Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course, on the Bloomberg Terminal. William Dudley is
Speaker 1: a former president in the New York Fat of course
Speaker 1: for years, legendary at Goldman Sachs writing for Bloomberg Opinion.
Speaker 1: We're thrilled that Bill Dudley could brief us this morning.
Speaker 1: Bill Dudley, I want to talk about policy rule, inertia,
Speaker 1: the physics envy of guys like you. You do Newtonian mechanics,
Speaker 1: and up we go. Interest rates start moving up and
Speaker 1: we start talking about inertia. What's the inertia look like
Speaker 1: right now to hire interest rates? Well, the short ending inertia,
Speaker 1: there's no enough, there's a the inertia of keeping short
Speaker 1: term rates steady. The feed is said that they're going
Speaker 1: to be very slow to raise interest rates. They're not
Speaker 1: going to begin to raise interest rates until they get
Speaker 1: to full employment to percent inflation, and they're confident that
Speaker 1: inflation is going to go aboff TOWERC. We know that's
Speaker 1: going to take a while to convince some of that.
Speaker 1: Once they start, however, they're gonna be late and they're
Speaker 1: gonna have to catch up, and so this is gonna
Speaker 1: be a period of slow and then it's going to
Speaker 1: be a period of fast. And I think the thing
Speaker 1: that people don't really fully appreciate is when they actually
Speaker 1: have to catch up, the level of short term rates
Speaker 1: is going to climb much higher than what's currently priced
Speaker 1: in financial mark What you just heard there's, folks, is
Speaker 1: a synthesis of history with economics that Bill Dudley was
Speaker 1: legendary for with McKelvey at Goldman Sachs. Bill Dudley, I'm
Speaker 1: gonna cut to the chase and your wonderful essay. You
Speaker 1: talk about that process of moving from the reality ex
Speaker 1: post we're behind and forward you talk about talking and
Speaker 1: then the Federal Act and finally they will do higher rates,
Speaker 1: Well they do it in a measured way or do
Speaker 1: we literally go back Arthur Burns where they're gonna be
Speaker 1: talking about eighth point or higher moves. I think they're
Speaker 1: gonna have to move relatively quickly because liftoff in terms
Speaker 1: of short term rates isn't going to happen until the
Speaker 1: economy is already at full employment. So there's gonna be
Speaker 1: a big gap between where they are starting where they
Speaker 1: need to be to keep the economy from overheating. So
Speaker 1: it seems to me that at least a quarter point
Speaker 1: of meeting seems like the most likely UH template. Think
Speaker 1: about what happened in two thousand and four to two
Speaker 1: thousand and six. The Fed raised the quarter point of
Speaker 1: meeting for there was seventeen meetings in a row, taking
Speaker 1: the federal fund rate from one percent to five and percent.
Speaker 1: Probably not gonna go quite that high this time, but
Speaker 1: we're gonna go quite a bit higher, I think than
Speaker 1: the two percent is currently priced into financial market. So, Bill,
Speaker 1: how would you charunterize this? Is this a race back
Speaker 1: to neutral once you do start, or a race through neutral? Well,
Speaker 1: you have to go beyond neutral because you're starting because
Speaker 1: you're already at full employment and inflation is likely to
Speaker 1: go above your two percent inflation objective. You actually have
Speaker 1: to go to how much was stately forced? Do you
Speaker 1: think the market would be in that environ man, just
Speaker 1: having a look back at is a case study to
Speaker 1: think about. Well, it's gonna be interesting to see how
Speaker 1: the market reactions. That's the one thing that could slow
Speaker 1: the FED down if the market reacts really poorly than
Speaker 1: the federals. Sort of well back a little bit, Well, well,
Speaker 1: look what happened between two thousand and four and two
Speaker 1: thousand six. FED tightened every meeting for over two years,
Speaker 1: and I guess what happened. The stock market was fine
Speaker 1: and the bond market was fine. So you're absolutely right
Speaker 1: how the markets react will affect the pace of tightening
Speaker 1: when the FED starts. Are you advocating for a change
Speaker 1: of policy then, Bill, or just highlighting where you think
Speaker 1: the risk lie? I think I'm just highlighting where the
Speaker 1: risk lie. I mean, there are there are benefits of
Speaker 1: what the Fed is doing. It's going to keep inflation
Speaker 1: expectations better anchored. It's going to get those eight million
Speaker 1: people that are still out of work post COVID back
Speaker 1: to work more quickly. But there are there are costs
Speaker 1: on the other side, and people in financial markets do
Speaker 1: need to be cognizant of that of those some of
Speaker 1: those downside risks, which thing let's cost on than it.
Speaker 1: Drug Miller is out in the Ball Street Journal Stanley
Speaker 1: drug A Miller, famed investor of course, a legendary hedge
Speaker 1: fund managers, and the following the long term risk from
Speaker 1: asset bubbles and fiscal dominance dwarf the short term risk
Speaker 1: of putting the brakes on a booming economy in twenty two.
Speaker 1: What do you make of that aspect of it, Bill?
Speaker 1: I think the fan is does recognize that financial markets
Speaker 1: are frothy, but they're looking through that because they especially
Speaker 1: for the equity market. They say the equity market, if
Speaker 1: the equity market wrey to go down to some future
Speaker 1: point in time, they don't see as a big risk
Speaker 1: of financial stability because people investors in the equity market
Speaker 1: typically don't do so on a highly leveraged basis. Remember
Speaker 1: what happened to Great Financial Crisis. It was leverage that
Speaker 1: killed us. So you know, the fans to view is
Speaker 1: if we tighten and the stock market goes down to
Speaker 1: some subsequent period of time, that will tighten financial conditions
Speaker 1: and we may then have to tighten monentrec passy as much.
Speaker 1: But you know, they agree that markets are frothy, but
Speaker 1: they're looking through that. They're determined to keep rates low
Speaker 1: until they actually get a lot more people back to work.
Speaker 1: Bill Dudley, don't want to digress. We just talked to
Speaker 1: Jared Bernstein to the White House about this, the arch
Speaker 1: conservative fear that we're not going to be able to
Speaker 1: grow our way, or the growth won't participate in our
Speaker 1: debt our deficit solutions. And this goes back to out
Speaker 1: on at Berkeley where you were Chip Jones and others
Speaker 1: and solo at M I, T, etcetera. The idea that
Speaker 1: just this fear that the growth won't be there frame
Speaker 1: your optimism that growth economic growth of this nation will
Speaker 1: assist in helping us with this pandemic debt and deficit. Well,
Speaker 1: I think it will help because we have excess capacity
Speaker 1: in the labor market. Uh. And I think you know,
Speaker 1: if you look at the pro tivty numbers, I mean,
Speaker 1: it's hard to read them through the pandemic, but they
Speaker 1: actually seem to be better than what people expected. End
Speaker 1: of the day, growth is about resources and proctivity. Resources
Speaker 1: not so much in the sense that the population growth
Speaker 1: in the US is pretty modest, so labor force growth
Speaker 1: is only but a half a percent a year. But
Speaker 1: proctivity growth, that's the key and if pro tivty growth
Speaker 1: takes up thing, you'll have stronger growth. But which is
Speaker 1: finally final question. We've got to get your take on
Speaker 1: that pyrosal pull from Friday. How would you be processing
Speaker 1: that if you're on the FED right now, I think
Speaker 1: you'd say, Wow, that was surprisingly weak. But you know,
Speaker 1: we don't have a lot of experience coming out of pandemics,
Speaker 1: and you know, it's very possible that is weak because
Speaker 1: people don't want to go back to work quite yet,
Speaker 1: because they can't gonna have people to take you know,
Speaker 1: they don't have people to take care of their telling
Speaker 1: me because schools are still out of session. Um so
Speaker 1: I think it's gonna just take a while to understand
Speaker 1: what's really happenings to the pandemic. I don't think they're
Speaker 1: gonna put a lot of weight on one month's uh
Speaker 1: weakness in terms of ferals. Oh A, tomny Pace would
Speaker 1: the former Federal Reserve Bank of New York President, Thank you, Bill.
Speaker 1: Look forward to catching up soon. It is a wonderful
Speaker 1: time to move on from the jobs reporting catch up
Speaker 1: with Jared Bernstein, member of the White House Council on
Speaker 1: Economic Advisors. Dr Bernstein has been definitive on socio economics
Speaker 1: with his work at the Center on Budget and Policy
Speaker 1: Priorities in e P I before that, an advisor to
Speaker 1: Vice President Biden, now holding court at the White House. Jared,
Speaker 1: thank you so much for joining us today. Jared, I
Speaker 1: want to go back to the arch conservative fear. It
Speaker 1: has been there from the time of David Ricardo and
Speaker 1: John Stewart Mill. We will not grow our way out
Speaker 1: of our challenges. Everyone in the middle, everyone liberal, including
Speaker 1: Joe Stiglets, a laureate, has battled disc for years, including
Speaker 1: solo at m I t N describe right now this
Speaker 1: fear that we can't grow our way out of our challenges. Well,
Speaker 1: that's certainly not a fear I share, and in fact,
Speaker 1: I think the administration's policies thus far are very much
Speaker 1: targeted at not just growing our way out of this,
Speaker 1: because that's always going to be just a part of
Speaker 1: the solution, but making sure that that growth is equitable,
Speaker 1: that it's reaching people that hasn't reached before. One of
Speaker 1: the touchstones of President Biden's economic policy will always be
Speaker 1: GDP growth, stock market growth. Even lower unemployment by itself
Speaker 1: is not enough. It has to reach the middle class
Speaker 1: that has to reach lower income people, and they need
Speaker 1: the bargaining clouds so they can claim they're fair share
Speaker 1: of the growth, which by the way, was six point
Speaker 1: four percent in the first quarter, and the and the
Speaker 1: fingerprints of the Rescue Plan are all over that getting
Speaker 1: to the other side of the crisis begat the building
Speaker 1: Back Better agenda, which is a much longer term set
Speaker 1: of investments. Jared, what does the Biden warning in America
Speaker 1: look like? You know, I think the way to think
Speaker 1: of that is uh kind of shifting from the American
Speaker 1: Rescue Plan to the Jobs and Family Plan. The Rescue
Speaker 1: Plan was always intended to do precisely what it's doing,
Speaker 1: get us to the other side of the crisis as
Speaker 1: quickly as possible by getting shots and arms checks in
Speaker 1: pockets and making sure families and businesses and childcare providers
Speaker 1: are intact on the other side of the crisis. But
Speaker 1: simply getting back to where we were is wholly insufficient
Speaker 1: for this administration. There needs to be a deep, ten
Speaker 1: year set of investments embedded in the Jobs and Family
Speaker 1: Plan to make sure that what I described in my
Speaker 1: first answer to you occurs, which is that we pull along.
Speaker 1: Folks have historically left behind by deep investments in education
Speaker 1: and an opportunity in neighborhoods that have been left behind,
Speaker 1: and clean energy, in manufacturing, and standing up a care
Speaker 1: sector for childcare and elder care. Those are all keystones
Speaker 1: of the jobs and family clans Montana, South Carolina, Arkansas,
Speaker 1: and now North Dakota Jacks, you'll be familiar with this
Speaker 1: story that push him back against the additional UI unemployment insurance.
Speaker 1: Have you spoken to the governors of those states? I
Speaker 1: have not personally spoken to the governors, but that's the president.
Speaker 1: There are people within the administration. I don't know how
Speaker 1: to read out of precisely who, but I do know that, yes,
Speaker 1: the presidents talks to talks to governors all the time.
Speaker 1: Do you think that's the wrong decision. Yeah, I do
Speaker 1: think it's the wrong decision. I think the right decision
Speaker 1: is what the President talked about yesterday, which is a
Speaker 1: twofold to make sure we take down any barriers that
Speaker 1: stand between people and getting back to work, with childcare
Speaker 1: being the most prominent. To make sure that the rules
Speaker 1: of the UI system are followed. If people are offered
Speaker 1: a suitable job, the rules say they need to take it.
Speaker 1: And suitable, by the way, means a job that is
Speaker 1: enables them to go back to work safely. And then
Speaker 1: and and and and recognizes that people have childcare obligations
Speaker 1: that they can't always meet, so helping to take down
Speaker 1: those barriers getting folks back to work, and recognizing that
Speaker 1: the UI system is classic insurance for people who don't
Speaker 1: have income from for work and it's been a huge
Speaker 1: boon to unemployed Americans throughout this period. If it's the
Speaker 1: wrong decision, let's stress test them. What would the consequences
Speaker 1: be this month and next month when these policies are introduced. Yeah,
Speaker 1: that's a great question. So I think they're twofold. One
Speaker 1: is that you'll see people really experience a level of
Speaker 1: economic hardship that wouldn't have occurred if they maintained their
Speaker 1: enhanced benefits. And the other is that you're not going
Speaker 1: to see much difference between uh, the labor market outcomes
Speaker 1: in these areas versus others. So if we dig into
Speaker 1: the data, thus far, I should say thus far, because
Speaker 1: these things change month to month. We don't see a
Speaker 1: negative correlation between places where unemployment insurance replacement rates, meaning
Speaker 1: the extent to which it's replacing the wage. We don't
Speaker 1: see a negative correlation between replacement rates and labor market outcomes,
Speaker 1: so that would suggest that UI is not the problem.
Speaker 1: And we know that people are facing barriers to childcare
Speaker 1: at to school. We know there's concerned about the virus
Speaker 1: out there. If you actually look at the vaccination rates
Speaker 1: among working age people, they're obviously a lot lower than
Speaker 1: the broader adult population. Dr Bernstein, you are eminently qualified
Speaker 1: to speak to those on the right and the left
Speaker 1: with your PhD and social welfare from Columbia. Folks. That
Speaker 1: is a history and inheritage that speaks of a long century.
Speaker 1: Dr Bernstein, frame right now on childcare, the debate of
Speaker 1: a federal solution versus states rights to decide what their
Speaker 1: child care would be. Where does that stand now and
Speaker 1: where does President Biden wanted to go. Probably the best
Speaker 1: way to answer that question is to look at every
Speaker 1: other advanced economy and recognize that they have stood up
Speaker 1: an accessible and affordable child care sector. And in the
Speaker 1: vast majority of those economies, the labor force participation rate
Speaker 1: among care takers, particularly women, is many percentage points higher
Speaker 1: than ours. This is not, you know, a a classical
Speaker 1: sort of federal state, right, And this is a classical
Speaker 1: missing markets problem. Even the most mainstream economics recognizes that
Speaker 1: when a market is missing, there's a role for the
Speaker 1: federal government to come in and fix that externality. And
Speaker 1: here the negative externality is a barrier to work for
Speaker 1: people who want to get into the labor market. So
Speaker 1: this is just a very simple solution to a market failure.
Speaker 1: I look, Jared, at the solution to a market failure,
Speaker 1: and I look at the politics. You don't have to
Speaker 1: worry about two thousand twenty two. Your boss does as well.
Speaker 1: How is the White House adapting economically to the reality
Speaker 1: of an election coming ever closer in two thousand twenty two. Yeah,
Speaker 1: that's an easy one. If you just watch the where
Speaker 1: the president and the Vice president are going and listen
Speaker 1: to what they're saying. They're taking their message to the
Speaker 1: American people, and if you look at the American people. Okay,
Speaker 1: I don't mean to interrupt, Jerry, but you've nailed it.
Speaker 1: How do they sell this to Republicans who support what
Speaker 1: you're talking about, yet the leadership that they have is
Speaker 1: dead set against it. How does that metric, that dialectric work, Well,
Speaker 1: I think you know, you don't have to sell things
Speaker 1: to people. If there are things that people want to need,
Speaker 1: you just have to tell them about it. So I
Speaker 1: think it's it's less sell and more tell. Explain to
Speaker 1: constituents why what you're trying to do. And what we
Speaker 1: found from the polling is that telling, uh does not
Speaker 1: require selling. When it's childcare, when it's safely reopening schools,
Speaker 1: when it's beating the vaccine, when it's providing people the
Speaker 1: resources they need to get to the other side of
Speaker 1: this crisis, and when it's making historic investments in the
Speaker 1: jobs and families plans, in their lives and their opportunities.
Speaker 1: Now you know what goes on in partisan circles in
Speaker 1: in d C. We have to show that out for
Speaker 1: what it is. But the President vice President are keeping
Speaker 1: their heads down meeting the needs of the American people
Speaker 1: on all sides of the aisle. When the President will
Speaker 1: be making with a big full in the White House
Speaker 1: tomorrow and change we're told about childcare. Are you determined
Speaker 1: to make childcare and policies addressing childcare issues a part
Speaker 1: of a broad to infrastructure package. Unquestionably so, And in fact,
Speaker 1: if you look at the jobs Plan and the Families Plan.
Speaker 1: You see that right at the heart of those plans.
Speaker 1: And I should be very clear about this. As I
Speaker 1: said before, I think sometimes this childcare story takes on
Speaker 1: a life of its own in the way that Tom
Speaker 1: was referring to. Otherwise, for us, it's providing an accessible
Speaker 1: and affordable path to get into the job market for
Speaker 1: care takers who want to do so. Some will want to,
Speaker 1: others will not want to. But if you want to
Speaker 1: and you need to get back to work, it is
Speaker 1: not hard to find care takers today who say I
Speaker 1: can't get back to the job market because I can
Speaker 1: find accessible, affordable care. It is a missing market and
Speaker 1: we have to stand that market up, and that's what
Speaker 1: our plans do. I'm not here to advocate for anyone's policies.
Speaker 1: You clearly aren't out and that's understandable in your positions.
Speaker 1: But when it comes to tomorrow, is that a redline
Speaker 1: for this administration? Childcare as part of a broader infrastructure package.
Speaker 1: Is that a redline? Well, you know, I'm not in
Speaker 1: a position of setting legislative redlines. I'm okay, I'm on
Speaker 1: the economics team, and I'm talking about the economic graphical
Speaker 1: President community hold on. It is at the core of
Speaker 1: everything that the President has talked about from the campaign,
Speaker 1: by the way, until through the American Jobs and Families plans,
Speaker 1: trying to get you to other privacies out to understand
Speaker 1: that you can't negotiate on behalf of the president. But
Speaker 1: when you sit around with the form, your understanding still
Speaker 1: a core pot of communications and negotiations with Republicans, very
Speaker 1: much so. And I think if you look again, I
Speaker 1: think one of the I don't always like to cite
Speaker 1: the polls because I think you can pick and choose
Speaker 1: what you want, But on this issue, you can't find
Speaker 1: a poll that doesn't show a majority of people saying
Speaker 1: this is really important to us to be able to
Speaker 1: access an affordable child If you actually look at the
Speaker 1: amount of income that a middle or a low income
Speaker 1: family has to pay for childcare, you're gonna start to
Speaker 1: get into ten of their income in some cases, and
Speaker 1: that is simply unsustainable for working families. And that's why
Speaker 1: the President is targeting this issue. John, and we appreciate
Speaker 1: your time to communicate the goes of this administration and
Speaker 1: look forward to catching up soon. John burnstaining that from
Speaker 1: the White House Council of Economic Advices. We get smarter
Speaker 1: now and we win with Francisco Blanche of Bank of
Speaker 1: America's securities out of Globe Commodities and Derivatives Research. Francisco,
Speaker 1: it has been way way too long. I want you
Speaker 1: to color now. We have all these legacy issues we're
Speaker 1: dealing with. Our collective memory of commodities are collective memories
Speaker 1: of supercycles. And you say, wait a minute, it's a
Speaker 1: split supercycle upon us, what do you mean by that? Well, Tom,
Speaker 1: thank you for having me. I think I think the
Speaker 1: there's certain there's a sector of metals and materials which
Speaker 1: is clearly in a in a supercyclical app swing, and
Speaker 1: we're seeing record prices and we'll continue see record prices
Speaker 1: for all of the raw materials there. But when it
Speaker 1: comes to energy we are we're not and in fact,
Speaker 1: I doubt we're gonna see record prices in this cycle.
Speaker 1: I think we're just seeing cyclical upside swings across the board,
Speaker 1: although as you pointed out, we're down today in oil.
Speaker 1: But really the story is that when it comes to
Speaker 1: materials um like like timber, we are now at the
Speaker 1: point where supply is extremely low in entories are extremely
Speaker 1: low um and and demand's roaring, so prices are extraordinarily volatile.
Speaker 1: Copper he's having in that direction with inventories declining quickly
Speaker 1: and also moving into demand ration. While as oil um
Speaker 1: primarily is still still very well supplied, OPEC is holding
Speaker 1: that capacity. So we are still trying to figure out
Speaker 1: what to do with all those spare barrels. Keeping some
Speaker 1: numbers on this forest, then Francisco, this split supercycle. Let's
Speaker 1: deal with the metal side of it. Copper right now
Speaker 1: is at ten five on eleven K. Watch now seemingly
Speaker 1: what are you looking for through the next six months
Speaker 1: two half months? So for copper, we're looking at basically
Speaker 1: a dollar uh breton, and we think we could go
Speaker 1: as highest twenty breton if the supply of scrap metal
Speaker 1: scrap copper doesn't make it. Just say, you're modeling a
Speaker 1: double off of leemy copper. We you know, we're we're
Speaker 1: our our official target is okay um. But we see
Speaker 1: a case over the next couple of years if we
Speaker 1: do not get enough scrap metal um coming out coming
Speaker 1: into a copper market, because remember a large chunk of
Speaker 1: the copper market of our corret is scraped right, So
Speaker 1: if we cannot scrap in off copper back into recycling,
Speaker 1: back into the market, I'm talking about the the copper
Speaker 1: that we get from past uses, not the copper that
Speaker 1: we are mining. The copper ores. Those are very tight,
Speaker 1: so we need to keep pushing prices higher also to
Speaker 1: create more supply. And that's the that's the crazy dynamic
Speaker 1: that's garning copper right now. Um. So, so remember, copper
Speaker 1: is critical to all the applications that we have um
Speaker 1: lining up for the decorganization of transportation, to the coorganization
Speaker 1: of industry, and the decorganization of the electricity sectors. So
Speaker 1: all of those require a lot of copper. Francis gonna
Speaker 1: champ in because we've gotta cut through these numbs a
Speaker 1: little bit more. We've got thirteen k as your base case.
Speaker 1: We've got twenty k. Is this big bolt case. Can
Speaker 1: you help us understand how big a falce rese kling
Speaker 1: of componentually is in the comper market and whether you
Speaker 1: expect that to actually materialize? Right so, so so it's
Speaker 1: about a quarter, I mean, it's it's hard to tell
Speaker 1: at this point. Remember, um, there's a lot of different
Speaker 1: uses they are going to recycling here, and it's it's
Speaker 1: possible that happens. I um, I do think that copper
Speaker 1: is probably the most constructive commodity out there from from
Speaker 1: medals perspective. But but there are others, right, I mean,
Speaker 1: remember we are at the stage were as I said before,
Speaker 1: we just printed way too much money. Um, so we
Speaker 1: never quite had a recession when it came when it
Speaker 1: comes to goods and when it comes to the demand
Speaker 1: for stuff and demand for industry. We already had an
Speaker 1: ip recession last year. So all of this is really booming,
Speaker 1: uh from from a most perspective, and copperate hours are
Speaker 1: actually degrading quite a bit. So so if you look
Speaker 1: at the supply of horses is declining across across Chilean
Speaker 1: prew we have elections so well and crew coming up
Speaker 1: right where where there is potential fears of sector nationalization.
Speaker 1: And this is also the kind of behavior you start
Speaker 1: to get when prices get out of control and and
Speaker 1: government suddenly see a lot of money in this command market,
Speaker 1: the smoke coming market. So forranstans Car collective memory quickly
Speaker 1: here is that we had a China boom up to
Speaker 1: two eight. Do we have a China boom again or
Speaker 1: is demand coming from a different theme. Well, Um, the
Speaker 1: the interesting thing in the cycle is the demand is
Speaker 1: coming really from from everywhere. I mean, for sure, we're
Speaker 1: saying strong demand from China, but also we're saying a robust,
Speaker 1: very robust consumer activity in the US. You know, you
Speaker 1: talk often to Michelle Meyer or US commist, and you
Speaker 1: know she can tell you how strong demand has been here.
Speaker 1: And part of it is just we've we've given people
Speaker 1: a lot of money to play with while they were
Speaker 1: sitting at home. Um. And and also um, also European
Speaker 1: demands actually picked up quite a bit, and and and
Speaker 1: well this is going on, by the way. I mean,
Speaker 1: I'm sure you've noticed European carbon prices I've reached fifty
Speaker 1: years a ton or sixty doors aton, which which effectively,
Speaker 1: uh means that there's gonna be even more demand for
Speaker 1: this copper and and for some of these metals that
Speaker 1: are going to help us the carbonites. Um, because it's
Speaker 1: so expensive now to to to burn carbon fuels in
Speaker 1: in the European unions. So there's a lot of things
Speaker 1: going on simultaneously really supporting the complex. We've got a
Speaker 1: minute left, and I want to use that by SalCo.
Speaker 1: You just one more question, Francisco, this big call on COMPA.
Speaker 1: Is this a cyclical call or a structural secular call
Speaker 1: they shift away from the fossil fuels and towards batteries,
Speaker 1: et cetera. What is it predominantly it's it's predominantly UM,
Speaker 1: it's predominantly the latter. It's it's a secular call. It
Speaker 1: should play out in a number of years, we think
Speaker 1: at the end of the day. Um, the the initial
Speaker 1: impulse came from monetary and fiscal Uh. The secondary impulse
Speaker 1: came from from this kind of trying to taking center
Speaker 1: stage in terms of growth last year. Uh. And now
Speaker 1: we're getting the US infrastructure and DICAS decorization impulse. And
Speaker 1: with US gonna take about ten years plus two complete.
Speaker 1: So it's a secular story which will continue. It may
Speaker 1: even slow down the organization at first. Uh. Interesting, Yes,
Speaker 1: that's a risk actually that we end up slowing down
Speaker 1: the organization at first because we just don't have the
Speaker 1: materials lined up for it. Francisco, We've got a run
Speaker 1: place to get tame was saw something else, so we
Speaker 1: can do this again. Tell him that's a massive called, Francisco,
Speaker 1: Blanche there of thanks America. Well, this is a precursor, folks,
Speaker 1: for an important conversation. Mr Kristia most interesting at IBM
Speaker 1: for a good amount of time, think thirty years. He
Speaker 1: was the one that generated the acquisition red hat. He is,
Speaker 1: of course from his India in the Indian Institute of
Speaker 1: Technology with the academic mc work at the University of
Speaker 1: Illinois or Benas Champagne as well, truly one of our
Speaker 1: noted computer education combines. You do this with a doubt negative.
Speaker 1: Here is our Caroline Hide. I'm Caroline Hyde from Bloomberg's
Speaker 1: London headquarters for our radio listeners and for our television
Speaker 1: viewers worldwide. IBM Chairman CEO Alvin Krishna joins us now
Speaker 1: of Anna joy to have you with us. And the
Speaker 1: reason you're joining us is because the side of products
Speaker 1: you're unfolding at your annual Think conference. And correct me
Speaker 1: if I'm wrong, but I'm feeling like AI is really
Speaker 1: the focus here. You've got, of course, what's an orchestrate
Speaker 1: with AI automating task for sales HR. You've got AI
Speaker 1: helping people access their customer data. You've got project code
Speaker 1: net to speed up business application of AI. For our audience,
Speaker 1: where AI hybrid cloud still buzzwords, how does it change
Speaker 1: their day to day? Well, okayline, great question, and thank
Speaker 1: you for having me here. So if you think about AI,
Speaker 1: begin with A with a cash phrase, the same way
Speaker 1: as electricity helped electrification at the turn of the last century.
Speaker 1: I believe that AI is going to infuse every enterprise
Speaker 1: in every process in this century. So, now that said,
Speaker 1: let's talk about making it real. AI is the only
Speaker 1: tool we know that can really help unlock inside from
Speaker 1: all the data we collect. So when we think about
Speaker 1: improving the service for our own customers, when we think
Speaker 1: about improving operations inside the enterprise, when we think about
Speaker 1: maybe COVID nineteen vaccinations happening at a rate and pace
Speaker 1: we've never seen. AI is what helps make all of
Speaker 1: that happen. So you take code net a thing I'm
Speaker 1: really excited about open source five million lines of code
Speaker 1: all collected so that we can train AI to help
Speaker 1: write code itself or programming. Imagine how much productivating that
Speaker 1: will unlock all you think about our auto SQL technology
Speaker 1: to help gather data from wherever it may reside across
Speaker 1: public clouds. These are all examples of how air really
Speaker 1: comes to life but really helps unlock and delight end users.
Speaker 1: How does it unlocked sales revenue for you? How will
Speaker 1: it speed up your own growth in revenue because you've
Speaker 1: just been bringing to your own stakeholders. Well, the fastest
Speaker 1: revenue growth in eighteen is that sustained. Um, so it
Speaker 1: we'll get sustained. I'll come to that in a moment, Caroline.
Speaker 1: The reason that we return to revenue growth is really
Speaker 1: a whole lot of work we have done over the
Speaker 1: last twelve months. We've talked about focusing our business only
Speaker 1: on hybrid cloud and AI. We have announced the spin
Speaker 1: of Kindrel, our manage infrastructure services business. We've increased our
Speaker 1: organic investment on both R and D and sales. We
Speaker 1: have also increased our spending our acquisitions eleven over the
Speaker 1: last twelve months, and we are begging to invest in
Speaker 1: our ecosystem. All that gave us a benefit in the
Speaker 1: first quarter, and we'll see more and more benefit as
Speaker 1: we go along and into next year. But I think
Speaker 1: about AI, let's unlock a little bit. There is a salesperson.
Speaker 1: They sit there and they're trying to see what is
Speaker 1: happening to their to their client and salesforce. Maybe an
Speaker 1: AI can look at that and say, Hey, this opportunity
Speaker 1: is progressing. What should I add into that opportunity to
Speaker 1: delight the client even more? Who else should I work
Speaker 1: with inside the enterprise in order to go back. That's
Speaker 1: where AI really helps augment human intelligence. And I use
Speaker 1: the word augment doesn't replace, but takes away the monday
Speaker 1: in tasks? Are you exactly where you need to be
Speaker 1: to unlock this sort of productivity that you speak of?
Speaker 1: Do you need more acquisitions to be made? You just
Speaker 1: said you've been spending. I think that to unlock what
Speaker 1: I'm talking about, we have what we need. That's a
Speaker 1: question of making sure we have all the expertise and
Speaker 1: can get it in front of all the clients. UM.
Speaker 1: You know, I think today, UM, Karen Lake, the CEO
Speaker 1: of EVS, will be speaking with me. She'll talk about
Speaker 1: how AI is being used to really help the COVID
Speaker 1: nineteen vaccinations. I think they've done like seventeen million, ten
Speaker 1: millions something like that vaccinations, and AI was really a
Speaker 1: big part of how they could get to that scale
Speaker 1: so quickly. And so I believe that we have the
Speaker 1: right pieces to go do these things. More moon shots
Speaker 1: perhaps later, but automating operations and worrying about intelligent, pliant
Speaker 1: experience we can do now when I'm thinking about my
Speaker 1: health data as CBS is using there, when I'm thinking
Speaker 1: about the world, the US reeling from a cyber attack
Speaker 1: on its own key infrastructure. Just yesterday we learned this,
Speaker 1: of course, and over the weekend of And how as
Speaker 1: a man who's focused on security within all of this
Speaker 1: important cybersecurity, how much of a concern is it to
Speaker 1: you for your customers, O Carline, I think you and
Speaker 1: I have spoken. I believe that cyber and cyber security
Speaker 1: is the issue of the decade. And when you say why,
Speaker 1: it's at that hard. If value goes into the cyber infrastructure, criminals, thieves,
Speaker 1: nation actors are going to come after the cyber infrastructure.
Speaker 1: So that said, then then what do you do about it? One?
Speaker 1: I think I take a lot of comfort in the
Speaker 1: fact I think financial institutions, most healthcare institutions do take
Speaker 1: it quite seriously. However, they're all doing it on their
Speaker 1: own and each of them has their own way of
Speaker 1: doing it. I believe we should have a government program
Speaker 1: similar to putting a man on the moon at that
Speaker 1: scale to get a public private partnership going to really
Speaker 1: take care of the cyber infrastructure. Otherwise the physical infrastructure
Speaker 1: like we saw on the Colonial pipeline, maybe victim or
Speaker 1: what is happening to the syber infrastructure that controls it.
Speaker 1: And so that's where I really believe we should go
Speaker 1: as a country. Then we have forty five seconds left.
Speaker 1: The business environment for you for our radio and TV audiences.
Speaker 1: Supply chain how much of an issue for you as
Speaker 1: you make chips. Look, I think that there is a
Speaker 1: whole supply to involved everybody. When we think of semi conductors,
Speaker 1: that is a clear shortage. That's why we invest in
Speaker 1: things like two an anomators. But government needs to lean
Speaker 1: in also with the chip sacked and the National semic
Speaker 1: Conductor Technology Center. That said, I see spending increasing going forward.
Speaker 1: So there is going to be pockets around the world
Speaker 1: ups and downs, but overall those optimism in the business environment.
Speaker 1: Oven Krishna always a joy to have you with us.
Speaker 1: Had so many more questions for you, but for our
Speaker 1: TV and radio audiences. IBM Chairman and CEO. We talked
Speaker 1: to a lot of people in strategy and economics and
Speaker 1: of course in politics. It is rare we talk to
Speaker 1: someone in true wealth management managing money and doing so
Speaker 1: in a time where portfolio construction is how much Ample
Speaker 1: do you own? How much Amazon you own? Sarah Hunt
Speaker 1: has scarred from years of dealing with clients Alpine Woods
Speaker 1: Capital over portfolio of construction. Sarah, what are you doing
Speaker 1: right now? I mean, if you didn't own enough Apple
Speaker 1: and Amazon and the rest of them last year, how
Speaker 1: are you recalibrating in your portfolio right now? Well, it's
Speaker 1: an interesting question because obviously you've seen the big move
Speaker 1: in some of these tech docks, and not a positive
Speaker 1: one in recent days. I think we were already at
Speaker 1: the beginning of the year, in January and February, thinking
Speaker 1: that things looked a little bit stretched and we're starting
Speaker 1: to look for value, but value in unusual ways. So
Speaker 1: you know, one of the stocks that we looked at
Speaker 1: is a company called acam I, and they were one
Speaker 1: of the early people using the Internet and figuring out
Speaker 1: how to fix bottlenecks. Well, they've gotten into security, and
Speaker 1: as you mentioned earlier, securities a big market right now,
Speaker 1: and people are very concerned about the pipeline issue just
Speaker 1: exacerbates that. So they had a big part of the
Speaker 1: business that was not growing in a small part that's
Speaker 1: been growing very rapidly. That's the kind of place where
Speaker 1: we're looking for a sweet spot where we looked it
Speaker 1: looked like there was some opportunity And Sarah, what's so
Speaker 1: important here? And I say this was great respect for
Speaker 1: the late David Swenson who all of us wren is
Speaker 1: the idea of finding sector diversification through sector selection or
Speaker 1: individual stock selection. Which is it right now? It's a
Speaker 1: combination of both really, because you've seen some very big
Speaker 1: movements under the under the indexes where you've seen some
Speaker 1: big rotation into value and into sectors like the cyclical
Speaker 1: sector and out of some of the technology sectors. Healthcare
Speaker 1: has been a little bit of both. You've seen something
Speaker 1: very positive in some things that are not Biotech has
Speaker 1: had a very What do you do with healthcare? Well,
Speaker 1: I think that you continue to invest in it. I mean,
Speaker 1: this is clearly a space where you're going to see growth,
Speaker 1: and you're going to see continued growth as the population ages,
Speaker 1: not just in the US but globally. But you also
Speaker 1: have to figure out how much was the pandemic a
Speaker 1: problem and how much are we going back to some
Speaker 1: sort of normal in our own healthcare system and other
Speaker 1: healthcare systems, because the healthcare system has been skewed by
Speaker 1: this global pandemic. And as you see that in the numbers,
Speaker 1: So you have to assume that at some point the
Speaker 1: numbers start to change and some of them traditional operations
Speaker 1: like hip replacements and nee replacements and all that, start
Speaker 1: to come back a little bit stronger. But right now
Speaker 1: you're still in a little bit of limbo because you
Speaker 1: don't have what I would call some sort of normalized procedurals.
Speaker 1: Let's get to the numbers right now, and that's like
Speaker 1: one hundred down by one point nine percent, just off
Speaker 1: sets and lows and off by two fifty points. Is
Speaker 1: this price sanction in search of a story, Sarah, or
Speaker 1: do you like this explanation the narrative that scripted the
Speaker 1: market this morning that a lot of this is just
Speaker 1: the reflationary thing leading into big tech growth and it's
Speaker 1: not good for it. Well, that's an interesting question because
Speaker 1: earlier you mentioned that Microsoft isn't really an inflation hedge,
Speaker 1: and traditionally speaking, it's not. But do we really think
Speaker 1: that Microsoft is going to have trouble raising its prices.
Speaker 1: Like you know, the the issue about pricing is something
Speaker 1: where on the technology side, a lot of those people
Speaker 1: do have pricing power. So the question is does is
Speaker 1: that really the issue or is this really rotation out
Speaker 1: of some names that had moved very quickly and very fast.
Speaker 1: Take a look at new Core. That stock was a
Speaker 1: bottle rock at the other day, and it's gone from
Speaker 1: fifty to a hundred in a very period of time.
Speaker 1: I think that's part of the supply chain shortages you're
Speaker 1: seeing as people start to look at that. But then
Speaker 1: they tend to extrapolate pricing for periods of time that
Speaker 1: may be too long. So there is some movement into
Speaker 1: the cyclicals. But is that movement going a little too
Speaker 1: far too fast is another question, just like it was
Speaker 1: in tech a little too part. Let's build on that then, Sarah,
Speaker 1: the relationship you think should exist between yields rights, real
Speaker 1: yields and a broader market growth equity Specifically, I think
Speaker 1: it's a very difficult thing to say that we are
Speaker 1: going to see much much higher interest rates, even if
Speaker 1: the FED does have to raise If you think about
Speaker 1: global governments, everybody has borrowed so much money that I
Speaker 1: find it difficult to believe that rates can go back
Speaker 1: to what we used to think of in traditional on
Speaker 1: a tenure. I think that's very difficult because it's very
Speaker 1: expensive for governments now it rates for that high. I
Speaker 1: want to dove jail two of these arguments. John, I
Speaker 1: think this is actually a brilliant conversation about portfolio construction
Speaker 1: and Sarah Hunt. When it comes down to is David
Speaker 1: Constant and Goldmen mentioned the duration framing of these big
Speaker 1: tech stocks versus a Jack Welsh like pricing power and
Speaker 1: you're saying the markets wrong. These people do have pricing
Speaker 1: power to meet. John, that's a huge debate at the
Speaker 1: end of the summer. So b t I J like
Speaker 1: consumer staples more constanding, I think likes consumer staples. Sarah.
Speaker 1: I keep hearing firms, banks, houses that like consumer staples
Speaker 1: because they like the pricing power aspect of it. Do
Speaker 1: you I think that given where the multiples are on
Speaker 1: consumer staples, I'm not sure that they have as much
Speaker 1: pricing power as you have in some other areas. So
Speaker 1: I see the argument, but I also think that in
Speaker 1: the end, you've got a lot of choices. Consumers do
Speaker 1: make choices. They will trade down in consumer staples in
Speaker 1: a way when budgets are tight, that they won't. You
Speaker 1: can't trade down from Microsoft to a different security system
Speaker 1: or a different I mean, I just don't. I don't
Speaker 1: see that kind of strade off happening in some of
Speaker 1: the areas that are traditionally linked to lower industries are
Speaker 1: better for them. This is like John such a flashback
Speaker 1: when Toto's Africa peaked in nineteen eight at number nineteen
Speaker 1: on the Builtboard chart. I mean Sarah's I mean, I'm
Speaker 1: gonna get misty idea. That was beautiful, Sarah. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg