Speaker 1: This is Bloomberg Wall Street Week. The global push into infrastructure,
Speaker 1: breaking the IPO logjam in text, the financial stories that
Speaker 1: shape our work, cutting inflation without losing jobs. Do we
Speaker 1: need rate cuts and if so? How many? Investing in
Speaker 1: a time of geopolitical.
Speaker 2: Turmoil Through the eyes of the most influential voices.
Speaker 1: Ten Rogueff economists of Harvard, former FDIC had Shila bet
Speaker 1: Ge CEO, Larry Culp, San Francisco fed President Mary Daily Bloomberg.
Speaker 2: Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: Market turmoil, Middle East threats, and the presidential race is
Speaker 1: off and running. This is Bloomberg Wall Street Week. I'm
Speaker 1: David Weston. This week, Harvard economist Greg Mank on facing
Speaker 1: up to the federal deficit.
Speaker 3: You can't leave your children a negative bequest unless you're
Speaker 3: doing it through the government.
Speaker 1: Former Pentagon Number two Michelle Flornoy on what's needed for
Speaker 1: the US to face a more dangerous world.
Speaker 4: We really have to take a fresh look at what
Speaker 4: we're spending on and where we're investing.
Speaker 1: And Jack Hittery of Sandbox AQ on what's real and
Speaker 1: what's hype in the world of artificial intelligence.
Speaker 5: This is a great moment for a I that takes
Speaker 5: us beyond the chat GPT.
Speaker 1: We start with a wild week in the markets, stocks
Speaker 1: and bonds responded to weak jobs numbers, a shift in
Speaker 1: Japanese monetary policy, and geopolitical uncertainty. To take us through
Speaker 1: what it all means, we turn once again to our
Speaker 1: special contributor, Larry Summers of Harvard. So, Larry a lot
Speaker 1: to sort through here. What was your overall take on
Speaker 1: the terminil the marketplace and the speculation, the speculation that
Speaker 1: FED maybe should have an emergency rate cut.
Speaker 6: I would shay on current facts, given that there has
Speaker 6: been some recovery, given that volatility has.
Speaker 7: Come way down.
Speaker 6: It were not out of the woods. You can't be certain.
Speaker 6: The FED certainly needs to be watching carefully, but I
Speaker 6: think an emergency response would be launching panicked, overheated and
Speaker 6: counterproductive on current facts, Which doesn't mean that the FED
Speaker 6: shouldn't be watching very closely. Before they have another decision
Speaker 6: to make in September, there's going to be a lot
Speaker 6: more data that it's going to come in, and I
Speaker 6: think they should make clear that they're going to be
Speaker 6: watching all that data and they're going to make a
Speaker 6: decision reflecting the need to balance the concern of making
Speaker 6: sure that we have stopped inflation with the concern of
Speaker 6: maximizing employment, and I think they need to not be
Speaker 6: pressured into specificity of a kind that is impossible.
Speaker 1: Let me pick up on one of the things you
Speaker 1: mentioned was volatility. The VIC really did spike up, I
Speaker 1: think over sixty, maybe the highest it had been since
Speaker 1: the pandemic first hit. How much attention should the FED
Speaker 1: pay to that volatility index what it might be telling
Speaker 1: you about the markets are functioning.
Speaker 6: I actually think that the SEC and the relevant exchanges
Speaker 6: may want to pay a bit of attention. My understanding
Speaker 6: is that because there are some ill liquid instruments that
Speaker 6: go into the calculation of the VIX, the VICS had
Speaker 6: a somewhat artificial movement on Monday that if one looks
Speaker 6: at the vic's futures, which are a somewhat different instrument,
Speaker 6: they the movements were much much less drum. So I
Speaker 6: certainly had my attention caught by the vics early in
Speaker 6: the day on Monday. But as I have looked into it,
Speaker 6: I think you were learning more about issues around liquidity
Speaker 6: in the options markets than you were about some profound
Speaker 6: reassessment of the American economy, and since that is so
Speaker 6: widely watched an indicator issues of liquidity. Issues around how
Speaker 6: it settles, I think should be studied by the relevant
Speaker 6: parties in the industry and the regulator, the SEC. Larry.
Speaker 1: We spent much of the week with various people getting
Speaker 1: advice to the FAT. It included our former President Donald
Speaker 1: Trump on Thursday and a long news conference and which
Speaker 1: he addressed it, reiterating he thinks the president should have
Speaker 1: some say over monetary policy and rate setting, including saying, boy,
Speaker 1: he'd made an awful lot of money and he thinks
Speaker 1: he knows better than the chair of the FED. You
Speaker 1: had a reaction to that. I know you posted on
Speaker 1: that question. Give us your stance about how dangerous that
Speaker 1: could be.
Speaker 6: I guess I can't say I was surprised by ex
Speaker 6: President Trump because he had said things like that before,
Speaker 6: but I sure was appalled at.
Speaker 8: How bad an idea it was.
Speaker 6: I mean, start with the preposterous arrogance. The Central Bank
Speaker 6: has nineteen members of the FOMC who spend more or
Speaker 6: less all their time scrutinizing every economic statistic. President's got
Speaker 6: a lot of things to do at any given moment,
Speaker 6: and he's actually much less close to the economy. God knows,
Speaker 6: the skills associated with being an economic forecaster and the
Speaker 6: skills associated with being a successful real estate operator are very,
Speaker 6: very different ones. So I don't think there's any particular
Speaker 6: reason to think that a president of the United States
Speaker 6: would have a intellectual contribution to make. And the reason
Speaker 6: why countries all over the world this isn't just.
Speaker 7: An American thing, but countries essentially.
Speaker 6: All over the world have moved to independent central banks
Speaker 6: is that they recognize a profound conflict of interest.
Speaker 7: Who's ever an.
Speaker 6: Elective or political office always is tempted to put more
Speaker 6: money lower Intereststrates hit the accelerator hard to get a
Speaker 6: boost to the economy to make people feel good, But
Speaker 6: when everybody sees that coming, it doesn't actually make people
Speaker 6: feel good. It just raises the expectation they have for inflation,
Speaker 6: so you get more inflation and you don't get any
Speaker 6: substantial output gain.
Speaker 1: Okay, Larry, thank you so very much once again for
Speaker 1: being with us. That is our special Wall Street Week contributor.
Speaker 1: He is Larry Summers of Harvard Markets went on a
Speaker 1: wild ride this week in the wake of the boj
Speaker 1: moved to titan and the week US jobs numbers from
Speaker 1: last Friday, but after gapping down when trading began the
Speaker 1: week with the VIC shooting up to over sixty, things
Speaker 1: settled down a bit. The S and P five hundred
Speaker 1: ended the week at fifty three forty four, just about
Speaker 1: where it was at the end of last week and
Speaker 1: only slightly below the median year end number for our
Speaker 1: Bloomberg elves of fifty five sixty eight. The Nasdaq hit
Speaker 1: a similar air pocket Monday morning, but ended the week
Speaker 1: up two point six percent from Monday's lows, again just
Speaker 1: under where it ended last week. The yield on the
Speaker 1: tenure in the meantime, added about fourteen bases points over
Speaker 1: the course of the week to end at three point
Speaker 1: nine to four percent to take us through the week.
Speaker 1: In the markets, we welcome back now, David Bianco, DWS
Speaker 1: America's Chief investment Officer. Always great to have you here, David,
Speaker 1: and this is a perfect week to have you because
Speaker 1: where there was a lot of action in the market,
Speaker 1: what did you make of it?
Speaker 9: It was wild indeed for in August, and even though
Speaker 9: the S and P is back to where we were
Speaker 9: last Friday, let's just for a moment talk a little
Speaker 9: bit about what the causes were for the volatility around
Speaker 9: the world. As said, a lot of conversation around the
Speaker 9: Bank of Japan hiking, poor timing around the hiking, and
Speaker 9: the unwind of the end carry trade, this legendary en
Speaker 9: carriage trade. It's real, always difficult to know just how
Speaker 9: big it is. But what happened last week was that
Speaker 9: not only did the BOJ hike, the FED put on
Speaker 9: the table the possibility of a cut in September. But then,
Speaker 9: don't forget, we had that jobs report on Friday, and
Speaker 9: the jobs report had a jump of further climb in
Speaker 9: the unemployment eight to four point three percent, and it
Speaker 9: triggered what a lot of people are calling the somb rules,
Speaker 9: some indication of a recession in progress. The job creation
Speaker 9: numbers were still good one hundred and fourteen thousand on
Speaker 9: the payroll survey, but a lot of panic broke out,
Speaker 9: particularly in the bond market, that maybe the Fed's way
Speaker 9: behind and maybe emergency cuts are necessary. So just as
Speaker 9: the BOJ what I think they could have done this
Speaker 9: earlier in the year, decided to do a hike, last week,
Speaker 9: you have the FED and then data suggesting the FED
Speaker 9: maybe cutting a lot. It was kind of crossing the streams.
Speaker 9: It's really dangerous across the streams to major central banks
Speaker 9: moving in different directions, and that sparked ye appreciation people
Speaker 9: trying to probably pay back some of their yen loans.
Speaker 9: That's part of what created all the volativity and made markets,
Speaker 9: particularly Japan, fall out of bed on Sunday night, Yet appreciated.
Speaker 9: Japanese stocks down more than twenty percent on one point,
Speaker 9: led by the big banks. It hurt other global equity
Speaker 9: markets on Monday. But we've recovered and there's more going
Speaker 9: on though than Japan during the week and last week.
Speaker 1: But David, how much did you think was the markets
Speaker 1: and how much was the economy? I mean, you referred
Speaker 1: to recession possibility, and some of the banks started saying, well,
Speaker 1: we're taking up our probability of recession, something that last
Speaker 1: year we thought was a real probability, Now not so much.
Speaker 1: Where are you on the probability of recession?
Speaker 9: I think we're still a safe distance from recession. We
Speaker 9: do dbs. We expect the economy to slow further, but
Speaker 9: I don't think we're slipping into a recession. Not right
Speaker 9: now what happened this week late last week, I think
Speaker 9: is more about investors overreacting, sometimes putting words into policymaker's
Speaker 9: mouths about what they may be doing, or maybe just
Speaker 9: overreacting to step in one direction how much further you're
Speaker 9: going to go, whether it be.
Speaker 4: Hikes or cuts.
Speaker 9: But there was this background of other concerns. We've had
Speaker 9: geopolitical risks, We've had investors take an additional concern with
Speaker 9: what remains a week economy in China and a week
Speaker 9: manufacturing economy in Europe and still weak in the United
Speaker 9: States outside of data centers and chips, and then an
Speaker 9: earning season. Well, the earning season is basically done. Ninety
Speaker 9: percent of companies have reported, and while the results of
Speaker 9: coming okay, we're still hearing from the non tech companies
Speaker 9: that businesses sluggish, manufacturing, consumer businesses. They're cautious about the
Speaker 9: outlook as well. And I would just say, even though
Speaker 9: we've got ten percent year on year growth at of
Speaker 9: SMP earnings about sixty dollars a share in the second quarter,
Speaker 9: it's all still coming from big cap tech.
Speaker 1: It doesn't help it's in August and so the markets
Speaker 1: are not as liquid as we normally expect, right, But
Speaker 1: what are you expecting for the rest of the year,
Speaker 1: given where we are in earnings right now, all the factors,
Speaker 1: where do you think the SMP five hundreds headed for
Speaker 1: the rest of the year.
Speaker 9: Well, I think market's going to stay volatile. Markets can
Speaker 9: be valuatle particularly any day any week. By the way,
Speaker 9: options and futures markets can be even more volatile. I
Speaker 9: think the volatility is with us. We've been shaken by
Speaker 9: some of the events that that broke out, and I
Speaker 9: think that those risks and those concerns, particularly the election
Speaker 9: and the uncertainty for what that means for taxes and tariffs,
Speaker 9: and I think investors want to see some election outcome
Speaker 9: that keeps taxes low and prevents tariffs from going higher.
Speaker 9: But you know, there's a lot of uncertainty around the elections,
Speaker 9: and I think markets will stay volatile at least until then.
Speaker 1: David, thank you so much for being here. That's David
Speaker 1: Bianco of DWS coming up. Despite the market volatility, the
Speaker 1: US economy continues its relatively strong performance. We ask carbon
Speaker 1: economist Greg Mank for his assessment of the economy and
Speaker 1: what the next president needs to do about it.
Speaker 3: I think we need to at some point move to
Speaker 3: a sustainable fiscal policy.
Speaker 1: That's next on Wall Street Week on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 1: This is Waltere Week. I'm David Weston. Jobs numbers may
Speaker 1: have come in weaker than expected, and some consumers spending
Speaker 1: may be softening, but overall the economy remains strong and
Speaker 1: inflation is moderating. We talked with Harvard economics professor Greg
Speaker 1: Mankew at the Aspen Economic Strategy Group meetings about how
Speaker 1: the FED is doing and what comes next.
Speaker 7: I think we're there.
Speaker 3: I give FED low marks early on because I thought
Speaker 3: they were slow off the mark, but then they once
Speaker 3: they realized the problem, they reacted vigorously. And I think
Speaker 3: we're basically very close to target now. And if you
Speaker 3: look at the measures of inflation, a big part of
Speaker 3: that is shelter, and shelter we know is measures a lag.
Speaker 3: If you look at the private sector measures of shelter inflation, rents.
Speaker 7: Are basically flat. Now there's no inflation in that.
Speaker 3: So I think the overall measured inflation rates we're get
Speaker 3: to CEPI say that's going to be coming down to
Speaker 3: target in the next six months.
Speaker 1: So the economy is doing well by most measures. A
Speaker 1: lot of people want to move to our country, right,
Speaker 1: they want to invest in our country, and then a
Speaker 1: lot of people are very unhappy with the economy. How
Speaker 1: do you square those two things.
Speaker 3: Well, the pandemic had a strange effect on people's finances
Speaker 3: because if you think back to the early pandemic, we
Speaker 3: were sending people lots of checks, whether it's just general
Speaker 3: stimulus checks or expanded unemployment insurance. So people were getting
Speaker 3: lots of income, but they couldn't spend it, so they're
Speaker 3: saving a lot. They are paying back down their credit
Speaker 3: card bills. So even though people are kind of unhappy
Speaker 3: being stuck up in their houses, their finances are pretty good.
Speaker 3: So let's look where are now. All these stimulus checks
Speaker 3: have disappeared. People are spending more and so their credit
Speaker 3: cards bollses are building up, credit card delinquencies are arising
Speaker 3: a little bit. So I think, if you're comparing where
Speaker 3: we were to twenty twenty, well better off because we're
Speaker 3: not in a pandemic.
Speaker 7: But people's finances are actually slightly worse.
Speaker 1: There's a lot of talk about when the federal cut
Speaker 1: how much we will cut? Put that to one side,
Speaker 1: Where do you think we will end up? Where we
Speaker 1: end up through this cycle, Because there's a debate really
Speaker 1: on whether we're going to go back down to really
Speaker 1: low interest rates or whether there are structural factors that
Speaker 1: will keep them elevated.
Speaker 3: I don't think we know, and I think the Fed
Speaker 3: is going to have to play it by year. I
Speaker 3: think there were good reasons why we had a thirty
Speaker 3: year decline in real interest rates prior to the pandemic
Speaker 3: and the recent recent events to what I sent, all
Speaker 3: those forces still in play, and to what I sent,
Speaker 3: they're new forces, like very big budget deficits that are
Speaker 3: going to keep them straights high. I don't think we
Speaker 3: really know yet. Partly it's going to depend on future policy,
Speaker 3: and the next present is going to have to make
Speaker 3: decisions over taxes and spending, and so I don't think
Speaker 3: we really know where the FED is going to end up.
Speaker 3: It's probably lower than it is today, but probably higher
Speaker 3: than it was before the hiking cycle began.
Speaker 1: You mentioned the debt and the deficit. How big are
Speaker 1: problem is after the economy?
Speaker 7: Well, I think there's two problems with the debt.
Speaker 3: I think this is one of the ordinary problems, and
Speaker 3: the extraordinary problems. The ordinary problems are basically passing a
Speaker 3: debt onto our children. You can't leave your children a
Speaker 3: negative bequest unless you're doing it through the government, and
Speaker 3: that's what we're basically doing because we're leaving our children
Speaker 3: in negative bequest by running up the debt. So they're
Speaker 3: going to face higher taxes that will encourage some crowding
Speaker 3: out of private capital, reduced activity growth. And then this
Speaker 3: is the extraordinary problems of debt. You know, could the
Speaker 3: United States turn into Greece or Argentina where there's a
Speaker 3: fiscal crisis. The markets don't think there's going to be one,
Speaker 3: that they're expecting us to be responsible. I hope they're right,
Speaker 3: But the laws of economics that played out in Greece
Speaker 3: and Argentina could happen in the United States. And so
Speaker 3: I think we need to at some point move to
Speaker 3: a sustainable fiscal policy.
Speaker 1: Even short of Greece or Argentina. At some point, does
Speaker 1: the deficit problem curtail the fedibility actually to control the economy,
Speaker 1: because at some point the markets take over in setting
Speaker 1: rates from the FED.
Speaker 7: Well, the FED would have to set higher rates.
Speaker 3: I think that I'm not really worried about the FED
Speaker 3: losing control sort of a fiscal crisis. I'm not worried
Speaker 3: about the FED losing control of the economy, but it
Speaker 3: doesn't mean the FED is going to have to place
Speaker 3: higher rates, and that could be a problem for fiscal policy.
Speaker 3: These higher rates put pressure on the budget deficit, and
Speaker 3: as a result, the tension between fiscal policy makers and
Speaker 3: monetary policy makers could be exacerbated.
Speaker 1: How we defined debt crisis? What are the prospects for
Speaker 1: the next president, whoever it is, we'll have to deal
Speaker 1: with the debt crisis. And I guess that really is
Speaker 1: bond vigilantes, right.
Speaker 3: Well, it is exactly. It's bond bond vigilantes. And I
Speaker 3: don't think we know it's partly psychological. At what point
Speaker 3: do people become scared. I don't think it's gonna happen soon,
Speaker 3: but I think at some point in our lifetimes the
Speaker 3: current policy has to be changed, because if you look
Speaker 3: at the CBO projections on their current policy, that GDP
Speaker 3: ratio is going up to infinity, and we know that's
Speaker 3: not gonna happen.
Speaker 7: So at some point that's gonna change.
Speaker 3: It's probably not gonna change the next few years, but
Speaker 3: it's something we're gonna have to deal with, and how
Speaker 3: to deal with that does not be an easy political problem.
Speaker 1: What about the election coming up? In so far as
Speaker 1: we know anything, we have I think a sense maybe
Speaker 1: if we're a second president, Trump would take us. I
Speaker 1: don't know how much we know abou Kamala Harris, but
Speaker 1: what are the alternatives? You see them?
Speaker 6: Well?
Speaker 3: One of the big issues for me is the role
Speaker 3: of the United States and the global economy.
Speaker 7: I know it's a sort of a bad word these
Speaker 7: days that I'm a globalist.
Speaker 3: I actually believe that integrating the United States with the
Speaker 3: global economy is a good thing. So I'm in favor
Speaker 3: of free trade agreements. I'm in favor of more relaxed
Speaker 3: immigration rules. This is a sort of mainstream view back
Speaker 3: in the Bush and Clinton years. Now is a sort
Speaker 3: of backlash against it. I think that backlash has been
Speaker 3: is ill informed, and I think at some point we
Speaker 3: need to go back to being a leader in the
Speaker 3: global economy, which I think is good not only for
Speaker 3: the rest of the world, but also for the United States.
Speaker 1: What about US relationships with China, when it comes to
Speaker 1: the economy.
Speaker 3: Well, China is the big challenge, not not so much economically,
Speaker 3: but I think politically and especially the threat in Taiwan.
Speaker 3: So I do worry a lot about sort of what's
Speaker 3: going on in that part of the world. I understand
Speaker 3: I don't really like industrial policy in general, but I
Speaker 3: understand the motivation had the Chips Act because almost all
Speaker 3: the high end chips are coming from Taiwan's semiconductor and
Speaker 3: that's a very vulnerable.
Speaker 7: Part of the world.
Speaker 3: So relationship with China is very important, but it's not
Speaker 3: so much an economic relationship as a geopolitical relationship, and
Speaker 3: that's the part we need to negotiate.
Speaker 1: That was Harvard economics professor Greg mank. Whoever wins the
Speaker 1: US presidency in November, they will confront geopolitical hotspots around
Speaker 1: the world, from the Middle East to Ukraine to the
Speaker 1: South China Sea. Michelle Flornoy was the Deputy Secretary of
Speaker 1: Defense under President Obama, and when we sat with her
Speaker 1: at the Aspen Economic Strategy Meetings last week, we started
Speaker 1: with what the Defense Department needs to do to be
Speaker 1: prepared for the range of challenges it faces.
Speaker 4: I think the United States you know, we're a global power.
Speaker 4: We have interests, very real interests in many parts of
Speaker 4: the world. So if we get engaged in say deterring
Speaker 4: a Chinese attack on Taiwan, or deterring Russian aggression beyond
Speaker 4: Ukraine and to NATO, we have to also be able
Speaker 4: to still have presence and deterrence ability elsewhere so that
Speaker 4: the Middle East doesn't also erupt. So you never want
Speaker 4: to be in a situation where your engagement in one
Speaker 4: region basically provokes or encourages another adversary elsewhere to start
Speaker 4: to take advantage of that and start something else. And
Speaker 4: so you really do need to have the ability to
Speaker 4: look across multiple theaters at a time and to be
Speaker 4: fully engaged in one while deterring in the others.
Speaker 1: You mentioned some of the relationships with allies. Obviously we
Speaker 1: have NATO when it comes to Europe, and now there's
Speaker 1: more and more development in Asia, including these talks among
Speaker 1: South Korea, Japan, and the United States we just have happened.
Speaker 1: How much can that relieve some of the pressure on
Speaker 1: the United States itself?
Speaker 4: First, it's extremely important politically and in terms of demonstrating resolves.
Speaker 4: So if you're trying to affect Hijipang's calculus about whether
Speaker 4: to use force in the region, knowing that he won't
Speaker 4: just have to deal with a US response, but a
Speaker 4: Japanese response, a Korean response, an Australian response, and others
Speaker 4: in the region who you know coming together in coalition
Speaker 4: to try to protect the rules based order in Asia.
Speaker 4: And then these allies increasingly, particularly Japan, Korea, Australia, they
Speaker 4: have real capability to contribute to any sort of crisis situations.
Speaker 1: There are a lot of fiscal pressures in the United
Speaker 1: States right now. At the same time, many people think
Speaker 1: we're going to have to commit more resources actually to defense,
Speaker 1: given some of the things you've just talked about. Larry
Speaker 1: Summers said that repeatedly on this program. We're looking forward,
Speaker 1: we're going to spend more on defense. Are we spending enough?
Speaker 1: Do we need to spend it more and if so,
Speaker 1: how much more?
Speaker 4: Well? I do think that given the way the world
Speaker 4: is evolving in our interests, we probably do need to
Speaker 4: increase our investment. But just throwing money at the problem
Speaker 4: is not going to be enough. At the same time,
Speaker 4: we really have to take a fresh look at what
Speaker 4: we're spending on and where we're investing because in a
Speaker 4: lot of these situations, you know, buying more of the
Speaker 4: same thing that has served us well, you know, in
Speaker 4: a force that was optimized for the Middle East and
Speaker 4: counter terrorism is not necessarily what we need to deal
Speaker 4: in a maritime and air theater predominantly in the Asia
Speaker 4: Pacific and elsewhere. Plus you have this profound period of
Speaker 4: technological disruption, and so so you really have to look at,
Speaker 4: you know, how do we adopt innovation, integrate it into
Speaker 4: the force to enable the legacy forces, we have to
Speaker 4: be able to operate differently and get different outcomes. So
Speaker 4: it's innovation adoption and it's new operational concepts. We have
Speaker 4: to think much more asymmetrically than we have in the past.
Speaker 4: If we're going to keep our edge in the.
Speaker 1: Future, how should we think about the role of technological
Speaker 1: innovation because some of themselves a lot less expensive than some
Speaker 1: of the big weapons systems.
Speaker 4: Right. I think the US is hands down the leader
Speaker 4: globally in technical innovation, and that includes in the defense domain.
Speaker 4: But we are not all that good at innovation adoption
Speaker 4: actually taking particularly if something's coming out of the commercial sector,
Speaker 4: like take for example, small cheap attritable drones. We are
Speaker 4: seeing how that is impacting the war between Russia and Ukraine.
Speaker 4: We are starting to see Iran use them against Israel,
Speaker 4: you know, in an Asia of Asian theater where China
Speaker 4: will always have a quantitative advantage because they have their
Speaker 4: whole force right there. It's their backyard where we have
Speaker 4: to project power from the United States and other regions.
Speaker 4: How do we buy back mass? How do we sort
Speaker 4: of leverage things like drones under sea, on the sea,
Speaker 4: in the air controlled by human operators. How do we
Speaker 4: leverage that to really create new problems for an adversary,
Speaker 4: and how do we use them to contribute to deterrence.
Speaker 4: So the technological piece is absolutely key to keeping our
Speaker 4: edge in the future.
Speaker 1: Financial markets right now are really almost obsessed with artificial intelligence.
Speaker 1: How does that apply a defense area?
Speaker 4: It is being adopted already. I think the Department of
Speaker 4: Defense gets credit and this administration gets credit for setting
Speaker 4: out a framework for responsible AI. How do we keep
Speaker 4: it safe? How do we make sure it behaves appropriately?
Speaker 4: How do we make sure, you know, it's trans parent,
Speaker 4: that we're following data rules and so forth. We're not
Speaker 4: so sure as whether our adversaries will be so responsible
Speaker 4: in how they develop it. But we see it coming
Speaker 4: into in the intelligence field, helping analysts sort through the
Speaker 4: massive amounts of information to focus on what's important for insight.
Speaker 4: We see it in the area of maintenance, preventative maintenance,
Speaker 4: so getting data that suggests you need to repair something
Speaker 4: before it breaks, which takes less time and is cheaper.
Speaker 4: And then we'll eventually seeing applying it to this human
Speaker 4: machine teaming. I talked about where you have a single
Speaker 4: human being operating very large, large numbers of unmanned systems,
Speaker 4: so you still have the human in the loop, but
Speaker 4: you've bought back a lot of mass for your forces. Ultimately,
Speaker 4: I also think it's going to be important to give
Speaker 4: us an edge and decision making. If we can process
Speaker 4: information faster, get insight faster, tee up options fast, master
Speaker 4: for the human decision maker, we will have an edge
Speaker 4: in any future crisis.
Speaker 1: That was former Deputy Secretary Defense Michelle Flornoy, managing partner
Speaker 1: and co founder of West Exec Advisors, coming up to
Speaker 1: the rush. Degenerative AI has shifted enormous amounts of capital
Speaker 1: and driven tech shares higher. We talked about whether it's
Speaker 1: all gone too far too fast with AI pioneer Jack
Speaker 1: Heitory of Sandbox AQ.
Speaker 5: The bigger part of the economy really needs a different
Speaker 5: kind of AI, and that AI is large quantitative bondus.
Speaker 1: That's next on Wall Street Week on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 1: This is Wall Street Week. I'm David Weston. Invidios stock
Speaker 1: has gone through the roof the so called Hyperscalers are
Speaker 1: investing tens of billions of dollars as the dream of
Speaker 1: generave AI has seized the imagination of investors. But now
Speaker 1: some people are second guessing the land rush to take
Speaker 1: us through what's real and what's overdone. Welcome now a
Speaker 1: pioneer in the field. He's Jack Hitory, CEO of Sandbox AQ.
Speaker 1: So Jack, so good to have you with us. Thank
Speaker 1: you for being here. So for those of us who
Speaker 1: really are not that well versus this, give us your
Speaker 1: overall take. We have seen some backing off, some suggestions,
Speaker 1: for example in Vidio may have some delays in some
Speaker 1: of their chips. Maybe some questions about it. How much
Speaker 1: is real and how much of it is hype?
Speaker 5: David Firstell, great to see you this is these are
Speaker 5: very exciting times right now for AI. Not only the
Speaker 5: kind of AI that people have seen before, like chat,
Speaker 5: GPT and AI focused on words, but also AI now
Speaker 5: applied to the biggest industries in the world to make
Speaker 5: new drugs, to make new alloys, to lightweight vehicles, to.
Speaker 8: Create new energy opportunities for the world.
Speaker 5: This is a great moment for AI that takes us
Speaker 5: beyond the chat GPT. When we look at Nvidia to
Speaker 5: your question about Nvidia, we see a company with a
Speaker 5: great set of high performance chips, initially the g and
Speaker 5: GPU of course for graphics, and then of course to
Speaker 5: large language models. But now there's new demand curves coming
Speaker 5: to Invidia, and so I think, well, there may be
Speaker 5: a couple of initial bumps in the road here in
Speaker 5: the near term. What I recommend people do is look
Speaker 5: at the mid and long term nature of opportunity, which
Speaker 5: now has a big demand curve for quantitative AI, which
Speaker 5: is the next wave AI that's now hitting.
Speaker 1: So Jack, from your experience, you guys are really heavy
Speaker 1: hitter investors. Is it patient capital? I mean when they
Speaker 1: see some of these bumps along the road, do they
Speaker 1: get nervous? Did they call you up? Or are they
Speaker 1: in it for the long haul.
Speaker 5: Most investors that call me up, and many do, are
Speaker 5: in it for the long haul. They see the value
Speaker 5: of these kind of platforms. They see the demand from
Speaker 5: the large data centers, from many companies buying these kinds
Speaker 5: of chips. But what's most important now is the next
Speaker 5: wave of AI that's coming. The initial wave, of course,
Speaker 5: was focus on downloading the Internet training language models like chat,
Speaker 5: GPT and other kinds of large language models known as llms.
Speaker 5: That's certainly a good first wave, and there are certain
Speaker 5: key applications of llms. David, for example, customer service. Right
Speaker 5: now we all agree, I think we can have better
Speaker 5: customer service from telcos and cable operators and airlines and
Speaker 5: folks like that, and I think the chat GPTs of
Speaker 5: the world will help with that. But the bigger part
Speaker 5: of the economy really needs a different kind of AI,
Speaker 5: and that AI is large quantitative models l qms instead
Speaker 5: of just l lms. And that's because we really want
Speaker 5: to see new drug drugs in the marketplace, new treatments
Speaker 5: for brain cancer, pancreatic cancer, for Alzheimer's, for dementia. I
Speaker 5: think everyone watching this show today David knows a loved one,
Speaker 5: a family friend who is impacted by these diseases. Forty
Speaker 5: years of research has not yielded much for the patients
Speaker 5: that are afflicted by these conditions. What we're seeing now
Speaker 5: is the advent of a new, bigger AI, an AI
Speaker 5: that handles quantitative relationships. It understands chemistry, it understands physics,
Speaker 5: It understands financial relationships for asset management and portfolio construction
Speaker 5: for financial services.
Speaker 8: These are the big verticals.
Speaker 5: Biopharma is eight trillion in size, financial services ten trillion,
Speaker 5: Automotive and aerospace fifteen trillion, and finally chemicals energy materials
Speaker 5: another fifteen trillion, part of the one hundred trillion dollar
Speaker 5: GDP economy worldwide. These are the bigger applications that are
Speaker 5: now upon us in the world of AI.
Speaker 1: So Jack, that's very helpful. The distinction between large language
Speaker 1: model and large quantitative model big difference. That's one queue.
Speaker 1: Another queue is quantum. You're involved in quantum. What does
Speaker 1: quantum add to the mix when it comes to AI.
Speaker 5: What's fascinating is that let's look at AI and quantum, David,
Speaker 5: as part of a bigger hole of advanced compute and
Speaker 5: so when we look at AI, I think now people
Speaker 5: get a feel of how powerful that is already, and
Speaker 5: it's going to even get more powerful over the next
Speaker 5: two three four years. And now into the world of quantum.
Speaker 5: Most people when they think about quantum, they think about
Speaker 5: quantum computers, and certainly quantum computers are going to have
Speaker 5: a wonderful impact on our society. Give us even more
Speaker 5: computer on top of and with the AI that we
Speaker 5: just discussed. But what's not often discussed is the other
Speaker 5: applications of quantum. For example, quantum sensors. These are senses
Speaker 5: that are here today, their room temperature, they're very compact
Speaker 5: their solid state, and for example, we can use them
Speaker 5: to improve medical diagnostics.
Speaker 1: Bring us to the here and now, right now in
Speaker 1: concrete terms. I was with somebody recently from one of
Speaker 1: the hyperscalers saying, though you know, a little bit like
Speaker 1: electricity and the latter part last century, you have the
Speaker 1: power planning of the grid, and then you have the appliances,
Speaker 1: and what we need in part with AI are the
Speaker 1: appliances as it were. You had an announcement just this
Speaker 1: week with the Mayo Clinic about some cardia analysis, and wow,
Speaker 1: you can help with that. What is that and how
Speaker 1: close is it to being real?
Speaker 8: That's a great point, David.
Speaker 5: It's the applications of AI and quantum sensing that are
Speaker 5: the most exciting things, not just the theory. And so
Speaker 5: this week, as you pointed out, we in the Mao
Speaker 5: Clinic announced that our AI and device are inside the
Speaker 5: Mayo Clinic right now in yet another clinical trial. We
Speaker 5: already completed trials now at UCSF Hospital and the Mount
Speaker 5: Signi Hospital, New York, and now this new trial is
Speaker 5: starting at the Mayo Clinic, one of the premier hospitals
Speaker 5: of the entire world. Very very proud to be working
Speaker 5: with the Mayo Clinic on this and very excited to
Speaker 5: see some of the outcomes. What's important about that is
Speaker 5: that the ability to bring quantitative AI LQMS combined with
Speaker 5: advanced sensors in a single format of this box allow
Speaker 5: us to put that in the cardiac hospital and look
Speaker 5: at real patients in real time and how their heart
Speaker 5: is doing in a way that no other modality can do.
Speaker 5: What's happened is that quantum sensors have become room temperature,
Speaker 5: they become very portable and small format, low power draw
Speaker 5: but the challenge was how to read this huge plethora,
Speaker 5: this fountain of information coming out of these sensors. That's
Speaker 5: where AI comes in. Specifically, that's where lqms come in.
Speaker 5: You cannot add a chat GPT to this box and
Speaker 5: have it interpret those signals.
Speaker 8: Being trained on Wikipedia.
Speaker 5: And Reddit and Twitter is not going to help you
Speaker 5: with this kind of signal. Rather, this kind of training
Speaker 5: requires quantitative data. So this is a major step forward
Speaker 5: for cardiovasculine disease. Doctor Toby Cosgrove, who used to head
Speaker 5: up the Cleveland Clinic for the past thirteen years, called
Speaker 5: it the key to transforming cardiovascular medicine. So it's great
Speaker 5: to see this kind of advancement combining AI and quantum jack.
Speaker 1: That was very helpful and very informative. One last question
Speaker 1: in a very different area, and that's the area of defense.
Speaker 1: We've talked to some people in the defense establishment. What's
Speaker 1: going on, but even maybe an arms race when it
Speaker 1: comes to AI and use of AI in defense contracting.
Speaker 1: Where are we that in so far as you can
Speaker 1: tell us about it.
Speaker 8: Sure, defense is a very very critical application.
Speaker 5: National security is of paramount importance for both United States
Speaker 5: and its allies. I think we all agree with the
Speaker 5: confabgrations going on around the world. It's even more important
Speaker 5: today than it was just a few years ago. This
Speaker 5: is both on the cyber aspect as well as the
Speaker 5: kinetic aspect of war and of conflict. And so when
Speaker 5: we look at the applications, let me give some examples.
Speaker 5: If we take navigation, when you're in a wartime scenario,
Speaker 5: even a pre wartime scenario, the first thing your adversary
Speaker 5: will do, David, is they will block and jam GPS.
Speaker 5: You want to do that as an adversary because you
Speaker 5: want to stop planes from coming at you and dropping bombs.
Speaker 5: You want to stop missiles from coming at you, you
Speaker 5: want to stop drones from coming at you.
Speaker 8: And you see it today.
Speaker 5: Russia right now is jamming not only would be Ukraine,
Speaker 5: but over enough of area of Europe that it has
Speaker 5: disrupted thousands of commercial flights. Thousands of commercial flights have
Speaker 5: been disrupted by Russ's jamming of GPS. And this is
Speaker 5: another application of both AI and advancedensing.
Speaker 1: How is that the case, Jack, thank you so much
Speaker 1: as has been really terribly helpful. That is Jack Heitory
Speaker 1: of Sandbox AQ. If you want a friend in Washington,
Speaker 1: get a dog. President Truman is thought to have said
Speaker 1: this when he was running for reelection back in nineteen
Speaker 1: forty eight. There is little doubt that the companionship of
Speaker 1: an animal can be a consolation when it feels like
Speaker 1: no one else is on our side. Maybe that's why
Speaker 1: nearly every one of our presidents has had a cherished pet,
Speaker 1: going all the way back to George Washington's foxhounds, and
Speaker 1: those presidential pets haven't all been dogs. Thomas Jefferson broke
Speaker 1: from mister Washington by keeping mockingbirds. Andrew Jackson had a
Speaker 1: parent named Paul, who had to be removed from Jackson's
Speaker 1: funeral because of the parrot's foul language. You can decide
Speaker 1: where the bird may have picked that up. But despite
Speaker 1: the assorted goats, sheep, and pigs kept by presidents down
Speaker 1: through the ages, by far the most popular presidential pets
Speaker 1: have been dogs. The most famous was FDR's beloved Falla,
Speaker 1: a Scottish terrier who was President Roosevelt's constant companion. Fala
Speaker 1: even became an issue in mister Roosevelt's campaign for reelection
Speaker 1: in nineteen forty four, when Republicans claimed that millions of
Speaker 1: taxpayer dollars had been spent sending a destroyer to retrieve
Speaker 1: the dog from the Aleutian Islands after he'd been left behind.
Speaker 1: That turned out to be an urban myth, but President
Speaker 1: Roosevelt took it on directly and humorously in a national
Speaker 1: radio dress in the middle of the campaign.
Speaker 10: The Republican leaders are not in contempt with a pack
Speaker 10: on me, are on my wife, are on my son?
Speaker 10: They now include my little dog foul.
Speaker 1: By the way, Fala is the only presidential pet to
Speaker 1: be immortalized as a bronze statue as part of the
Speaker 1: Roosevelt Memorial on the National Mall in Washington. Since then,
Speaker 1: there's been a steady succession of dogs in the White House,
Speaker 1: from Ronald Reagan's Rex and Lucky to George Herbert Walker
Speaker 1: Bush's Millie.
Speaker 7: To George W.
Speaker 1: Bush's Barney, made famous by the Barney Cam showing up
Speaker 1: every Christmas from the White House. Indeed, it was only
Speaker 1: President Trump who went without a pet in recent years,
Speaker 1: but not all of the stories about presidents or presidential
Speaker 1: wannabes have been happy ones when it comes to the animals.
Speaker 1: Those of us of a certain age remember the controversy
Speaker 1: when President Johnson decided to show off his hounds they
Speaker 1: were called Him and Her, by picking them up by
Speaker 1: the ears and hearing them yelp, something the President insisted
Speaker 1: was good for them. President Biden's German shepherd commander was
Speaker 1: banished to a farm after repeatedly biting members of the
Speaker 1: Secret Service.
Speaker 8: He put hey doing lord.
Speaker 1: But some in national politics have gone well past making
Speaker 1: their dogs yell or sending him to a farm. South
Speaker 1: Dakota Governor Christy Noam, in the running to become Donald
Speaker 1: Trump's running mate, at one point this year, did herself
Speaker 1: no favors when she admitted in her autobiogree that she'd
Speaker 1: shot her dog when he misbehaved. And then this week,
Speaker 1: presidential candidate RFK Junior, in an interview with Roseanne Barr,
Speaker 1: admitted that he'd come across a dead bear cub in
Speaker 1: upstate New York, put it in his car, drove it
Speaker 1: to Manhattan, and then staged its death by bicycle in
Speaker 1: Central Park because, according to mister Kennedy, he didn't want
Speaker 1: the meat to go.
Speaker 8: To waste in Central Park.
Speaker 1: And we'll make it look like however it all really happened.
Speaker 1: It was a long way from FDR's beloved Falla. But
Speaker 1: then again, let's go back to the source of that
Speaker 1: supposed Truman quote about getting a dog if you want
Speaker 1: a friend in Washington. It turns out that there is
Speaker 1: no evidence President Truman ever said anything about making a
Speaker 1: friend of a dog. Indeed, when he was asked about
Speaker 1: a Cocker Spaniel he'd been given by a supporter, said
Speaker 1: simply that it was around someplace. The someplace turned out
Speaker 1: to be Ohio, where Feller had been sent, because, as
Speaker 1: the President put it, I didn't ask for him and
Speaker 1: I don't need him. But if my own dogs, Whiskey
Speaker 1: and Walker, are watching, don't worry. We have no plans
Speaker 1: of shipping you to Ohio. That does it for this
Speaker 1: episode of Wall Street Week. I'm David Weston. This is Bloomberg.
Speaker 1: See you next week.