speaker 1: of the whole venture sector, which has been dynamic, unless
Speaker 1: the government is able to assure that this situation is
Speaker 1: worked through. Right now, the holders of uninsured deposits have
Speaker 1: been told that those deposits are frozen and camp be withdrawn.
Speaker 1: There are dozens, if not hundreds of startups that we're
Speaker 1: planning to use that cash to meet their payroll next week.
Speaker 1: If that's not able to happen, the consequences will it
Speaker 1: will be quite severe for our innovation system. I suspect
Speaker 1: that ways will be found to at least provide significant
Speaker 1: advances on those deposits to enable the payment of payrolls.
Speaker 1: I think the FDIC is going to have to think
Speaker 1: very hard about how to be maximally creative in using
Speaker 1: its authorities to assure that this doesn't have a set
Speaker 1: of collateral consequences for the innovation economy. I don't think
Speaker 1: this is a time for moral hazard lectures or for
Speaker 1: talk about teaching people lessons. We have enough strains and
Speaker 1: challenges in the economy without adding the collateral consequences of
Speaker 1: a breakdown in an important sector of the economy. So
Speaker 1: I hope that they will in the short run be
Speaker 1: aggressive about containing the problem and containing possible contagion, and
Speaker 1: then over the medium term, I think there are important
Speaker 1: lessons for how we regulate what roles we use for
Speaker 1: market values in regulation that need to be learned from
Speaker 1: this experience. I think we have tended to have a
Speaker 1: bit of a romance with the community bank relative to
Speaker 1: the larger banks, and we're going to have to figure
Speaker 1: out how to maintain banking services for communities while moving
Speaker 1: to also pay attention to making sure that we've got
Speaker 1: as much financial stability as we possibly can. Whenever we
Speaker 1: talk about financial stability, we are reassured that the banking
Speaker 1: system is so much stronger than it was before twenty eight,
Speaker 1: two thousand and nine, so many reforms. Is there some
Speaker 1: question now about whether that's exactly right? And let me
Speaker 1: be very specific, what about the stress tests? Why didn't
Speaker 1: they kick this out? Look? I think I have written
Speaker 1: that there are a lot of concerns about the stress
Speaker 1: tests I do not believe the stress tests give an
Speaker 1: accurate picture of the resilience of the banking system. I
Speaker 1: think they are far too optimistic in thinking about what
Speaker 1: would happen in a catastrophic kind of scenario. That's said,
Speaker 1: I think any fair minded observer has to think that
Speaker 1: banks are better protected than they were before the two
Speaker 1: thousand and eight financial crisis. Though I think we have
Speaker 1: to recognize that a large part of the lending in
Speaker 1: the country, and lending to businesses is now done by
Speaker 1: institutions that are not banks, and so there are important
Speaker 1: issues in the shadow banking system. So this certainly should
Speaker 1: come as a reminder that rational financial regulation is hugely
Speaker 1: important to the success of the American economy. Larry also
Speaker 1: got jobs numbers out on Friday this week, and they
Speaker 1: were more robust, once again than expected, three eleven thousand
Speaker 1: new jobs. At the same time, the rate of wage
Speaker 1: increase actually came down just a little bit. What did
Speaker 1: those tell you about the strength the economy and, for
Speaker 1: that matter, where we're headed with inflation. I think that
Speaker 1: most of us probably have a kind of now more
Speaker 1: than ever view after these numbers. If you were a
Speaker 1: person who is very worried about inflation, you focus on
Speaker 1: the strength in the economy and the seemingly ever tighter
Speaker 1: labor market. If you're a person who is less concerned
Speaker 1: about inflation, you probably take heart from the lower wage
Speaker 1: inflation number. So I doubt these numbers changed too many minds.
Speaker 1: I'm gonna be watching for the CPI number next week.
Speaker 1: But I think more broadly, it seems to me that
Speaker 1: we don't have a lot of evidence of a basic
Speaker 1: downwards trend in inflation. It looks to me more like
Speaker 1: the inflation story is fluctuation around an underlying inflation rate
Speaker 1: of four and a half or five and if that's
Speaker 1: close to right, it suggests that the FED has considerably
Speaker 1: more work to do. Well. That's exactly my question. What
Speaker 1: does it mean for monetary policy? What do you think
Speaker 1: the FED should take away from these numbers? What does
Speaker 1: that mean they should do? For example, on terminal rate,
Speaker 1: I suspect that there's a quite good chance that we're
Speaker 1: going to need to get to a terminal rate near six.
Speaker 1: After all, we have inflation running it close to five percent,
Speaker 1: and we have interest rates at about five percent, and
Speaker 1: so interest rates and inflation in the same range doesn't
Speaker 1: point to a lot of pressure to bring inflation down.
Speaker 1: So I'm very much open to changing my mind, and
Speaker 1: I think confident pronouncements about these things are a mistake.
Speaker 1: If we get a strong CPI number on Tuesday, I
Speaker 1: think the right thing to do will quite likely be
Speaker 1: to increase rates by fifty basis points in March, because
Speaker 1: if we're pretty confident that rate increases of that magnitude
Speaker 1: or necessary, I don't see much reason not to get
Speaker 1: on not to get on with it. If the CPI
Speaker 1: number is more moderate, then I think it's a or
Speaker 1: comes in surprisingly low, then I think it's a very
Speaker 1: different kind of judgment that needs to be reached. In general,
Speaker 1: I think there is more risk of underreacting to the
Speaker 1: inflation concern than of overreacting. Larry, Finally, and briefly, if
Speaker 1: we can what about the budget that we saw out
Speaker 1: of the White House this week as six point nine
Speaker 1: trillion dollars spending an awful lot more on a lot
Speaker 1: of things. Are we having a serious discussion about the
Speaker 1: federal budget on either the Democrats or the Repulican side
Speaker 1: at this point? And if not, how do we get
Speaker 1: to one? A lot of good ideas in the budget.
Speaker 1: But I think for a variety of reasons, the deficit
Speaker 1: path is likely to end up greater than the administration
Speaker 1: imagines unless there are substantial policy actions. And I think
Speaker 1: we're getting back into a phase as interest rates rise,
Speaker 1: where it's going to be very important to think about
Speaker 1: the long run behavior of budget deficits. In many ways,
Speaker 1: the picture is more adverse than it was a decade
Speaker 1: ago when the Simpson Bowls process was launched. So I
Speaker 1: do think we need to have that as a bipartisan conversation.
Speaker 1: I welcome the President's providing his budgetary blueprint and asking
Speaker 1: the Republicans to provide their political blueprint as a basis
Speaker 1: for conversation and dialogue. I am glad to see rising
Speaker 1: focus on containing healthcare costs, because that's probably the single
Speaker 1: most important issue in thinking about the budget over the
Speaker 1: longer term. Though I'd have to say that my judgment
Speaker 1: is that the ultimately necessary expenditures on national security are
Speaker 1: going to be substantially greater than the President's budget. Larry,
Speaker 1: thank you so much. As Larry Summers of Harvard coming up,
Speaker 1: whatever you think of chat GPT, maybe it can help
Speaker 1: us get rid of some of those pesky lawyers. That's
Speaker 1: next on Wall Street Week on Bloomberg. Finally, one more thought.
Speaker 1: The first thing we do, let's kill all the lawyers. Well,
Speaker 1: that wasn't really my idea. Shakespeare had his character Dick
Speaker 1: the Butcher say it in Hendry the Sixth, Part two,
Speaker 1: but it's something we've heard often repeated, even by some
Speaker 1: lawyers like me. Now for the first time, it may
Speaker 1: just be possible, maybe not to kill the lawyers, but
Speaker 1: to make them a little less necessary. It's a use
Speaker 1: case for artificial intelligence and all those chatbots we're hearing
Speaker 1: so much about. This is chat gpt. It is routing
Speaker 1: out an AI chat bought service. Is chat gpt. Feva
Speaker 1: suits the world. It's way too early to say where
Speaker 1: AI will lead us, but it's hard to find anyone
Speaker 1: denying that it's going to be. This could be the
Speaker 1: most important generals technology since the wheel or fire, with
Speaker 1: the potential to transform everything from banking. As Jamie Diamond
Speaker 1: told us this week, AI is real. This is not
Speaker 1: no crypt tongue, that's not crypt done. This is a
Speaker 1: technology which is staggering, and we're fully engaged to hedge funds.
Speaker 1: According to Ken Griffin of Citadel. This branch of AI
Speaker 1: will be game changing for the economy and like most
Speaker 1: changes in technology, with clear winners and losers to it,
Speaker 1: with HPE CEO Narry pointing to AI for his company's
Speaker 1: growth prospects, a no AI is total mind for people
Speaker 1: today and that's where it has a big opportunity for
Speaker 1: us as a company. And now chatbots are stepping up
Speaker 1: to the bar, the legal bar, that is, with reports
Speaker 1: that chat GPT scored a passing C plus on a
Speaker 1: standard law school exam at the University of Minnesota. Now
Speaker 1: that's not good enough to make a law review, but
Speaker 1: a passing grade it is, nonetheless, and that may just
Speaker 1: be good enough for routine contracts and memoranda. At global
Speaker 1: law firm Allen and Ovary, which has been using its
Speaker 1: own chatbot dubbed Harvey eerily similar to the half of
Speaker 1: two thousand and one a space odyssey, and I want
Speaker 1: to help you not to be outdone. Major international law
Speaker 1: firm DLA Piper said this week it has hired a
Speaker 1: new chief Data Scientists to oversee ten as what they
Speaker 1: call top tier data scientists for its new artificial intelligence
Speaker 1: and data analytics practice, but for all the anticipation of
Speaker 1: a brave new world. It's a little hard to imagine
Speaker 1: a chatbot, no matter how smart, taking the place of
Speaker 1: a good old country lawyer. I've been appointed to defend
Speaker 1: Tom Robinson now that has been charged. That's what I
Speaker 1: intend to do. That does it for this episode of
Speaker 1: Wall Street Week. I'm David Weston. This is Bloomberg. C
Speaker 1: you next week.