Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Wall Street Week.
Speaker 1: I'm David Weston.
Speaker 2: The attempted assassination of former President Trump and the tragic
Speaker 2: shooting of innocent bystanders shook a nation already in the
Speaker 2: throes of a tumultuous presidential campaign and added to the
Speaker 2: momentum that mister Trump was already experiencing in the race.
Speaker 2: Take us through the market reaction and what a second
Speaker 2: term of a Trump presidency could mean for investors. Welcome now,
Speaker 2: Stephen Rattner, chairman of Willed Advisors, which invests the personal
Speaker 2: and philanthropic assets of Michael Bloomberg, our founder and majority shareholder.
Speaker 2: I always a treat to have you here, Steve. Thank
Speaker 2: you for coming back.
Speaker 1: Thanks for having me, David.
Speaker 2: So, one of the themes of this week is, so
Speaker 2: this so called Trump trade, given what's going on, apparently
Speaker 2: we don't know about what's going on. Apparently in the
Speaker 2: campaign it seems like at least it's a substantial possibility
Speaker 2: that Donald Trump will be our next president. What is
Speaker 2: in the Trump trade? What are people reacting to in
Speaker 2: the market.
Speaker 3: Well, well, first of all, there's a number of different
Speaker 3: things going on in the market at the moment. There
Speaker 3: are a lot of cross currents and so forth. But
Speaker 3: if we want to just focus on the Trump trade,
Speaker 3: his probability of success is now close to seventy percent,
Speaker 3: and that has made the market wake up and say, okay,
Speaker 3: so what are we looking at? And so it really
Speaker 3: spans a huge gamut of things, everything from gun manufacturers,
Speaker 3: for profit education which thinks they're going to benefit if
Speaker 3: he stops us through the loan forgiveness, to the GSS
Speaker 3: Fanny and Freddie because maybe he won't, he won't take
Speaker 3: the dividends sweep anymore, energy stocks, manufacturing companies that might
Speaker 3: benefit from the tariffs, and so investors are rushing around
Speaker 3: looking for all the different places they think they would
Speaker 3: benefit from another Trump presidency.
Speaker 2: One of the things I think we've seen is in
Speaker 2: the bond curve, basically for treasuries, because there's a sense
Speaker 2: that actually there's going to be higher rates out there
Speaker 2: in the long end of the curve, which changes a
Speaker 2: fair number of things. What is the possibility of a
Speaker 2: Trump presidency with these economic policies leading to more inflation,
Speaker 2: therefore the Fed baby having to raise rates again.
Speaker 3: Well, the bond trades a little complicated because we did
Speaker 3: have that good in the sense of being a slightly
Speaker 3: soft jobs number, and the predicted number of FED rate
Speaker 3: cuts is now up to something over two and therefore
Speaker 3: the ten years started to come down. And now you
Speaker 3: have the Trump piece layering on that, pushing it up
Speaker 3: a little bit, but not hugely. But I don't think
Speaker 3: there's a lot of doubt that his fiscal policies, as
Speaker 3: expressed would be would be inflationary and therefore biased toward
Speaker 3: higher interest rates.
Speaker 2: So talk about that Tax Cutting Jobs Act specific We
Speaker 2: had Scott Bessen on last week and he said, oh.
Speaker 1: No, don't worry about it.
Speaker 2: We're gonna save a lot of money. We're gonna save
Speaker 2: a trillion dollars a year from the basically undoing the
Speaker 2: Inflation Reduction Act. We're gonna save another trillion by redoing Medicare.
Speaker 2: And now I will note that when President Trump had
Speaker 2: came in the first time, he said they were going
Speaker 2: to get rid of Obamacare. That would save us low money,
Speaker 2: but one of the prospects that actually would cut back
Speaker 2: into of the spending under the Bide administration.
Speaker 3: Well, remember that we didn't get rid of Obamacare because
Speaker 3: John McCain and because while he had technically had control
Speaker 3: of both houses of Congress, lost a Republican that costs
Speaker 3: him that. So a lot of this is going to
Speaker 3: depend on what happens to Congress. If both houses of
Speaker 3: Congress go Republican, then he's obviously got much more scope
Speaker 3: to do a bunch of stuff. Whether he really would
Speaker 3: do it or not, who knows. The record of the
Speaker 3: first Trump presidency was not good from a fiscal point
Speaker 3: of view. The deficit went up by hundreds of billions
Speaker 3: of dollars before COVID ever arrived, in large part because
Speaker 3: the TCJA never came close to paying for itself. It
Speaker 3: was close to two trillion dollar costs with no offsets
Speaker 3: in spending and no real revenues associated with it.
Speaker 2: So that's all on the text, the revenue side, as
Speaker 2: it were. What about tariffs? The one thing President Trouble
Speaker 2: has always seemed to enjoy has been imposing tariffs, particularly
Speaker 2: on China, but not only on China. Frankly, he likes tariffs.
Speaker 2: That does, of course increase the cost to the consumers
Speaker 2: and therefore I guess inflation.
Speaker 3: Sure, And by the way, his last set of tariffs,
Speaker 3: which were far less robust than what he's talking about
Speaker 3: now rare. He's something like thirty billion of revenue. I
Speaker 3: thought you were going to ask about revenue, very little
Speaker 3: contribution to revenue.
Speaker 1: The evidence is overwhelming.
Speaker 3: Many economists have studied this that essentially one hundred percent
Speaker 3: ninety five, one hundred and five percent something in that
Speaker 3: ballpark was paid for by consumers. None of it was
Speaker 3: paid for by China. Maybe a little of it came
Speaker 3: out of the companies in terms of profit margins, but
Speaker 3: essentially it was paid for by consumers and was therefore inflationary.
Speaker 3: Now they were very limited tariffs. Start talking about ten
Speaker 3: percent across the board on all imports, you're in a
Speaker 3: different ballgame.
Speaker 2: Well, we talked about inflation. One of the things we
Speaker 2: naturally think about is the feder reserve.
Speaker 1: It's their job. Actually, it has price stability.
Speaker 2: Right. There's a lot of speculation, not necessarily coming from
Speaker 2: Donald Trump himself, it's from people around him like Peter.
Speaker 1: Navarro who talked about firing J. Powell.
Speaker 2: But what are the prospects of really undermining to some
Speaker 2: extent the independence of the Fed.
Speaker 3: That's to me incredibly scary. I think the independence of
Speaker 3: the Fed. They don't get everything right, they got inflation wrong.
Speaker 3: Will stipulate to that they got some stuff wrong in
Speaker 3: twenty nineteen. They may have gotten some stuff wrong coming
Speaker 3: out of the GFC, although they did a great job
Speaker 3: generally in the GFC. But let's just stipulate independence of
Speaker 3: the FED is critical and central to our economic success.
Speaker 3: There's no sands or butts about that. You would not
Speaker 3: want the Congress or the White House in charge of
Speaker 3: monetary policy. And so any step to undermine the FED
Speaker 3: by any president of either party should be something that
Speaker 3: we all push back as strongly as possible.
Speaker 2: So overall, why do we find so many investors who
Speaker 2: are backing President Trump giving everything you just said? What
Speaker 2: do you see they don't or what do they see
Speaker 2: you don't?
Speaker 3: They have a variety of reasons that I understand their reasons.
Speaker 3: For example, one of the biggest reasons you hear is
Speaker 3: the regulatory stuff. There's no question, and now, in fairness
Speaker 3: to the President, although he appointed these people, they are
Speaker 3: independent regulatory agencies. But nonetheless a lot of what the
Speaker 3: FTC has been trying to do, a lot of what
Speaker 3: the SEC has been trying to do, even the FCC,
Speaker 3: the FDA really has upset business, and they simply feel
Speaker 3: that this president is too progressive, and they feel that
Speaker 3: his vice president, should she become president, is even more progressive,
Speaker 3: and they don't like any of that.
Speaker 1: And there are other reasons, but that's a good.
Speaker 3: Example, maybe the main example of what they They just
Speaker 3: don't think this is a pro business administration. I would say,
Speaker 3: even though I do support the president, acting businessmen with
Speaker 3: some regularity is really not the way to get their support.
Speaker 1: I don't think. That's not what my mother taught me.
Speaker 2: Fair No, okay, Steve, I'm delighted to say he's going
Speaker 2: to be staying with us as we turn to the
Speaker 2: rest of the world, particularly whether investors might be falling
Speaker 2: out of love with the so called Magnificent seven. That's
Speaker 2: nextell Wall Street Week on Bloomberg. This is Wall Street Week.
Speaker 2: I'm David Weston. Stephen Ratner of will It Advisors has
Speaker 2: stayed with us. So see, let's talk about the rest
Speaker 2: of the world as it were, and particularly those big
Speaker 2: tech companies that have been getting so much money with
Speaker 2: huge I would say huge capital investment about AI.
Speaker 1: Yeah, look, those companies have had a great run.
Speaker 3: Obviously in Vidia we all know about, but Microsoft, Google
Speaker 3: and so forth Amazon, And the question really is whether
Speaker 3: the market is valuing this situation appropriately. You're talking about
Speaker 3: massive cap X by on estimates anywhere from six hundred
Speaker 3: billion to one point two trillion dollars per year on
Speaker 3: this kind of stuff. And the question the market is
Speaker 3: starting to ask itself is are the revenues going to
Speaker 3: be there to offset it? And that cap X is
Speaker 3: not just a cash expense, but it runs through the
Speaker 3: income statement and depreciation and so forth, and so.
Speaker 1: It affects their margins.
Speaker 3: It affects their profits, and you have to earn You
Speaker 3: have to create a huge amount of revenue to justify
Speaker 3: the magnitude of the cap X that is going on
Speaker 3: right as we speak.
Speaker 2: So see back in the olden days at capsities, for gimer,
Speaker 2: when I was running budgets, if I had a capital expense,
Speaker 2: I had to show what the projections were about when
Speaker 2: I would save that money back just what And we
Speaker 2: usually had a rule about a couple of years, maybe
Speaker 2: two and a half years, we had to earn it back.
Speaker 2: Is anybody taking pencil and paper, if they have it anymore,
Speaker 2: and doing that with AI, Is anybody actually thinking about
Speaker 2: where do we really see this in the real economy
Speaker 2: in terms of increased productivity.
Speaker 3: Well, that's exactly what's happening now to some degree, and
Speaker 3: why you're starting to see a bit of a rotation.
Speaker 3: It might be just a mean reversion after a big run.
Speaker 3: It might be people doing what you talk about, but
Speaker 3: people are doing it. And by the way, this is
Speaker 3: a very debated subject. There's not a preponderance of view
Speaker 3: on one side or the other. And I don't even
Speaker 3: frankly have conviction myself. I think you could argue either way,
Speaker 3: although I think the numbers are pretty daunting. But what
Speaker 3: you're starting to see the analysts do is exactly what
Speaker 3: you said. They're starting to pencil into their projections. This
Speaker 3: is the level of capex, this is a level of
Speaker 3: depreciation we're going to be taking for it. This is
Speaker 3: the amount of revenue we have to generate to justify
Speaker 3: that and achieve the kind of paybacks you're talking about.
Speaker 1: And you say to yourself, is this really plausible?
Speaker 3: Are we really going to you know, is Microsoft really
Speaker 3: going to be able to generate thirty billion dollars of
Speaker 3: revenue from AI? I think that's actually a roughly right number.
Speaker 3: In the next over the two years from now, and
Speaker 3: given that at the moment this stuff is essentially free,
Speaker 3: you might pay ten dollars a month for this or that,
Speaker 3: it's a real open question whether those kind of revenues
Speaker 3: are there.
Speaker 1: Let me just make one other point, which is.
Speaker 3: That if you think back on the success of Microsoft, Google, Facebook,
Speaker 3: they were essentially software companies. I mean, there was certainly
Speaker 3: some Capex involved in that, but nothing on the scale
Speaker 3: of what we're talking about here. And so we're in
Speaker 3: a whole different world, a whole different boat all game
Speaker 3: for these companies. And by the way, it's also a
Speaker 3: competitive ballgame. Open AI is not going to own all
Speaker 3: of AI. Microsoft is not going to own all of AI.
Speaker 3: It's going to be very They all have to protect
Speaker 3: their market share and it's going to be a pretty
Speaker 3: competitive world.
Speaker 2: So, Steve, I'm never going to ask you about specific
Speaker 2: investments that you're making or not making it, but just
Speaker 2: attitude investor. When you're looking at this phenomenon, you're looking
Speaker 2: at the NVIDIAs of this world, and Microsoft and others
Speaker 2: just take off like a rocket ship. It must be
Speaker 2: difficult to stay out of it. I mean, if you're
Speaker 2: running a big fund or something like that when you're
Speaker 2: seeing the fear of being left behind must be enormous.
Speaker 2: But what do you do when you don't know whether
Speaker 2: it's going to work or not going to work?
Speaker 3: Yes, this has been a challenge for active investors this
Speaker 3: year because these big companies Microsoft is something like a
Speaker 3: seven point three or seven point five percent waiting in
Speaker 3: the SMP. Very few money managers have a seven percent
Speaker 3: position in anything, and so it's very when you know,
Speaker 3: you know the numbers, when you disaggregate the magnificent seven
Speaker 3: from the rest of the market, what the differences are,
Speaker 3: and so it's been very tough for active ma That's
Speaker 3: point one point two is Look, this is no different
Speaker 3: than any other investment. You do your best work, you
Speaker 3: figure it out as best you can, and you make
Speaker 3: a bet and sometimes you're right, sometimes you're wrong. I
Speaker 3: would say we tend to be pretty conservative in our
Speaker 3: view of this stuff, and a little bit of the
Speaker 3: view that we've seen some of these movies before and
Speaker 3: we want to be a little careful about piling in,
Speaker 3: especially late in the game.
Speaker 2: Is there a risk that the enormous success of that
Speaker 2: Magnificent seven what are you going to call them, is
Speaker 2: masking other weakness in stock markets. As you say, you
Speaker 2: look at the rest of the market, it has not
Speaker 2: done all that well. And yet we tend to gloss
Speaker 2: over that and say a bit market and the aggregate
Speaker 2: boys doing great.
Speaker 1: It's totally masking it.
Speaker 3: If you take the magnificent seven out and you start
Speaker 3: looking at some sectors, especially things like manufacturing, industrial stuff
Speaker 3: like that. Markets actually had a pretty poor run over
Speaker 3: the last certainly this year and even I think last year,
Speaker 3: and so yes, I think we're starting to see when
Speaker 3: we listen to companies, we listen to our managers, we
Speaker 3: are starting to see signs of softness in the economy
Speaker 3: on the consumer side, on the manufacturing side, and so forth.
Speaker 3: I don't think the economy is falling out of bed,
Speaker 3: but we definitely are in the later stages of an expansion.
Speaker 2: Let me ask about an ancillary part to the AI.
Speaker 2: If I we talk about Nvidia and much of the things,
Speaker 2: but the power required to drive this general AI is enormous.
Speaker 2: I mean, I'm hearing stories now. They're just really in
Speaker 2: a lot of story and that's really driving a lot
Speaker 2: of demand for power. Is that an investment opportunity?
Speaker 3: We have invested around this opportunity. I would say modestly.
Speaker 3: We were actually kind of early to it. Others have
Speaker 3: now caught on to it. And if you look at
Speaker 3: the stocks, for example, of nuclear utilities that have less
Speaker 3: regulated power and also clean power, which is important to
Speaker 3: these hyperscalers, they've shot up. I think people have woken
Speaker 3: up to the fact that the conventional projections of electricity
Speaker 3: demand over the next five to ten years we're ridiculously
Speaker 3: conservative relative to what's going to happen, and we're going
Speaker 3: to face a major I believe we're going to face
Speaker 3: a significant power crunch in this country unless we do something,
Speaker 3: and so running to the conflict between the desire to
Speaker 3: reduce our dependence on fossil fuels and.
Speaker 1: The need for power that's right in front of us.
Speaker 2: That's just what I was going to ask, because this
Speaker 2: goes right against the need to deal with the climate
Speaker 2: where we were trying to give up the fossil fuels,
Speaker 2: and this drives us back into it. Unless you go,
Speaker 2: for example, the nuclear maybe there's small modular reactors.
Speaker 3: As you know, I think you may even talk about
Speaker 3: on your show. Bill Gates has a project I think
Speaker 3: out in Wyoming or someplace to build not a small reactor,
Speaker 3: but a new technology that involves less less heat and
Speaker 3: less water and so on and so forth. But it's
Speaker 3: going to be done in twenty thirty. He doesn't have
Speaker 3: a permit for it. So we're a long way. I
Speaker 3: think we're a long way from nuclear happening. It could happen.
Speaker 3: I think the technology is there, whether it's small nuclear
Speaker 3: reactors or different kinds of nuclear technology, but I see
Speaker 3: no support at all from people to do it. And
Speaker 3: so the result is we're going to have probably some
Speaker 3: coal staying around longer than any of us would like,
Speaker 3: probably building more what it called ccgts natural gas generating
Speaker 3: facilities in order to support the renewables, because obviously the
Speaker 3: sun doesn't always shine, the wind doesn't always blow. We
Speaker 3: all know that, so you have to have baseload power.
Speaker 3: And we're going to find that we are doing more
Speaker 3: with fossil fuels than any of us would like.
Speaker 2: So so find as Steve gives us. Because you're a
Speaker 2: long term investor, you're looking out their ways and you
Speaker 2: look at the economy overall, and we've had extraordinary time
Speaker 2: of growth from World War Two on, but certainly in
Speaker 2: the last thirty years or so that's been challenged. More recently,
Speaker 2: productivity has sort of backed off a bit. Maybe it's
Speaker 2: coming back or maybe not. As you look long term,
Speaker 2: what do you think of the opportunities for an investor
Speaker 2: in the economy. What do you think are likely to
Speaker 2: be with us for a while and really grow.
Speaker 3: You have to have a view about some of the
Speaker 3: things you just said. We definitely the real problem in
Speaker 3: the economy is slow productivity growth. In my opinion, there's
Speaker 3: a decent chance that AI will change that. It could
Speaker 3: be like the Industrial Revolution or lots of other periods
Speaker 3: in our past where we really get a transformational kind
Speaker 3: of change, and that would really be good for all
Speaker 3: kinds of businesses, whether manufacturing business, consumer businesses and so forth.
Speaker 3: And so that to me is really the most interesting
Speaker 3: thing in front of us. Hard to invest around for
Speaker 3: all the reasons we talked about, But beyond that, I
Speaker 3: can't tell you there's a particular sector that I would
Speaker 3: focus on as being the place to go. I do
Speaker 3: worry a lot in terms of economic challenges about the
Speaker 3: budget deficit, the impact on interest rates, the fact that
Speaker 3: we are going to have to deal with this sooner
Speaker 3: or later. But at the moment, I think we're actually
Speaker 3: not in a terrible place.
Speaker 2: Okay, Steve, it's such a treat you have you here.
Speaker 2: Thank you so much that it's Stephen Rattner of will
Speaker 2: It Advisors