Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, We're having
Speaker 2: a rolling recession. To kind of roll looks pretty strongly
Speaker 2: it is when it comes to jobs, the financial stories
Speaker 2: that shape our world. Three major regional bank failures send
Speaker 2: shockwaves through the banking system. We're all trying to figure
Speaker 2: out what to make of generative AI.
Speaker 1: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well Then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: A strike settles, the FED decides, the Treasury bar short,
Speaker 2: and a war in Gaza enters a new phase. This
Speaker 2: is Bloomberg Wall Street Week. I'm David Weston. This week's
Speaker 2: special contributor Larry Summers of Harvard and former Biden Chief
Speaker 2: economist to Celia Rouse on the jobs numbers, the FED decision,
Speaker 2: and what comes next for the US economy.
Speaker 3: This was a favorable number, but I don't think anybody
Speaker 3: should overinterpret it.
Speaker 4: I think we.
Speaker 5: Are seeing the slowing of the labor market, which has
Speaker 5: been long in anticipated.
Speaker 4: Some might say, what took so long?
Speaker 2: Cars are Steve Rattner of Will Advisors on the auto settlement.
Speaker 6: And that's the yun and the yang for the unions
Speaker 6: to think about, because if General Motors and Stalantis and
Speaker 6: Ford can be competitive with Tesla, then they're gonna lose jobs.
Speaker 2: And kk ours Henry McVeigh, I'm investing in Asia as
Speaker 2: the Chinese economy comes back down to earth.
Speaker 7: When you think about China as a global growth engine,
Speaker 7: used to be one third of global GDP growth, it's
Speaker 7: clearly not that engine there.
Speaker 2: Global Wall Street. It spent yet another week keeping one
Speaker 2: eye on the war unfolding between Israel and Hamas. As
Speaker 2: Israeli troops moved into Gaza, calls.
Speaker 1: For cease far are calls for Israel to surrender to Hamas,
Speaker 1: to surrender to terrorists, to surrender to barbaras.
Speaker 2: That will not happen. And still it was hard to
Speaker 2: see any light at the end of this long tunnel.
Speaker 4: We're sending in between fire and eight hundred trucks a day.
Speaker 4: Right now, we're up to almost sixty.
Speaker 8: We're trying to get to one.
Speaker 4: Hundred this week. That is the bare minimum of what's needed.
Speaker 2: But even as we followed more tragedy in the Middle East,
Speaker 2: there was some good news as the UAW announced the
Speaker 2: third and final tentative agreement with the Big three automakers.
Speaker 9: Today's historic agreement, because you had another piece of good
Speaker 9: economic news showing something I've always believed, worker power.
Speaker 2: The Fed came out with its much anticipated rates decision,
Speaker 2: and as anticipated, didn't budge with Chair Pal saying they
Speaker 2: will take it one step at a time.
Speaker 6: We're going meeting, my meeting, We're asking ourselves whether we've
Speaker 6: achieved a stance of policy to the sufficiently restrictive to
Speaker 6: bring inflation down to two percent over time.
Speaker 2: Over a treasury they came out with their borrowing plans
Speaker 2: for the next quarter, which came in a bit light
Speaker 2: and a bit short.
Speaker 7: The problem, of course for the Treasury Department is that
Speaker 7: people are criticizing them for not turning out earlier. They
Speaker 7: have to pay more, so they are kind of locked
Speaker 7: in here.
Speaker 2: And artificial intelligence was back in the news, not that
Speaker 2: it was ever really out of it. As President Biden
Speaker 2: signed a new executive order.
Speaker 9: To realize the promise of AI and void the risk
Speaker 9: we need to govern this technology.
Speaker 2: On Thursday, a jury in southern Manhattan needed only a
Speaker 2: few hours to convict Samuel Bankman freed on all seven counts.
Speaker 6: Sam Bankman free perpetrated one of the biggest financial frauds
Speaker 6: in American history, a multi billion dollar scheme designed to
Speaker 6: make him the king of crypto.
Speaker 8: We respect the jury's decision. We're very disappointed in the result.
Speaker 2: On Friday, US jobs numbers confirmed a slowing of the
Speaker 2: US labor market, adding one hundred and fifty thousand new
Speaker 2: jobs rather than the one hundred and eighty thousand that
Speaker 2: had been expected, and the unemployment rate ticked up just
Speaker 2: a bit to three point nine percent. To help us
Speaker 2: understand these jobs numbers and the FED decision from earlier
Speaker 2: in the week, we welcome the person who until recently
Speaker 2: interpreted them for President Biden, and as of the first
Speaker 2: of the year, we'll be taking the helmet the Brookings Institution.
Speaker 2: She is doctor Cecilia Rouse. So, doctor Ross, thank you
Speaker 2: so much for being with us. You're an economist to
Speaker 2: give us put these in perspective. We're looking for some
Speaker 2: slowing in the economy, in partly because we don't want
Speaker 2: that overheating with the inflation. Do you think we're seeing
Speaker 2: it yet?
Speaker 5: I think we are seeing the slowing of the labor market,
Speaker 5: which has been long anticipated. Some might say what took
Speaker 5: so long? But what we see is that employment growth
Speaker 5: remains healthy. Like if we were to talk pre pandemic,
Speaker 5: an average job growth if we look over the last
Speaker 5: three months has been just over two hundred thousand jobs
Speaker 5: a month. This month it came into one hundred and fifty.
Speaker 5: That number will be revised, but what we see is
Speaker 5: healthy job growth, which is consistent with an economy that
Speaker 5: is powering along, but which is coming down from the
Speaker 5: very high growth we had as the economy recovered from
Speaker 5: the pandemic. I think these numbers will be welcomed by
Speaker 5: the Fed. As I said, I think many economists will
Speaker 5: see this as the natural of the economy getting back
Speaker 5: to normal.
Speaker 2: Well, no offense to the economists such as you, but
Speaker 2: you've been off on some few things recently, and let
Speaker 2: me talk about that specifically, the relationship between the labor
Speaker 2: market on the one hand and inflation on the other.
Speaker 2: We thought we knew what that was, that it seemed
Speaker 2: to really the relationship went away. That Phillips currency knew
Speaker 2: really flat. Where are we now? Do we have a
Speaker 2: theory about what the labor market means for inflation?
Speaker 5: So you know, the reality is that in economics there's
Speaker 5: not a fabulous theory and one theory of inflation, and
Speaker 5: I think that is part of the challenge.
Speaker 4: Another part of the challenge is what was the source.
Speaker 5: We know that we had unprecedented supply challenges due to
Speaker 5: the pandemic, both in terms of getting goods to people
Speaker 5: manufacturing goods because people have a part of that process
Speaker 5: and with the pandemic they couldn't show.
Speaker 4: Up to work.
Speaker 5: And then we also know we had unprecedented demand because
Speaker 5: of the remarkable support that the federal government here and
Speaker 5: abroad provide to consumers and businesses to get them through
Speaker 5: the pandemic. So we know we had this mismatch of
Speaker 5: supply and demand. The question is which was going to
Speaker 5: win in terms of regularizing faster.
Speaker 4: So I think this goes back to we hadn't.
Speaker 5: Seen inflation for a long time, economics doesn't have one solid,
Speaker 5: well established theory of inflation, and the fact that we
Speaker 5: had an unprecedented shock to our domestic economy and the
Speaker 5: global economy. What we're seeing now is monetary authorities stepped in,
Speaker 5: the federal government stepped in. They pulled back appropriately, and
Speaker 5: the economy is getting back to normal.
Speaker 2: Another big development this week was the Federal Reserve decision
Speaker 2: and the press conference, the news conference from Chair Pow
Speaker 2: And when you were with the one as you would
Speaker 2: always say, that's their business. I stay out of that.
Speaker 2: But now you're not at the White House anymore. I'm
Speaker 2: not going to ask you to tell them what to do.
Speaker 2: But are you sympathetic to what I take to be
Speaker 2: a chair Pole's position, which is, we just don't know
Speaker 2: right now. We've got to take this meeting by meeting.
Speaker 2: I can't predict out too far because we're in uncertain territory.
Speaker 2: Is that the way you see the ecount right now,
Speaker 2: because it's grown awfully strong considering all those increases in
Speaker 2: your rates that you referred to.
Speaker 5: Yeah, I'm very sympathetic to charb. Howell's view of how
Speaker 5: to proceed. One thing we know is that our economic
Speaker 5: models have the economic forecasting has been rather imprecise through
Speaker 5: this pandemic.
Speaker 4: It's tricky business.
Speaker 5: Again, we hadn't had the kind of shock both to
Speaker 5: the supply side of the domestic and global economy and
Speaker 5: then this demand support. We just hadn't seen that, and
Speaker 5: so the economy is not behaving the way that many
Speaker 5: economists predicted. So I think he and his colleagues are
Speaker 5: right to say, Look, we remain at the We stand
Speaker 5: at the ready. We understand that inflation is costly to everyone.
Speaker 5: At the same time, we understand that there are huge
Speaker 5: benefits to a strong labor market and a full economy.
Speaker 4: So we are going to wait.
Speaker 5: We don't want to be sit back on our heels,
Speaker 5: but we are going to take this eating by meeting
Speaker 5: as we watch all of the data and assess what's
Speaker 5: the best way forward.
Speaker 2: And finally, we look at all these data sort of
Speaker 2: week by week, month by month, quarter by quarter, but
Speaker 2: there's also the longer term trends. And when it comes
Speaker 2: to the labor market, something you've done a lot of
Speaker 2: work on is the role of women in the workplace
Speaker 2: and particularly childcare. Tell us about why we should be
Speaker 2: focused not maybe for this week or this month, but
Speaker 2: a longer term on that part of the labor market.
Speaker 4: Yeah.
Speaker 5: So this was a speech given in Washington, d c.
Speaker 5: Sponsored by the one hundred Foundation. This is Adam Smith,
Speaker 5: three hundredth birthday, birth year, And the point I was
Speaker 5: making is that as women have entered the labor force
Speaker 5: and women disproportionately care for children, men are obviously can
Speaker 5: be caretakers as well, but if we just look at
Speaker 5: the data, women bear the disproportioned share of that care.
Speaker 5: If we want to have a robust labor market, which
Speaker 5: we know we need to do, we have falling fertility,
Speaker 5: we have an aging demograph, we have an immigration system
Speaker 5: that is not replenishing. If we're going to have a
Speaker 5: robust labor market, we need everybody who wants to work
Speaker 5: to be able to work and to be able to
Speaker 5: do so productively.
Speaker 4: The reality is children need to be careful.
Speaker 5: So in order for people to be able to balance
Speaker 5: work and family, they.
Speaker 4: Need to be able to provide for childcare. So there
Speaker 4: is an.
Speaker 5: Externality there that means that there are benefits that go
Speaker 5: beyond the family but to the rest of society, both
Speaker 5: in terms of the benefit and economic growth, but also
Speaker 5: in terms of making investments in children and high quality
Speaker 5: childcare have benefits to the rest of us throughout their lifetimes.
Speaker 5: So there's a role for government in providing or subsidizing
Speaker 5: high quality childcare. Labored on top of the fact that
Speaker 5: childcare is expensive and that happens at a time when
Speaker 5: families and workers are not at their peak earnings. You
Speaker 5: can't take out a loan to pay for childcare, so
Speaker 5: again we have a problem in our credit markets. Again
Speaker 5: a potential role for government. And finally that it's very
Speaker 5: costly for providers, and so most providers, not the big chains,
Speaker 5: but the little providers where most children are cared for,
Speaker 5: are barely getting by, and we know that their workers
Speaker 5: are paid very little. More than fifty percent of childcare
Speaker 5: workers receive some form of public assistance, so there's high turnover,
Speaker 5: not consistent with high quality childcare.
Speaker 4: So this is a market that could use help.
Speaker 5: It's a role that the government should be actively involved in,
Speaker 5: whether it's provision, subsidization, but the point is that it's
Speaker 5: critical if we're going to improve and maintain our economic growth,
Speaker 5: which benefits us all.
Speaker 2: Doctor Ross, thank you so very much for being with us.
Speaker 2: The best of luck as you take over the helmet Brookings.
Speaker 2: That is doctor Cecilia Rauss. Coming up, we'll go through
Speaker 2: how the market reacted to all the news this week
Speaker 2: with Scott Kronert of City that's coming up next do
Speaker 2: on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. The market
Speaker 2: had one wild week as the SMP five hundred added
Speaker 2: five point eighty five percent to end up at forty
Speaker 2: three point fifty eight, though that is still below the
Speaker 2: median year end number of our Bloomberg ls, which is
Speaker 2: at forty four to thirty five. The Nasdaq was up
Speaker 2: six point six percent, while the yield on the ten
Speaker 2: year gave up a full twenty eight basis points, falling
Speaker 2: all the way back down to four point five seven.
Speaker 2: Here to explain it all to us to Scott Cronerd,
Speaker 2: he's City US equity strategist. It's gott great to have
Speaker 2: you back with us. So why don't you explain because
Speaker 2: it was quite a wild weekend as the week went
Speaker 2: on and got wilder and wilder.
Speaker 10: Well, I think, David, let's just start with, you know,
Speaker 10: two words interest rates. So to put some context into
Speaker 10: what happened this week, let's consider the following since the
Speaker 10: end of July. So over the past three months, you've
Speaker 10: seen the nominal SMP the nominal tenure ye'ld move from
Speaker 10: roughly four percent to approaching five percent as recently as
Speaker 10: a week or so ago. In the mean time, really
Speaker 10: yields moved from roughly one and a half percent up
Speaker 10: to two and a half percent. This had a couple
Speaker 10: of profound impact on the SMP. First, what it did
Speaker 10: was increase the concern regarding the economic readthrough to rising rates. Second, yes,
Speaker 10: it had some valuation influence on the broader market, but
Speaker 10: then third it also increased the concern about even higher
Speaker 10: rates and the implications that may have for our growing
Speaker 10: deficit situation. So this week, essentially what happened to your point,
Speaker 10: you took ten year yields down and the response to
Speaker 10: some of the economic data fed commentary, and essentially you
Speaker 10: snapped the rubber band that had been getting stretched pretty wide,
Speaker 10: as the SMP had pulled back roughly ten percent over
Speaker 10: that timeframe.
Speaker 2: And you have a chart that will put up for
Speaker 2: our television audience actuation showing that rubber band snapping back,
Speaker 2: which is a relative yield between stocks and bonds. Essentially
Speaker 2: to simplify the chart that will show it to the audience.
Speaker 10: Yeah, essentially, what's been happening here is as rates have
Speaker 10: backed up, are cross asset valuation work has increasingly favored
Speaker 10: fixed income or bonds. And so essentially, as you look
Speaker 10: at the opportunity and say a five year ten year
Speaker 10: yield versus the expected return on the S and B
Speaker 10: five hundred or US equities, it's increasingly skewed in favor of, Hey,
Speaker 10: why didn't I stay in bonds, whether it be short
Speaker 10: term be money market funds where the Fed funds rate is,
Speaker 10: or longer term out to the ten year yield. And
Speaker 10: so our point here is that that concern, we think
Speaker 10: has kept a lot of flow headwind on US equities,
Speaker 10: and again, combined with this pullback in ten year yields
Speaker 10: this week, you've triggered a snapback that has had the
Speaker 10: effect of drawing money back into equities very quickly.
Speaker 2: Scott, it strikes me through that really lucid explanation of
Speaker 2: the week, there wasn't that much reference to the Fed
Speaker 2: and what they're doing the rates. I mean, sure, we
Speaker 2: had a news conference with Chair Japal and they came
Speaker 2: out of the decision not to do anything, But how
Speaker 2: much of this is really a matter of federal funds rates?
Speaker 2: As opposed to other macro factors right now.
Speaker 10: Yeah, So I think the federal funds situation, I think
Speaker 10: most investors have gotten comfortable that if we're not at
Speaker 10: a FED fund peak, we're awfully close, right, And so
Speaker 10: whether the Fed decided to put another twenty five basis
Speaker 10: points on or not was certainly relevant. But in our
Speaker 10: view it's kind of paled in comparison to what's been
Speaker 10: happening within the bond market internals, where this move in
Speaker 10: the ten yere yields is probably more indicative of the
Speaker 10: rate that you would use for evaluating future projects and
Speaker 10: a company by company basis, how you think about this
Speaker 10: again stock versus bond math, and increasingly how you think
Speaker 10: about the longer term valuation set up for equities, and
Speaker 10: so yes, Fed funds is very important here. Our focus
Speaker 10: for the past month or longer has really been more
Speaker 10: so on the ten year yield component as the culmination
Speaker 10: of all these issues that are coming into play right now.
Speaker 2: Really great to have you with us. That's Scott Croner
Speaker 2: of City. UAW has tentative agreements with all three major
Speaker 2: US automakers. Did the uawhad, Sean Fain says, didn't leave
Speaker 2: any money on the table from his point of view,
Speaker 2: to take us through those deals and what they may
Speaker 2: mean for the industry. Welcome back now, Steve Radner, Chairman
Speaker 2: and CEO of Will Advisors, which invests the personal and
Speaker 2: philanthropic assets of Michael Bloomberg. He is, of course our
Speaker 2: founder and majority shareholders. In addition to so many things
Speaker 2: you've done in your career, you're also the lead advisor
Speaker 2: to President Obama for the Presidential task Force in the Auditors.
Speaker 2: So you know this business terribly Well, what do you
Speaker 2: make of the deals as they've been described so far
Speaker 2: for the Big Three?
Speaker 6: Well, I think we have the details now, have packaged.
Speaker 6: It's this stick I was just reading it. I think
Speaker 6: it's a good outcome for both sides. Actually, I think
Speaker 6: the union got what they want, most of what they
Speaker 6: were much of what they wanted, and much of what
Speaker 6: they deserve, which are substantial pay increases. They got cola
Speaker 6: cost of living adjustments, back, the right to strike in
Speaker 6: certain places, things like that. And I think from the
Speaker 6: standpoint of the companies, what's really important is that there
Speaker 6: was no backsliding on world rules, on all the restrictions
Speaker 6: that made it hard to manage those companies before we
Speaker 6: restructured them in two thousand and nine, and they also
Speaker 6: did not go back to define benefit pension plans or
Speaker 6: company paid retirey healthcare, which of course everybody would like
Speaker 6: workers to have, but simply isn't in the playbook anymore
Speaker 6: in today's economy.
Speaker 2: What about that flexibility because earlier on Walls Reetvik, you
Speaker 2: weren't warned about those work rules because you had to
Speaker 2: deal with those back two thousand and twousand and nine,
Speaker 2: there were some agreements such as, for example, the right
Speaker 2: to strike as I understand it, for any individual plant closing.
Speaker 2: Do you think this will still give the auto companies
Speaker 2: enough flexibility to deal with a really changing environment in autos.
Speaker 6: Yeah, I do. I think the thing that the union
Speaker 6: has to be careful about is, as we've talked about before,
Speaker 6: the INN and the Yang, is that when you increase
Speaker 6: pay increase costs to the companies. They're talking about eight
Speaker 6: or nine hundred dollars a car potentially of increased costs.
Speaker 6: What can happen then is the jobs can move, that
Speaker 6: the next plant doesn't get built in the US, it
Speaker 6: gets built in Mexico, and that the right to strike
Speaker 6: does not prevent that from happening. And that's what's been
Speaker 6: happening in the auto industry for the last fifteen years,
Speaker 6: the number of the jobs I've been moving. It's not
Speaker 6: a coincidence that the big three companies essentially don't really
Speaker 6: make small cars in the US anymore.
Speaker 2: They cannot afford.
Speaker 6: They simply can't make them with any kind of reasonable
Speaker 6: profit margin given the cost structures they have. So we
Speaker 6: all want workers to do more, but we don't want
Speaker 6: it to cost jobs. And that's the thing we have
Speaker 6: to be really careful about.
Speaker 2: Come back to your point of at a competition moving
Speaker 2: to Mexico, moving to right to work states, there's also
Speaker 2: a competition from non union producers, for example of teslas,
Speaker 2: you know, for electric vehicles. Does this put the Big
Speaker 2: three at a substantially greater disadvantage to the Teslas of
Speaker 2: this world and also some of the Japanese automakers, who,
Speaker 2: as understand, also don't have unions.
Speaker 8: Yeah, it does.
Speaker 6: No getting around that if you increase your costs of
Speaker 6: a car by eight or nine hundred dollars, you're at
Speaker 6: a disadvantage. And I get to mention Tesla because it
Speaker 6: wasn't really around in two thousand and nine. I was
Speaker 6: thinking about Mexico and the southern transplants, but Tesla is
Speaker 6: absolutely a factor in this, and companies like Tesla that
Speaker 6: don't have unions and pay substantially less, and again that's
Speaker 6: the yin and the yang for the unions to think about,
Speaker 6: because if General Motors and Stillantis and Ford can't be
Speaker 6: competitive with Tesla, then they're going to lose jobs. They're
Speaker 6: gonna lose sales, which means losing jobs. And you can
Speaker 6: have the right to strike all day long, but if
Speaker 6: if the company ends up closing a factory or reducing
Speaker 6: the number of shifts, that's what's going to happen.
Speaker 2: What do you make of the question of the shift
Speaker 2: in power toward labor. There has been historically shift away
Speaker 2: from labor toward capital overall and certainly the private sector particularly.
Speaker 2: Are we seeing a fundamental shift back again, or are
Speaker 2: we seeing essentially a peak time when labor has the
Speaker 2: most power and it may well come down from there.
Speaker 6: I think somewhere in between. I think we're definitely seeing
Speaker 6: a shift back. If you look at a chart showing
Speaker 6: stays lost to you'll see that relative to five years
Speaker 6: or ten years ago, there's been a significant increase in
Speaker 6: days loss to strikes. We all know about the ups
Speaker 6: drivers and the screenwriters and the auto workers, but you'll
Speaker 6: also see the days lost or nothing compared to what
Speaker 6: they were back in the seventies and eighties. So we're
Speaker 6: not anywhere back in that zip code. I think this
Speaker 6: is a healthy development. Actually, I think that capital has
Speaker 6: benefited too much at the expense of labor.
Speaker 8: You're in a.
Speaker 6: Situation now where people's real wages still have not recovered
Speaker 6: given the inflation we've had, but corporate profits have remained
Speaker 6: quite strong. And I'm happy corporate profits have remained quite strong,
Speaker 6: But I think companies can ford to do more.
Speaker 2: Okay, Steve, thank you so much for Rebecca. Great to
Speaker 2: have you on. Willsh Reek. That is Steve Retner of
Speaker 2: Willet Advisors coming up. China's economic miracle may be a
Speaker 2: little bit less miraculous. What does that mean for investors
Speaker 2: in Asia? We ask Henry McVeigh of KKR.
Speaker 7: Now you get to China and it feels more disinflationary,
Speaker 7: and Japan feels more inflationary. There's a repositioning of global
Speaker 7: macro economic trends within Asia.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Well Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: China. Until recently it was an economic miracle, having grown
Speaker 2: its economy more than any nation in history.
Speaker 8: China is not just a rising power. China has risen.
Speaker 9: China is now seriously rivaling in the US in virtually
Speaker 9: every domain.
Speaker 2: But recently things have gotten a bit rougher for the
Speaker 2: rising Middle Kingdom, led by challenges in its huge real
Speaker 2: estate market.
Speaker 11: A commercial regisling market in China has had a huge
Speaker 11: policy correction, and I think we are at the bottom
Speaker 11: of the market, but it will take quite a while
Speaker 11: for that market to recover and gain momentum.
Speaker 2: Which is spread to the broader economy.
Speaker 12: It's to be acknowledged that the current state of the
Speaker 12: economy is under pressure in China, and that's also something
Speaker 12: that we see coming back through in our results.
Speaker 2: And it doesn't help that its main economic rival, the
Speaker 2: United States, is pulling back at least in some areas
Speaker 2: like high tech.
Speaker 13: So we intend to continue with a major trade relationship
Speaker 13: with China. But we have said and this is the
Speaker 13: small yard, high fence, the d risking strategy that we
Speaker 13: are not going to permit the sale of advanced semiconductors
Speaker 13: AI chips into China that could be used for military
Speaker 13: advantage by the PLA.
Speaker 2: Which raises questions for investors about whether China is their
Speaker 2: go to destination as it once was, or whether other
Speaker 2: places in Asia may offer more attractive alternatives.
Speaker 14: I think that you think some other signs of life
Speaker 14: and other places like Japan is doing much better. It's
Speaker 14: done much better this year. I think some of the
Speaker 14: emerging markets outside of China have done relatively well.
Speaker 15: Money has slowed into impact this year, into Taiwan, into Korea,
Speaker 15: into the rest of the emerging world, but particularly India
Speaker 15: has been the biggest beneficiary.
Speaker 2: And to take us through the prospects of investing in
Speaker 2: Asia today, wilkinsony who knows the area terribly well and
Speaker 2: has a lot of money at work there. He is
Speaker 2: Henry Vay. He is KKR CIO of the balance sheet.
Speaker 2: So welcome Henry. It's really good to have you on.
Speaker 8: It's great to be here.
Speaker 2: Until recently, China was sort of the economic miracle. It
Speaker 2: was the one place you went to invest. Now we
Speaker 2: hear from a lot of investors, maybe not so much
Speaker 2: given some sloat on growth, some uncertainty with the government.
Speaker 2: Where are you in China right now?
Speaker 7: So I think from a growth standpoint, China used to
Speaker 7: run in a nominal GDP, which is real GDP plus inflation,
Speaker 7: about twenty percent, which is a huge number. Today that's
Speaker 7: about six percent, so it's down by a third.
Speaker 8: So when you think about China.
Speaker 7: As a global growth engine, used to be one third
Speaker 7: of global GDP growth, it's clearly not that engine.
Speaker 8: There.
Speaker 7: You know, this is my third trip I just got
Speaker 7: back this year and what I would have been going
Speaker 7: since ninety five, so we do have some comparing contrast.
Speaker 7: What I would say is, I think the story on
Speaker 7: what's growing in China's actually misunderstood right. One is that housing.
Speaker 7: I think people know that it's not growing, and I
Speaker 7: think that's been well documented. What they're missing, though, is
Speaker 7: the growth drivers. What you're seeing is a huge growth
Speaker 7: surge in the decarbonization or the energy transition. And the
Speaker 7: second is really around industrial automation. Most investors have been
Speaker 7: focused on consumption upgrades, which is certainly an attractive area,
Speaker 7: but there's a real shift in the underlying momentum of
Speaker 7: the economy. I'd say the economy actually bottomed in April.
Speaker 7: That was my second trip, and what we saw was
Speaker 7: some slight improvement when we were back there recently.
Speaker 2: So, as you say, historically it's been sort of export
Speaker 2: driven as well as housing property. Now it's shifting over.
Speaker 2: You've got the climate change issues, green issues. You also
Speaker 2: got industrialization and sort of the monetization of there is
Speaker 2: the government behind that because one of the questions always
Speaker 2: is how's the government going to come out of this?
Speaker 2: Because the government shifted on some things like tech for example.
Speaker 7: Yeah, Look, I think tech has been well documented remains
Speaker 7: a complex area for a variety of reasons, both in
Speaker 7: the United States in China. On the decarbonization that is
Speaker 7: a massive part of the economy. It's already ten percent
Speaker 7: of the economy, it's growing forty percent year every year,
Speaker 7: and it goes across multiple different areas. Industrial kind of
Speaker 7: what I would say is digitalization. That's phase two of
Speaker 7: the exports story that you mentioned. It's really about how
Speaker 7: to create automation. Right when I first went to China
Speaker 7: and China joined the WTO, labor costs were forty four
Speaker 7: times cheaper than the US today. That's four and they
Speaker 7: actually have a negative growth rate for Chinese locals that
Speaker 7: are in the age group twenty to.
Speaker 8: Fifty, so they need automation.
Speaker 7: One of the areas that we spend time learning about
Speaker 7: was actually robots a year every year. That's growing seventy
Speaker 7: five percent year every year that business in China. Second
Speaker 7: is civil aviation is growing about forty percent year every year.
Speaker 7: These are not typical industries that China has been affiliated
Speaker 7: with in the past. I think form about global You know,
Speaker 7: we're a global firm. We're very local though in Asia,
Speaker 7: including China. But we've got eight offices around Asia in
Speaker 7: about seventy or eighty billion dollars across a variety of
Speaker 7: asset classes in Asia. And what you need to understand
Speaker 7: is not only investing in China, but how is it connected.
Speaker 8: What we see as.
Speaker 7: A local investor is that intra Asia trade is escalating massively,
Speaker 7: and so a lot of people think about us China
Speaker 7: trade is the only avenue.
Speaker 8: You're missing the bigger story.
Speaker 2: Just as we hear from some investors, we're not as
Speaker 2: enthusiasts we had China anymore. I hear a lot of
Speaker 2: enthusiasm about Japan. What's going on there?
Speaker 8: Yeah, Look, our view. We've been in Japan for a
Speaker 8: long time.
Speaker 7: We did one private equity transaction seven years and then
Speaker 7: we've done probably fourteen or fifteen in the last couple
Speaker 7: of years. A lot of these have been around corporate
Speaker 7: carb outs. The final legacy of abonomics will be that
Speaker 7: corporate reform is accelerating and that's leading to big companies Hatachi,
Speaker 7: you know, Panasonic, companies like that that are starting to
Speaker 7: look to sell subsidiaries to create growth and value creation.
Speaker 7: That's kind of theme one where we've been active. Second
Speaker 7: is we did make an acquisition in the real estate
Speaker 7: market in Japan and that's starting to create value, which
Speaker 7: is can you unlock some of the real estate value
Speaker 7: that was maybe suppressed in a deflationary environment. And then
Speaker 7: the third is you're seeing more activism and I think
Speaker 7: KKR has really emerged as a kind of a white
Speaker 7: Night and more of that. What I would say is
Speaker 7: activist market. So things are accelerating. You know, it's somewhat ironic,
Speaker 7: which is we used to go to China and people
Speaker 7: talk about inflation as a constraint, and then the constraint
Speaker 7: in Japan was deflation. Now you go to China and
Speaker 7: it feels more disinflationary and Japan feels more inflationary. So
Speaker 7: it's really there's a repositioning of global macro economic trends
Speaker 7: within Asia.
Speaker 2: Well, that was one of those I asked, do you
Speaker 2: think inflation's back to stay in Japan?
Speaker 8: I do, I do. I think there's this cyclical in
Speaker 8: the secular.
Speaker 7: The cyclical is around food and energy inflation, which I
Speaker 7: actually don't think is good inflation. I think the wage
Speaker 7: growth is actually very constructive, and so that's what you're seeing.
Speaker 7: That leads to more spending, It creates confidence. The offset
Speaker 7: of that and where we focus as a firm, it's
Speaker 7: back to this industrial automation concept, which is you need
Speaker 7: to get productivity gains that allow wages to grow without
Speaker 7: margins being pressured. And that's what we're seeing. You saw
Speaker 7: this from the Prime Minister when he was in New York.
Speaker 7: What did he talk about. He talked about Capex in
Speaker 7: Japan was at a record level. That Capex is going
Speaker 7: back into creating productivity into a workforce that probably needs
Speaker 7: more automation, needs more sophistication. So you've got to watch
Speaker 7: all parts of the economic story together. You can't just
Speaker 7: focus solely on inflation component.
Speaker 2: So when you look for the economy to grow in Japan,
Speaker 2: you have to make up for some of the demographic
Speaker 2: issues and the workforce issues that you just referred to.
Speaker 2: Do you think that it's possible for CAPEX to be
Speaker 2: enough to make up for some of the challenges they
Speaker 2: have with an aging population.
Speaker 8: I think one is there are a couple of things
Speaker 8: to keep in mind.
Speaker 7: Japan's done an incredible job of actually bringing women into
Speaker 7: the workforce, and if you think about childcare costs in Japan,
Speaker 7: they're four times cheaper than they are in the US.
Speaker 7: That's a massive competitive advantage. Second of they've actually gotten
Speaker 7: males fifty five and older to come back in the workforce,
Speaker 7: and they're starting to get some small signs on immigration.
Speaker 7: So we're not looking for, you know, ten percent real
Speaker 7: GDP growth in Japan. What we're really looking for is
Speaker 7: some improvement from really on a nominal basis which was
Speaker 7: deflationary to inflationary, some positive nominal GDP growth, and then
Speaker 7: we're looking for corporate reforms, and so I think investors
Speaker 7: have to separate the.
Speaker 8: Earnings from GDP.
Speaker 7: The best ronment for KKR is actually, can you help
Speaker 7: companies grow their earnings when GDP growth is actually somewhat slower,
Speaker 7: and that means that the central bank doesn't have to overtighten.
Speaker 7: And that's really what you get in Japan. I mean,
Speaker 7: our founder is Henry Cravis and George Roberts saying internally
Speaker 7: they pioneered the private equity business and they said, if
Speaker 7: we were twenty two, we would go to Japan right now,
Speaker 7: because that's actually where you're seeing some of the real
Speaker 7: movement and creating some opportunities in private equity.
Speaker 2: That's saying something. One last one India. We hear a
Speaker 2: lot about a boom coming in India, yasually they don't
Speaker 2: have that demographic problem that we talked about with Japan. Yeah,
Speaker 2: what's going on in India?
Speaker 8: India?
Speaker 7: I actually there are two things that are going on
Speaker 7: in India. One is the exports are actually picking up
Speaker 7: and some of that as you've seen some reshoring into India,
Speaker 7: So when you look at their export momentum, it's actually
Speaker 7: quite strong. And then second is similar to Japan and
Speaker 7: similar to China, there's a global capex cycle where they're
Speaker 7: seeing their infrastructure investment in particular go up.
Speaker 8: That's a big.
Speaker 2: Deal and they're really great. Tavin wealshreet than for having me.
Speaker 2: It's great to tell you. As Hendrik Faye of KKR
Speaker 2: coming up, how are you going to keep them back
Speaker 2: in the office after they've worked from home? Maybe try
Speaker 2: a little magic. That's next Don wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: Finally, one more thought. Aristotle taught that pleasure in the
Speaker 2: job puts perfection in the work. Judging by what we're
Speaker 2: seeing these days, it's no wonder we aren't seeing much
Speaker 2: perfection in the work because a lot of employees don't
Speaker 2: seem to be getting much pleasure from doing the work.
Speaker 2: Auto workers have spent weeks off the job demanding they
Speaker 2: get a larger share of the fruits of their labor.
Speaker 9: This contract demonstrates the incredible power that workers have when
Speaker 9: they are not afraid to use it.
Speaker 2: They were the latest of this series of work actions
Speaker 2: around the world, starting with a major strike against the
Speaker 2: trains and schools in England at the beginning of the year.
Speaker 2: This is really the biggest school night to strike actually
Speaker 2: we've seen in the UK for a decade, and then
Speaker 2: German airport workers shut down the nation's major airports in
Speaker 2: the spring.
Speaker 7: You have the Services Union VERDI and also the rail
Speaker 7: Transmit Union EVG.
Speaker 6: So they started these strikes at midnight tonight.
Speaker 11: It is, you know, disrupting all kinds of travel.
Speaker 2: For much of the year, Hollywood has been saddled with strikes,
Speaker 2: first by the writers and then by the actors.
Speaker 12: This has been a very difficult time obviously going doing this.
Speaker 12: And the goal here is to get people back to work.
Speaker 12: The goal is to get the town opened up. This
Speaker 12: is not just hurting our industry, it's hurting every other
Speaker 12: business that supports our industry.
Speaker 2: And then just this week, technology workers at the New
Speaker 2: York Times walked off the job to protest they're being
Speaker 2: required to come back into the office instead of working
Speaker 2: from home. Fans of working from home think employers should
Speaker 2: see working from home as an opportunity rather than a challenge.
Speaker 4: Now, the question is we have this amazing, once in
Speaker 4: a lifetime opportunity to recreate it in our within our
Speaker 4: own creativity.
Speaker 2: And Steve Schwarzman says he understands the motivation, whether or
Speaker 2: not he agrees with the result.
Speaker 3: People got used to, you know, staying at home, and
Speaker 3: it was actually more profitable for them to stay at
Speaker 3: home because one they didn't work as hard, regardless of
Speaker 3: what they tell you. And the second is they don't
Speaker 3: spend money to commute. You know, they can make their
Speaker 3: lunch at home, they don't have to buy expensive clothes,
Speaker 3: and so their incomes are higher.
Speaker 2: Given all the worker discontent, it is no surprise that
Speaker 2: employers are trying to come up with some creative ways
Speaker 2: to keep their workers happy or at least happier. Everything
Speaker 2: from the World Bank upping its subsidy for communing costs
Speaker 2: and cutting the costs of childcare, to a British office
Speaker 2: building a Sheffield constructing a circular slide employees can take
Speaker 2: to get from the third floor to the ground floor
Speaker 2: seven seconds, has reported in The Wall Street Journal. To
Speaker 2: the latest and perhaps the grandest word came this week
Speaker 2: that Ken Griffin is paying for twelve hundred of his
Speaker 2: Asia employees and family members to travel to Tokyo's Disney
Speaker 2: resort for a three day celebration of the company's anniversary,
Speaker 2: and will cost mister Griffin a pretty penny. As Bloomberg
Speaker 2: reported this week that the costs for a week long
Speaker 2: trip for a family of fourd to Disney World back
Speaker 2: here in the United States has gone up to twenty
Speaker 2: five thousand dollars and could go as high as forty
Speaker 2: thousand dollars. But no matter the cost, it looks like,
Speaker 2: at least for Citadel's Asia employees, their dreams really may
Speaker 2: come true. Where are your Jeans Come True? That does
Speaker 2: it for this episode of Wall Street Week. I'm David Weston.
Speaker 2: This is Bloomberg. See you next week.