WEBVTT - Bloomberg Wall Street Week - February 23rd, 2024 0:00:00.240 --> 0:00:02.440 This is Bloomberg Wall Street Week. 0:00:02.480 --> 0:00:04.400 And we may not have an overall recession, we're having 0:00:04.400 --> 0:00:06.760 a rolling recession. Econ of roll looks pretty strongly. It 0:00:06.800 --> 0:00:07.680 is when it comes to jobs. 0:00:07.720 --> 0:00:09.880 The financial stories that shape our world. 0:00:09.960 --> 0:00:13.640 Three major regional bank failures send shockwaves through the banking system. 0:00:13.680 --> 0:00:15.440 We're all trying to figure out what to make of 0:00:15.600 --> 0:00:17.000 generative AI. 0:00:16.920 --> 0:00:19.320 Through the eyes of the most influential voices. 0:00:19.440 --> 0:00:22.400 Welcome down, doctor Paul Krugman, Ryan moynihan, a Bank of America, 0:00:22.560 --> 0:00:25.279 deebro Lair of the Paulson Institute, well then Hubbard of 0:00:25.280 --> 0:00:26.280 the Columbia Business School. 0:00:26.280 --> 0:00:30.160 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:30.320 --> 0:00:33.239 Forget about war in the Middle East and Europe, or 0:00:33.320 --> 0:00:35.840 whether the FED is going to cut or raise rays. 0:00:36.240 --> 0:00:40.040 All anyone is talking about is AI and Nvidia's tree 0:00:40.120 --> 0:00:43.239 growing to the sky. This is Bloomberg Wall Street Week. 0:00:43.360 --> 0:00:46.800 I'm David Weston. This week we'll talk with Nobel Prize 0:00:46.800 --> 0:00:50.199 winning economist Paul Romer about US trade policy, what it 0:00:50.200 --> 0:00:52.360 should let in and what it should keep out. 0:00:52.720 --> 0:00:55.360 What we want to do is encourage as much flow 0:00:55.480 --> 0:00:57.720 of ideas around the world as we can, but we 0:00:57.800 --> 0:01:00.520 don't need to worry so much about the flows of ours. 0:01:00.760 --> 0:01:04.000 And with former House Majority Leader Eric Canter of Mollis 0:01:04.040 --> 0:01:06.920 about the role of business in changing the direction of 0:01:06.959 --> 0:01:07.959 the Republican Party. 0:01:08.240 --> 0:01:10.880 Donald Trump has transformed the Republican Party. 0:01:10.920 --> 0:01:24.160 It is much more of a populist party now. 0:01:26.080 --> 0:01:28.640 But first we start with what the Fed's rapid increase 0:01:28.640 --> 0:01:31.080 in interest rates has meant for those who owe money. 0:01:31.400 --> 0:01:35.000 Years of record low interest rates naturally led to more borrowing, 0:01:35.200 --> 0:01:38.800 whether by the federal government or private individuals and companies. 0:01:39.200 --> 0:01:42.560 When you have the real interest rate very low, like 0:01:42.640 --> 0:01:46.280 we had when I nominal interest rate, nominal bond yield 0:01:46.440 --> 0:01:50.000 was less than one percent, and real bond yields were 0:01:50.480 --> 0:01:54.320 one and a half one in three quarters negative, that's 0:01:54.360 --> 0:01:57.320 free money. And what that free money does is everybody 0:01:57.320 --> 0:02:00.120 goes in and they borrow and buy things and your 0:02:00.280 --> 0:02:01.680 until it's unhealthy. 0:02:01.920 --> 0:02:04.240 But now that interest rates have risen to the five 0:02:04.320 --> 0:02:07.680 percent range, there's a piper to be paid, with borrowers 0:02:07.760 --> 0:02:10.640 needing to refinance loans as they come do. But the 0:02:10.720 --> 0:02:14.880 extraordinary thing that we're facing is a trillion plus dollars 0:02:14.919 --> 0:02:17.880 of debt that's coming due over the next three four years. 0:02:18.400 --> 0:02:20.200 And that debt needs to get refinanced. 0:02:20.680 --> 0:02:24.040 Even as banks hesitate to take more on their balance sheets. 0:02:24.400 --> 0:02:27.000 If you raise those capital levels, they are going to 0:02:27.040 --> 0:02:31.840 have lower roe and factually they'll be less capital for lending, all. 0:02:31.680 --> 0:02:36.080 Of which creates opportunities for what we call distressed investors and. 0:02:36.160 --> 0:02:39.200 High ye olden loans. There's a lot of dispersion, meaning 0:02:39.200 --> 0:02:42.880 that if you look at ratings, for example, double b's 0:02:42.880 --> 0:02:45.600 are pricing in negative defaults, triple cs are pricing and 0:02:45.720 --> 0:02:48.400 high defaults. So I think if you can get these 0:02:48.440 --> 0:02:50.960 credits picked right and not make mistakes, you're going to 0:02:50.960 --> 0:02:52.919 earn nine to ten percent. And it's time to start 0:02:53.240 --> 0:02:54.320 doing that and. 0:02:54.240 --> 0:02:56.600 To tell us where he sees these opportunities. Welcome town, 0:02:56.639 --> 0:02:59.720 Joshua Friedman. He's co founder and co CEO of Canyon 0:02:59.760 --> 0:03:01.919 part So, josh thank you so much for being back 0:03:01.919 --> 0:03:04.600 with this. Let's take a step back, as we say, 0:03:04.840 --> 0:03:07.320 we had really low, historically low interest rates for a 0:03:07.360 --> 0:03:09.079 long time. Lot Buiple took a lot of debt on 0:03:09.600 --> 0:03:11.880 and now they've come back up. So where do you 0:03:12.000 --> 0:03:14.919 see the most debt A massed out there? 0:03:16.080 --> 0:03:18.520 Thank you for having me again on the show. I 0:03:18.520 --> 0:03:20.680 think when you zoom out today and try to look 0:03:20.720 --> 0:03:23.480 at the overall context. I think there are at least 0:03:23.520 --> 0:03:26.520 four sets of balance sheets that all are carrying an 0:03:26.560 --> 0:03:29.720 awful lot of leverage relative to historical levels, and in 0:03:29.760 --> 0:03:33.080 many ways unsustainable amounts. The first one is the federal 0:03:33.160 --> 0:03:36.360 government itself, which is sitting with thirty five trillion dollars 0:03:36.360 --> 0:03:38.880 of debt and managed to amass the last trillion in 0:03:38.960 --> 0:03:41.920 record time, something like one hundred and six days. And 0:03:42.080 --> 0:03:45.320 the pressure that refinancing that debt, which has relatively short 0:03:45.360 --> 0:03:48.000 average maturities, is a lot of pressure on interest rate 0:03:48.040 --> 0:03:51.040 markets generally. So that's the first balance sheet. The second one, 0:03:51.040 --> 0:03:54.600 I would say, is corporate balance sheets. And as you mentioned, 0:03:54.640 --> 0:03:56.840 if you give something to people for free, they take 0:03:56.920 --> 0:03:59.320 on a lot of it, and what was free was debt. 0:03:59.680 --> 0:04:03.040 So this balance sheet after balance sheet after balance sheet 0:04:03.080 --> 0:04:06.600 in the corporate world, mostly in private equity sponsored companies, 0:04:06.880 --> 0:04:09.920 where the level of debt is six seven eight times EBITITAH, 0:04:10.240 --> 0:04:13.520 and those maturities are rapidly advancing, and the rate of 0:04:13.640 --> 0:04:16.920 interest on those debt on that debt is quite high. 0:04:17.480 --> 0:04:20.080 Most of the floating rate debt was not fixed, and 0:04:20.320 --> 0:04:24.200 refinancing the old debt today is expensive. The third set 0:04:24.360 --> 0:04:28.400 is real estate balance sheets, and in many cases people 0:04:28.480 --> 0:04:30.800 might have swapped or capped their interest rates for two 0:04:30.880 --> 0:04:32.880 years or three years, but they didn't cap it for 0:04:32.920 --> 0:04:35.680 twenty years. Or if they fixed their interest rate, it 0:04:35.720 --> 0:04:37.640 might have been fixed for five years or seven years 0:04:37.680 --> 0:04:40.200 or ten years, but you're well into that period. And 0:04:40.200 --> 0:04:43.200 when you have to refinance into a six percent plus 0:04:43.279 --> 0:04:46.440 environment from a three percent environment, you can't. 0:04:46.200 --> 0:04:47.280 Sustain as much debt. 0:04:47.440 --> 0:04:48.920 So it leaves a gap and there's going to be 0:04:49.000 --> 0:04:52.800 a lot of interesting opportunities in those balance sheets. And 0:04:52.839 --> 0:04:55.560 the final balance sheets that are really a little bit 0:04:55.600 --> 0:05:02.640 out of whack are banks, both national critical banks that 0:05:02.720 --> 0:05:04.880 hone a lot of commercial real estate loans as well 0:05:04.920 --> 0:05:07.479 as regional banks. And we're starting to see some of 0:05:07.520 --> 0:05:11.360 the exposure in those balance sheets. And what is causing well, well, 0:05:11.360 --> 0:05:14.840 they're slowly tiptoeing back into the lending business. It's really 0:05:14.880 --> 0:05:17.320 constraining a lot of those activities that they might otherwise 0:05:17.360 --> 0:05:17.800 engage in. 0:05:18.000 --> 0:05:19.320 Why are we going to sort out? If I can 0:05:19.360 --> 0:05:21.359 say the sheep from the goats, where are you going 0:05:21.440 --> 0:05:23.840 to see some bankruptcies? Some of these people really go away. 0:05:24.480 --> 0:05:27.200 You're starting to see it. The number of bankruptcies has 0:05:27.200 --> 0:05:29.520 gone up statistically by quite a bit. And the place 0:05:29.520 --> 0:05:32.320 where you see that good company versus bad company in 0:05:32.360 --> 0:05:35.640 the most extreme light is in real estate. 0:05:36.040 --> 0:05:38.400 You see bad real estate. 0:05:38.200 --> 0:05:40.599 And what I mean by that might be markets that 0:05:40.640 --> 0:05:43.479 are having outflows of people that are never recovered from 0:05:43.720 --> 0:05:47.480 the COVID work at home phenomenon, where there are outmoded 0:05:47.480 --> 0:05:50.120 buildings that might have been built, like office buildings that 0:05:50.920 --> 0:05:54.919 are somewhat obsolete, that don't look like they're ever recovering. 0:05:55.160 --> 0:05:57.320 That we're sold for a price of X, and now 0:05:58.200 --> 0:06:00.120 the debt is trading at fifty cents or low or 0:06:00.120 --> 0:06:02.080 and the keys are being handed over. So those are 0:06:02.200 --> 0:06:05.640 really bad assets with bad balance sheets. There are other 0:06:05.880 --> 0:06:09.799 properties in real estate that are very good assets. Let's 0:06:09.839 --> 0:06:14.200 just take simple multifamily in very good markets, fully leased, etc. 0:06:14.560 --> 0:06:17.839 Maybe rents are a little soft, but they're still okay, 0:06:18.279 --> 0:06:21.400 fully occupied. But the balance sheet when it has to 0:06:21.440 --> 0:06:24.200 be refinanced, when the constructions completed, the building is done, 0:06:24.240 --> 0:06:27.120 it has to be permanently financed. The rate of interest 0:06:27.200 --> 0:06:29.320 is in the sixes, it's not in the threes, and 0:06:29.360 --> 0:06:33.839 therefore the proceeds that can be maintained in a sustainable way, 0:06:34.000 --> 0:06:36.600 are maybe half what the sponsor was expecting. 0:06:37.040 --> 0:06:39.040 Now, I'm going to guess that Canyon Partners is more 0:06:39.040 --> 0:06:41.080 interested in the second of those than the first of those. 0:06:42.120 --> 0:06:44.320 So where are you seeing opportunities right now, Canyon Partners, 0:06:44.320 --> 0:06:46.720 where are you seeing you can step in and really 0:06:46.920 --> 0:06:49.920 play a significant role in really restructuring some of these. 0:06:50.040 --> 0:06:53.359 Sure, well, there are certain deals that are just liquidations 0:06:53.720 --> 0:06:56.599 or pure bankruptcies, the ftx's of the world and others. 0:06:56.760 --> 0:06:58.800 Those can be very very interesting and last for a 0:06:58.839 --> 0:07:01.640 certain period of time. Those are a little bit anomalous. 0:07:01.640 --> 0:07:05.600 Maybe The much more systematic pattern is good company bad 0:07:05.680 --> 0:07:08.120 balance sheet six and a half seven, seven and a 0:07:08.160 --> 0:07:10.800 half times ebatah. But the value really does. 0:07:10.640 --> 0:07:12.000 Exceed the debt. 0:07:12.360 --> 0:07:15.080 It requires a careful study of what rights you have 0:07:15.280 --> 0:07:18.480 versus the borrower and what rights you have versus the 0:07:18.520 --> 0:07:21.920 other creditors, because we're in a gloves off environment and 0:07:22.080 --> 0:07:24.680 people try to take advantage of their positions to fix 0:07:24.720 --> 0:07:27.120 the balance sheet in a way that advantages themselves. 0:07:27.520 --> 0:07:29.080 Josh, it's so great to have you, beck On Wallsher, 0:07:29.280 --> 0:07:32.680 thank you for being here. That's Josh Friedman of Kenyon Partners. 0:07:33.280 --> 0:07:35.840 Markets were off to the races this week, with both 0:07:35.880 --> 0:07:37.920 the S and P five hundred and the now setting 0:07:37.960 --> 0:07:41.160 new records. The SMP was up one point seven percent 0:07:41.200 --> 0:07:43.480 of the week that's ending at five oh eight eight. 0:07:43.560 --> 0:07:46.320 That's staying above the year end consensus of the Bloomberg 0:07:46.320 --> 0:07:49.360 Elves despite the l's taking their median number up by 0:07:49.400 --> 0:07:52.600 fifty points. The NASDAC added one point four percent, while 0:07:52.600 --> 0:07:55.760 the yield on the tenure fell just over three basis 0:07:55.760 --> 0:07:58.880 points to end the shortened trading week at four point 0:07:58.920 --> 0:08:01.520 two five percent. To take us through the weekend, the markets, 0:08:01.560 --> 0:08:04.480 Welcome back now, Alicia Levine, bny Melon, the head of 0:08:04.520 --> 0:08:08.160 Investment Strategy and Equity Advisory Solutions. Alicia, great to have 0:08:08.200 --> 0:08:10.400 you back with us. Thank you for being here. Thanks David, So, 0:08:10.480 --> 0:08:12.120 I guess first of all, how much of this was 0:08:12.160 --> 0:08:14.280 in Nvidia, I mean, in video is quite a phenomenon 0:08:14.280 --> 0:08:16.000 in the equity markets this week. How much of what 0:08:16.040 --> 0:08:17.880 we're seeing in the equity markets is really because the 0:08:17.960 --> 0:08:18.720 Nvidia effect. 0:08:18.960 --> 0:08:21.520 So it's in Vidia, but it's not just in Vidia 0:08:21.600 --> 0:08:25.640 per se, because what in video represents is the next 0:08:25.680 --> 0:08:30.280 growth leg of corporate America, of productivity and of earnings 0:08:30.480 --> 0:08:33.720 for the fastest growing companies in America. So yes, it 0:08:33.760 --> 0:08:36.720 was that one company, but it's also what it represented 0:08:37.200 --> 0:08:40.760 is in that the AI revolution looks to be real. 0:08:41.280 --> 0:08:44.600 The growth is spectacular. It won't be the only company 0:08:44.640 --> 0:08:48.920 that benefits from So there are creators and there they 0:08:48.960 --> 0:08:51.960 are benefacturers from this, and so all that went into 0:08:52.000 --> 0:08:55.240 the invidious story. So, yes, the numbers were terrific. They 0:08:55.280 --> 0:08:57.439 beat a high bar, right, they beat a high bar. 0:08:57.480 --> 0:09:01.240 I mean, it's remarkable, remarkable that the market rally, but 0:09:01.280 --> 0:09:04.920 the earnings were good, the outlook was great, and so 0:09:05.000 --> 0:09:07.360 that just rallied the whole complex related to AI. 0:09:07.800 --> 0:09:10.280 There's been concern that the market's a little too narrow. 0:09:10.440 --> 0:09:12.440 We were talking about the Magnificent seven. I guess we 0:09:12.480 --> 0:09:15.040 talk about it all the time. Is there any indication 0:09:15.160 --> 0:09:17.079 that the market is broadening out a little bit? 0:09:17.640 --> 0:09:20.480 So it's a great question because in some ways the 0:09:20.520 --> 0:09:24.319 Magnificent seven has turned into the feisty five. Right, So 0:09:24.400 --> 0:09:27.240 a couple of the larger companies are simply stumbling this year, 0:09:27.320 --> 0:09:30.480 not just on fundamentals but also on sock price. At 0:09:30.480 --> 0:09:32.680 the same time, you are seeing a broadening out to 0:09:32.760 --> 0:09:36.199 other parts of the large cap universe. We're not there 0:09:36.280 --> 0:09:38.600 yet in small cap, but we are in large caps. 0:09:38.640 --> 0:09:41.520 So the industrials are doing well, healthcare is doing well, 0:09:41.679 --> 0:09:44.960 parts of consumer are doing well, so that part of 0:09:45.000 --> 0:09:49.559 the world it's broadening out. But that whole Magnificent seven 0:09:49.679 --> 0:09:52.400 I think, is going to crack apart. And now ELI 0:09:52.440 --> 0:09:55.440 Lilly is part of that as well, so that was 0:09:55.480 --> 0:09:57.160 not part of ELI Lily was not part of the 0:09:57.240 --> 0:09:59.720 Magnificent seven last year, So you're seeing a broadening. 0:10:00.800 --> 0:10:02.520 It was a time not long ago when it was 0:10:02.520 --> 0:10:04.160 all about the Fed. Are they going to cut, how 0:10:04.200 --> 0:10:05.839 much they're gonna cut, how soon are they're going to cut? 0:10:06.400 --> 0:10:09.199 How much risk is there in the marketplace right now? 0:10:09.320 --> 0:10:11.640 But the Fed not cutting as much as we thought 0:10:11.760 --> 0:10:12.880 or hope they would. 0:10:12.720 --> 0:10:15.320 So let's roll that question back a little bit. The 0:10:15.360 --> 0:10:18.440 real risk is inflation. That's the risk, and then of 0:10:18.480 --> 0:10:21.440 course the Fed's reaction function to it. So as long 0:10:21.480 --> 0:10:25.840 as inflation stays on this downward path, the Fed can 0:10:25.920 --> 0:10:28.760 cut and can cut by June. The big risk here 0:10:29.080 --> 0:10:34.240 is what happens with CPI for February reported in March. Right, 0:10:34.280 --> 0:10:37.160 If it's another hot month, then you could get some 0:10:37.240 --> 0:10:41.000 dislocation in the market. But where we stand today, I 0:10:41.040 --> 0:10:44.839 think that the FED story is very understood. So the 0:10:44.880 --> 0:10:47.600 market very quickly went from pricing in six cuts to 0:10:47.720 --> 0:10:51.560 three cuts for this year, even as growth was better, 0:10:51.920 --> 0:10:55.559 Earning slightly better, and the markets just kind of digested it. 0:10:55.800 --> 0:10:58.439 So I think as long as the FED cuts by June, 0:10:59.040 --> 0:11:02.760 the story remains in tact, which is fair a bullish one, 0:11:02.800 --> 0:11:03.920 it's a strong one. 0:11:04.320 --> 0:11:06.640 So that's monetary policy. We're on a fiscal policy because 0:11:06.640 --> 0:11:08.640 there's still some money coming out of the federal government 0:11:08.679 --> 0:11:10.960 under those bills that got enacted in prior years. 0:11:11.000 --> 0:11:13.280 That's right, So I think there's no accident to note 0:11:13.520 --> 0:11:16.360 that those enormous two trillion dollar bills that came out 0:11:16.400 --> 0:11:18.640 of the administration that were passed a couple of years ago, 0:11:18.720 --> 0:11:22.040 the IRA, the Chips Act, the Infrastructure Act. Guess when 0:11:22.480 --> 0:11:25.560 the money really starts getting pumped into the economy. That 0:11:25.720 --> 0:11:27.199 is in twenty twenty. 0:11:26.920 --> 0:11:28.400 Four, an election year. 0:11:28.720 --> 0:11:31.719 So we're seeing one hundred billion dollars coming in from 0:11:31.800 --> 0:11:34.840 those acts this year into the economy. And at the 0:11:34.880 --> 0:11:38.240 same time, Congress both Democrats and Republicans, are passing a 0:11:38.320 --> 0:11:41.400 tax bill that also bring the fiscal stimulus into the 0:11:41.400 --> 0:11:45.640 economy in an election year, So I'd say that what 0:11:45.679 --> 0:11:48.080 that tells me is it's going as the year goes on, 0:11:48.160 --> 0:11:51.600 it's going to be harder to get the recession because 0:11:51.600 --> 0:11:55.959 the fiscal policy is working towards growth. And so with that, 0:11:56.200 --> 0:11:59.559 I think that the risk of a recession that folks 0:11:59.640 --> 0:12:02.400 still want worry about because of the tightening of policy 0:12:02.480 --> 0:12:06.880 and the retraction and bank credit to the economy, it's 0:12:06.960 --> 0:12:09.280 being offset by the fiscal into the economy. 0:12:09.360 --> 0:12:13.080 I know that historically markets don't discount geopolitical risk very well, 0:12:13.480 --> 0:12:15.520 but at some point do they have to start thinking 0:12:15.520 --> 0:12:17.080 about it. Where are we today? 0:12:17.240 --> 0:12:19.480 We look to be fracturing. We look to be going 0:12:19.520 --> 0:12:22.760 back to a place where there are blocks, there's competition 0:12:22.840 --> 0:12:26.880 both militarily and economically, and for that you have to 0:12:26.880 --> 0:12:29.640 go back past the Cold War, because the Cold War 0:12:29.679 --> 0:12:32.240 was essentially two blocks, and we're going back before that. 0:12:32.640 --> 0:12:35.560 I'd say, ultimately, if you want to think of it 0:12:35.600 --> 0:12:38.240 this way, the US is really involved in a two 0:12:38.320 --> 0:12:40.880 front war right now, and the question is is there 0:12:40.920 --> 0:12:41.560 a third one? 0:12:41.760 --> 0:12:43.680 Yeah, infascination. Sooner or later, the markets are going to 0:12:43.679 --> 0:12:45.800 have to deal with all this geopolitics. Thank you so 0:12:45.840 --> 0:12:48.960 much for Alesha Levin of BNY Mellon and this is 0:12:49.000 --> 0:12:50.640 Wall Street Week on Bloomberg. 0:12:53.640 --> 0:12:57.800 This is Bloomberg Wall Street Week with David Weston from 0:12:57.960 --> 0:13:04.640 Bloomberg Radio. 0:13:05.520 --> 0:13:08.360 This is Wall Street Week. I'm David Weston. US trade 0:13:08.360 --> 0:13:11.640 policy is already playing a role in this presidential election 0:13:11.920 --> 0:13:14.640 as a leading Republican candidate, Donald Trump is calling for 0:13:14.640 --> 0:13:17.960 an across the board tariff of ten percent on goods 0:13:18.000 --> 0:13:21.800 imported from all countries and potentially much higher from China. 0:13:22.280 --> 0:13:25.360 Nobel Prize winning economist Paul Romer of Boston College takes 0:13:25.440 --> 0:13:27.880 us through the economic effects of tariffs. 0:13:29.760 --> 0:13:33.040 I think we need a more nuanced view, and it's 0:13:33.280 --> 0:13:35.240 really one that goes all the way back to the 0:13:35.240 --> 0:13:40.600 origins of my work distinguishing ideas from objects. And what 0:13:40.640 --> 0:13:43.360 we want to do is encourage as much flow of 0:13:43.480 --> 0:13:46.280 ideas around the world as we can. But we don't 0:13:46.320 --> 0:13:48.760 need to worry so much about the flows of objects 0:13:49.200 --> 0:13:51.640 because we don't get very much benefit out of the 0:13:51.720 --> 0:13:54.760 trade and the objects. And as I'll describe that, there's 0:13:54.760 --> 0:13:56.440 some costs associated with those. 0:13:56.920 --> 0:13:59.760 I think historically, as economists have told us that free 0:13:59.760 --> 0:14:03.040 trade is really valuable to growing the economy, that you 0:14:03.040 --> 0:14:06.920 have comparative advantage, really grow an economy. If you actually 0:14:06.960 --> 0:14:10.120 do cut back on free trade, do you have to 0:14:10.160 --> 0:14:12.640 give up growth in the economy. No, so you don't 0:14:12.679 --> 0:14:14.520 have to give up the growth because it's the trade 0:14:14.520 --> 0:14:19.920 and ideas which is essential for faster growth. So, for example, 0:14:20.000 --> 0:14:22.240 if you've got a firm that invents, like a better 0:14:22.240 --> 0:14:24.800 pharmaceutical in the United States, you want them to be 0:14:24.880 --> 0:14:27.680 able to earn royalties on that all over the world 0:14:28.000 --> 0:14:31.200 because the returns to innovation will be higher and they'll 0:14:31.400 --> 0:14:33.960 discover more things. But that doesn't mean that the pill 0:14:34.000 --> 0:14:37.920 has to be manufactured in the United States. The firm 0:14:37.960 --> 0:14:42.200 can get the royalties just on the intellectual property and 0:14:42.280 --> 0:14:45.960 have that manufactured anywhere. To give you another example, when 0:14:46.120 --> 0:14:51.040 during the seventies, Japan had gotten better at making cars 0:14:51.760 --> 0:14:57.600 according to these zero defect quality control standards, and we 0:14:57.680 --> 0:15:01.320 came to an agreement with Japan where we said, Toyota, Honda, 0:15:01.480 --> 0:15:04.240 those companies they can come and manufacture cars in the 0:15:04.320 --> 0:15:07.920 United States. So the ideas that they had developed they 0:15:07.920 --> 0:15:10.840 could earn a profit on, and US consumers could get 0:15:10.880 --> 0:15:13.960 the benefits of higher quality cars. But we still had 0:15:14.040 --> 0:15:17.760 cars that were manufactured by workers in the United States. 0:15:18.320 --> 0:15:20.920 And that's the advantage of some kind of restrictions on 0:15:21.000 --> 0:15:23.920 the trade in goods is that we can actually protect 0:15:23.920 --> 0:15:29.040 the jobs and the incomes for the people who you know, unfortunately, 0:15:29.040 --> 0:15:31.680 for the last two decades, have really been left behind. 0:15:32.200 --> 0:15:35.200 One of the concerns repeated most frequently about tariffs is 0:15:35.200 --> 0:15:37.880 the effect that they may have on economic growth overall, 0:15:38.160 --> 0:15:39.960 even if they do save some jobs. 0:15:40.600 --> 0:15:43.320 I don't think there's any debate among serious economists. From 0:15:43.320 --> 0:15:48.680 a macroeconomic standpoint, trade is good. Therefore, moving against trade 0:15:48.760 --> 0:15:51.560 is bad in terms of the impact on the overall economy. 0:15:51.560 --> 0:15:53.960 Whether we go into a crash and the depression, I'm 0:15:54.000 --> 0:15:56.440 not sure I would predict that, but it's bad on 0:15:56.560 --> 0:16:01.040 a micro level. The problem with free trade, so to speak, 0:16:01.360 --> 0:16:04.040 is that there were jobs lost. The opening of China 0:16:04.080 --> 0:16:10.000 into the WTO unabashedly, unquestionably caused US manufacturing jobs, but 0:16:10.080 --> 0:16:12.520 the overall economy was better. Everything you and I bought 0:16:12.760 --> 0:16:15.320 was cheaper and better because it was made in China. 0:16:15.400 --> 0:16:17.600 And yeah, we can reverse all that. We can ban television, 0:16:17.680 --> 0:16:21.520 SATs and bicycles from China, and the consequences would be 0:16:21.920 --> 0:16:24.000 not I don't think disastrous, but. 0:16:24.000 --> 0:16:25.480 They would be noticeably bad. 0:16:26.120 --> 0:16:29.000 The way to cut it is high school educated versus 0:16:29.120 --> 0:16:31.760 college educated people. And if you look at something like 0:16:31.920 --> 0:16:36.720 life expectancy, high school educated people are dying younger. They're 0:16:36.800 --> 0:16:40.560 dying from these deaths of despair. If you look at employment, 0:16:41.480 --> 0:16:44.920 the average adult, the average number of adults who have 0:16:44.920 --> 0:16:47.560 a job in the United States has gone down, mostly 0:16:47.600 --> 0:16:50.520 because the people who are high school educated have such 0:16:51.120 --> 0:16:52.840 miserable prospects. 0:16:52.240 --> 0:16:53.520 That some of them have given up. 0:16:53.840 --> 0:16:56.600 The rest are staying there in the market, but they're 0:16:56.920 --> 0:17:00.960 they're really they're really suffering. So life expecting, see willingness 0:17:01.000 --> 0:17:03.200 to work. I mean, these are the kinds of underlying 0:17:03.400 --> 0:17:06.960 indicators that tell us life is not getting better. It's 0:17:07.000 --> 0:17:10.040 getting worse for a large fraction of the people here 0:17:10.040 --> 0:17:11.720 in the United States. And we got to think about 0:17:12.040 --> 0:17:15.600 what do we do to give them a growth prospect 0:17:16.080 --> 0:17:18.199 like the rest of us have the college educated have 0:17:18.520 --> 0:17:21.359 What will make it so that they can see progress 0:17:21.359 --> 0:17:24.280 in their lives and even progress where their children will 0:17:24.320 --> 0:17:25.880 do better than they did. 0:17:26.920 --> 0:17:29.080 It's not just goods that the United States and forces 0:17:29.119 --> 0:17:32.520 world broad It also welcomes capital investment, as Nippon Steel 0:17:32.600 --> 0:17:36.080 seeks even now to invest in US steal something the 0:17:36.080 --> 0:17:38.560 Biden administration is carefully reviewing. 0:17:39.480 --> 0:17:45.480 This is a test for the Biden administration. Has their 0:17:45.680 --> 0:17:52.719 commitment to resilience and industrial policy in a serious commitment 0:17:53.280 --> 0:17:58.920 based on a desire to strengthen and make more resilient 0:17:59.240 --> 0:18:05.800 the economy, or is it a cloak for protectionists pandering 0:18:06.440 --> 0:18:16.280 to traditional industries with no genuine national security rationale. There 0:18:16.359 --> 0:18:22.399 is no remotely plausible national security rationale for questioning the 0:18:22.480 --> 0:18:30.400 nipon steel. Nipon US steel transaction Japan is a staunch ally. 0:18:30.600 --> 0:18:34.960 The production will continue to take place in the United States. 0:18:35.560 --> 0:18:39.520 The result will be the infusion of more capital into 0:18:40.200 --> 0:18:46.760 the US steel industry. The result will be lower price 0:18:46.880 --> 0:18:50.920 steel as an input when a hundred times as many 0:18:51.480 --> 0:18:56.360 US workers are in industries that use steal as are 0:18:56.440 --> 0:19:03.560 in the steel industry self. So this should be a 0:19:03.760 --> 0:19:11.040 layup for policy makers who have the right motivations, and 0:19:11.440 --> 0:19:16.919 if it's not, it is a sign of very troubling economic. 0:19:16.480 --> 0:19:19.240 Nationalism on the part of the United States. 0:19:20.280 --> 0:19:23.240 I think foreign investment is by far the most important 0:19:23.600 --> 0:19:27.840 vector for moving ideas around the world. There's licensing, there's 0:19:28.560 --> 0:19:34.240 intellectual property, but it's really foreign it's firms that carry ideas. 0:19:34.280 --> 0:19:37.000 So NIP on steel could bring its ideas in about 0:19:37.000 --> 0:19:40.480 how it makes how to make steel or better, better, 0:19:40.640 --> 0:19:44.160 more efficient methods. That's just like Toyota and Honda had 0:19:44.160 --> 0:19:47.720 these ideas about quality control, which interesting we were ideas 0:19:47.840 --> 0:19:50.639 developed by a professor in the United States deming, but 0:19:50.840 --> 0:19:53.200 nobody has States would listen to him, so he took 0:19:53.280 --> 0:19:54.200 the ideas to Japan. 0:19:54.440 --> 0:19:55.359 They developed them. 0:19:55.280 --> 0:19:59.000 They turned out to be fantastically important, and then we 0:19:59.119 --> 0:20:02.160 got them back through the direct foreign investment by those firms. 0:20:02.560 --> 0:20:06.320 So we definitely want us both to protect our firm's 0:20:06.320 --> 0:20:09.520 ability to go earn a return in other countries in 0:20:09.520 --> 0:20:11.840 the world, but also we want to fight for that. 0:20:11.920 --> 0:20:13.679 We also want to fight for the ability for the 0:20:13.720 --> 0:20:17.479 foreign firms that have good ideas to come and supply 0:20:17.560 --> 0:20:20.280 them to workers and consumers in the United States. 0:20:20.520 --> 0:20:22.760 So you're an economist, of course, you're not a national 0:20:22.800 --> 0:20:25.879 security expert. How does national security cut across this petific 0:20:25.880 --> 0:20:28.959 because there are concerns it's some investment, foreign investment, particularly 0:20:29.000 --> 0:20:32.640 from some rivals, if not enemies, rivals in some US 0:20:32.720 --> 0:20:34.800 industries could actually undermine our national security. 0:20:34.960 --> 0:20:38.080 Yeah again, I think I think people are like barking 0:20:38.160 --> 0:20:40.199 up the wrong tree here. I think that what we 0:20:40.200 --> 0:20:43.480 should really be thinking about on national security is we 0:20:43.520 --> 0:20:49.080 want to make critical security technology goods like chips in 0:20:49.080 --> 0:20:52.280 the United States so that if things get really bad, 0:20:52.359 --> 0:20:55.080 we control the supply, and we want to make things 0:20:55.119 --> 0:20:56.840 like masks, like for. 0:20:56.800 --> 0:20:58.560 The next pandemic in the United States. 0:20:58.600 --> 0:21:01.600 And we've gotten ourselves in a position where we are 0:21:01.640 --> 0:21:05.800 not self sufficient in chips or masks, So those are 0:21:05.840 --> 0:21:08.360 the things we need to invest in, and if necessary, 0:21:08.720 --> 0:21:11.720 put tariff barriers because it'll be a little more expensive 0:21:11.760 --> 0:21:15.280 to produce them here. But put tariff barriers or subsidized 0:21:15.359 --> 0:21:18.760 one way or the other make it profitable for firms 0:21:18.800 --> 0:21:21.119