Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: were Stock's pushing kaya following a boost from Micron's blowout
Speaker 2: earnings report. Sebastian page of two, Row price writing AI
Speaker 2: is an expanding theme from GPUs to other bottlenecks along
Speaker 2: the data center supply chain, as buzz light Years said
Speaker 2: to infinity and beyond. Sebastian joins us now for more. So,
Speaker 2: welcome back to the program, Buddy. Are you just saying,
Speaker 2: stay on grip tie, keep rounding this ball?
Speaker 3: John? When I wrote my notes, I didn't think you'd
Speaker 3: pick up on the buzz light year quote. I'm going
Speaker 3: to be honest. We have an expending trade from bottlenecks
Speaker 3: to more and more bottlenecks. You look at cooling, at electrification,
Speaker 3: at aerospace, at gas turbines, We're invested in those bottlenecks.
Speaker 3: We think it's a trade that has legs. Look the
Speaker 3: AI build out. A lot of people mentioned those forecasts
Speaker 3: on your show, but we're looking at three trillion by
Speaker 3: twenty twenty eight. So it's a trade and it's going
Speaker 3: to continue to go. In my mind, the key question
Speaker 3: right now is when is this going to show in
Speaker 3: AI users' margins. Now we have three hundred analysts on
Speaker 3: our platform. I read their notes, but now I use
Speaker 3: AI to read their notes, and I ask AI, where
Speaker 3: are we seeing companies in our own proprietary research that
Speaker 3: are increasing their margins because they're using AI. Now I've
Speaker 3: seen estimates out there John that are I think exaggerated,
Speaker 3: but anecdotally we're starting to see this as well in
Speaker 3: the users of AI. This will be the next leg.
Speaker 3: So I think that technology revolution will continue. I'm conscious
Speaker 3: as I say this I sound a little bit like
Speaker 3: Dan Ives, but yeah, this we're long US large cap
Speaker 3: growth stocks.
Speaker 2: So I'll push back just a little bit and I'll
Speaker 2: give you the alternative view on things step where the
Speaker 2: economics of all of this get a little bit complicated.
Speaker 2: So the cost of building capacity is increasing. We can
Speaker 2: see that evidenced by some of the margins at some
Speaker 2: of these companies at a time when the end user
Speaker 2: demand is getting a little bit fragile with regards to
Speaker 2: pricing goverall, and they're rationally spending on AI. How's that
Speaker 2: going to make sense going forward? What we need to
Speaker 2: rationalize here?
Speaker 3: Look, as long as the products keep improving, and they
Speaker 3: are there is tremendous demand for it, it looks to
Speaker 3: me like we're still scratching the surface on demand and
Speaker 3: usage of AI. And by the way, John, I completely
Speaker 3: take the point that this spending is gigantic and free
Speaker 3: cash flows are coming down really fast for a lot
Speaker 3: of the hyper scalers. But you know, if you think
Speaker 3: about it, the price earnings on the Russell one thousand growth,
Speaker 3: we were in the thirty range. We peaked at thirty
Speaker 3: several times over the last five years. John, We're at
Speaker 3: twenty two. So there is you know, trust the market.
Speaker 3: There is an adjustment here that's been made. You know,
Speaker 3: this is this is in the bottom for Russell one
Speaker 3: thousand growth valuation. This is in the bottom thirty percent
Speaker 3: of the last ten year range. You can also play
Speaker 3: AI bottlenecks, by the way, in other areas. You can
Speaker 3: also play them in small and MidCap, which we're long too.
Speaker 3: We have this barbell between US larscap growth and small
Speaker 3: and MidCap. We're talking about the golden component. Once you
Speaker 3: have a component that becomes a part just a bottleneck,
Speaker 3: a part of that electrification, power supply, data center, whatever
Speaker 3: it is, your company stock goes vertical. Also, merging markets,
Speaker 3: A lot of people mention this on surveillance. Emerging markets
Speaker 3: are becoming part of that trade. So yeah, I mean
Speaker 3: it's a position you need to balance. You need to
Speaker 3: diversify the risk in the portfolio. For example, I still
Speaker 3: think there's inflation risk in the portfolio, and at some
Speaker 3: point that becomes part of the supplying the energy to AI,
Speaker 3: that becomes part of the picture.
Speaker 2: Well, pick up on that just one second, SEB.
Speaker 1: You're talking about trying to race to find the next
Speaker 1: bottleneck where you can see stocks go vertical, akin to
Speaker 1: what we're seeing with Micron this morning. I just wonder
Speaker 1: if people truly are understanding or if it's a healthy
Speaker 1: technical They just have a rolling ball of cash. On
Speaker 1: one hand, people are chasing who has pricing power. On
Speaker 1: the other hand, Google shares down eight percent this month.
Speaker 1: Microsoft poised for its worst monthly loss going back to
Speaker 1: twenty and eight of nineteen percent losses. The payers of
Speaker 1: this bill are getting penal At what point is that
Speaker 1: a warning side?
Speaker 3: I mean, it is absolutely, Lisa. You have winners and losers.
Speaker 3: And this is why skilled active management and fundamental research
Speaker 3: is working here. You're going to have software companies that
Speaker 3: are going to be disrupted, but you're going to have
Speaker 3: companies that, I think increasingly the next leg of this
Speaker 3: is along the bottlenecks to eventually the handoff to the
Speaker 3: users that are going to create real efficiency. I see
Speaker 3: it in our company. We're creating efficiency, We're improving our processes.
Speaker 3: It's really that that's going to be the next leg,
Speaker 3: and that's what is going to keep it going. And
Speaker 3: again I go back to the fact that it's not
Speaker 3: you know, a lot of this increase in leverage and
Speaker 3: borrowing and decrease in free cash flow margins, a lot
Speaker 3: of it has been adjusted in the price twenty two
Speaker 3: relative to the thirty range. In prior episodes over the
Speaker 3: last five years, I think is pretty good for Russell
Speaker 3: one thousand growth.
Speaker 1: Se could you justify the investment and further AI, if
Speaker 1: the borrowing costs were higher in the face of inflation,
Speaker 1: in the face of some of this acceleration that we're
Speaker 1: seeing in other components and price components that everyone's trying
Speaker 1: to chase.
Speaker 3: Well, the reality is that this three trillion is spending.
Speaker 3: A lot of it is generating, generated by companies that
Speaker 3: still have a ton of cash. I don't like the
Speaker 3: comparisons to the Duck Humbubble, but we're nowhere near the
Speaker 3: level of corporate leverage and aggregate that we had. So yes,
Speaker 3: there is some borrowing, but if you look at the
Speaker 3: metrics by historical standards, it's not a very high level
Speaker 3: of leverage by historical standards, And there is tremendous capital
Speaker 3: that's available, as we're seeing with IPOs and you know
Speaker 3: those issues. I think there is there is demand for
Speaker 3: the end product at the end of the day, that's
Speaker 3: what really matters. People want to use it. They're billions
Speaker 3: of users already, they're just scratching the surface. I'm doing
Speaker 3: roundtables with investors and I realize a lot of them,
Speaker 3: my peers, a lot of them are just starting. It
Speaker 3: makes me happy because I feel like we're really ahead
Speaker 3: and how we're using agents and so on in our
Speaker 3: investment process. But also it makes me think that as
Speaker 3: long as the demand for the end product is there,
Speaker 3: people are willing to pay for it. We'll go through
Speaker 3: ups and downs. We'll go through episodes where tokens get
Speaker 3: more expensive and people go to cheaper models and so on,
Speaker 3: But the trend is our friend.
Speaker 4: Here.
Speaker 3: Three trillion spending by twenty eight. Again, Lisa, I didn't
Speaker 3: think I come in this morning and sound like dan Ives,
Speaker 3: but we do have a long position in US large
Speaker 3: gap growth, and we do believe in the AI bottlenecks
Speaker 3: and the expansion of that trade.
Speaker 5: You also are concerned that even with oil prices becoming lower,
Speaker 5: that you actually think there's still a lot of inflation
Speaker 5: baked into the system. Is a fed potentially having to
Speaker 5: maybe hike going to be an issue for where you
Speaker 5: see the market going and your dan Ives bullishness this morning.
Speaker 3: Yeah, Look, I'm Marie. If we like twenty five base
Speaker 3: points fifty base points of hikes, I don't think that's
Speaker 3: a big issue for markets. I do think generally though,
Speaker 3: inflation right now is underestimated as a risk. You had
Speaker 3: the Torsten Slock quote earlier, I would argue that he's right.
Speaker 3: I would agree with that, Yes, oil prices are coming
Speaker 3: back down really quickly. My view is that there's spent
Speaker 3: up inflation. There are lots of lags in inflation data
Speaker 3: and in inflation itself. You have from fertilizer to food,
Speaker 3: from freight and insurance to transportation, to industrial production to
Speaker 3: the final goods, from fiscal stimulus to demand. There's lots
Speaker 3: of lags that are working their way through. By the way,
Speaker 3: the last three months on the rolling basis, the headline
Speaker 3: CPI is up eight percent. If you annualize it, you're
Speaker 3: not supposed to analyze three months. You know it's noisy data,
Speaker 3: but still eight percent. But the shelter for the last
Speaker 3: three months is four point eight percent. There's also a
Speaker 3: lag de fact here with prior rent increases. Now, put
Speaker 3: all of this in context of the fact that the
Speaker 3: break even for the one year horizon is one point
Speaker 3: seven percent and the one year inflation swap is two
Speaker 3: point two percent. So my mind is still an underestimated
Speaker 3: risk especially for the next three to six months. In
Speaker 3: the long run, yeah, will normalize, but I think the
Speaker 3: market is underpricing the inflation risk. I guess we have
Speaker 3: a print this morning, We'll see I watch surveillance often
Speaker 3: with a twelve or twenty four hour lag, and I
Speaker 3: always I'm mindful that some people come in and make
Speaker 3: forecasts a few minutes before the data release. I'm not
Speaker 3: going to make that. I'm I'm not going to do
Speaker 3: that this morning. It's always interesting to listen to it
Speaker 3: after the fact when you know what happened. But as
Speaker 3: a general trend, I'm not talking necessarily PC maybe four
Speaker 3: percent this morning, but as a general trend, the inflation
Speaker 3: here is underestimated by the market based on the pricing
Speaker 3: you've seen in break evens and inflation swap.
Speaker 2: Stay with us, Mulblinberg, Savana's coming up off to this,
Speaker 2: Micron's share searching on its blockbus to forecast. Hey, Terry
Speaker 2: of City Research right in the health of the AI
Speaker 2: trade will continue to be defined by the irresistible force
Speaker 2: of enterprise demand meeting the immovable object of inference capacity.
Speaker 2: Heith joins us now for more. Hath good morning, good
Speaker 2: to see it.
Speaker 6: Good morning.
Speaker 2: Let's pick up on that enterprise demand. Just how robust
Speaker 2: is that right now?
Speaker 7: Look, it's incredibly robust. We'll get Q two numbers in
Speaker 7: a few weeks. But if you look at what we've
Speaker 7: seen over the last the last few quarters, we've gone
Speaker 7: from twenty eight percent year over your growth in Q
Speaker 7: one of last year to thirty three percent in Q two,
Speaker 7: to fifty three percent in Q three, to ninety one
Speaker 7: percent to one hundred and forty one percent in Q
Speaker 7: one of this year. Like that kind of bend in
Speaker 7: the S curve that we're that we're seeing here and
Speaker 7: we believe it's going to accelerate again in Q two.
Speaker 7: That's the best proxy for what's happening in enterprise demand.
Speaker 7: And anybody who works at a Fortune five hundred type
Speaker 7: company that is pushing this into products could can tell
Speaker 7: you they're seeing it in real time.
Speaker 2: There is a rush to build out capacity to make
Speaker 2: all this demand. Some companies are benefiting both than others
Speaker 2: Microme with eighty five percent margins. Other companies that are
Speaker 2: doing a lot of the spending right now being punished.
Speaker 2: The stocks are being punished. This is a thing we
Speaker 2: keep bringing up that changes the trajectory for spending.
Speaker 7: Look, no, I mean not anytime soon, because the companies
Speaker 7: are getting real returns on this. The market right now
Speaker 7: is not giving the companies that are spending on this,
Speaker 7: the hyperscalers the kind of credit that they normally would
Speaker 7: for a couple of different reasons, but the biggest one
Speaker 7: is there is this gap between when you have to
Speaker 7: start spending and building all of this out when you
Speaker 7: actually start seeing the returns on it. If you look
Speaker 7: at cash return on cash invested, which we believe is
Speaker 7: sort of the best gauge of the returns that they're
Speaker 7: actually generating on this, hyper scalers are generating twenty nine
Speaker 7: percent returns on this investment, very stable. It was twenty
Speaker 7: nine percent in Q one, is twenty nine percent in
Speaker 7: Q four. If you have the ability to borrow at
Speaker 7: six percent or to issue equity and get a twenty
Speaker 7: nine percent return on it, you're supposed to do that
Speaker 7: regardless of what your stock price is doing. And while
Speaker 7: the stock prices aren't doing what Micron stock price is doing,
Speaker 7: they're hanging in there enough that investors haven't rejected this.
Speaker 3: Right.
Speaker 7: Google issued eighty five billion dollars worth of equities the
Speaker 7: market didn't really blink.
Speaker 1: Well, just to build on though what John is talking about,
Speaker 1: maybe people are still lending and they're.
Speaker 2: Still able to raise cash.
Speaker 1: Nonetheless, it's getting a little bit hairy for the likes
Speaker 1: of Microsoft down eighteen percent for this worst monthly performance
Speaker 1: going back to two thousand and eight. You see Oracle
Speaker 1: down more than thirty percent. Are we starting to see
Speaker 1: the beginnings of investor pushback that maybe hasn't put teeth
Speaker 1: in this trade by withdrawing cash, but certainly has put
Speaker 1: a little bit of notice around that capital.
Speaker 7: Well, the thing that we have to remember, particularly when
Speaker 7: it comes to Microsoft and Oracle, is those are both
Speaker 7: software companies. Look at everything else in software and what
Speaker 7: those stocks have done. The market's not responding negatively to
Speaker 7: the acceleration and growth that you're seeing at Azure, the
Speaker 7: returns you're seeing at Azure. It's responding to the other
Speaker 7: seventy percent of Microsoft's business that is software. It's responding
Speaker 7: to the biggest part of Oracle's business, which is software.
Speaker 7: And so I think that's that, if anything, should encourage
Speaker 7: more investment in this area, particularly as we start to
Speaker 7: see the acceleration in Azure revenues through through the end
Speaker 7: of this year, which we believe the market will respond
Speaker 7: positively to.
Speaker 1: We've seen this rolling ball of cash, and as we
Speaker 1: heard from Sebastian Page earlier, everyone's looking for the choke points.
Speaker 1: The next place where you're going to see things just
Speaker 1: sort of shoot exponentially higher because of this insatiable demand
Speaker 1: and a limited supply. After memory, what's next, I mean,
Speaker 1: do you have your eye on kind of those choke points.
Speaker 2: I mean we do.
Speaker 7: I mean the choke points sort of exist throughout the
Speaker 7: supply chain right now, Memories obviously the biggest one. Anthropic
Speaker 7: told you that very loudly a few weeks ago when
Speaker 7: they raised their most recent round. They have the opportunity
Speaker 7: to choose strategic partners. They could have picked anyone they wanted.
Speaker 7: They chose three, Samsung, Micron, and Heinex, and so like
Speaker 7: if anyone who's surprised by what's happening with Micron today
Speaker 7: and what's been happening with high bandwidth memory didn't pay
Speaker 7: attention to what Anthropic told them, the next point after
Speaker 7: that is it's at interconnect, it's in storage, it's in
Speaker 7: labor in a very big way, and of course it's
Speaker 7: in power. We've been talking about that for so long.
Speaker 7: It's also because of what you see with Micron. It's
Speaker 7: very much in semicap equipment because we do have to
Speaker 7: make more memory, we do have to make more chips,
Speaker 7: We need more compute, we need more storage and memory.
Speaker 5: Do you think some of these companies along the supply
Speaker 5: chain we could potentially see these issues emerged later in
Speaker 5: the year or next year as they build this out.
Speaker 5: Are undervalued right now?
Speaker 4: Well?
Speaker 7: I mean, so we've been saying this, like from I
Speaker 7: started at City a year ago. The first thing that
Speaker 7: we said is you want to be where the model
Speaker 7: necks are, and that has continued to be the case,
Speaker 7: and we sort of stuck with that. This is where
Speaker 7: pricing goes. You were talking about sort of the underperformance
Speaker 7: of the hyperscalers. You want to be where people are
Speaker 7: spending money, not necessarily with the people who are spending
Speaker 7: the money, and so that's going to continue to be
Speaker 7: the case. We would argue it's not even so much
Speaker 7: undervalued as just estimates are too low, Consensus numbers aren't
Speaker 7: high enough. Because the amount of infrastructure that is going
Speaker 7: to get built, the amount of pricing increases that you're
Speaker 7: going to see that, you know, irresistible demand, immovable supply.
Speaker 7: The only thing that breaks in that is price. You
Speaker 7: saw in the Micron number eighty five percent gross margins.
Speaker 7: Memory companies are not supposed to have eighty five percent
Speaker 7: gross margins. Eventually, that will settle out because that's what
Speaker 7: cyclicals do. But we're a long way away from that happening.
Speaker 1: You said that one of the choke points was in labor.
Speaker 1: Are you talking about Jonas Adler Are you talking about
Speaker 1: Dave who constructs some of what we're seeing with the
Speaker 1: hyperscaler buildings.
Speaker 7: So it's certainly both. There is not a lot of
Speaker 7: talent out there that has the capability of advancing these
Speaker 7: models the way that level of sort of the Jonas
Speaker 7: Addlers of the world do.
Speaker 6: I have no idea, but.
Speaker 7: I mean, if you look at some of the stuff
Speaker 7: that was announced last summer, right when Meta was doing
Speaker 7: these deals, right, Anthropic is doing these deals now, Meta
Speaker 7: was doing them last summer, it was six and in
Speaker 7: some cases, you know.
Speaker 6: I mean it was it was.
Speaker 7: Very large sort of you know, in some cases billion
Speaker 7: dollar kind of pay packages over multi multi years. And
Speaker 7: when you look at sort of the acquisition hires that
Speaker 7: many companies have done. It falls into that hundreds of
Speaker 7: millions and beyond kind of level. That said, what I
Speaker 7: was referring to is very much it's the electricians, the plumbers,
Speaker 7: the construction people that actually have to build these data centers.
Speaker 7: There are very few people in the world that have
Speaker 7: the skills to be able to build at the level
Speaker 7: that these data centers require. And those people are in
Speaker 7: massive demand right now, and deservedly they're getting paid a
Speaker 7: lot more to stay with us.
Speaker 2: Mult Bloomberg surveyance coming up after this check Kevin Walsh
Speaker 2: making changes at the Central Bank limited forward guidance task
Speaker 2: forces and putting even more way on signals from financial markets.
Speaker 2: The former New York Fed President Bill do be Wang
Speaker 2: in writing this a fresh look is appropriate, but this
Speaker 2: needs to be done with greater care than w WASSH
Speaker 2: is shown to date. Bill joins us now for more. Bill,
Speaker 2: welcome to the show. It's nice to reflect on these
Speaker 2: kind of things with you, So thanks for being with us.
Speaker 2: What are you reflecting on right now? What are you
Speaker 2: concerned about? Is this comes together?
Speaker 6: Well?
Speaker 4: What I'm concerned about is that I'm perfectly fine with
Speaker 4: it getting rid of four guns. But what I'm concerned
Speaker 4: about is worsh is not disclosing what is monetary policy
Speaker 4: reaction functions. In other words, how would the FED adjust
Speaker 4: policy as the economic environment changes. And I think that's
Speaker 4: a big mistake and the idea that you can rely
Speaker 4: on financial markets to tell you what you should do
Speaker 4: in terms of monetary policy, that won't work because markets
Speaker 4: priced to what they think the FED will do. So
Speaker 4: if the Fed's looking at the markets and the markets
Speaker 4: are looking at the FED, how is policy actually set.
Speaker 4: It's really important in the United States that markets understand
Speaker 4: how the Feds could react, because monetary policy works mainly
Speaker 4: through financial conditions, the effect of short term rates on
Speaker 4: bond stocks, credit spreads, the dollar. So if the markets
Speaker 4: don't understand what the FED is doing, uh, those markets
Speaker 4: aren't going to be priced appropriately relative to what the
Speaker 4: FED is actually going to do. And that's going to
Speaker 4: both slow down the transmission of mandre policy to the
Speaker 4: real economy, but it's also going to make it less,
Speaker 4: you know, less less efficient.
Speaker 6: So it seems to me like you've.
Speaker 4: Got to provide more guidance about how you're actually going
Speaker 4: to react if things evolve differently than you anticipate.
Speaker 2: To your point, Bet, I think you're picking up on attention.
Speaker 2: We are witnessed in the news conference he seemed to
Speaker 2: find difficult to separate forward guidance from communicating articulating a
Speaker 2: reaction function. Where do you think that came from? Why
Speaker 2: is that difficult? Do you think it's straightforward?
Speaker 6: I think it's straightforward.
Speaker 4: I mean, I think Ford guidance is really basically saying,
Speaker 4: here's what we expect to do next. The madre policy
Speaker 4: reaction function isn't about what we're going to do next.
Speaker 4: It's about how we would react to different sorts of
Speaker 4: incoming information.
Speaker 6: So I think he needs to distinguish between those two things.
Speaker 4: Right now, I don't really understand how much how he
Speaker 4: expects to set mandreate policy. The job of mandre policy
Speaker 4: is the fedest job, not the market job, and so
Speaker 4: the FEDS needs to do its job.
Speaker 1: Part of his argument, perhaps just being generous, might be
Speaker 1: that their task forces for that, and essentially they have
Speaker 1: to understand what data they're looking for at before they
Speaker 1: understand exactly how they should react.
Speaker 4: Do you buy that argument, Well, obviously it makes sense
Speaker 4: to take a fresh look at what data is available,
Speaker 4: but at the end of the day, these task forces
Speaker 4: have a finite life. I mean, the FED has basically
Speaker 4: got to conduct mandre policy not just over the next
Speaker 4: six months, but over the next number of years. So
Speaker 4: I think the reliance on task forces maybe it buys
Speaker 4: him some time to think about what he really wants
Speaker 4: to do. But at the end of the day, these
Speaker 4: task forces are not a replacement for the FED communicating
Speaker 4: about how it's going to act as economic conditions change.
Speaker 1: Right now, BO, when you take a look at the
Speaker 1: inflation ry, when you take a look at the oil input,
Speaker 1: but also the broadening as we're seeing it in core PCEE,
Speaker 1: which we're going to get in about nine minutes time,
Speaker 1: do you think it is appropriate for them to high
Speaker 1: at least once, if not twice or three times this year.
Speaker 4: Well, I think that the case for monetary policy becoming
Speaker 4: a bit tighter is pretty compelling to mebe for two reasons.
Speaker 4: Number One, we've been at this level of rates or
Speaker 4: higher for three years and the economy is still at
Speaker 4: a four point three percent unemployment rates, So what's the
Speaker 4: evidence that monetary policy is restrictive? And second, financial conditions
Speaker 4: are really accommodative. The board has a model of financial conditions,
Speaker 4: and right now it shows the impulse to growth over
Speaker 4: the next year is over one percent positive on GDP growth.
Speaker 4: That's the highest since late two thousand and one early
Speaker 4: twenty twenty two. So I think that easy financial conditions,
Speaker 4: no evidence that monetary policy is restrictive at the time
Speaker 4: that you've missed your target for more than five years
Speaker 4: does create a strong argument for tightening montary policy.
Speaker 6: I'm aligned with you know, Alberto Missal and Lori.
Speaker 4: Logan, But what I think doesn't really matter is really
Speaker 4: what Kevin Warish is ultimately going to do. One thing
Speaker 4: is going to help a little bit in his you know,
Speaker 4: giving them a little bit more time. Is this is
Speaker 4: probably the really last bad headline inflation report we're going
Speaker 4: to have for a while, because with the decline and
Speaker 4: l prices, when we get the inflation data for June,
Speaker 4: headline inflation at both the CPI and PC level is
Speaker 4: going to decline quite significantly.
Speaker 5: But what about the housing market. Isn't it still fair
Speaker 5: to say who we have is highly restrictive for housing.
Speaker 4: Well, I think housing is not doing well for a
Speaker 4: couple of reasons. The main reason though, is lack of
Speaker 4: demand because we don't have any labor force growth. So
Speaker 4: if you don't have labor force growth, you don't have
Speaker 4: household formation. If you don't have househole formation, you don't
Speaker 4: have a lot of demand for houses. There's also an
Speaker 4: affordability issue in terms of what level of income you
Speaker 4: have to achieve to be able to buy a house.
Speaker 4: But I don't think you know, you look at mortgage rates.
Speaker 4: Our mortgage rates particularly high. I mean they're high relatives
Speaker 4: the last fifteen years or so. But if you go
Speaker 4: back prior to the Great Financial Crisis, you know, mortgage
Speaker 4: rates in the six and a half a percent range.
Speaker 6: No one would view that as particularly high.
Speaker 5: Well, it is high, though, if you're sitting on a
Speaker 5: three percent rate and fuse to move because then it
Speaker 5: doesn't offer up a lot more housing for everyone else, well.
Speaker 4: There's a lock in effects that people are deciding not
Speaker 4: to move because they don't want to lose the advantage
Speaker 4: of those very low mortgage rates. But if they move,
Speaker 4: they're they're demanding another house. So I'm not sure that
Speaker 4: you know that really is going to have a big
Speaker 4: effect on housing affordability. A big, big question I think
Speaker 4: if for a house of affordability is what can you
Speaker 4: do about zoning, what can you do about land use
Speaker 4: to basically allow more homes to actually be produced. Increasing
Speaker 4: the supply of housing would then weigh on housing prices,
Speaker 4: and that would make housing more affordable. But I don't
Speaker 4: think it's really a big interest rate problem, frankly.
Speaker 2: But just a final thread, a few questions just on
Speaker 2: this institution. You've worked at it a long time, from
Speaker 2: your position at the New York FED, going down to
Speaker 2: Washington on so many occasions, how easy is it to
Speaker 2: change this institution?
Speaker 4: Well, there's certainly a lot of inertia in the sense
Speaker 4: that do you have staff that are there going to
Speaker 4: be there a lot longer than Kevin Wosh is going
Speaker 4: to be there, for example. And the staff has a
Speaker 4: lot of pride in their work, and deservedly so because
Speaker 4: they have a tremendous amount of expertise. But you can
Speaker 4: definitely move things if you have a better mousetrap. And
Speaker 4: when I went when I went down to the near
Speaker 4: FED after the first day, when the second day I
Speaker 4: was president of the r FEDI basically said my mantra,
Speaker 4: best idea wins. The best idea that people come up
Speaker 4: with should actually dominate, regardless of where it comes from.
Speaker 4: And I think the board staff, the staff of the
Speaker 4: federals or banks really subscribe to that. So if Kevin
Speaker 4: Warrish and the task forces come up with better ideas,
Speaker 4: I think those best ideas will actually win.
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