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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Wall Street Week.

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Speaker 1: I'm David Weston.

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Speaker 2: The attempted assassination of former President Trump and the tragic

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Speaker 2: shooting of innocent bystanders shook a nation already in the

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Speaker 2: throes of a tumultuous presidential campaign and added to the

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Speaker 2: momentum that mister Trump was already experiencing in the race.

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Speaker 2: Take us through the market reaction and what a second

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Speaker 2: term of a Trump presidency could mean for investors. Welcome now,

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Speaker 2: Stephen Rattner, chairman of Willed Advisors, which invests the personal

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Speaker 2: and philanthropic assets of Michael Bloomberg, our founder and majority shareholder.

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Speaker 2: I always a treat to have you here, Steve. Thank

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Speaker 2: you for coming back.

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Speaker 1: Thanks for having me, David.

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Speaker 2: So, one of the themes of this week is, so

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Speaker 2: this so called Trump trade, given what's going on, apparently

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Speaker 2: we don't know about what's going on. Apparently in the

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Speaker 2: campaign it seems like at least it's a substantial possibility

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Speaker 2: that Donald Trump will be our next president. What is

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Speaker 2: in the Trump trade? What are people reacting to in

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Speaker 2: the market.

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Speaker 3: Well, well, first of all, there's a number of different

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Speaker 3: things going on in the market at the moment. There

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Speaker 3: are a lot of cross currents and so forth. But

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Speaker 3: if we want to just focus on the Trump trade,

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Speaker 3: his probability of success is now close to seventy percent,

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Speaker 3: and that has made the market wake up and say, okay,

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Speaker 3: so what are we looking at? And so it really

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Speaker 3: spans a huge gamut of things, everything from gun manufacturers,

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Speaker 3: for profit education which thinks they're going to benefit if

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Speaker 3: he stops us through the loan forgiveness, to the GSS

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Speaker 3: Fanny and Freddie because maybe he won't, he won't take

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Speaker 3: the dividends sweep anymore, energy stocks, manufacturing companies that might

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Speaker 3: benefit from the tariffs, and so investors are rushing around

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Speaker 3: looking for all the different places they think they would

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Speaker 3: benefit from another Trump presidency.

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Speaker 2: One of the things I think we've seen is in

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Speaker 2: the bond curve, basically for treasuries, because there's a sense

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Speaker 2: that actually there's going to be higher rates out there

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Speaker 2: in the long end of the curve, which changes a

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Speaker 2: fair number of things. What is the possibility of a

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Speaker 2: Trump presidency with these economic policies leading to more inflation,

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Speaker 2: therefore the Fed baby having to raise rates again.

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Speaker 3: Well, the bond trades a little complicated because we did

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Speaker 3: have that good in the sense of being a slightly

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Speaker 3: soft jobs number, and the predicted number of FED rate

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Speaker 3: cuts is now up to something over two and therefore

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Speaker 3: the ten years started to come down. And now you

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Speaker 3: have the Trump piece layering on that, pushing it up

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Speaker 3: a little bit, but not hugely. But I don't think

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Speaker 3: there's a lot of doubt that his fiscal policies, as

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Speaker 3: expressed would be would be inflationary and therefore biased toward

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Speaker 3: higher interest rates.

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Speaker 2: So talk about that Tax Cutting Jobs Act specific We

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Speaker 2: had Scott Bessen on last week and he said, oh.

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Speaker 1: No, don't worry about it.

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Speaker 2: We're gonna save a lot of money. We're gonna save

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Speaker 2: a trillion dollars a year from the basically undoing the

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Speaker 2: Inflation Reduction Act. We're gonna save another trillion by redoing Medicare.

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Speaker 2: And now I will note that when President Trump had

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Speaker 2: came in the first time, he said they were going

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Speaker 2: to get rid of Obamacare. That would save us low money,

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Speaker 2: but one of the prospects that actually would cut back

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Speaker 2: into of the spending under the Bide administration.

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Speaker 3: Well, remember that we didn't get rid of Obamacare because

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Speaker 3: John McCain and because while he had technically had control

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Speaker 3: of both houses of Congress, lost a Republican that costs

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Speaker 3: him that. So a lot of this is going to

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Speaker 3: depend on what happens to Congress. If both houses of

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Speaker 3: Congress go Republican, then he's obviously got much more scope

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Speaker 3: to do a bunch of stuff. Whether he really would

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Speaker 3: do it or not, who knows. The record of the

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Speaker 3: first Trump presidency was not good from a fiscal point

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Speaker 3: of view. The deficit went up by hundreds of billions

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Speaker 3: of dollars before COVID ever arrived, in large part because

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Speaker 3: the TCJA never came close to paying for itself. It

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Speaker 3: was close to two trillion dollar costs with no offsets

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Speaker 3: in spending and no real revenues associated with it.

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Speaker 2: So that's all on the text, the revenue side, as

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Speaker 2: it were. What about tariffs? The one thing President Trouble

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Speaker 2: has always seemed to enjoy has been imposing tariffs, particularly

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Speaker 2: on China, but not only on China. Frankly, he likes tariffs.

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Speaker 2: That does, of course increase the cost to the consumers

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Speaker 2: and therefore I guess inflation.

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Speaker 3: Sure, And by the way, his last set of tariffs,

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Speaker 3: which were far less robust than what he's talking about

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Speaker 3: now rare. He's something like thirty billion of revenue. I

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Speaker 3: thought you were going to ask about revenue, very little

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Speaker 3: contribution to revenue.

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Speaker 1: The evidence is overwhelming.

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Speaker 3: Many economists have studied this that essentially one hundred percent

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Speaker 3: ninety five, one hundred and five percent something in that

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Speaker 3: ballpark was paid for by consumers. None of it was

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Speaker 3: paid for by China. Maybe a little of it came

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Speaker 3: out of the companies in terms of profit margins, but

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Speaker 3: essentially it was paid for by consumers and was therefore inflationary.

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Speaker 3: Now they were very limited tariffs. Start talking about ten

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Speaker 3: percent across the board on all imports, you're in a

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Speaker 3: different ballgame.

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Speaker 2: Well, we talked about inflation. One of the things we

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Speaker 2: naturally think about is the feder reserve.

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Speaker 1: It's their job. Actually, it has price stability.

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Speaker 2: Right. There's a lot of speculation, not necessarily coming from

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Speaker 2: Donald Trump himself, it's from people around him like Peter.

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Speaker 1: Navarro who talked about firing J. Powell.

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Speaker 2: But what are the prospects of really undermining to some

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Speaker 2: extent the independence of the Fed.

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Speaker 3: That's to me incredibly scary. I think the independence of

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Speaker 3: the Fed. They don't get everything right, they got inflation wrong.

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Speaker 3: Will stipulate to that they got some stuff wrong in

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Speaker 3: twenty nineteen. They may have gotten some stuff wrong coming

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Speaker 3: out of the GFC, although they did a great job

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Speaker 3: generally in the GFC. But let's just stipulate independence of

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Speaker 3: the FED is critical and central to our economic success.

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Speaker 3: There's no sands or butts about that. You would not

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Speaker 3: want the Congress or the White House in charge of

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Speaker 3: monetary policy. And so any step to undermine the FED

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Speaker 3: by any president of either party should be something that

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Speaker 3: we all push back as strongly as possible.

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Speaker 2: So overall, why do we find so many investors who

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Speaker 2: are backing President Trump giving everything you just said? What

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Speaker 2: do you see they don't or what do they see

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Speaker 2: you don't?

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Speaker 3: They have a variety of reasons that I understand their reasons.

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Speaker 3: For example, one of the biggest reasons you hear is

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Speaker 3: the regulatory stuff. There's no question, and now, in fairness

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Speaker 3: to the President, although he appointed these people, they are

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Speaker 3: independent regulatory agencies. But nonetheless a lot of what the

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Speaker 3: FTC has been trying to do, a lot of what

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Speaker 3: the SEC has been trying to do, even the FCC,

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Speaker 3: the FDA really has upset business, and they simply feel

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Speaker 3: that this president is too progressive, and they feel that

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Speaker 3: his vice president, should she become president, is even more progressive,

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Speaker 3: and they don't like any of that.

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Speaker 1: And there are other reasons, but that's a good.

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Speaker 3: Example, maybe the main example of what they They just

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Speaker 3: don't think this is a pro business administration. I would say,

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Speaker 3: even though I do support the president, acting businessmen with

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Speaker 3: some regularity is really not the way to get their support.

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Speaker 1: I don't think. That's not what my mother taught me.

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Speaker 2: Fair No, okay, Steve, I'm delighted to say he's going

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Speaker 2: to be staying with us as we turn to the

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Speaker 2: rest of the world, particularly whether investors might be falling

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Speaker 2: out of love with the so called Magnificent seven. That's

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Speaker 2: nextell Wall Street Week on Bloomberg. This is Wall Street Week.

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Speaker 2: I'm David Weston. Stephen Ratner of will It Advisors has

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Speaker 2: stayed with us. So see, let's talk about the rest

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Speaker 2: of the world as it were, and particularly those big

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Speaker 2: tech companies that have been getting so much money with

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Speaker 2: huge I would say huge capital investment about AI.

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Speaker 1: Yeah, look, those companies have had a great run.

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Speaker 3: Obviously in Vidia we all know about, but Microsoft, Google

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Speaker 3: and so forth Amazon, And the question really is whether

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Speaker 3: the market is valuing this situation appropriately. You're talking about

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Speaker 3: massive cap X by on estimates anywhere from six hundred

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Speaker 3: billion to one point two trillion dollars per year on

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Speaker 3: this kind of stuff. And the question the market is

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Speaker 3: starting to ask itself is are the revenues going to

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Speaker 3: be there to offset it? And that cap X is

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Speaker 3: not just a cash expense, but it runs through the

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Speaker 3: income statement and depreciation and so forth, and so.

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Speaker 1: It affects their margins.

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Speaker 3: It affects their profits, and you have to earn You

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Speaker 3: have to create a huge amount of revenue to justify

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Speaker 3: the magnitude of the cap X that is going on

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Speaker 3: right as we speak.

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Speaker 2: So see back in the olden days at capsities, for gimer,

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Speaker 2: when I was running budgets, if I had a capital expense,

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Speaker 2: I had to show what the projections were about when

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Speaker 2: I would save that money back just what And we

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Speaker 2: usually had a rule about a couple of years, maybe

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Speaker 2: two and a half years, we had to earn it back.

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Speaker 2: Is anybody taking pencil and paper, if they have it anymore,

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Speaker 2: and doing that with AI, Is anybody actually thinking about

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Speaker 2: where do we really see this in the real economy

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Speaker 2: in terms of increased productivity.

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Speaker 3: Well, that's exactly what's happening now to some degree, and

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Speaker 3: why you're starting to see a bit of a rotation.

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Speaker 3: It might be just a mean reversion after a big run.

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Speaker 3: It might be people doing what you talk about, but

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Speaker 3: people are doing it. And by the way, this is

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Speaker 3: a very debated subject. There's not a preponderance of view

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Speaker 3: on one side or the other. And I don't even

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Speaker 3: frankly have conviction myself. I think you could argue either way,

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Speaker 3: although I think the numbers are pretty daunting. But what

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Speaker 3: you're starting to see the analysts do is exactly what

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Speaker 3: you said. They're starting to pencil into their projections. This

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Speaker 3: is the level of capex, this is a level of

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Speaker 3: depreciation we're going to be taking for it. This is

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Speaker 3: the amount of revenue we have to generate to justify

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Speaker 3: that and achieve the kind of paybacks you're talking about.

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Speaker 1: And you say to yourself, is this really plausible?

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Speaker 3: Are we really going to you know, is Microsoft really

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Speaker 3: going to be able to generate thirty billion dollars of

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Speaker 3: revenue from AI? I think that's actually a roughly right number.

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Speaker 3: In the next over the two years from now, and

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Speaker 3: given that at the moment this stuff is essentially free,

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Speaker 3: you might pay ten dollars a month for this or that,

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Speaker 3: it's a real open question whether those kind of revenues

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Speaker 3: are there.

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Speaker 1: Let me just make one other point, which is.

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Speaker 3: That if you think back on the success of Microsoft, Google, Facebook,

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Speaker 3: they were essentially software companies. I mean, there was certainly

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Speaker 3: some Capex involved in that, but nothing on the scale

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Speaker 3: of what we're talking about here. And so we're in

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Speaker 3: a whole different world, a whole different boat all game

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Speaker 3: for these companies. And by the way, it's also a

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Speaker 3: competitive ballgame. Open AI is not going to own all

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Speaker 3: of AI. Microsoft is not going to own all of AI.

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Speaker 3: It's going to be very They all have to protect

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Speaker 3: their market share and it's going to be a pretty

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Speaker 3: competitive world.

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Speaker 2: So, Steve, I'm never going to ask you about specific

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Speaker 2: investments that you're making or not making it, but just

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Speaker 2: attitude investor. When you're looking at this phenomenon, you're looking

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Speaker 2: at the NVIDIAs of this world, and Microsoft and others

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Speaker 2: just take off like a rocket ship. It must be

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Speaker 2: difficult to stay out of it. I mean, if you're

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Speaker 2: running a big fund or something like that when you're

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Speaker 2: seeing the fear of being left behind must be enormous.

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Speaker 2: But what do you do when you don't know whether

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Speaker 2: it's going to work or not going to work?

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Speaker 3: Yes, this has been a challenge for active investors this

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Speaker 3: year because these big companies Microsoft is something like a

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Speaker 3: seven point three or seven point five percent waiting in

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Speaker 3: the SMP. Very few money managers have a seven percent

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Speaker 3: position in anything, and so it's very when you know,

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Speaker 3: you know the numbers, when you disaggregate the magnificent seven

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Speaker 3: from the rest of the market, what the differences are,

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Speaker 3: and so it's been very tough for active ma That's

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Speaker 3: point one point two is Look, this is no different

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Speaker 3: than any other investment. You do your best work, you

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Speaker 3: figure it out as best you can, and you make

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Speaker 3: a bet and sometimes you're right, sometimes you're wrong. I

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Speaker 3: would say we tend to be pretty conservative in our

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Speaker 3: view of this stuff, and a little bit of the

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Speaker 3: view that we've seen some of these movies before and

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Speaker 3: we want to be a little careful about piling in,

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Speaker 3: especially late in the game.

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Speaker 2: Is there a risk that the enormous success of that

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Speaker 2: Magnificent seven what are you going to call them, is

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Speaker 2: masking other weakness in stock markets. As you say, you

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Speaker 2: look at the rest of the market, it has not

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Speaker 2: done all that well. And yet we tend to gloss

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Speaker 2: over that and say a bit market and the aggregate

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Speaker 2: boys doing great.

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Speaker 1: It's totally masking it.

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Speaker 3: If you take the magnificent seven out and you start

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Speaker 3: looking at some sectors, especially things like manufacturing, industrial stuff

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Speaker 3: like that. Markets actually had a pretty poor run over

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Speaker 3: the last certainly this year and even I think last year,

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Speaker 3: and so yes, I think we're starting to see when

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Speaker 3: we listen to companies, we listen to our managers, we

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Speaker 3: are starting to see signs of softness in the economy

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Speaker 3: on the consumer side, on the manufacturing side, and so forth.

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Speaker 3: I don't think the economy is falling out of bed,

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Speaker 3: but we definitely are in the later stages of an expansion.

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Speaker 2: Let me ask about an ancillary part to the AI.

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Speaker 2: If I we talk about Nvidia and much of the things,

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Speaker 2: but the power required to drive this general AI is enormous.

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Speaker 2: I mean, I'm hearing stories now. They're just really in

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Speaker 2: a lot of story and that's really driving a lot

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Speaker 2: of demand for power. Is that an investment opportunity?

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Speaker 3: We have invested around this opportunity. I would say modestly.

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Speaker 3: We were actually kind of early to it. Others have

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Speaker 3: now caught on to it. And if you look at

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Speaker 3: the stocks, for example, of nuclear utilities that have less

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Speaker 3: regulated power and also clean power, which is important to

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Speaker 3: these hyperscalers, they've shot up. I think people have woken

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Speaker 3: up to the fact that the conventional projections of electricity

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Speaker 3: demand over the next five to ten years we're ridiculously

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Speaker 3: conservative relative to what's going to happen, and we're going

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Speaker 3: to face a major I believe we're going to face

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Speaker 3: a significant power crunch in this country unless we do something,

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Speaker 3: and so running to the conflict between the desire to

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Speaker 3: reduce our dependence on fossil fuels and.

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Speaker 1: The need for power that's right in front of us.

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Speaker 2: That's just what I was going to ask, because this

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Speaker 2: goes right against the need to deal with the climate

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Speaker 2: where we were trying to give up the fossil fuels,

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Speaker 2: and this drives us back into it. Unless you go,

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Speaker 2: for example, the nuclear maybe there's small modular reactors.

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Speaker 3: As you know, I think you may even talk about

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Speaker 3: on your show. Bill Gates has a project I think

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Speaker 3: out in Wyoming or someplace to build not a small reactor,

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Speaker 3: but a new technology that involves less less heat and

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Speaker 3: less water and so on and so forth. But it's

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Speaker 3: going to be done in twenty thirty. He doesn't have

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Speaker 3: a permit for it. So we're a long way. I

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Speaker 3: think we're a long way from nuclear happening. It could happen.

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Speaker 3: I think the technology is there, whether it's small nuclear

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Speaker 3: reactors or different kinds of nuclear technology, but I see

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Speaker 3: no support at all from people to do it. And

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Speaker 3: so the result is we're going to have probably some

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Speaker 3: coal staying around longer than any of us would like,

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Speaker 3: probably building more what it called ccgts natural gas generating

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Speaker 3: facilities in order to support the renewables, because obviously the

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Speaker 3: sun doesn't always shine, the wind doesn't always blow. We

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Speaker 3: all know that, so you have to have baseload power.

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Speaker 3: And we're going to find that we are doing more

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Speaker 3: with fossil fuels than any of us would like.

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Speaker 2: So so find as Steve gives us. Because you're a

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Speaker 2: long term investor, you're looking out their ways and you

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Speaker 2: look at the economy overall, and we've had extraordinary time

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Speaker 2: of growth from World War Two on, but certainly in

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Speaker 2: the last thirty years or so that's been challenged. More recently,

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Speaker 2: productivity has sort of backed off a bit. Maybe it's

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Speaker 2: coming back or maybe not. As you look long term,

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Speaker 2: what do you think of the opportunities for an investor

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Speaker 2: in the economy. What do you think are likely to

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Speaker 2: be with us for a while and really grow.

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Speaker 3: You have to have a view about some of the

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Speaker 3: things you just said. We definitely the real problem in

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Speaker 3: the economy is slow productivity growth. In my opinion, there's

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Speaker 3: a decent chance that AI will change that. It could

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Speaker 3: be like the Industrial Revolution or lots of other periods

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Speaker 3: in our past where we really get a transformational kind

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Speaker 3: of change, and that would really be good for all

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Speaker 3: kinds of businesses, whether manufacturing business, consumer businesses and so forth.

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Speaker 3: And so that to me is really the most interesting

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Speaker 3: thing in front of us. Hard to invest around for

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Speaker 3: all the reasons we talked about, But beyond that, I

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Speaker 3: can't tell you there's a particular sector that I would

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Speaker 3: focus on as being the place to go. I do

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Speaker 3: worry a lot in terms of economic challenges about the

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Speaker 3: budget deficit, the impact on interest rates, the fact that

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Speaker 3: we are going to have to deal with this sooner

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Speaker 3: or later. But at the moment, I think we're actually

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Speaker 3: not in a terrible place.

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Speaker 2: Okay, Steve, it's such a treat you have you here.

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Speaker 2: Thank you so much that it's Stephen Rattner of will

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Speaker 2: It Advisors