Speaker 1: This is Bloomberg Well Street Week.
Speaker 2: I mean may not have an overall recession, We're having
Speaker 2: a rolling recession. Economy roll looks pretty strongly is when
Speaker 2: it comes to jobs.
Speaker 3: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI through.
Speaker 3: The eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: Zebra Lair of the Paulson Institute, Glen Hubbard of the
Speaker 2: Columbia Business School.
Speaker 3: Bloomberg Well Street Week with David Weston from Bloomberg Radio.
Speaker 2: A lot of talk about climate, about US China relations,
Speaker 2: about the big banks, but the action still is in
Speaker 2: Gaza is Israel presses ahead. This is Bloomberg Wall Street Week.
Speaker 2: I'm David Weston, this week's special contributor Larry Summers of
Speaker 2: Harvard about US jobs numbers and more.
Speaker 4: I still think the market is a bit overpricing. How
Speaker 4: much easing the Fed's going to decide it can prudently undertake.
Speaker 5: Howne you all.
Speaker 2: CEO Vimill Kapoor on his latest at inquisition and how
Speaker 2: it fits into his overall business model.
Speaker 6: So it fits right in the heart of our building
Speaker 6: automation business and prepares it for higher growth trade in
Speaker 6: the future.
Speaker 2: And Bob Diamond of Atlas Merchant Capital on the Big
Speaker 2: Bank's big appearance on Capitol Hill. Gill wall Street watched
Speaker 2: this week as those eighty thousand delegates continued their Top
Speaker 2: twenty eight meetings in Dubai, with US Special Envoy John
Speaker 2: Carey turning up the rhetorical heat. The best scientists in
Speaker 2: the world are saying what we face now is alarming, terrifying,
Speaker 2: while Chinese officials reacted badly to Commerce Secretary of Romando's
Speaker 2: saying it poses a risk to the United States, even
Speaker 2: as Trade Representative Catherine Tye talked in terms of balance, the.
Speaker 7: Lessons that we've learned from the past seven years on
Speaker 7: trade mean that we can't ever ignore the domestic political
Speaker 7: consequences of what we're doing in trade.
Speaker 2: There was a lot of talk in front of the
Speaker 2: Senate Banking Committee this week as CEOs made their case
Speaker 2: that ramping up reserve requirements would not be good for
Speaker 2: the economy.
Speaker 7: The most likely result of increasing the costs of banks
Speaker 7: to offer a variety of products. Is that it would
Speaker 7: move more activity into the less regulated non bank sector,
Speaker 7: which carries its own risk for consumers and the stability
Speaker 7: of the financial system.
Speaker 2: The place where there was much more than just talk
Speaker 2: was once again in Gaza, as Israeli forces renewed their offensives,
Speaker 2: spreading into southern areas and urging civilians to flee.
Speaker 5: Again.
Speaker 8: The real question is how do you, on the one hand,
Speaker 8: allow a sovereign nation like Israel to go after terrorist targets,
Speaker 8: while on the other hand, have them do so in
Speaker 8: a way that minimizes the harm to civilians.
Speaker 2: And Israel was very much the subject on Capitol Hill
Speaker 2: when the presidents of Harvard, Penn and MIT were summoned
Speaker 2: to address the rise of anti Semitism.
Speaker 8: I have sought to confront hate while preserving free expression.
Speaker 8: This is difficult work, and I know that I have
Speaker 8: not always gotten it right.
Speaker 2: And then on Friday we got the US jobs numbers,
Speaker 2: showing once again that the labor market is stronger than
Speaker 2: people thought, as the US added another one hundred and
Speaker 2: ninety nine thousand jobs in November, taking an unemployment rate
Speaker 2: down to three point seven percent, while wage growth accelerated.
Speaker 2: And here to take us through these employment numbers for
Speaker 2: this week, we welcome our very special contributor, Larry Summers
Speaker 2: of Harvard. SOI, Larry, more jobs were created than expected
Speaker 2: and unemployment was lower than expected.
Speaker 5: How do you interpret.
Speaker 1: Them, David? These were good numbers.
Speaker 4: They showed an economy that, at least as of November,
Speaker 4: was still looking pretty robust. Some of the greatest fears
Speaker 4: that the economy was turning over certainly looked to have
Speaker 4: been false.
Speaker 1: By this number. The fact that average.
Speaker 4: Hourly earnings were running running at four tenths of a
Speaker 4: percent bit more than was expected reinforces my sense that
Speaker 4: people need to be careful about declaring the war against
Speaker 4: inflation as having been one. They need to be nervous
Speaker 4: about what could happen from supply shocks, from.
Speaker 1: Other adverse developments.
Speaker 4: But I read these as a pretty favorable.
Speaker 5: Number.
Speaker 4: They certainly make a soft landing look more in play,
Speaker 4: although I certainly think it would be a mistake to
Speaker 4: treat a soft landing as something we can take for
Speaker 4: granted or be confidence about.
Speaker 5: What do they say to the Fed?
Speaker 2: Do you think, Larry, Because on the one hand, you say, boy,
Speaker 2: this is a pretty robust labor economy. We don't need
Speaker 2: to cut too soon, and people were expecting some cuts.
Speaker 2: And as you say, on inflation, there are some indications
Speaker 2: inflation is ticking back up. We have a line of
Speaker 2: Fed that says that, and they have you miss consumer
Speaker 2: in a sentiment this week indicated that it really dropped
Speaker 2: the consumer expectations for inflation for one year out look.
Speaker 1: I think the Fed's got to be very careful.
Speaker 4: Progress has been made about against inflation, but they've got
Speaker 4: to make sure that it keeps being made, and they've
Speaker 4: got to make sure that once it's made, it's entrenched
Speaker 4: and locked in. And I think this will make it
Speaker 4: easier for them to do that. They've got a very
Speaker 4: tricky problem at the FED because whenever people conclude that
Speaker 4: it's looking good that we're not going to need more
Speaker 4: rat increases, they long rates come way down, and the
Speaker 4: stock market has a tendency to go up, and that
Speaker 4: then undoes some of the tightening that they have already
Speaker 4: put in place.
Speaker 1: So I think it's very hard to know what's going
Speaker 1: to happen.
Speaker 4: I still think the market is a bit overpricing how
Speaker 4: much easing the Fed's going to decide it can prudently undertake.
Speaker 4: But those issues are very much at the margin, unlike
Speaker 4: the situation we had a couple of years ago where
Speaker 4: it seemed to me the FED was very far, very
Speaker 4: far off. So I think the Fed's in broadly the
Speaker 4: right place of watchful waiting. But the moment they turn
Speaker 4: or announce they're going to turn, is going to be
Speaker 4: a seismic moment, and for that reason, they probably need
Speaker 4: to be very deliberative and careful about getting to that
Speaker 4: point and waiting until they see some overwhelming evidence of
Speaker 4: inflation being locked in low or see some real evidence
Speaker 4: of the economy churning over. And I don't think we
Speaker 4: have either of those at this point.
Speaker 5: Let me just turn this something.
Speaker 2: It's very much in the news once again this week,
Speaker 2: and you have spoken out about it, and that is
Speaker 2: the rise of antisemitism, at least on some college campuses.
Speaker 2: We had the three university presidents go down and appear
Speaker 2: in Congress from your own Harvard, as well as MIT
Speaker 2: and pen And if they meant to put an end
Speaker 2: to this, they certainly did not succeed. As of right now,
Speaker 2: it looks like if anything got to be more so,
Speaker 2: but this is one of my questions. You ran Harvard,
Speaker 2: you're a president there, but you also were at very
Speaker 2: senior levels in the government. When things start to go
Speaker 2: off the rails, when you start to lose control of
Speaker 2: the narrative, how do you get it back. Because we
Speaker 2: have everybody now wanting to run universities for the college presidents,
Speaker 2: whether it's Congress is where the contributors or whatever, how
Speaker 2: do you regain control of the narrative.
Speaker 4: I think this is as difficult a moment for elite
Speaker 4: higher education as any moment since the Vietnam War period,
Speaker 4: perhaps more difficult. I think everybody needs to take a
Speaker 4: bit of a deep breath. I've had considerable sympathy with
Speaker 4: some of the things that have been saying said by
Speaker 4: both people in the government and by some of the
Speaker 4: billionaires some of the donors to these universities. But even
Speaker 4: when the concerns are warranted, it's very important for us
Speaker 4: to remember that if universities start being run by politicians
Speaker 4: or by small groups of large doors, that's going to
Speaker 4: be a very problematic thing over time for the American
Speaker 4: university system, which is a huge source of.
Speaker 1: Strength for our country.
Speaker 4: That said, David, we have to recognize that there's been
Speaker 4: a double standard in how incidents of racism have been
Speaker 4: regarded in the past, Incidents of what people call micro aggressions,
Speaker 4: incidents of things that make people feel hurt or sensitive
Speaker 4: have been regarded in the past, and the way things
Speaker 4: that are abhorrent to the sensibilities of so many of
Speaker 4: us have been regarded in the last several months. And
Speaker 4: that double standard, which in different ways has been and
Speaker 4: present on many campuses, creates an extremely difficult situation. I
Speaker 4: do not side with those who believe that the answer
Speaker 4: is simply to ratchet up the protections and condemnations of
Speaker 4: speech which is offensive, to include Jewish students more fully
Speaker 4: in what has happened in the past.
Speaker 5: Larry, really food for thought, Thank you so much.
Speaker 2: That's our special contribuity here on Wall Street Week is Larry.
Speaker 5: Summers of Harvard.
Speaker 2: Coming up, we take a look at the weekend markets
Speaker 2: with Aaron Brown of Pimco. That's next on Wall Street
Speaker 2: Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: blue Berg Radio.
Speaker 5: This is Wall Street Week. I'm David Weston.
Speaker 2: Stocks had another good week, helped by those jobs numbers,
Speaker 2: so the SMB five hundred, up for the sixth straight week,
Speaker 2: and to get forty six oh four that is well
Speaker 2: above the median estimate of the Bloomberg elves for the
Speaker 2: end of this year and for that matter, for the
Speaker 2: end of next year as well. The NASAQ was up
Speaker 2: seven tenths percent, while bonds had an up and down week,
Speaker 2: but in the end, the yield and the tenure added
Speaker 2: a bit over three basis points to finish at four
Speaker 2: point two to three. To interpret all these markets for US,
Speaker 2: we welcome back now Aaron Brown. She's PIMCO Multi Asset
Speaker 2: Strategies portfolio manager erin great to have you back with us.
Speaker 2: So I start with the jobs numbers, the other economic
Speaker 2: data we got this week.
Speaker 5: How did the markets react to it?
Speaker 9: So I think that the markets actually behaved pretty rationally.
Speaker 9: We had a significant rally into the end of November,
Speaker 9: both across equity markets as well as bond markets, and
Speaker 9: I think probably the bomb market got a little bit
Speaker 9: ahead of itself going into today's number. You know, keep
Speaker 9: in mind that prior to today, the market was pricing
Speaker 9: in about one hundred and twenty seven basis points of
Speaker 9: interest rate cuts next year, which is a really aggressive
Speaker 9: interest rate cutting cycle that had been priced in, you know,
Speaker 9: particularly against the backdrop of still elevated inflation, wage growth
Speaker 9: north of four percent, and a pretty healthy economy. And
Speaker 9: so what you saw today I think was just some
Speaker 9: of that optimism of rate cuts being priced out of
Speaker 9: the market. What's interesting is it didn't really hurt the
Speaker 9: equity markets. Equity still, you know, rallied into the end
Speaker 9: of the day, did quite well. But the market really
Speaker 9: is pricing in a pretty soft landing across both equity
Speaker 9: and bond markets, and I think just some of that
Speaker 9: enthusiasm was priced out of the bond market, but still
Speaker 9: a very healthy environment of healthy macroblock backdrop for stocks.
Speaker 2: Aaron, Well, well, in December now it started to time
Speaker 2: to start thinking about twenty twenty four.
Speaker 5: It's not too early.
Speaker 2: What are you projecting for twenty twenty four? And as
Speaker 2: you talk about those rate cuts, it always strikes me
Speaker 2: the only reason they cut rates is if maybe things
Speaker 2: are not going so well the economy. So I'm not
Speaker 2: sure if we should wish for that.
Speaker 9: Well, there's other reasons why the Fed would would price
Speaker 9: in rate cuts, and the reason for that is right now,
Speaker 9: rates are quite restrictive. You know, the rates are probably
Speaker 9: two hundred basis points over the neutral rate, and that
Speaker 9: was really necessary given the very elevated levels of inflation.
Speaker 9: But we're starting to see inflation come down, and as
Speaker 9: we see inflation normalize, the FED may want to take
Speaker 9: out some of that restrictiveness even apps in a recession,
Speaker 9: so that we could still see rate cuts in a
Speaker 9: healthy macro environment long as long as inflation is lower
Speaker 9: than where it is today. What was a little bit
Speaker 9: concerning about the job's number is we saw wage growth
Speaker 9: increase again and it's you know, elevated above four percent.
Speaker 9: The FED is probably going to have difficulty cutting rates
Speaker 9: with inflation wage inflation above three percent, so we need
Speaker 9: to see that mark that really move lower in order
Speaker 9: to be in the fence comfort level overall to start
Speaker 9: cutting rates. I think next year we're going to continue
Speaker 9: to see a gradually slowing economic environment that could stagnate,
Speaker 9: but right now at least, I'm not pricing in a
Speaker 9: recession for next year, but I do expect a slow
Speaker 9: growth environment in the US with the potential for recession risk,
Speaker 9: particularly outside of the US, that could open the door
Speaker 9: for ray cuts towards the end of next year, but
Speaker 9: it's unlikely that we're going to see ray cuts in
Speaker 9: the first quarter, particularly after tip today's payroll print.
Speaker 2: Aaron, I know your job is really monitoring to that
Speaker 2: balance between equities on the one hand and bonds on
Speaker 2: the other. Now, bonds are giving you some real returns.
Speaker 2: I mean, you're getting some real money. What does that
Speaker 2: mean you at your investment portfolio as you go into
Speaker 2: twenty twenty four.
Speaker 9: So I think bonds are in a really unique sweet
Speaker 9: spot right for investors. Typically, there's three things that you
Speaker 9: look for in bonds, and I call it the trifecta
Speaker 9: of bonds. The first is yield, and you want real
Speaker 9: yield from bonds. If you look at a core US
Speaker 9: bond portfolio today, it's yielding four point eight percent on
Speaker 9: a real basis, so absent inflation, if you subtract out inflation,
Speaker 9: that's a positive real return from your fixing come portfolio.
Speaker 9: That's really elevated versus where we've seen during very slow
Speaker 9: growth environments, and certainly very elevated versus the yield that
Speaker 9: you were getting from any type of bond portfolio over
Speaker 9: the last decade or so. The second is the potential
Speaker 9: for capital appreciation, and just given the really rapid sell
Speaker 9: off and the extent of the selloff that we saw
Speaker 9: both in twenty twenty two and twenty twenty three with
Speaker 9: across you know, fixing come portfolios, I think you could
Speaker 9: see the potential for real capital return as well next
Speaker 9: year as bond's rally as a continuation of what we
Speaker 9: saw over the last month. And then the third is diversification.
Speaker 9: And we've seen you know, stock bond correlation go back
Speaker 9: to inversely correlated with one another, which means that when
Speaker 9: bonds sell off, stocks rally, and when stocks sell off,
Speaker 9: bonds rally. And that's really important from a diversification perspective
Speaker 9: for most investors' acid mix and their core acid allocation
Speaker 9: across their portfolios. And so you're now getting all three
Speaker 9: benefits from bonds, whereas you know two years ago you're
Speaker 9: really only getting you know, potential for diversification which failed.
Speaker 9: So I think bonds are in a real sweet spot
Speaker 9: next year for investors.
Speaker 2: The COVID nineteen pandemic has triggered some big changes in
Speaker 2: investment patterns and supply chains around the world. To take
Speaker 2: us through what his industrial company is doing, we welcome now.
Speaker 2: The CEO of Honeywell is Vimal Kapoor. So Vim Well,
Speaker 2: thank you so much for being with us.
Speaker 5: Great to have you here.
Speaker 6: Thanks for having me David, and it's a pleasure to
Speaker 6: be here.
Speaker 5: A lot of talk about supply chains.
Speaker 2: Give us a sense from Honeywell's perspective, what has changed,
Speaker 2: if anything, since the pandemic.
Speaker 6: I heard a thing I would say, I mean, it's
Speaker 6: been a biggest diceuption in our business for the last
Speaker 6: two years. It started with the disruption in electronics, which
Speaker 6: we all well aware, and you don't get chips, you
Speaker 6: don't get parts, and that was really I would say
Speaker 6: about two years back. That's mostly healed for most part.
Speaker 6: What's still left behind for US. Aerospace is the largest
Speaker 6: segment for Honeywell, and then they're the healing is yet
Speaker 6: to happen completely. We are in a midway and the
Speaker 6: constraint there is Tier three Tier four suppliers. They moved
Speaker 6: on with a lot of people during COVID and when
Speaker 6: the capacity came back. Rebuilding the capacity of the people
Speaker 6: has been a big challenge because these are certified skills,
Speaker 6: not too easy to hire people. And that's the state
Speaker 6: we are in. So electronics mostly healed on the mechanical side,
Speaker 6: products in aerospace more in the midway. But we're making
Speaker 6: progress every week, every month and continue.
Speaker 1: To produce more.
Speaker 6: Other thing I must bring in it changed is how
Speaker 6: we think about insourcing versus outsourcing. That was I would
Speaker 6: say we generally practice the strategy of local for local,
Speaker 6: so produce for North America, and North America for Europe
Speaker 6: and Asia for Asia. So for us live with not
Speaker 6: a lot of moves. But when should you outsource and
Speaker 6: when you should not outsource? Because one thing we learned
Speaker 6: was that when we control the supply chain, we healed quickly,
Speaker 6: and when it was outsourced more, we healed slower. And
Speaker 6: that kind of also raising the question on how should
Speaker 6: we configure on the things we do outsource, specifically electronic side,
Speaker 6: and should that not be done by us to drive
Speaker 6: more control and more execution.
Speaker 5: So what about geography.
Speaker 2: There's been a lot of talk with other companies about
Speaker 2: friends sourcing and on shoring things like that. Has that
Speaker 2: been a shift for you? Is most of your supply
Speaker 2: chain within the United States, you have you taken it
Speaker 2: into other countries that we will call so called friends showing.
Speaker 6: So we always had a strategy of local for local,
Speaker 6: and our North America supply chain always supported in US
Speaker 6: and Mexico, and Europe was in Europe, and Asia was
Speaker 6: prominently China. So for US what changes. Certainly Mexico has
Speaker 6: become more important. We always had a great presence there,
Speaker 6: so probably we are doing some insourcing type of work
Speaker 6: in Mexico, considering that to do moving forward. But we
Speaker 6: see a lot of our customers moving into friend shoring.
Speaker 6: We see activity in Asian countries like in Vietnam, Malaysia,
Speaker 6: we see a lot of activity in Poland, we see
Speaker 6: activity in Turkey. Mexico is probably top of the charts there.
Speaker 6: So clearly people are making decisions to redo their businesses
Speaker 6: to align more with the friend shoring.
Speaker 2: Well, thank you so much. That is Wikapoor. He is
Speaker 2: the Honeywell CEO.
Speaker 5: Coming up the Big.
Speaker 2: Bank statement of their case to the Senate Banking Committee
Speaker 2: on Wednesday. We'll go through with Bob Diamond to Atlas
Speaker 2: Capital Management. That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 5: This is Wall Street Week.
Speaker 2: I'm David Weston, the CEOs of the major banks appeared
Speaker 2: before the Senate Banking.
Speaker 5: Committee this week, and most.
Speaker 2: Of the discussion was about the proposed regulations increasing reserve
Speaker 2: requirements as part of that move to Basel three requirements.
Speaker 2: To give us an expert view on the merits of
Speaker 2: the complaints we heard this week, Welcome to Bob Diamond.
Speaker 2: He's founder and CEO of Atlas Merchant Capital. Bob, great
Speaker 2: to have you back on Wall Street week. So, as
Speaker 2: I say, listen to some of those CEOs. They're not
Speaker 2: too happy with this idea about these reserves, are they right?
Speaker 2: Is it really gonna suppress lending? Is it really going
Speaker 2: to hurt the economy?
Speaker 10: Well, listen, of course the bank CEOs are not going
Speaker 10: to be looking for higher capital levels. I think the
Speaker 10: banks are doing pretty well right now. You know, the
Speaker 10: mantra that I used in two thousand and eight, David,
Speaker 10: was how do we how do we keep banks safe
Speaker 10: and sound while also driving jobs.
Speaker 5: And economic growth?
Speaker 10: And it would be hard to say that we're not
Speaker 10: doing a pretty good job on both of those right now.
Speaker 10: I think the banks are safer and sounder than they've
Speaker 10: been since two thousand and eight. And I think, on
Speaker 10: the other hand, people are pretty pleased with economic growth,
Speaker 10: really pleased with job creation in the US. So I
Speaker 10: think one of the things they're saying is there's some
Speaker 10: of balance. Factually, if you raise those capital levels, they
Speaker 10: are going to have lower rowe and factually they'll be
Speaker 10: less capital for lending. So I think what they said
Speaker 10: is correct. I think the balance you have to put
Speaker 10: it is one of safety and soundness.
Speaker 2: Well, and safety and soundness hasn't gotten more important to
Speaker 2: make sure that these really big banks, they're really big
Speaker 2: money center banks, are safe Because there was a time
Speaker 2: we say we don't want to have too big to fail.
Speaker 2: I think we're past that point, at least with that
Speaker 2: handful of big banks. I'm not sure we can handle
Speaker 2: if they fail.
Speaker 4: Well.
Speaker 10: I think that's a very good point. And if you
Speaker 10: go back to two thousand and eight, both City and
Speaker 10: Bank of America, two of the biggest four banks in
Speaker 10: the US were pretty much and solvent without the TART program.
Speaker 10: So the Fed and the Treasury came up with a
Speaker 10: program to put equity in the banks, and they're doing
Speaker 10: great today. But the truth is the big four banks JP, Morgan,
Speaker 10: ba A, Wells, Fargo City today versus two thousand and
Speaker 10: eight are bigger, more concentrated, closer to government, more like
Speaker 10: utilities or an.
Speaker 1: Oligopoly at that level.
Speaker 10: And so if there was a mistake, if there was
Speaker 10: a systemic failure, it would be a problem.
Speaker 2: Well, talk about the banking system overall. Are we headed
Speaker 2: to our world where we really have a handful of
Speaker 2: megabanks and then presumably a lot of small community banks
Speaker 2: and local things, and we really are putting a lot
Speaker 2: of pressure on the middle the so called regional banks.
Speaker 10: Well, this is why we have been talking so much
Speaker 10: in Alys Smirntry Capital about the opportunities in regional community
Speaker 10: specialist banking. You know, we have over four thousand banks
Speaker 10: in this country. We're very very unique in that way,
Speaker 10: and I think the benefit that that as to our
Speaker 10: economy the diversification of lending, particularly the lending to specialist
Speaker 10: companies middle market companies. But we also have a very
Speaker 10: diverse financial services industry outside of the banks. So you know,
Speaker 10: we own three middle market m and a advisory platforms
Speaker 10: or advisory platforms from middle market companies in the US.
Speaker 10: They serve small businesses and family owned businesses in a
Speaker 10: way that the large megabanks just can't afford to serve
Speaker 10: them in all of that benefits the financial services industry.
Speaker 10: So we're very positive on the regional banks and the
Speaker 10: community banks, and we think that there's clearly a spot
Speaker 10: for them.
Speaker 2: The regional banks in twenty twenty three have come into
Speaker 2: a lot of stress starting with SVP. We had those failures.
Speaker 2: There was a lot of concern about them. They caught
Speaker 2: in between and they have a lot of the costs,
Speaker 2: particularly regulatory and other costs that the huge banks have,
Speaker 2: but they can't distribute it quite as broadly. Should we
Speaker 2: be promoting, encouraging, allowing more consolidation at that rank.
Speaker 10: I think it's going to happen fairly naturally. And you know,
Speaker 10: to your point, David, they got hit with you know,
Speaker 10: a triple whammy with interest rates moving up quickly. The
Speaker 10: mark to market portfolio or the treasury portfolio that was
Speaker 10: not marked to market got hit for every bank. I
Speaker 10: think loans is a percentage of assets are higher in
Speaker 10: regional and community banks, and so there's been some concern there.
Speaker 10: And lastly, and I think it's not really a topic
Speaker 10: as much as it should be, is the higher regulatory
Speaker 10: costs and post SVB, And first Republic. The impact of
Speaker 10: regulation and inspection on the smaller community banks is just
Speaker 10: much greater than it would be on the larger banks.
Speaker 2: As you say above, there's increased regulatory costs and those
Speaker 2: get distributed. They don't ramp up or ramp down. They're
Speaker 2: not scalable. But what about tech costs as well. We're
Speaker 2: looking at we're on the edge of AI, generative AI,
Speaker 2: and how that's going to probably transform banking. Again, there's
Speaker 2: one thing for a city or a Bank of America
Speaker 2: or JP Morgan to afford it, it's another thing for
Speaker 2: some of these smaller banks.
Speaker 5: To afford it.
Speaker 10: I think it's going to be a huge advantage for them.
Speaker 10: I think, really, I think that technology of processing and
Speaker 10: back office and those are big, big challenges for the
Speaker 10: smaller banks, but I think their access to AI excuse me,
Speaker 10: will be a huge boost for them. So I think
Speaker 10: one of the things that we're pretty excited about going
Speaker 10: forward is that will be a pretty positive impact. But
Speaker 10: back to your point, David, four thousand banks today, some
Speaker 10: of the smaller ones are really really good banks, but
Speaker 10: they're struggling to get their return on equity up. So
Speaker 10: we think some of the stronger ones are right for investment,
Speaker 10: and that investment can be to help increase capital levels,
Speaker 10: but it can also be to give them the capital
Speaker 10: to acquire some of the smaller banks.
Speaker 5: One more point about those hearings.
Speaker 2: We've heard a fair amount of concern, especially by the CEOs,
Speaker 2: that as you increase some of the regulatory requirements, you're
Speaker 2: driving money out of the regulated bank banking system. You're
Speaker 2: driving into private credit into some of the non bank banks.
Speaker 2: Is that a real issue? Is it a real problem?
Speaker 2: Should we be concerned about it?
Speaker 10: Of course, you want to be concerned about everything in
Speaker 10: financial services. But I think one of the great attributes
Speaker 10: of the financial services industry in the US and its
Speaker 10: impact in the economy is the diversification. So the amount
Speaker 10: of private credit is actually quite a small percentage relative
Speaker 10: to all credit from the banking system. But it's venture funds,
Speaker 10: it's hedge funds, it's credit opportunity funds, it's regional banks,
Speaker 10: it's community banks, it's m and a advisory platforms for
Speaker 10: middle market companies. No other country has is diverse and
Speaker 10: strong and diversified financial services industries we have. I think
Speaker 10: it's one of our great strengths. So does it need
Speaker 10: to be regulated, of course, But is it a real
Speaker 10: positive for our economy that not all of this activity
Speaker 10: is happening in four banks as it is in Canada
Speaker 10: in many of the European countries.
Speaker 5: I think it's a real positive.
Speaker 2: But taking the of the large banks just for a
Speaker 2: moment here, is there a risk of the small the
Speaker 2: private credit facilities cherry picking. It may not be big
Speaker 2: in the overall course things, but they may get the
Speaker 2: most lucrative.
Speaker 1: It's competition.
Speaker 10: I think it's fantastic. Of course, the private credit platforms
Speaker 10: are going to look for the best pieces of the
Speaker 10: lending sector, so I think that competition will be very good.
Speaker 2: Is there systemic risk is the big issue from a regulator,
Speaker 2: and that's what we really care about, is the overall system.
Speaker 2: Is there systemic risk because we don't really know what's
Speaker 2: in a lot of the private credit.
Speaker 10: Listen, one of the things that it's been hard for
Speaker 10: anyone to think about since two thousand and eight is
Speaker 10: that failure is okay, too big to fail? Is talking
Speaker 10: about systemic risk for the economy. So many of these
Speaker 10: private credit platforms have sovereign wealth funds investing in them,
Speaker 10: so the risk is well well diversified, and I think
Speaker 10: if the FED and the Treasury felt that there was
Speaker 10: systemic risk on the private capital platforms, they should take action.
Speaker 10: But I don't see any evidence that failure in private
Speaker 10: credit right now is going to create systemic risk.
Speaker 2: Historically, private credit was available to sort of the more wealthy,
Speaker 2: the more sophisticated investors of various sorts. But we've seen,
Speaker 2: certainly in private equity a move into retail, the ways
Speaker 2: to figure out retail to participate. Is that happening in
Speaker 2: private credit, and it's that pose a risk for just
Speaker 2: a mom and pop putting their money, their savings into this.
Speaker 10: I'm not as close to some of the private equity firms,
Speaker 10: but I would expect they're looking more and more at
Speaker 10: retail as well. So again it's the diversification, and it's
Speaker 10: the question of is their systemic risk.
Speaker 2: So to make the banking system even stronger than it is today,
Speaker 2: you said it's pretty good shape.
Speaker 5: What would you do?
Speaker 10: Well, listen, I think what Michael Barr is looking at
Speaker 10: as the vice chair in terms of the capital levels
Speaker 10: is appropriate given that the banks are larger, more concentrated,
Speaker 10: and carry a larger and larger percentage of the deposits.
Speaker 10: So at some point, you know, you and I have
Speaker 10: talked about this is Is it four large banks at
Speaker 10: the expense of a couple thousand banks. I'd like to
Speaker 10: see at the capital levels a little bit less onerous
Speaker 10: at the smaller community banks, and the regulatory costs a
Speaker 10: little bit less onerous there and give them a chance
Speaker 10: to continue to grow and get their row up.
Speaker 2: Bob, it's always such a treaty, have you of Wall Street.
Speaker 5: We thank you so much for coming in.
Speaker 2: That is Bob Diamond of Atlas Merchant Capital, coming up
Speaker 2: enough with the fountain of youth. Get ready for a
Speaker 2: fountain of age, brought to you compliments of your friendly
Speaker 2: generative AI. That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 5: Finally, one more thought.
Speaker 2: Mark Twain taught us that age is an issue of
Speaker 2: mind over matter. If you don't mind, it doesn't matter,
Speaker 2: it must be Frank, we do mind, and yes it
Speaker 2: does matter. After all, didn't ponste leone spend years back
Speaker 2: in the sixteenth century looking for that lost fountain of youth?
Speaker 2: In these days, it sometimes seems as though we're surrounded
Speaker 2: by people who could use a drink from that found
Speaker 2: of youth, starting with many of our politicians. People do
Speaker 2: believe that our elected leaders are just too old, and
Speaker 2: those same.
Speaker 9: Elected leaders are really reluctant to give up that.
Speaker 2: Power, which makes it all the harder for the young
Speaker 2: to wait for their turn in the big leagues. But
Speaker 2: it turns out there are at least some places where
Speaker 2: that weight is getting shorter rather than getting longer, like tech,
Speaker 2: for example, where Mark Zuckerberg became a billionaire at twenty three.
Speaker 2: This guy's probably smiling big day, yes.
Speaker 1: Big small in his face.
Speaker 9: His wealth went up by one point six billion dollars
Speaker 9: just in one.
Speaker 2: Day yesterday, and Evan Spiegel made it by twenty five.
Speaker 2: Sam Bankman Freed was a billionaire briefly when he was
Speaker 2: twenty nine, But I'm not sure that that one still counts.
Speaker 5: The players like Sam Bankman Freed might be new.
Speaker 8: Just kind of fraud, kind of corruption is as old as.
Speaker 2: Time or In sports, we have young baseball players racing
Speaker 2: their way through the miners like never before. According to
Speaker 2: sports site Defector, like Jackson Holliday moved up by the
Speaker 2: Orioles to triple a ball only a year out of
Speaker 2: high school, aided by high tech applied to his training.
Speaker 2: Though Detroit Tigers fans like me might recall that our
Speaker 2: al kline first played in the Major's A eighteen, long
Speaker 2: before we used all those new fangled computers, which takes
Speaker 2: us to artificial intelligence. Nobel Prize winner Michael Spence told
Speaker 2: us that the best use of AI may well be
Speaker 2: to augment what we do, rather than replace it.
Speaker 3: Our best guess is that generative AI is mainly, not exclusively,
Speaker 3: but mainly going to turn out to be a powerful
Speaker 3: digital assistant.
Speaker 2: And some professions are already using this new digital assistant
Speaker 2: to advance the careers of their junior talent faster than
Speaker 2: ever before.
Speaker 5: This week, Bloomberg.
Speaker 2: Reported that new graduates hired at KPMG are using artificial
Speaker 2: intelligence tools to do tax works that used to require
Speaker 2: at least three or four years of experience, and law
Speaker 2: firm McFarland's has junior lawyers working with AI to interpret
Speaker 2: complex legal documents that the partners wouldn't let us go
Speaker 2: near back when I was starting out. All of which
Speaker 2: may mean those accountants and those lawyers will get their
Speaker 2: coveted partnerships much earlier than we used to. So it
Speaker 2: turns out that four hundred and fifty years after constantly
Speaker 2: owned trapes around Florida looking for that fountain of youth,
Speaker 2: we have found the opposite, artificial intelligence that lets us
Speaker 2: grow old earlier. Call it maybe the fountain of age.
Speaker 2: Now the question is whether this will spread from lawyers
Speaker 2: to doctors. Stanford Medical School Dean Lloyd Miners says they're
Speaker 2: already well into integrating AI into medicine.
Speaker 11: There will be less emphasis on memorization, more emphasis, I
Speaker 11: think on truly understanding and in particular understanding what these
Speaker 11: models are doing and how they can be responsibly deployed
Speaker 11: and trained.
Speaker 2: So we may be just around the corner from bringing
Speaker 2: to the world what thirty years ago TV only imagined
Speaker 2: in Doogie Houser, who graduated from med school at fourteen
Speaker 2: and was practicing medicine at sixteen.
Speaker 7: Today's sixteenth birthday getting his license would just be the
Speaker 7: most perfect present.
Speaker 9: You want to go to jail, No, you'll be going
Speaker 9: to deal for criminal negligence.
Speaker 7: Who is a character that's.
Speaker 5: My sin with the doctor that does it.
Speaker 2: For this episode of Wall Street Week, I'm David Weston,
Speaker 2: This is Bloomberg.
Speaker 5: See you next week.