Speaker 1: This is Bloomberg Business Week from Bloomberg Radio. Hi, I'm
Speaker 1: Jason Kelly. Welcome to the weekend edition of Bloomberg Business Week.
Speaker 1: My co host Carol Master is off this week. Over
Speaker 1: the next couple of hours, we're going to bring you
Speaker 1: news of the week, insights from the magazine, and a
Speaker 1: lot more. Well. The big story this week continues to
Speaker 1: be the coronavirus. Later on in the show, we'll hear
Speaker 1: about the impact of virus is having on Chinese factories
Speaker 1: and about a Norwegian based coalition working on a vaccine.
Speaker 1: Also in the show, an in depth, provocative conversation with
Speaker 1: the former chairman of Lehman Brothers, Michael Ainsley. He was
Speaker 1: in the room where it happened, as they say, that
Speaker 1: fateful decision to declare bankruptcy. And this hour we'll take
Speaker 1: a look at why Vanguard Group is moving into private
Speaker 1: equity along with it seems like the rest of the
Speaker 1: world plus subdued inflation, has some investors worried about global
Speaker 1: central bank policy, whether there are any arrows left in
Speaker 1: the quiver, and a little bit of complacency. But first,
Speaker 1: Bernie Sanders rise and Joe Biden's fall. Tyler Pager is
Speaker 1: here for the latest from the campaign trail, Tyler, what
Speaker 1: went on in New Hampshire. Yeah, so the big story
Speaker 1: obviously is Bernie Sanders wins again. He won in sixteen
Speaker 1: and he continued that track record. He won by a
Speaker 1: smaller margin though, and I think the big story behind
Speaker 1: that is people jug and Amy clob which are kind
Speaker 1: of fighting to be that moderate alternative to Bernie Sanders.
Speaker 1: And then again Joe Biden's collapsed finishing fifth in a distant,
Speaker 1: distant fifth, not getting any delegates from that contest right
Speaker 1: and and basically like say in peace Out before the
Speaker 1: numbers were even tallied, heading to South Carolina, That's where
Speaker 1: it all hangs in the balance for him. At sais
Speaker 1: they saw the writing on the wall and decided it's
Speaker 1: better to try to save face, go to where his
Speaker 1: stronghold is supposed to be in South Carolina, and start
Speaker 1: to build up the campaign there and kind of relaunch
Speaker 1: it as they prepare for that primary at the end
Speaker 1: of the month. That is his firewall, and it shows
Speaker 1: some cracks, but we'll see if he's able to maintain
Speaker 1: that lead and and catapult him him out of South
Speaker 1: Carolina into Super Tuesday was the mood on the ground,
Speaker 1: How did people feel, what did they say was new
Speaker 1: or different here in than from sixteen or even going
Speaker 1: back to two eight. I mean, the biggest difference is
Speaker 1: just how big the field is and how big it remains.
Speaker 1: You think, Iowa New Hampshire are kind of these winnowing
Speaker 1: contests where people start to drop out. After that, we
Speaker 1: saw a few people in the single digit chop out,
Speaker 1: but we still have a pretty large field heading onto
Speaker 1: these next two states of Nevada and South Carolina and
Speaker 1: then into Super Tuesday. So I think obviously the biggest
Speaker 1: difference is it wasn't a binary contest between Hillary Clinton
Speaker 1: and Bernie Sanders. There are a lot of choices across
Speaker 1: the spectrum, both moderates and progressives that that voters could
Speaker 1: choose from. And life for Amy Klobuchar exactly, she is
Speaker 1: gets out of New Hampshire um with with some momentum.
Speaker 1: She's going to struggle a little bit because it's shown
Speaker 1: that she's not pulling as well with voters of color,
Speaker 1: and she needs to build an organization that can capture
Speaker 1: this momentum. She gets out of New Hampshire, but but
Speaker 1: she gets life in and and and live stifout another day.
Speaker 1: And meanwhile the press that sort of feasting on a
Speaker 1: lot of this discord. Yeah, this is exactly what the
Speaker 1: president wants. There's no one clear front runner at this
Speaker 1: moment that the Democrats can rally behind and unite behind Um.
Speaker 1: And Donald Trump is excited about the prospect of facing
Speaker 1: Bernie Sanders. His campaign thinks that's the best person for him.
Speaker 1: He can paint him as a as a democratic socialist,
Speaker 1: which is what he identifies as in and really harness
Speaker 1: um that energy against that kind of mindset and bring
Speaker 1: in moderates and independence into the folds. All right, Tyler
Speaker 1: Pager headed back to d C. We know you'll be
Speaker 1: on the campaign trail a lot more to come. Thank you.
Speaker 1: We turned out to Tracy Alloway via Skype. She's got
Speaker 1: the cover story. It's all about fragile China. Tracy, thank
Speaker 1: you so much for joining me. So you understand the
Speaker 1: economics in the markets so incredibly well here you know
Speaker 1: the history and there is a sense, to the point
Speaker 1: of the cover that China is fragile in a way
Speaker 1: that maybe none of us fully understand. Help us understand it, well,
Speaker 1: this is always been the big existential question about China
Speaker 1: and its role not just in the world economy, but
Speaker 1: also in global financial markets. You know, people like the
Speaker 1: Trump administration, they tend to portray China as this big
Speaker 1: threat to the American economy, to the American worker. But
Speaker 1: there's also a line of thought that China is much
Speaker 1: weaker than many people actually think. And one area of
Speaker 1: weakness in particular has been the notion of debt and
Speaker 1: leverage in its financial system. We've heard people talk about
Speaker 1: this for years and years and years now. China's financial
Speaker 1: system relies heavily on debt fueled growth. It's what they
Speaker 1: reach for whatever they have a slowdown in the economy,
Speaker 1: Like back in two thousand and eight, we saw a
Speaker 1: lot of infrastructure spending. That's what they reach for, really
Speaker 1: to develop their economy and get the standard of living
Speaker 1: up to where they want it to be in order
Speaker 1: to solidify the CCPs power. And of course, when you
Speaker 1: have growth that is driven by debt and by leverage,
Speaker 1: there is always a chance that it could take a
Speaker 1: hint and the whole edifice could come falling down. And
Speaker 1: so in Hong Kong, we're not just talking about the
Speaker 1: financial system we're talking about protests, and obviously we're talking
Speaker 1: more and more about the coronavirus. Tie it all together
Speaker 1: for me, How worried are people that this could be
Speaker 1: the thing that starts to pull this apart. Yeah. So,
Speaker 1: one of the really interesting things about being here on
Speaker 1: the ground in Hong Kong is that you are seeing
Speaker 1: this variety of opinion. At the moment, Hong Kong is
Speaker 1: Asia's biggest financial center. We have a lot of people
Speaker 1: here who have basically tied their careers, their money, their
Speaker 1: lives to the growth of China and its integration into
Speaker 1: the world economy and financial markets. Now there seems to
Speaker 1: be a little bit of doubt creeping in as to
Speaker 1: whether that might happen to the extent or at the
Speaker 1: pace that a lot of people had expected or hoped
Speaker 1: that it would. The Corona Una virus outbreak really, uh,
Speaker 1: I should say, the coronavirus outbreak really puts a question
Speaker 1: mark over the Chinese growth story. Now, what we're seeing
Speaker 1: from some fund managers is their positioning for a big
Speaker 1: stimulus effort from the Chinese government. They're buying things like
Speaker 1: cement stocks, property stocks on the expectation that that's going
Speaker 1: to come. But some other people are getting pretty wary
Speaker 1: at this point. They think if China unleushas stimulus, they're
Speaker 1: not going to be able to do infrastructure spending like
Speaker 1: they did before. They're probably not going to be able
Speaker 1: to lower rates as much as they would have hoped
Speaker 1: because rates are already low. And again you get back
Speaker 1: to that question of whether or not you can keep
Speaker 1: prompting additional economic growth through the use of additional leverage.
Speaker 1: And that's Bloomberg Tracy Allaway with this week's cover story.
Speaker 1: So if you want to get one of the most
Speaker 1: read stories, most talked about stories on the Bloomberg, just
Speaker 1: call up a well known investor and say, what do
Speaker 1: you think about China. You think it's in trouble. We've
Speaker 1: seen it time and time again, and yet crash hasn't happened,
Speaker 1: and yet the worries still seem to be out there.
Speaker 1: Pat Regnier and his team dug into that in this
Speaker 1: week's edition. Tell us what you found, So, I mean,
Speaker 1: what we really found was a system that just looks
Speaker 1: really fragile. Um It's it's a system where you know,
Speaker 1: debt has been piling up. You know, the Chinese economy
Speaker 1: went through this kind of extraordinary transformation. I mean, if
Speaker 1: you remember a decade ago we talked about China sort
Speaker 1: of doing vendor financing for consumers in the US. Well,
Speaker 1: what have they had over the last decade. But they've
Speaker 1: had a consumer boom. It's been a partly a debt
Speaker 1: finance consumer boom. You've seen uh, you know, a real
Speaker 1: estate boom there. Uh, you know, huge levels of you know,
Speaker 1: peer to peer internet finance, kinds of debt, lots of
Speaker 1: corporate debt, lots of defaults. And through it all you've
Speaker 1: had a central government that has been managing it and
Speaker 1: many ways they have more tools to manage the economy
Speaker 1: and to fine tune it. And uh then in some
Speaker 1: other countries, and the question is always will they you know,
Speaker 1: get this kind of you know, lumbering economy across the
Speaker 1: tight rope so to speak, uh, you know, to safety.
Speaker 1: Can they let the air out of this uh slowly?
Speaker 1: Or is there you know, the possibility of some kind
Speaker 1: of crack up along the way. All right, So let's
Speaker 1: go down a level, because there are a lot of
Speaker 1: different components to this. One is the consumer economy that,
Speaker 1: as you say, has just i mean blossomed boomed, exploded.
Speaker 1: You know in so many aspects. What are the concerns there? Well,
Speaker 1: one is just that you know again uh, you know,
Speaker 1: high levels of household indebtedness. I mean that was just
Speaker 1: something that China didn't used to have UM and and
Speaker 1: now it does. And you know, some of that has
Speaker 1: come from the kinds of lenders that if we had
Speaker 1: them here, we'd say, like, you know, that looks like
Speaker 1: you know, possibly you know, a predatory lender. Uh, you know,
Speaker 1: some of it has maybe come from lenders that weren't
Speaker 1: particularly well financed themselves. So you know, there there's worries
Speaker 1: on that side. So you have you have that UM.
Speaker 1: You have really you know, high um price to income
Speaker 1: ratios for housing in the major cities. You know, these
Speaker 1: are unaffordable cities that they've had to apply these kinds
Speaker 1: of cooling measures to things again that you you couldn't
Speaker 1: do here, you know, caps on how many units a
Speaker 1: family can own. And when people you start to think
Speaker 1: maybe people are trying to get around that by like
Speaker 1: you know, somebody divorcing. Well, one of the things that
Speaker 1: can happen in China is they can say, well, you know,
Speaker 1: we're gonna put restrictions on borrowing. Uh you know, if
Speaker 1: if you're divorcing, so that you're not trying to get
Speaker 1: around those caps. So the government's local governments have been
Speaker 1: really sort of trying to like keep a lid on
Speaker 1: things that you know, in other places, uh, you know
Speaker 1: might run wild. But even there, you've just you know,
Speaker 1: you've had over you know, a series of just a
Speaker 1: few years, you know, price increases well and the government's
Speaker 1: role excuse me, and in all of this is a
Speaker 1: really important one to to understand, and it is complicated
Speaker 1: in many you mentioned sort of the tools that the
Speaker 1: government has. The entire system is one of command and control.
Speaker 1: But control only goes so far. It's clear right right,
Speaker 1: and you know, as as we're sitting here talking right
Speaker 1: now with uh, you know, the coronavirus, I mean, we're
Speaker 1: beginning to see, like you know, when you look to
Speaker 1: one institution to control everything, I mean right now, they
Speaker 1: are having you know, you know, huge issues containing you know,
Speaker 1: a difficult outbreak, um, and all of those things get
Speaker 1: kind of you know tied up together. Uh you know,
Speaker 1: are they if you know, are they managing that competently?
Speaker 1: And if they're managing that competently or not. How does
Speaker 1: how do we how do we take that for how
Speaker 1: they're going to be able to manage and finding the economy? Right? Yeah,
Speaker 1: So let's talk about that because you know, we've talked
Speaker 1: about the debt side. You mentioned the virus. What do
Speaker 1: we know so far in terms of the economic management,
Speaker 1: the financial management, sort of the social management that that
Speaker 1: the government has employed as you look at this a
Speaker 1: financial lens, Well, I think for a lot of people,
Speaker 1: you know, what what's interesting and what you know? We
Speaker 1: asked um our writers in Hong Kong Tracy Alloway to
Speaker 1: to ask, is are people, um, you know, blurring these
Speaker 1: two things together or are they compartmentalizing it like there's
Speaker 1: an economic management over here and there's virus management over here?
Speaker 1: And you know, I mean I think you're actually beginning
Speaker 1: to see some of that, some of that blurring together,
Speaker 1: um you know. And yet you know here here in
Speaker 1: the U s. If you look at how markets are responding,
Speaker 1: even with all this stuff happening in the world second
Speaker 1: largest economy, people still seem to not be quite ready
Speaker 1: to like look at this as an economic crisis. Yeah.
Speaker 1: Does that surprise you as someone who's looked at the
Speaker 1: world through that economic and financial lens for a long time.
Speaker 1: Well you know, as we've said, people have been called
Speaker 1: calling a crisis in China for a decade. I mean
Speaker 1: I so in a sense, it doesn't surprise me in that,
Speaker 1: you know, it's always very hard to call the top
Speaker 1: of something. And I think you know, most people in uh,
Speaker 1: you know, in the United States and Europe are still
Speaker 1: like working to kind of get their heads around like all,
Speaker 1: you know, the size and the pace, the pace of
Speaker 1: change and showing right, well, and we shouldn't forget you know,
Speaker 1: one of the elements that brought this to the for
Speaker 1: two things actually, one is the trade war, you know
Speaker 1: that obviously sort of put the Chinese economy in a
Speaker 1: different light. And then something as seemingly separate but important,
Speaker 1: especially to our financial audience, as the protests in Hong Kong.
Speaker 1: But all of this sort of starts to play into
Speaker 1: this stu in a way. It's it's all happening at once.
Speaker 1: And again, now that's something that I think a lot
Speaker 1: of people in the United States or the UK may
Speaker 1: may may experience to like suddenly all the news is
Speaker 1: happening at once, and it seems like we're all kind
Speaker 1: of caught in these cycles of you know, of of
Speaker 1: all this and and and look at look at all
Speaker 1: those places in the the US, US and Europe. I mean,
Speaker 1: the the markets have kind of trondled along right exactly well,
Speaker 1: and the and the Hong Kong. When I think, you know,
Speaker 1: I think about some of the work you and I
Speaker 1: have done together around the financials US in the big
Speaker 1: financial firms, and wrestling with how to understand Hong Kong
Speaker 1: and its role in the in the broader financial world,
Speaker 1: which brings me to to one thing I wanted to
Speaker 1: make sure we talked about, which is the role of
Speaker 1: the banking system and the government's role in all of
Speaker 1: that state control lack of state control. Where does the
Speaker 1: banking system fit into all of this? Well, I mean
Speaker 1: this is this is one of the key levers that
Speaker 1: you know that Chinese authorities have to pull. They can
Speaker 1: they can control you know, interest rates, they can control
Speaker 1: lending um. They particularly have to think about the rise
Speaker 1: of shadow banking UM that that's such an important factor
Speaker 1: in China, the rise of these financial institutions that are
Speaker 1: outside of the traditional UM lending system. And when we
Speaker 1: were talking about P two p UM you know, just
Speaker 1: the rise in the amount of dead outstanding in peer
Speaker 1: to peer lending a few years ago, and then how
Speaker 1: quickly you know that that was brought down? I mean
Speaker 1: you you you don't. You don't see changes of that
Speaker 1: scale without a crisis happening, um uh in in most
Speaker 1: in most other countries. You know, we did an interesting story,
Speaker 1: um not too long ago about default about bad loans
Speaker 1: and defaults in China, and they're rising and rising and
Speaker 1: rising and um. At some point I asked, you know,
Speaker 1: it's like, we keep doing these stories about record record
Speaker 1: defaults in China. If we kept having headlines like this,
Speaker 1: um here, we'd be talking about a crisis. And one
Speaker 1: of the things that one of the reporters explained to me,
Speaker 1: it's like, you know, this isn't a crisis. This was
Speaker 1: a plan, right, You know that that that the Chinese
Speaker 1: government has a policy now of sort of encouraging companies
Speaker 1: to instead of extend and pretend to start to default.
Speaker 1: And so that so that investors who are coming in
Speaker 1: as as money from around the world is beginning to
Speaker 1: be invested in the domestic Chinese bond market, are will
Speaker 1: begin to have expectations that when you lend to a
Speaker 1: Chinese company they could default. And that's editor Pat Regnar.
Speaker 1: So this is a story we've been following very closely.
Speaker 1: It's about the mutual fund business, but it's also a
Speaker 1: about the increasing power of the big three Vanguards. Certainly
Speaker 1: one of them, any Massa has been falling this so closely.
Speaker 1: She's got a story in this week's edition in the
Speaker 1: finance section. Tell me what's going on with Vanguard? Not
Speaker 1: just for index and passive investing anymore. Yeah, Vanguard announced
Speaker 1: plans to make its first real foray into private equity
Speaker 1: with a fund that's going to be managed by an
Speaker 1: outside firm called Harbor Vest Partners. All Right, this feels
Speaker 1: like a big deal. Uh, it feels like this is
Speaker 1: one of the holy grails on all sides of this,
Speaker 1: which is more people getting into what his largely been
Speaker 1: a pretty exclusive club. Why do they want in? Holy grill?
Speaker 1: Is exactly the right way of describing it. I would say,
Speaker 1: I think if you're a Vanguard, you see that there's
Speaker 1: so much more focus on private markets recently. Fewer companies
Speaker 1: are going public now and you can frankly earn higher
Speaker 1: fees in that area. Um So if you're Vanguard, and
Speaker 1: you're a big index fund provider, I mean, a giant
Speaker 1: of index and truly the world's second largest asset manager,
Speaker 1: and you typically compete on costs. Um they see a
Speaker 1: window where they can compete on costs for PE funds
Speaker 1: while still earning higher fees on those funds than they
Speaker 1: would on cheap index Alright, let's talk about that, because
Speaker 1: the fees you start to get into one of the
Speaker 1: most interesting aspects of all of this at a time.
Speaker 1: And you know this better than anyone. Where fees are
Speaker 1: going down, down, down, all the way to free, we're
Speaker 1: talking about an industry where the fees are by most accounts,
Speaker 1: pretty extraordinary. Two and twenty is the way that private
Speaker 1: equity funds, as you well know, charge two percent annual
Speaker 1: fees of profits. That seems like mind blowing in the
Speaker 1: world of low fees. How do they square all that? Yeah,
Speaker 1: compare that too in twenty two a cheap SMP five
Speaker 1: tracking fund that might just charge three basis points and
Speaker 1: that's it. So, I mean, there's obvious appeal on the
Speaker 1: fee side. Uh for a firm like Vanguard. They will
Speaker 1: first of all, only offer this to institutions in the
Speaker 1: beginning phases smaller institutions like endowments and nonprofit foundations. But
Speaker 1: their aspirations are clear to bring to bring this to
Speaker 1: a wider audience, and they might be able to do
Speaker 1: that through their advisor channels. They've got UM a growing
Speaker 1: network and a huge network of advisors UM who could eventually,
Speaker 1: if UM it were allowed, UM bring these kinds of
Speaker 1: investments to their clients. And so this isn't the first
Speaker 1: time that a big money manager has sort of flirted
Speaker 1: with this idea, right, remind us of the history here? Yeah, Actually,
Speaker 1: I mean going back to UM. Around two thousand and one,
Speaker 1: Vanguard itself tried to make a push into private equity, UM,
Speaker 1: bringing in Hamilton Lane for a fund of funds, and
Speaker 1: in the fallout from the dot com bust, they just
Speaker 1: abandoned that effort and they said that they couldn't raise
Speaker 1: enough assets for it. UM. But you've also seen black
Speaker 1: Rock again world's biggest asset. Man. You're seven trillion in assets.
Speaker 1: Two threads of that comes from UM its index product suite. UM.
Speaker 1: They've also made a bigger push into alternatives and private equity,
Speaker 1: specifically UM. They launched this fund called Long Term Private
Speaker 1: Capital that takes stakes in private companies about two years ago.
Speaker 1: Now that could be seen as a cautionary tale in
Speaker 1: some ways because it hasn't progressed as quickly as they
Speaker 1: initially said it would. So that shows some of the
Speaker 1: struggle for an outsider um trying to get into private equity,
Speaker 1: such a relationships based kind of arena, right right. You
Speaker 1: fast forward to now, the private equity industry you point
Speaker 1: this out in your story, has a trillion and a
Speaker 1: half dollars or so just in dry powder, three four
Speaker 1: trillion dollars in total assets under management, names like black
Speaker 1: Stone and KKR and Carlisle. At the same time those names,
Speaker 1: the Blackstones and the Carlisles, they're trying to get to
Speaker 1: some of these same investors. How is that going in
Speaker 1: terms of getting to the retail Holy growl, that's right
Speaker 1: sore seeing this real convergence. At the same time that
Speaker 1: Vanguard is trying to sneak into private equity, the Blackstones
Speaker 1: and Kkrs are trying to see how they could get
Speaker 1: their private equity vehicles into the hands of more investors,
Speaker 1: more retail investors. Even traditionally private equity is walled off
Speaker 1: from all but the institutions and the high net worth individuals,
Speaker 1: accredited investors. You've got to be accredited to get in
Speaker 1: right exactly, and what Blackstone would like to see, what
Speaker 1: the private equity giants would like to see. Um are
Speaker 1: some of those restrictions being loosened. And they've made that
Speaker 1: case in front of the SEC, and the SEC is
Speaker 1: looking at it and assessing whether it would make sense
Speaker 1: to ever open up private equity style investments to a
Speaker 1: larger audience, because I think that they fear that an
Speaker 1: average investor could be missing out on those returns um
Speaker 1: if you know, if they're increasingly walled off from that realm. Right.
Speaker 1: Critics and skeptics look at that and say, well, maybe
Speaker 1: there's a reason that retail investors aren't in there. It's
Speaker 1: much less liquid in many ways, it's much more opaque.
Speaker 1: The transparency just isn't there. What do you make of
Speaker 1: those arguments as you talk to people? That's exactly right.
Speaker 1: So investor advocates say, wait a minute, this is really
Speaker 1: a sales push on the private equity side. It can
Speaker 1: be hard enough for an average investor to just sort
Speaker 1: out the right mix of stocks and bonds and a
Speaker 1: portfolio without getting in cash without getting involved in something
Speaker 1: as opaque as private equity and something where they might
Speaker 1: not understand the complexities, might not be as happy with
Speaker 1: the longer lock up periods um So, there is definitely
Speaker 1: a vocal piece of the market that's saying that private
Speaker 1: equity style investments are not right for your average retail investor.
Speaker 1: And that's reporter Annie Massa. So, first came the trade war,
Speaker 1: now the virus, all of this playing into the Chinese economy,
Speaker 1: especially when it comes to manufacturers. Here with more on
Speaker 1: the impact as the virus spreads not just in that
Speaker 1: country but potentially globally, is the editor of the Economic section,
Speaker 1: Christina limp lad high Hi. Alright, so we spend so
Speaker 1: much time talking about is this going to spread? What's
Speaker 1: going to happen? Meanwhile, back in this one province where
Speaker 1: it all started in China, what does it look like economically? Well,
Speaker 1: that province, Whovey, is important to China's economy. It's about
Speaker 1: the GDP of that province alone is bigger than Poland's,
Speaker 1: but that that province is not a big exporter onto itself.
Speaker 1: So what we looked at in our story is what
Speaker 1: is happening to the to China's industrial heartland, which is
Speaker 1: more on the East coast. Um, and they are you know,
Speaker 1: it's it's been freezing. Like the disruptions are just sort
Speaker 1: of you know, like radiating through the country and then internationally.
Speaker 1: So at one point last week of China's productive capacity
Speaker 1: was offline because authorities had not allowed um, you know,
Speaker 1: company owners to reopen. Now we've been seeing this week
Speaker 1: gradually some places start to say you can go back
Speaker 1: to work. Of course, um, that is not possible for
Speaker 1: every company because a lot of them have their workers
Speaker 1: are stuck in their home counties because they went home
Speaker 1: for the Lunar New Year holiday and then face quarantines
Speaker 1: and then travel bands. So even if today you know,
Speaker 1: local authorities said it's okay, go back, go back to work,
Speaker 1: because I think there is now this push in China
Speaker 1: to normalize at least like you know, economically, um, and
Speaker 1: maybe that you you know, we talked to one company.
Speaker 1: Its workers, um, you know are from other from other provinces,
Speaker 1: and so excuse me and remind us of the geography here.
Speaker 1: You mentioned it briefly, but we're talking about the Pearl
Speaker 1: River delta, right, I mean, this is global supply chain
Speaker 1: practically like global headquarters of global supply chain in many
Speaker 1: ways delta and a little bit wider. But yes, these
Speaker 1: are companies that are very, very embedded in global supply chains,
Speaker 1: which is not always the case for you know, the
Speaker 1: companies that are in the epicenter of the outbreak. So,
Speaker 1: I mean, there was a company we talked to in
Speaker 1: India that makes capacitors and they were saying basically that
Speaker 1: they just haven't received any supplies from China that they
Speaker 1: need for parts, so they're going out to South Korean suppliers.
Speaker 1: But those companies also sourced from China, so their inventories
Speaker 1: are running down fast. And so synthesize this with the
Speaker 1: trade war because that was already sort of top of
Speaker 1: mind for the Chinese economy obviously in the U. S
Speaker 1: economy too, but there had already been correct me, if
Speaker 1: I'm a sort of changes made to the supply chain
Speaker 1: to some extent in a positive way in a negative way,
Speaker 1: like how do we sort of put all this together? Well,
Speaker 1: I my concern and I think we're an economists are
Speaker 1: going to be looking at and there's not as much
Speaker 1: clarity as it might be for big companies, as small
Speaker 1: and meeting size companies in China because obviously they just
Speaker 1: don't have the deep pocket to some of the national
Speaker 1: champions do. And so there was a survey that came
Speaker 1: out recently of almost a thousand and and you know,
Speaker 1: the owners of these firms said that they couldn't um
Speaker 1: sustain three months of the kind of situation that they've
Speaker 1: been experiencing the last few weeks, and about a third
Speaker 1: said that they expect to see half of their revenues
Speaker 1: wiped out this year. You know, you have to remember
Speaker 1: that for certain types of companies, this this happened at
Speaker 1: a crucial time of the year, which would be equivalent
Speaker 1: to like, let's say, like you know, the the holiday's
Speaker 1: chapping season in the US. So I mean, there's no
Speaker 1: way to recoup those sales. They're not coming back, even
Speaker 1: if you're going to be able to open tomorrow. So
Speaker 1: I think that that's where a lot of people are
Speaker 1: sort of feeling their way what is going to be
Speaker 1: the impact on China's economy. I think a lot of
Speaker 1: the thinking is if this is kind of quickly contained,
Speaker 1: there is going to be a bounce back in the
Speaker 1: second quarter and by the like second half of the year,
Speaker 1: we'll see a stabilization. Still, a lot of people are
Speaker 1: every going around to the idea that it's going to
Speaker 1: be very hard for China to make a six six
Speaker 1: percent growth rate, which is sort of originally where the
Speaker 1: government you know, had had forecast was. So I think
Speaker 1: a lot of what we're going to be seeing this
Speaker 1: year is for people in the next few weeks and
Speaker 1: months for people to be constantly revising those numbers of
Speaker 1: up and so, you know, speaking of the government, we
Speaker 1: spent a lot of time around this table over the
Speaker 1: years with you talking about the government's role. You know,
Speaker 1: you mentioned national champions and the idea that the government
Speaker 1: really does get behind especially some of the bigger companies
Speaker 1: and support some of the smaller companies to do. We
Speaker 1: anticipate that the government is going to have to step
Speaker 1: in a more meaningful way to sort of prop up
Speaker 1: the manufacturing industry more broadly. Um At this moment, what
Speaker 1: we're seeing is they're doing things, for example, is urging
Speaker 1: local governments to speed up issuance of this special type
Speaker 1: of bonds is used for infrastructure spending. So the you know,
Speaker 1: so there are things that we're already in the pipe
Speaker 1: blind and they're being moved up. So right now we're
Speaker 1: not seeing giant new stimulus coming along, just kind of stimulus.
Speaker 1: I was already there being advanced with Christina Lindblad, the
Speaker 1: editor or the economic section of the magazine. Christina, another
Speaker 1: story from your section. It's all about inflation and monetary
Speaker 1: policy and it's wide ranging impact on all of us.
Speaker 1: A lot of people are talking about inflation lately. It's
Speaker 1: something top of mind, especially here at Bloomberg. Why are
Speaker 1: we so concerned about it now? Well, I think a
Speaker 1: lot of it was a great deal of attention paid
Speaker 1: to the comments that Ken Griffin, the founder of Citadel
Speaker 1: Hedge Fund, made at the Economic Clove of New York
Speaker 1: last week in which he said, we are totally unprepared
Speaker 1: for the return of inflation um. And he's basically alluding
Speaker 1: to the fact that monetary policy in the US and
Speaker 1: other places is so loose that it would be hard
Speaker 1: to you know, to quickly ramp up to contain you know,
Speaker 1: price pressures um. And then some other people bull piped
Speaker 1: in saying, you know, you know, the death of inflation.
Speaker 1: You know, it's grossly exaggerated, Like why are we writing
Speaker 1: these obituaries? You know, so I think a lot of
Speaker 1: people are thinking, like, you know, they're not ready to
Speaker 1: write off the idea that that there is inflation in
Speaker 1: the system, that this kind of this economic perennial thing,
Speaker 1: right like. But then though, there's a whole other camp
Speaker 1: that's pooh poo. This is sort of like this almost
Speaker 1: like a New Year's tradition. One person said to start
Speaker 1: the year saying, this year is going to be different.
Speaker 1: This is the year where we're going to see a
Speaker 1: return of inflation. And certainly there are many factors that
Speaker 1: you could say would would make this year actually be
Speaker 1: the one that we should be looking at, because we
Speaker 1: have in the US in the UK very tight labor markets,
Speaker 1: and those are have traditionally been you know, kind of
Speaker 1: precursors um. But there are a couple of other things
Speaker 1: going on, and one thing is the trade war and
Speaker 1: the other one is coronavirus, and those two are disruptive
Speaker 1: to supply chains, which is another place where inflation can
Speaker 1: come up. I mean, if you're losing access to your
Speaker 1: regular suppliers and all of a sudden, let's say in China,
Speaker 1: and all of a sudden you have to go to
Speaker 1: South Korean company, Well, a lot of other companies may
Speaker 1: be knocking on that firm store that's going to go up, right,
Speaker 1: that's an opportunity for that company to, you know, to
Speaker 1: put up prices, right. So that and and the idea
Speaker 1: being that that company puts up prices and it sort
Speaker 1: of has this ripple effect where ultimately the prices of
Speaker 1: things just start to go up finally, but we're not
Speaker 1: seeing but we're not seeing it yet, right, And so
Speaker 1: let's go back to to what you started with a
Speaker 1: minute ago, which is this idea of a tight labor market.
Speaker 1: We've been in a tight labor market now for it
Speaker 1: feels like a pretty long time. How has that not
Speaker 1: played through yet? What do people say in terms of
Speaker 1: that lack of cause and effect that maybe we've seen
Speaker 1: thus far? Well, I think, you know, there's this kind
Speaker 1: of ritual now where the monthly job numbers come out
Speaker 1: and they're like gangbusters cons and while they're not but
Speaker 1: mostly I mean, certainly the most recent want surprise on
Speaker 1: the upside. So there's this you know, there's this like, wow,
Speaker 1: how how is this not affecting prices? But you know,
Speaker 1: you have to remember that wage gains have come late
Speaker 1: in this more than ten years. Essentially non existed for
Speaker 1: a long time. Um, and they're not and wages you know,
Speaker 1: are still not growing that that strongly. Like in the
Speaker 1: in December there was actually a blip in which we
Speaker 1: saw a break in this sort of trend in which
Speaker 1: they had been growing you know, modestly, right. So that's
Speaker 1: one factor, um. And also you know, it's like it
Speaker 1: could be that companies are choosing to swallow you know,
Speaker 1: price increases from suppliers and sacrifice some margins, although um,
Speaker 1: I haven't seen studies about how, you know, how widespread
Speaker 1: that is. So in a world in which comparison shopping
Speaker 1: for all sorts of things is so easy, people are
Speaker 1: more I mean, companies are businesses are more reluctant I
Speaker 1: think to put up prices. Some people have alluded to
Speaker 1: this mentality that you have in hand, where like even
Speaker 1: convenience stores you know, are just completely freaked out by
Speaker 1: the idea of having to mark anything up because you know,
Speaker 1: people will just go to like the rival down the street.
Speaker 1: So I think that mentality writ large, you know, is
Speaker 1: a factor. Um. And also so we looked at market
Speaker 1: measures of inflation of anticipation and basically you know, they're
Speaker 1: not we don't really see anything um the in the
Speaker 1: large majority of investors feeling that that anything surprising is
Speaker 1: around the corner. I mean, inflation has been tracking closer
Speaker 1: to the two percent target that is the Fed's target.
Speaker 1: But you know, Clarida um said recently that they're not
Speaker 1: right right, that they're not ready to say we're at
Speaker 1: full employment. I mean, this, you know, was something that
Speaker 1: happened in eighteen where the FED came very you know,
Speaker 1: basically decided that economy was a full employment you know,
Speaker 1: and that we were above four percent at that point unemployment,
Speaker 1: and and then they started high rates. This mistake is
Speaker 1: not going to happen again, certainly not in an election
Speaker 1: year when they're even more cautious about, you know, about
Speaker 1: moving around the extension. Well. And meanwhile, you know, anecdotally,
Speaker 1: I feel like we all talk about this idea that, yes,
Speaker 1: while there are no good gauges that prices are going up,
Speaker 1: housing prices continue to rise, at least in certain you know,
Speaker 1: parts of the country, So it doesn't for the average person,
Speaker 1: it just doesn't quite square right, It's true. I mean,
Speaker 1: I think for a lot of people, housing prices is
Speaker 1: what they feel strongly. But you know, if you look
Speaker 1: at prices gasoline, thanks, you know that are in the
Speaker 1: basket in the consumer price and next like they're not
Speaker 1: going out. And that's editor Christina Lynn Blad. As the
Speaker 1: coronavirus continues to be the biggest story of the week,
Speaker 1: one Norwegian based coalition is looking for a vaccine. Economics
Speaker 1: editor Peter Coy joins us now with that story, Peter,
Speaker 1: the virus. It's the first big test for the Coalition
Speaker 1: for Epidemic Preparedness Innovation and SEPPI for short. Where did
Speaker 1: this group come from? Well back when we had the
Speaker 1: Ebola outbreak in governments had been working on funding a
Speaker 1: vaccine for the Ebola had been known about since the
Speaker 1: nineteen seventies, but nothing had ever been done, and no
Speaker 1: company had taken the baton and gone out and developed
Speaker 1: a vaccine because look um, its outbreaks are fairly rare.
Speaker 1: The people who would be vaccinated or quite poor canon
Speaker 1: really afford a vaccines. So the private market just wasn't
Speaker 1: doing the job of protecting people from Ebola. So they
Speaker 1: looked at us and said, we're gonna have other viruses striking,
Speaker 1: you know, we need to have a plan. So at DABOS,
Speaker 1: the World Economic Forum annual meeting in Switzerland, and the
Speaker 1: idea was conceived. They went back to the drawing board
Speaker 1: and then a year later went ahead with it. So
Speaker 1: it's headquartered in Norway, of all places, which has had
Speaker 1: zero k is of the coronavirus so far. So it
Speaker 1: has like three years old, sixty eight employees. So in
Speaker 1: one way it's very small. In another way, it's very
Speaker 1: big because of its power to coordinate. As you said,
Speaker 1: a lot of different players, the research team community. That
Speaker 1: would include the boutique researchers on vaccines as well as
Speaker 1: the big manufacturers who need to be able to work together, governments,
Speaker 1: supplying funds, regulators so that we can speed these new
Speaker 1: vaccines through the regulatory process. It's sort of like a
Speaker 1: providing a needed coordination function. Well, and what's so interesting
Speaker 1: you point this out in your piece is that there
Speaker 1: obviously is an element of this that is medical and biological.
Speaker 1: This is largely organizational right precisely. You know, I actually
Speaker 1: liken it to um sort of a societal immune response.
Speaker 1: In the same way the body produces antibodies against society
Speaker 1: produces new structures to fine outbreaks. And because of the
Speaker 1: world we're living in. Those need to be pretty complex,
Speaker 1: those organizations, you know, pulling together all of those different
Speaker 1: elements that you describe. How optimistic are people that this
Speaker 1: is working or can work. I talked to Dr Richard Hatchett,
Speaker 1: the executive director for the article, and he's thinking now
Speaker 1: they'll take twelve to eighteen months before a vaccine as ready.
Speaker 1: It sounds like a long time, except it used to
Speaker 1: be like a decade and more to create a vaccine.
Speaker 1: So this is like running a lot of processes in
Speaker 1: parallel that would normally be done one at a time,
Speaker 1: getting everybody on board, making sure there are no glitches,
Speaker 1: no hitches, everything happens, So it may not even happen
Speaker 1: that fast. That's he said. He's almost reluctant to give
Speaker 1: a date. Could be wrong. But while that might seem
Speaker 1: like a long time, it's going to be too late
Speaker 1: for the people in this initial outbreak. If this coronavirus
Speaker 1: is as bad as some people fear it will be,
Speaker 1: the vaccine will be crucial for future outbreaks or the
Speaker 1: possibility that this vaccine, this this virus never goes away,
Speaker 1: it just becomes an endemic in the population like the
Speaker 1: common cold right. Well, and also this element of every
Speaker 1: time something like this happens, whether it's stars or ebola
Speaker 1: or something else, there is looking at them sort of
Speaker 1: an academic perspective, something to be learned, right, in terms
Speaker 1: of reaction, in terms of all these different stakeholders and
Speaker 1: their actions and the speed of their actions in coordination.
Speaker 1: I hate to be ghoulish, but in some ways an
Speaker 1: outbreak as an opportunity because you can't test a vaccine
Speaker 1: against the disease in which nobody has it, right, It's
Speaker 1: only when people have contracted it that you can introduce
Speaker 1: the vaccine to people who are not affected to see
Speaker 1: if they are protected from it. So that's why you
Speaker 1: take advantage of this terrible event to try to create
Speaker 1: and test the vaccine that will pretict other people from it. Well,
Speaker 1: and as you say, we are talking about ultimately people here,
Speaker 1: we're talking about human behavior, and you can't model that
Speaker 1: so well, even the most advanced artificial intelligence still is
Speaker 1: ultimately artificial in terms of determining how humans are going
Speaker 1: to react. You know, even thinking about something as small
Speaker 1: an example of how cruise ships are sort of playing
Speaker 1: a part in this whole current crisis, you know, cruise
Speaker 1: ships trying to pour in different places, and governments having
Speaker 1: different reactions, and all of those sorts of things just
Speaker 1: goes back to the complexity of all the stakeholders here well,
Speaker 1: So that Hatchet would say the efforts to isolate people
Speaker 1: protect from the current outbreak, the main reason for that
Speaker 1: is just trying to slow down the advance until the
Speaker 1: vaccine can come in, like the cavalry riding over the
Speaker 1: ridge to the rescue. Once there's a vaccine, then we
Speaker 1: actually have hope of arresting this right. You know. One
Speaker 1: of the things that your peace calls to mind, Peter,
Speaker 1: thinking about sort of your body of work as it were,
Speaker 1: is this does require a level a level of coordination
Speaker 1: that maybe in today's world, as small as it feels,
Speaker 1: is a little more complicated. You know, on a medical level,
Speaker 1: there's been an enormous amount of co operation. The Chinese
Speaker 1: scientists immediately supplied scientists all of the world with the
Speaker 1: data they needed to start working on vaccines, scientists a scientists.
Speaker 1: The cooperation the globalization is still there. Whether that carries
Speaker 1: over to coordination between countries as you gave the example
Speaker 1: the cruise ships is not so clear, but That's why
Speaker 1: SEPPI is. It's called Coalition for Epidemic Preparedness. Innovations can
Speaker 1: can try to knit together people who might otherwise be
Speaker 1: going off in different directions. That's Economics editor Peter coy
Speaker 1: So in this week's issue, it's a tale of one
Speaker 1: steel company totally in favor of President Trump's tariffs until
Speaker 1: it wasn't here to explain his story, Joe Do, He
Speaker 1: covers the commodity space here at Bloomberg. This is quite
Speaker 1: a tale. How did you get turned onto this? So?
Speaker 1: Brian Really, the reporter who is the head byline on this,
Speaker 1: came to me a few months ago, maybe three months ago,
Speaker 1: and said, had you heard about this whole story? I said,
Speaker 1: I have, actually, and I told him a year before
Speaker 1: I had been sitting in a conference room in Chicago
Speaker 1: and an industry event and John Heritz, the CEO of
Speaker 1: js W Steele, was up there and he basically said,
Speaker 1: I got a billion dollar investment from corporate which is
Speaker 1: back in India for js W Steele essentially because of
Speaker 1: the Trump administration passing these terrors, and I could not
Speaker 1: be happier about the terrorists flash forward did everything short
Speaker 1: of like wearing a maga hat at that. I mean
Speaker 1: pretty much right. I mean, listen, John's a straightforward guy.
Speaker 1: He will tell you he was a supporter of these terraces.
Speaker 1: A supporter of the press, isn't it. He's been in
Speaker 1: photo ops with the president many times before. Fast forward
Speaker 1: to August and we get a thing in the wire
Speaker 1: that says that they're suing the Trump administration, and Brian says,
Speaker 1: we gotta write this story. So how do you unpack
Speaker 1: something like? I mean, you just pick up the phone
Speaker 1: and call this guy. What happened? Yeah, the first thing
Speaker 1: I did was I actually had run into him recently
Speaker 1: and said, you know, I'd like to chat with you
Speaker 1: more about this case if you have the time. And um,
Speaker 1: you know, we had a trouble kind of getting to him,
Speaker 1: and finally, after various calls and you know, jumping through
Speaker 1: various soups, they said, come on down and see us
Speaker 1: in Mingo Junction out in Ohio. And so we did
Speaker 1: that right before the holiday break. We sat down with John.
Speaker 1: He told us what was what, He ran us through
Speaker 1: everything and said, listen, you know, it's basically we're putting
Speaker 1: in new facilities. We're putting in new mills were investing
Speaker 1: a billion dollars or we're hoping to invest a billion
Speaker 1: dollars so that we can be self sufficient making steel
Speaker 1: slabs and turning him into pipe down in Baytown. Those
Speaker 1: pipes obviously would be supplied to the energy industry. So
Speaker 1: they thought in the meantime it could just import the
Speaker 1: slabs from their parent company in India, and ultimately the
Speaker 1: Commerce Department said, now, we're not gonna let you do that,
Speaker 1: and so you get their argument right there, like, well,
Speaker 1: we're investing this money because the whole point of the
Speaker 1: terrace was to do that, and in the meantime, so
Speaker 1: we're not losing money, we'll be able to import for free.
Speaker 1: And a big part of that is they're saying they're
Speaker 1: actually losing money right now because they're paying the Terrors
Speaker 1: to import, which means that one billion dollar investment is
Speaker 1: looking down more at the million dollar investment, and they're
Speaker 1: serious questions as to whether or not they're actually going
Speaker 1: to follow through with all of the build out that
Speaker 1: they were going to do at these two mills in
Speaker 1: Texas and in Ohio. Alright, so take us to Bingo juncture,
Speaker 1: like like take us to to the field because or
Speaker 1: take us into the field. I should say, because part
Speaker 1: of what this sort of reporting really helps us understand,
Speaker 1: especially candidly, we're sitting here in New York City. We
Speaker 1: don't really understand fully until we go what it actually
Speaker 1: looks at and feels like, what are people saying? What
Speaker 1: are they feeling? There? So it is this hill town,
Speaker 1: I mean we write it in the story. Right there, Ohio.
Speaker 1: You come out of West Virginia into a high because
Speaker 1: we flew into Pittsburgh, we drove out of Pennsylvania through
Speaker 1: a part of West Virginia. We pull into Ohio and
Speaker 1: then all of a sudden, there's this valley. Right, there's
Speaker 1: this river, The Ohio River is just right there, and
Speaker 1: you kind of drive down the Ohio River for a
Speaker 1: few miles and you're basically in this old steel town. Right.
Speaker 1: I mean this town was actually viewed in The Deer Hunter. Right,
Speaker 1: so all the guys are coming out of this this
Speaker 1: old steel mill, which is where the current steel mill sits.
Speaker 1: It's entirely different, but there it is, right you think
Speaker 1: of the Deer Hunter. I've been to a lot of
Speaker 1: steel mills. This one it's an E A F. So
Speaker 1: it's a mini mill that you scrap and they re
Speaker 1: melt it and turn it into steel. But it had
Speaker 1: very clearly not been operating for a while. And I've
Speaker 1: heard about this mill in my other reporting where people say, yeah,
Speaker 1: this mill, it's gotten up, and then it has it
Speaker 1: hasn't really produced and it has it's been too costly.
Speaker 1: We show up and that they take us on a
Speaker 1: tour through the mill, right. And the thing that struck
Speaker 1: me is when we walked into the area where the
Speaker 1: slabs were sitting, so literal, just massive, just bricks like
Speaker 1: you know, just the size of the side of a building,
Speaker 1: just sitting there, laid on top of each other. You
Speaker 1: could still feel the heat emanating off the steel. The
Speaker 1: room where they were sitting was just a dirt floor.
Speaker 1: And when you go to the back of the room,
Speaker 1: because I said, can can we go? Can we go
Speaker 1: further back? There was just a bunch of junk metals
Speaker 1: sitting around, just scrap metals sitting there. I said, you know,
Speaker 1: what is this and and the guy said, you know,
Speaker 1: this is just a lot of the parts that we
Speaker 1: found over the past year and have put off to
Speaker 1: the corner since we've restarted the mill. Some of it
Speaker 1: could probably be used, you know, as parts. Most of
Speaker 1: it will be scrapped because listen, any steel, whatever it is,
Speaker 1: it's it's got value. Somebody sees value in that steel.
Speaker 1: So that's what. And then you walk out of the mill, right,
Speaker 1: and you're very much just in this town with there's
Speaker 1: a few you know, spots of homes, couple on the
Speaker 1: on the hillside, and uh, and it feels very you know,
Speaker 1: middle America, right blue collar. You know. We went into
Speaker 1: the town and and and met a couple of the
Speaker 1: store owners. It's not much though, right, it's a very
Speaker 1: small town and and and and it's forty five not
Speaker 1: even forty five minutes outside of Pittsburgh, Pennsylvania, but you
Speaker 1: feel like you're a world away from it, right. And
Speaker 1: is the feel in the town that things are going
Speaker 1: well with the mill or tbd? Well, listen, they're happy
Speaker 1: the mills back, right and and and this is the
Speaker 1: truth of anybody who's gotten back to work and steel.
Speaker 1: They're happy that jobs are back. And you're talking about
Speaker 1: telling someone there is no job and the mill is
Speaker 1: done and it's never coming back to it's actually there.
Speaker 1: And I think the feel was this is great that
Speaker 1: it's here, you know, let's see what they can really
Speaker 1: do with it. Our hope is, you know, they'll stick
Speaker 1: to their promise and they'll be able to make money
Speaker 1: and and keep it open, because the whole idea is
Speaker 1: they're going to ship if they get it operating the
Speaker 1: way they wanted to, they ship it down the Ohio
Speaker 1: River into the Mississi it be, you know, and then
Speaker 1: on down to Texas. I mean that it's kind of
Speaker 1: the lifeblood of of American metal here in the United States,
Speaker 1: especially in the East Coast. And so that's how it's
Speaker 1: supposed to work. That's how it was designed. And yet
Speaker 1: it gets really complicated. Where does it sort of go
Speaker 1: pun intended, like off the rails a little bit. Uh,
Speaker 1: it's it's the tariffs. So they they're still importing all
Speaker 1: of this slab from India, right, So they have the
Speaker 1: shipping costs to get it from India and then they
Speaker 1: have to pay a tariff on top of on top
Speaker 1: of that. So right now they're essentially a reroller where
Speaker 1: they just get metal and they reroll it into the
Speaker 1: stuff that you know, goes into infrastructure or goes into
Speaker 1: automobiles or whatever it might be. But it's that simple.
Speaker 1: That cost, you know, the shipping plus the tariff makes
Speaker 1: it unprofitable and makes it very difficult for them to
Speaker 1: follow through with this plan that they had. So what's
Speaker 1: the argument on the government side. Well, the government's saying, listen,
Speaker 1: we we wrote it in Stone you get arabs if
Speaker 1: you're importing foreign steel, and we've had enough. Uh. Steelmakers
Speaker 1: in the United States say they can supply you with
Speaker 1: the slab in the meantime. So they had been filing
Speaker 1: these exemptions to the Commerce Department, and UH, companies like
Speaker 1: New Core and U. S Steel, who we know very well,
Speaker 1: we're saying, um, actually, Commerce Department, we can supply them
Speaker 1: with what they need. Uh. Of course JS W. Steele
Speaker 1: saying it's not that easy. You know, they're saying they
Speaker 1: have far more steel they can supply than they actually
Speaker 1: produce in a year. And that's where you kind of
Speaker 1: get in the back and forth. And that's reporter Joe
Speaker 1: do love talking to him. He knows this space so well.
Speaker 1: And this story is far from over. So I'm just
Speaker 1: gonna say, one of my favorite stories in the magazine
Speaker 1: this week. It also was one of the most read
Speaker 1: on the Bloomberg scaling Mount Everest in Vermont. Wait what, well,
Speaker 1: we're gonna get into it? Andrew's mellon. He wrote it.
Speaker 1: He did it here to tell us about in New
Speaker 1: York City. Hello, how are you all right? How do
Speaker 1: you get an idea like this? How do you get
Speaker 1: the idea to even think about this? It kind of
Speaker 1: came across my desk and I thought it sounded a
Speaker 1: bit too weird and funny to pass off an opportunity
Speaker 1: to check it out because I had the same reaction
Speaker 1: climbing Mount Everest in Vermont. What's going on here? And
Speaker 1: the guy who's behind all this is named Jesse Hitzler,
Speaker 1: well known in some circles. He most famously in some
Speaker 1: ways or most publicly literally had a Navy seale move
Speaker 1: into his house and then wrote a book about it
Speaker 1: in New York Times bestseller. This is a pretty accomplished guy,
Speaker 1: very much so. He's siri entrepreneur. He was a rapper
Speaker 1: early in his career. Then he founded a private check
Speaker 1: company that Berkshire Hathaway bought in about a decade ago,
Speaker 1: and since then he's been an inmester. He's helped build
Speaker 1: and sell a couple of companies and now he is
Speaker 1: a life coach, essentially runs a life coaching program and
Speaker 1: this eversting challenge is part of that. All right, So
Speaker 1: take us to Vermont. What what's entailed here? First of all,
Speaker 1: it cost four thousand dollars. It does, it does, so
Speaker 1: it's it's a pretty penny just to go on a
Speaker 1: really long hike, a really long series of hikes in
Speaker 1: in many ways. All right. So you arrive and you
Speaker 1: sort of show up. It's like I'm a reporter, I'm
Speaker 1: just gonna sort of chat with people. But you're also
Speaker 1: a very accomplished athlete in and of your own right,
Speaker 1: So you get sucked at. I did. Yeah, I showed
Speaker 1: up in in the Stratton Mountain in Vermont, where this
Speaker 1: event took place in October, which essentially entails that you
Speaker 1: hike up the ski slope it's a black diamond ski slope,
Speaker 1: and then you take the gondala down and then you
Speaker 1: repeat that sixteen times, seventeen times in total, and then
Speaker 1: by that time, the altitude that you've gained equals Mount Everest,
Speaker 1: So you've effectively climbed Mount Everest, but without the oxygen
Speaker 1: tanks and right feet. Yeah, a little over um why, why,
Speaker 1: why why do people do this? That's what I asked
Speaker 1: dozens of them out there on the course. There were
Speaker 1: about two hundred of us that did this over thirty
Speaker 1: six hours, and everybody had a slightly different answer. Some
Speaker 1: people were there because they're you know, many were a
Speaker 1: mid career and kind of felt a bit of a
Speaker 1: life crisis. But many just simply said that, you know,
Speaker 1: I'm very accomplished professionally and I have I like my
Speaker 1: life the way it is, but you know, I don't
Speaker 1: really have these things when I get out and really
Speaker 1: test my limits physically, So you almost one guy told
Speaker 1: me that, you know, you almost have to manufacture these
Speaker 1: insanely hard things for yourself, and I think they sharpen you, right,
Speaker 1: And I mean, and this is of the moment in
Speaker 1: many ways. And you and I have spent a lot
Speaker 1: of time off air talking about our various pursuits in
Speaker 1: this regard. You're very accomplished swimmer runner, all of these
Speaker 1: different things. What was it like for you physically? You're
Speaker 1: in unbelievable shape. This was still pretty hard. I used
Speaker 1: to be in a good eight when I was still
Speaker 1: a swimmer, but that was years ago. Um, but I
Speaker 1: showed up there, hadn't really planned on doing the whole thing.
Speaker 1: I figured I would scale two three times with them
Speaker 1: and just get the feel for it. But then I
Speaker 1: showed it up and realized that I was out of
Speaker 1: the two hundred participants, I was pretty much the youngest
Speaker 1: person there, and then felt compelled to you know, compe
Speaker 1: never quite leave you. So I was very underprepared in
Speaker 1: terms of equipment. It had rained, and it was windy
Speaker 1: and cold, and I was wearing running gear and and
Speaker 1: just a couple of sweaters and a beanie. But got
Speaker 1: ahold of a couple of ski poles and and decided that,
Speaker 1: you know, let's try it. And ultra events and ultra
Speaker 1: endurance events are a bit different than you know, even
Speaker 1: a marathon, where you know that it starts grinding on
Speaker 1: you after a while. This it takes about roughly an
Speaker 1: hour and hour plus for the average person to scale
Speaker 1: the mountain once, and then you do that's seventeen times,
Speaker 1: which means that it's a lot of time that you
Speaker 1: spend on your feet. So it's this low intensity um
Speaker 1: exhaustion that that builds up that it just kind of
Speaker 1: it wears you down for time. Well sort of strips
Speaker 1: away everything right, And that's part of the reason that
Speaker 1: people do it is we've all got all these things
Speaker 1: going on in our minds. We've got all these plans,
Speaker 1: all these feelings and emotions and and whatnot, and there's
Speaker 1: only nothing in front of you except the mountain and
Speaker 1: the next step and the next step and the next step.
Speaker 1: That's part of the appeal. Yeah, after a while, it
Speaker 1: gets hard to really think about anything else but just
Speaker 1: one foot in front of the other because you are
Speaker 1: just you get so exhausted and and but you still
Speaker 1: got to keep going. And it's not a race or
Speaker 1: is it. No, Like many endurance events, this is finishing.
Speaker 1: It's the goal, and everybody finishes at their pace and
Speaker 1: completed at their own pace and in their own way,
Speaker 1: so that the which also brings out a very supportive
Speaker 1: or it creates a very supportive environment on the course
Speaker 1: because you're not competing with other people. It's about finishing,
Speaker 1: and then everybody can rally around that and support each other.
Speaker 1: And that's reporter Ander's melon an incredible athlete and as
Speaker 1: you heard, couldn't help himself once he got a chance
Speaker 1: to everest. There are some individuals who live a life
Speaker 1: that often finds them in the center of high profile events.
Speaker 1: That includes Michael Ainsley. He has done so many things
Speaker 1: and found himself really at moments in our history. Well,
Speaker 1: we talked so much about being in the room where
Speaker 1: it happens, of course, but so many rooms and some
Speaker 1: amazing places that he's been. He's got a new book out,
Speaker 1: it's called A Nose for Trouble, and we're so delighted
Speaker 1: he's here with us in New York City. First of all, Michael,
Speaker 1: congrats on the book. Welcome back to Bloomberg. Thank you.
Speaker 1: It's nice to be here. So why do it? You know?
Speaker 1: Two reasons. I have a lot of young people that
Speaker 1: I care about, five kids, eight grandkids, scores of posse
Speaker 1: scholars that I've mentored over the years. I want them
Speaker 1: to know that life is not easy. There are a
Speaker 1: lot of bad things happened to all of us, and
Speaker 1: the question is how do you deal with it, how
Speaker 1: do you learn from it? Where do you go next?
Speaker 1: So my Nose for Trouble got me into some difficulty
Speaker 1: every decade of my life, and I think I've made
Speaker 1: some pretty good choices afterwards. Second reason, there's a whole
Speaker 1: story about Lehman. That's never been told. We were muzzled
Speaker 1: as directors for five six years by the lawyers saying
Speaker 1: we couldn't talk, and I have views on that. The
Speaker 1: rest of that story, well, Jason, I would go through
Speaker 1: the galleys, and I think both of us were like,
Speaker 1: all right, where's the Lehman party? Because I do think
Speaker 1: you were in the room where it happened. When it
Speaker 1: came to the vote on whether or not Lehman should
Speaker 1: file for bankruptcy. Take us there. It was incredibly scary. Uh.
Speaker 1: It happened so fast. We thought the Fed would continue
Speaker 1: to lend to us, we thought there might be a merger,
Speaker 1: and yet that weekend it became clear the government was
Speaker 1: backing out. They were not going to do their job
Speaker 1: as a lender of two financial institutions, and the biggest
Speaker 1: bankruptcy in world history was facing us. We considered not
Speaker 1: doing it. We said, let's see if they'll really flinch.
Speaker 1: Will they lend tomorrow morning if we don't declare? But
Speaker 1: what a terrible game of chicken to be playing. It
Speaker 1: was if if if we had said no and they
Speaker 1: had said no, we'd probably all not be here right now.
Speaker 1: It would have been awful. And so as you've had
Speaker 1: time to both think about it yourself, obviously you put
Speaker 1: a lot of it down in the book. As you've
Speaker 1: had a chance to talk to to other people. What
Speaker 1: were those sort of catalytic moments both in your board
Speaker 1: room and in Washington that ultimately led to the fate
Speaker 1: of Lehman. Well, Hank Paulson, Well, not like my book,
Speaker 1: but he's got a tough skin. Uh. First of all,
Speaker 1: it was Bernankee's decision. The Federal Reserve is supposed to
Speaker 1: lend to financial institutions. They abdicated and turned it over
Speaker 1: to Paulson. Paulson made a political decision. It was not
Speaker 1: an economic decision. He was not based on Lehman's collateral.
Speaker 1: There was plenty of collateral there. I want to promote
Speaker 1: not only my book, but this book. This is by
Speaker 1: Lawrence Ball, the dean of economics at Johns Hopkins. This
Speaker 1: is the ultimate book about the Lehman bankruptcy. It's two
Speaker 1: hundred pages of data and very very thoughtful prose about
Speaker 1: what went on. And I really recommended anyone that's serious
Speaker 1: about financial history take a look at Larry Ball's book.
Speaker 1: He's a very very good scholar. In any event, um,
Speaker 1: we were. We were left with no alternative. Uh did
Speaker 1: you realize is that in the last week of Lehman's existence,
Speaker 1: our our clearing bank JP Morgan Chase demanded and got
Speaker 1: eight point six billion of our cash collateral to shore
Speaker 1: themselves up against Lehman possible losses. Well, they had the
Speaker 1: right to do that. Apparently the fine print of their
Speaker 1: loan agreement let them do that, because we lost that
Speaker 1: lawsuit four years later. However, it drained the liquidity out
Speaker 1: of Lehman. We were solvent until literally three or four
Speaker 1: days before the bankruptcy. So why why did it happen
Speaker 1: to Lehman? Why was why was Lehman the one firm
Speaker 1: that was allowed to fall? Here's my explanation. We all
Speaker 1: know that A I G was much bigger than Lehman.
Speaker 1: If they had gone under, the world would have changed
Speaker 1: A I G. O. Goldman sacks billions and billions of
Speaker 1: dollars for various commitments. In my belief, Paulson said, I
Speaker 1: can't get both done. I can't save Lehman and save
Speaker 1: I G. And if I can only save one, I'll
Speaker 1: save A G. And I think we were collateral damage
Speaker 1: we had done nothing wrong. That's why nobody went to jail.
Speaker 1: The examiner's suit of the bankruptcy examiners said, there's no
Speaker 1: colorable crime here and no colorable violation. Value their management
Speaker 1: for the board. But when the FED closes its window,
Speaker 1: you can't function. Michael, one of the things you talk
Speaker 1: about in your book, both explicitly and implicitly, is that ultimately,
Speaker 1: these are people making these decisions. These are people with relationships,
Speaker 1: longstanding relationships, some good, some bad, and at the very
Speaker 1: least complicated. What do you make of the role that
Speaker 1: some of those relationships played in the ultimate demise of Lehman.
Speaker 1: I think they were important. I think Paulson liked and
Speaker 1: was close to his successor at Goldman. He didn't like
Speaker 1: Dick Fauld. They had had very contentious relations over the years.
Speaker 1: Lehman had stolen some of Goldman's best people. John Walker
Speaker 1: had just come over to run asset management for Lehman.
Speaker 1: Fold had turned down a request to put a lot
Speaker 1: of money into long term capital management back in the
Speaker 1: late nineties. We were asked to put into fifty million.
Speaker 1: Dick finally, very late in the game, put in a
Speaker 1: hundred million for for Lehman. Paulson was furious. Paulson felt
Speaker 1: Fold wasn't trying hard enough to find a takeover partner
Speaker 1: or a merger partner. So there were a lot of
Speaker 1: frictions there. Do you recall in those days leading up
Speaker 1: where there was the possibility that they could have been
Speaker 1: bought at, that there could have been a partnership or
Speaker 1: a combination that would have really changed the future of Leman,
Speaker 1: that Lehman would still be around today. The closest we
Speaker 1: came to a merger was with Barclay, and that should
Speaker 1: have happened. Uh. The Chancellor of the Exchequer in in
Speaker 1: London said, we won't give you a waiver of a
Speaker 1: shareholder vote that killed the deal. But he could have
Speaker 1: done that, we believe, and Uh, that should have happened,
Speaker 1: and Barkley's would be you know, some form of combination
Speaker 1: of Barkley's and Lehman would still exist. What were the
Speaker 1: American officials helping you in terms of that process as
Speaker 1: as much as they could have, because at that point
Speaker 1: everybody had to come together because it was a global crisis.
Speaker 1: I think they were. I think Paulson really did want
Speaker 1: to see that happen. The sad thing is that Alistair Darling,
Speaker 1: the Chancellor of the Exchequer, said we don't want to
Speaker 1: import your cancer, not knowing that as soon as the
Speaker 1: bankruptcy occurred, London's Lehman operation, which was huge, would be
Speaker 1: bankrupt also. So they did get the cancer. And you
Speaker 1: write about this in the book, Michael, sort of the
Speaker 1: aftermath and and obviously you've had some years to reflect
Speaker 1: on it as as we've talked about so as a
Speaker 1: businessman is a very successful businessman. As a human being,
Speaker 1: what do you take away from what do you internalize
Speaker 1: that either changes your worldview, changes your view of the
Speaker 1: financial system, changes your view of maybe the next crisis.
Speaker 1: UM less leverage all the banks, we were right there
Speaker 1: with them. We were too leveraged, more equity UM. So
Speaker 1: that's been a good thing coming out of the financial
Speaker 1: I think, and we should not be rolling back those regulations. However,
Speaker 1: the Fed's ability to act has been severely restricted by
Speaker 1: Dodd Frank for example, and I only recently learned this.
Speaker 1: Any refinancing that the FED approves now has to be
Speaker 1: approved by the Secretary of the Treasury, which makes it
Speaker 1: back to political politics. I don't think that it's a
Speaker 1: good rule. The FED should focus on the banking system,
Speaker 1: not on the politics at the moment. What about is
Speaker 1: a human being? What what do you take away from it?
Speaker 1: Because that is a harrowing experience, as harrowing probably as
Speaker 1: anything from a financial or a business perspective that anyone's
Speaker 1: gone through in in in our lifetime. You see those
Speaker 1: people carrying their boxes out like it's it's hard not
Speaker 1: to have an impact, right, it's uh, you know, you
Speaker 1: realize how you know how many people were affected? And
Speaker 1: I study economics. I love the field, and that's why
Speaker 1: I became a real fan of Lawrence Ball. He has
Speaker 1: done a study of the post ten years after Lehman,
Speaker 1: of the twenty three countries of the o e c D,
Speaker 1: the growth rates in those countries are still dramatically suppressed
Speaker 1: because of the Lehman bankruptcy. It's still hurting our world.
Speaker 1: Why do you think the German bond ten year German
Speaker 1: bond is selling at minus point six or whatever it
Speaker 1: is negative yield. The world's economies have not recovered today,
Speaker 1: twelve years later from the Lehman bankruptcy. That's why I
Speaker 1: think it was a huge policy mistake. I think Paulson
Speaker 1: should have fought to save at least for the moment,
Speaker 1: wipe out all the equity holders. Dilute. Don't give the
Speaker 1: shareholders anything or next to nothing, but don't let this
Speaker 1: cont this company go into bankrupts. That's former Lehman Brothers
Speaker 1: chairman Michael Ainsley really enjoyed our conversation, wide ranging and
Speaker 1: going well beyond just Lehman. He was also the former
Speaker 1: CEO of South Abes. What an amazing career he has
Speaker 1: had to hear the full conversation. Download our Bloomberg Business
Speaker 1: Week Extra podcast. Well, that wraps up the weekend edition
Speaker 1: of Bloomberg Business Week from Bloomberg Radio. Thanks so much
Speaker 1: for joining us. I'm Jason Kelly. Be sure to tune
Speaker 1: into Bloomberg Business Week Radio Live Monday through Friday, starting
Speaker 1: at two pm Wall Street Time. And if you can't
Speaker 1: catch us live, get our daily podcast. Download that wherever
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