1 00:00:00,120 --> 00:00:03,360 Speaker 1: This is Bloomberg wool Street Week. What's the state of 2 00:00:03,400 --> 00:00:06,360 Speaker 1: corporate governance? Its deficit is a real issue. The US 3 00:00:06,400 --> 00:00:09,719 Speaker 1: economy continues to send nixed signals to the financial stories 4 00:00:09,800 --> 00:00:12,719 Speaker 1: that cheap our word fed action to con concerns over 5 00:00:12,760 --> 00:00:16,360 Speaker 1: dollar liquidity and encouraging China data. The town's reaction to 6 00:00:16,440 --> 00:00:18,960 Speaker 1: news on Breakfast through the eyes of the most influential 7 00:00:19,040 --> 00:00:22,599 Speaker 1: voices Larry Summers, the former Treasury Secretary, Star CEO, Kevin 8 00:00:22,680 --> 00:00:26,400 Speaker 1: Johnson sec Chairman j Clayton, Bloomberg wool Street Week, we'd 9 00:00:26,520 --> 00:00:30,320 Speaker 1: David Weston on Bloomberg Radio. Welcome to Wall Street Week 10 00:00:30,320 --> 00:00:33,280 Speaker 1: on Bloomberg Radio. I'm David Weston. Coming up this hour, 11 00:00:33,440 --> 00:00:37,040 Speaker 1: we'll bring you a conversation on geopolitics with Harvard's Michelle Flournoy, 12 00:00:37,400 --> 00:00:41,159 Speaker 1: plus what has in store for the world of philanthropy. 13 00:00:41,240 --> 00:00:44,159 Speaker 1: But first, it was the bull market that defied a 14 00:00:44,240 --> 00:00:48,680 Speaker 1: euro crisis, political earthquakes and shaky corporate earnings, and central 15 00:00:48,680 --> 00:00:51,680 Speaker 1: banks danced to a dobish beat. Now we under the 16 00:00:51,720 --> 00:00:54,520 Speaker 1: next decade, with interest rates at record lows and an 17 00:00:54,560 --> 00:00:57,320 Speaker 1: asset bubble that many fear is ready to pop. Let's 18 00:00:57,360 --> 00:01:00,280 Speaker 1: bring in our roundtable now We're joined by Larry Summers Warmer, 19 00:01:00,360 --> 00:01:04,640 Speaker 1: US Treasury Secretary and Roger Ferguson, President and CEO of 20 00:01:04,680 --> 00:01:08,280 Speaker 1: the Teacher's Insurance and Annuity Association. Larry, it gives a 21 00:01:08,319 --> 00:01:10,400 Speaker 1: sense of this decade that just happened, a big run 22 00:01:10,480 --> 00:01:13,920 Speaker 1: up in the markets, particularly equity. What drove that. Part 23 00:01:13,920 --> 00:01:16,040 Speaker 1: of what drove it was how weak the markets were 24 00:01:16,080 --> 00:01:19,319 Speaker 1: at the beginning of the decade as a consequence of 25 00:01:19,319 --> 00:01:22,399 Speaker 1: the financial crisis. Part of what drove it was we 26 00:01:22,520 --> 00:01:27,080 Speaker 1: had the longest recovery we have ever had. But crucially 27 00:01:27,120 --> 00:01:31,160 Speaker 1: what drove it was that interest rates fell so low 28 00:01:31,840 --> 00:01:35,560 Speaker 1: that uh people applied a much lower discount factor to 29 00:01:35,680 --> 00:01:40,280 Speaker 1: future earnings, and that inflated the price of all assets, 30 00:01:40,319 --> 00:01:43,840 Speaker 1: whether it was stocks, whether it was real estate, anything 31 00:01:43,880 --> 00:01:49,320 Speaker 1: that promised future cash flows became more valuable as interest 32 00:01:49,400 --> 00:01:52,240 Speaker 1: rates came down. So Roger, that raised the question, obviously, 33 00:01:52,360 --> 00:01:55,720 Speaker 1: are we inflating asset values through lower interest rates? So look, 34 00:01:55,760 --> 00:01:58,240 Speaker 1: I agree with Larry that without a doubt, the big 35 00:01:58,320 --> 00:02:01,400 Speaker 1: driver was the moving interest rate both here and around 36 00:02:01,440 --> 00:02:04,560 Speaker 1: the world. Question are we inflating values? I think it's 37 00:02:04,560 --> 00:02:07,280 Speaker 1: too strong to say that that implies some massive bubble, 38 00:02:07,320 --> 00:02:10,239 Speaker 1: that's about to burst. However, what we have seeing, David 39 00:02:10,440 --> 00:02:13,079 Speaker 1: is that the p multiples have started to increase as well, 40 00:02:13,160 --> 00:02:15,800 Speaker 1: which is suggesting that every dollar of earnings is getting 41 00:02:15,800 --> 00:02:18,040 Speaker 1: a bigger and bigger return. So I've been a little 42 00:02:18,040 --> 00:02:20,639 Speaker 1: cautious when we're inflating, but I agree completely with Larry 43 00:02:20,720 --> 00:02:23,800 Speaker 1: that low interest rates were the major drivers for markets. 44 00:02:23,919 --> 00:02:26,360 Speaker 1: Is the market overbought when it comes to equities, I 45 00:02:26,360 --> 00:02:29,360 Speaker 1: don't think it's clear that it is. I think that 46 00:02:30,080 --> 00:02:33,360 Speaker 1: given what's happened to interest rates, which in my view 47 00:02:33,480 --> 00:02:38,440 Speaker 1: is heavily driven by wheel events in the economy, more 48 00:02:38,520 --> 00:02:42,040 Speaker 1: saving because more of the money is going to affluent people, 49 00:02:42,639 --> 00:02:45,440 Speaker 1: less investment because the price of capital goods has come 50 00:02:45,480 --> 00:02:47,839 Speaker 1: down so far. I think those are the reasons why 51 00:02:47,919 --> 00:02:50,200 Speaker 1: you have lower interest rates. And when you have lower 52 00:02:50,200 --> 00:02:55,240 Speaker 1: interest rates, you have higher higher multiples. I'm not sure 53 00:02:55,320 --> 00:02:59,880 Speaker 1: that it represents some fundamental imbalance. This certainly isn't a 54 00:03:00,120 --> 00:03:03,080 Speaker 1: moment like the moment at the beginning of the decade 55 00:03:03,440 --> 00:03:07,440 Speaker 1: when markets look cheap, and I think we've got to 56 00:03:07,480 --> 00:03:12,040 Speaker 1: recognize that because interest rates are much lower, and maybe 57 00:03:12,120 --> 00:03:14,960 Speaker 1: risk premiums are the same as they always are, that 58 00:03:15,080 --> 00:03:19,360 Speaker 1: returns going forward are going to be substantially lower than 59 00:03:19,400 --> 00:03:21,280 Speaker 1: they have been over the last decade. And that is 60 00:03:21,280 --> 00:03:23,200 Speaker 1: the question. If lower interest rates and starting from a 61 00:03:23,200 --> 00:03:25,160 Speaker 1: low base drove the last decade, what's going to drive 62 00:03:25,200 --> 00:03:27,760 Speaker 1: the next decade. I think it's gonna depend on the news, 63 00:03:27,840 --> 00:03:29,799 Speaker 1: and we don't know whether the surprises are going to 64 00:03:29,880 --> 00:03:32,600 Speaker 1: be positive or negative. But I think if things work 65 00:03:32,639 --> 00:03:35,880 Speaker 1: out as everybody expects them to, then you're gonna be 66 00:03:35,960 --> 00:03:41,760 Speaker 1: looking at equity returns that are much lower than people 67 00:03:41,800 --> 00:03:47,840 Speaker 1: have become accustomed to over most much of the last generation. Uh. 68 00:03:48,280 --> 00:03:52,520 Speaker 1: My guests would be that if you invest your money 69 00:03:52,560 --> 00:03:55,960 Speaker 1: in part in stocks and in part in bonds, you're 70 00:03:55,960 --> 00:03:58,880 Speaker 1: gonna be looking at returns perhaps in the five six 71 00:03:58,960 --> 00:04:03,440 Speaker 1: percent range um, which is much lower than people experienced 72 00:04:03,480 --> 00:04:06,040 Speaker 1: over the last decade. And that's probably going to be 73 00:04:06,120 --> 00:04:09,080 Speaker 1: an unpleasant surprise for some people. So, Roger, you're responsible 74 00:04:09,080 --> 00:04:10,840 Speaker 1: for a lot of money for a lot of pensions. 75 00:04:10,840 --> 00:04:13,600 Speaker 1: People are gonna count on that money over the long term. 76 00:04:13,680 --> 00:04:16,160 Speaker 1: What is that thesis that Larry set out? What does 77 00:04:16,160 --> 00:04:19,000 Speaker 1: that tell you about investing? Well, first, a point I 78 00:04:19,040 --> 00:04:20,640 Speaker 1: would have made that I didn't hear that. I make 79 00:04:20,680 --> 00:04:22,800 Speaker 1: the thing that's going to drive markets over the next 80 00:04:22,800 --> 00:04:26,000 Speaker 1: several years. It's what's driven them the last several First 81 00:04:26,040 --> 00:04:28,440 Speaker 1: question is our interest face is going to main low, right, 82 00:04:28,480 --> 00:04:31,000 Speaker 1: and so the expectation that the Fed and other central 83 00:04:31,000 --> 00:04:33,000 Speaker 1: banks will be on hold for a period of time. 84 00:04:33,360 --> 00:04:35,720 Speaker 1: I think it's going to continue to support equity valuations 85 00:04:35,720 --> 00:04:38,880 Speaker 1: and other valuations. I think Larry is absolutely right. The 86 00:04:38,960 --> 00:04:41,800 Speaker 1: return that the average investor can expect an equity market, 87 00:04:41,880 --> 00:04:44,000 Speaker 1: so the next two or three, five, maybe ten years, 88 00:04:44,400 --> 00:04:46,000 Speaker 1: is going to be somewhat lower than we had in 89 00:04:46,040 --> 00:04:48,479 Speaker 1: the past. Um, that does not mean that it's gonna 90 00:04:48,560 --> 00:04:50,479 Speaker 1: sort of burst. It does mean that one should expect 91 00:04:50,480 --> 00:04:53,360 Speaker 1: slightly lower returns. The answer to all that, though, when 92 00:04:53,360 --> 00:04:55,760 Speaker 1: I think about pensions is you want to have broad diversification, 93 00:04:56,600 --> 00:04:59,840 Speaker 1: so equity fixed income, but certainly alternatives will be another 94 00:05:00,200 --> 00:05:02,040 Speaker 1: to look and they're going to want to play the 95 00:05:02,040 --> 00:05:05,160 Speaker 1: big global themes as well. What do you think. I mean, 96 00:05:05,160 --> 00:05:06,280 Speaker 1: one of the things that strikes me in the last 97 00:05:06,279 --> 00:05:09,039 Speaker 1: ten years, there's a delta they've been cutting interest rates 98 00:05:09,600 --> 00:05:12,919 Speaker 1: is just static low interest rates enough. That's the key point. 99 00:05:13,640 --> 00:05:18,160 Speaker 1: Roger's right about diversification. Rogers says they're going to be 100 00:05:18,279 --> 00:05:21,760 Speaker 1: slightly lower over the next decade. I think it's gonna 101 00:05:21,800 --> 00:05:25,120 Speaker 1: be a good deal more than UH slightly lower. I 102 00:05:25,160 --> 00:05:28,560 Speaker 1: think that people will do fine if they earn five 103 00:05:28,680 --> 00:05:33,839 Speaker 1: or six percent on their money. I think that people 104 00:05:33,880 --> 00:05:37,440 Speaker 1: are going to realize that it's not going to be 105 00:05:37,520 --> 00:05:41,039 Speaker 1: the kind of happy decade that we saw. I think 106 00:05:41,040 --> 00:05:45,200 Speaker 1: the happy decade came in part from the positive surprise 107 00:05:45,320 --> 00:05:50,920 Speaker 1: of falling interest rates that drove up on prices definition ly, 108 00:05:51,520 --> 00:05:54,880 Speaker 1: and it drove up stock prices because falling interest rates 109 00:05:54,960 --> 00:05:59,400 Speaker 1: meant higher multiples. We might see continued low interest rates, 110 00:05:59,800 --> 00:06:03,320 Speaker 1: but they're written that much room for interest rates to 111 00:06:03,520 --> 00:06:07,480 Speaker 1: fall starting from a ten year of one point eight. 112 00:06:07,920 --> 00:06:10,160 Speaker 1: So I don't think it's going to be nearly as 113 00:06:10,240 --> 00:06:13,520 Speaker 1: bullish a period over the next decade as it has 114 00:06:13,600 --> 00:06:18,880 Speaker 1: been uh in the last, and since the level of 115 00:06:18,960 --> 00:06:24,440 Speaker 1: interest rates is a kind of fundamental determinant of everything, um, 116 00:06:24,480 --> 00:06:28,800 Speaker 1: I don't think that. I think the versification is absolutely 117 00:06:28,839 --> 00:06:32,000 Speaker 1: the right strategy, but I don't think people are going 118 00:06:32,040 --> 00:06:38,000 Speaker 1: to be able to avoid the reality that returns are 119 00:06:38,040 --> 00:06:39,880 Speaker 1: going to be lower in the future than they have 120 00:06:40,000 --> 00:06:42,680 Speaker 1: been in the past. We'll be back with Larry Summers 121 00:06:42,760 --> 00:06:46,080 Speaker 1: and Roger Ferguson after a decade of growth. It's clear 122 00:06:46,240 --> 00:06:49,680 Speaker 1: global central bankers fear are reckoning to come, but our 123 00:06:49,760 --> 00:06:53,880 Speaker 1: monetary policy makers out of ammunition. We'll discuss with our roundtable. Next. 124 00:06:54,200 --> 00:06:57,320 Speaker 1: I'm David Weston and this is Bloomberg Wall Street Week. 125 00:07:04,640 --> 00:07:08,880 Speaker 1: This is Bloomberg Wall Street Week with David Weston from 126 00:07:09,000 --> 00:07:12,640 Speaker 1: Bloomberg Radio. We continue our round table with Larry Summers, 127 00:07:12,680 --> 00:07:16,120 Speaker 1: former U S. Treasury Secretary, and Roger Ferguson, President and 128 00:07:16,200 --> 00:07:19,680 Speaker 1: CEO of t I a A. Central banks may no 129 00:07:19,760 --> 00:07:22,360 Speaker 1: longer be the only game in town. That was the 130 00:07:22,400 --> 00:07:26,240 Speaker 1: sobering message from the American Economic Association's annual conference in 131 00:07:26,280 --> 00:07:29,720 Speaker 1: San Diego, a decade after the financial crisis rocked the 132 00:07:29,720 --> 00:07:33,559 Speaker 1: global economy. Policymakers confront a risky world of what could 133 00:07:33,560 --> 00:07:36,960 Speaker 1: be perpetually low growth, something Larry Summers warned about in 134 00:07:36,960 --> 00:07:38,680 Speaker 1: his speech to the I m F back in two 135 00:07:38,720 --> 00:07:42,400 Speaker 1: thousand thirteen. So, Larry, I guess congratulations that you were right, 136 00:07:42,520 --> 00:07:45,200 Speaker 1: but I'm not sure you wanted to be right. Secular 137 00:07:45,240 --> 00:07:50,520 Speaker 1: stagnation isn't good news. It suggests much more profound trade 138 00:07:50,520 --> 00:07:56,000 Speaker 1: offs between rapid economic growth and financial stability and fiscal 139 00:07:56,040 --> 00:07:59,720 Speaker 1: prudence than we thought we had and raises all kinds 140 00:07:59,720 --> 00:08:05,360 Speaker 1: of questions for macroeconomic policy going forward. But look what's 141 00:08:05,400 --> 00:08:09,400 Speaker 1: happened relative to the time when I put forth that 142 00:08:09,560 --> 00:08:14,960 Speaker 1: secular stagnation hypothesis in is, we've had bigger deficits than 143 00:08:15,040 --> 00:08:19,520 Speaker 1: people thought. We've had lower interest rates than people expected, 144 00:08:20,040 --> 00:08:23,280 Speaker 1: We've had more credit growth and higher asset prices than 145 00:08:23,320 --> 00:08:26,720 Speaker 1: people expected. So the accelerator has been on the floor, 146 00:08:27,560 --> 00:08:30,920 Speaker 1: but the car hasn't gone very fast. We've had lower 147 00:08:30,960 --> 00:08:35,560 Speaker 1: growth and lower inflation than people expected. And what that 148 00:08:35,679 --> 00:08:40,040 Speaker 1: suggests is that the underlying energy that the private sector 149 00:08:40,200 --> 00:08:46,160 Speaker 1: generates is much less than it used to be. That 150 00:08:46,240 --> 00:08:50,640 Speaker 1: we've been able to give some energy, but only by 151 00:08:50,720 --> 00:08:55,880 Speaker 1: having rising debt to GDP ratios, only by having quite 152 00:08:55,960 --> 00:09:01,240 Speaker 1: extraordinary monetary policies and low interest rate. And there's a 153 00:09:01,360 --> 00:09:04,720 Speaker 1: question how long that lasts. And there's also a question 154 00:09:04,800 --> 00:09:08,719 Speaker 1: of what the long run side effects of that are. 155 00:09:09,320 --> 00:09:13,000 Speaker 1: You know, people say that the so called to WE 156 00:09:13,400 --> 00:09:18,360 Speaker 1: neutral interest rate has declined by two or three percentage points. 157 00:09:18,480 --> 00:09:21,679 Speaker 1: What I've been able to show in some recent research 158 00:09:22,320 --> 00:09:25,280 Speaker 1: is that if we hadn't been running up the national 159 00:09:25,360 --> 00:09:29,640 Speaker 1: debt globally, that probably that real not neutral interest rate 160 00:09:29,760 --> 00:09:33,120 Speaker 1: would have declined by four or five or six or 161 00:09:33,120 --> 00:09:38,880 Speaker 1: seven even uh percentage points. So there's a fundamental structural 162 00:09:39,120 --> 00:09:43,160 Speaker 1: challenge around the fact that people are living longer more 163 00:09:43,240 --> 00:09:46,600 Speaker 1: the money is going to people who have high savings rates. 164 00:09:47,120 --> 00:09:50,840 Speaker 1: And at the same time, as you see with my 165 00:09:50,960 --> 00:09:54,320 Speaker 1: cell phone that costs five dollars and has a hundred 166 00:09:54,320 --> 00:09:57,559 Speaker 1: times as much computing power as the whole Apollo project, 167 00:09:58,120 --> 00:10:01,760 Speaker 1: capital goods are getting cheaper cheaper, and so the money 168 00:10:01,840 --> 00:10:07,520 Speaker 1: slashes into existing assets, leading to asset price inflation. But 169 00:10:07,760 --> 00:10:10,839 Speaker 1: with limited economic energy. It's a little bit like the 170 00:10:10,960 --> 00:10:16,440 Speaker 1: plight of Japan or some you might even call it 171 00:10:16,520 --> 00:10:20,280 Speaker 1: a monetary black hole. So Roger, as an investor, how 172 00:10:20,320 --> 00:10:22,960 Speaker 1: do you process all that? Basically, I think that Larry 173 00:10:23,000 --> 00:10:25,319 Speaker 1: saying we've kept it growing but basically running up the 174 00:10:25,360 --> 00:10:27,920 Speaker 1: credit card. No, look, I think Larry's points are certainly 175 00:10:27,920 --> 00:10:30,560 Speaker 1: well taken in terms of what happened in the last decade. 176 00:10:31,120 --> 00:10:33,320 Speaker 1: The way you process it is to say two things. 177 00:10:33,600 --> 00:10:35,920 Speaker 1: One is is there going to be a fundamental change 178 00:10:35,920 --> 00:10:39,320 Speaker 1: anytime soon? In particular, you know what we haven't talked 179 00:10:39,400 --> 00:10:41,080 Speaker 1: very much about is one of the things that's kept 180 00:10:41,160 --> 00:10:44,840 Speaker 1: rates so low as inflation and so inflation for variety 181 00:10:44,880 --> 00:10:46,960 Speaker 1: of reasons has been a no show, which has allowed 182 00:10:46,960 --> 00:10:50,520 Speaker 1: central banks to continue to be very very accommodative and 183 00:10:50,559 --> 00:10:53,120 Speaker 1: to drive down interest rates. So the way you play 184 00:10:53,120 --> 00:10:56,000 Speaker 1: it is, first, is that picture gonna change? Our interestate 185 00:10:56,080 --> 00:10:58,280 Speaker 1: is going to start picking up anytime? Is gonna have 186 00:10:58,280 --> 00:11:00,920 Speaker 1: to worry about. Secondly, as I said before, you know 187 00:11:00,920 --> 00:11:02,640 Speaker 1: what are the asset classes are going to benefit or 188 00:11:02,679 --> 00:11:04,920 Speaker 1: not benefit? And so you're gonna have to be thinking, 189 00:11:05,000 --> 00:11:07,720 Speaker 1: you know, much more cleverly about you know, how you differentiate. 190 00:11:08,080 --> 00:11:10,520 Speaker 1: You also are looking for is this has been a 191 00:11:10,520 --> 00:11:12,840 Speaker 1: global phenomenon? Is the US still the best place to be? 192 00:11:13,000 --> 00:11:14,960 Speaker 1: Or should we be looking at different emerging markets? How 193 00:11:15,000 --> 00:11:17,240 Speaker 1: should we think about it? So again, I think this 194 00:11:17,320 --> 00:11:19,559 Speaker 1: is the time where you move from the broad general 195 00:11:20,280 --> 00:11:22,360 Speaker 1: down to a much one now much more focused, much 196 00:11:22,360 --> 00:11:24,400 Speaker 1: more particular theory. It just strikes me that you are 197 00:11:24,440 --> 00:11:26,960 Speaker 1: an investor, but you also were vice share the FED. 198 00:11:27,679 --> 00:11:31,400 Speaker 1: Have the central banks basically done what they could do? Essentially? 199 00:11:31,440 --> 00:11:34,440 Speaker 1: I mean they've really kept a lot of simulus monetary 200 00:11:34,440 --> 00:11:36,520 Speaker 1: students and have they basically done everything they can do? 201 00:11:36,559 --> 00:11:38,839 Speaker 1: So Look, I think the general consensus and I share it, 202 00:11:39,200 --> 00:11:42,240 Speaker 1: is that the last recovery depended much too heavily on 203 00:11:42,360 --> 00:11:45,760 Speaker 1: central banks. Um. Uh heaven here in the US where 204 00:11:45,800 --> 00:11:48,480 Speaker 1: we had some fiscal stimulus. In hindsight, a lot of 205 00:11:48,480 --> 00:11:50,440 Speaker 1: folks think maybe we should have done more and kept 206 00:11:50,440 --> 00:11:53,640 Speaker 1: it going. Certainly, for one looks in Europe. Um clearly 207 00:11:53,800 --> 00:11:56,679 Speaker 1: that we'd say central banks are asked to do too much. 208 00:11:56,760 --> 00:11:58,560 Speaker 1: So yeah, I think too much weight has been put 209 00:11:58,559 --> 00:12:01,480 Speaker 1: on the shoulders of central banks. They responded by doing 210 00:12:01,480 --> 00:12:03,760 Speaker 1: a couple of things. One is using their regular tools 211 00:12:03,880 --> 00:12:07,640 Speaker 1: I called interest rates, and then to using some unusual 212 00:12:07,640 --> 00:12:11,000 Speaker 1: tools and new tools qualtitative easing for sure, building up 213 00:12:11,000 --> 00:12:13,360 Speaker 1: the size of their balance sheets, going in and buying 214 00:12:14,080 --> 00:12:18,000 Speaker 1: a variety of fixed income securities. And then they polished 215 00:12:18,080 --> 00:12:20,400 Speaker 1: up the use of forward guidance. You know what was it? 216 00:12:20,480 --> 00:12:22,720 Speaker 1: They said? So when you look at the debate that's 217 00:12:22,720 --> 00:12:25,640 Speaker 1: going on, the question is that enough? And will that 218 00:12:25,679 --> 00:12:27,880 Speaker 1: be sufficient the next time around? And I think that's 219 00:12:27,920 --> 00:12:30,400 Speaker 1: really a question that we former and current central bankers 220 00:12:30,440 --> 00:12:32,440 Speaker 1: are worried about. This is something that was the topic 221 00:12:32,440 --> 00:12:34,280 Speaker 1: of discussion out the a A that conference that you 222 00:12:34,320 --> 00:12:37,160 Speaker 1: attended in San Diego. One of the things that you raised, 223 00:12:37,280 --> 00:12:39,400 Speaker 1: I believe others have raised as well as something called 224 00:12:39,400 --> 00:12:44,679 Speaker 1: semi automatic stabilizers. Basically, as I understand, automatic fiscal injection 225 00:12:45,000 --> 00:12:48,360 Speaker 1: when certain things turned south. Is that a realistic alternative? 226 00:12:48,520 --> 00:12:52,320 Speaker 1: It better be um ben Burn Ankie gave a speech 227 00:12:52,320 --> 00:12:55,160 Speaker 1: out there which I think was a kind of last 228 00:12:55,280 --> 00:12:59,960 Speaker 1: hurrah for the central bankers. He argued that monetary policialed 229 00:13:00,000 --> 00:13:02,880 Speaker 1: be able to do it the next time. I think 230 00:13:02,880 --> 00:13:07,240 Speaker 1: that's pretty unlikely, given that in recessions we usually cut 231 00:13:07,280 --> 00:13:11,640 Speaker 1: interest rates by five percentage points, and interest rates today 232 00:13:11,720 --> 00:13:16,480 Speaker 1: or below U two, and I just don't believe that 233 00:13:16,960 --> 00:13:21,880 Speaker 1: quantitative easing and that stuff is worth anything like another 234 00:13:22,559 --> 00:13:25,240 Speaker 1: three percentage points. So I think we're gonna have to 235 00:13:25,320 --> 00:13:32,000 Speaker 1: rely on putting money in people's pockets, on direct government spending. 236 00:13:32,480 --> 00:13:36,200 Speaker 1: I think that's okay in a country where public investment 237 00:13:36,360 --> 00:13:41,640 Speaker 1: and infrastructure are decaying so badly. But I think that's 238 00:13:41,679 --> 00:13:46,080 Speaker 1: where we're going to have to look for our countercyclical energy. 239 00:13:46,200 --> 00:13:50,280 Speaker 1: And what Olivier Blanchard and I were talking about when 240 00:13:50,280 --> 00:13:55,360 Speaker 1: we discussed UH semi automatic stabilizers was the idea that 241 00:13:55,720 --> 00:14:00,280 Speaker 1: rather than relying on Congress to organize itself to act 242 00:14:00,400 --> 00:14:04,400 Speaker 1: each time there's an economic downturn. We should do more 243 00:14:04,520 --> 00:14:10,559 Speaker 1: with rules that would lock in changes in spending. Perhaps 244 00:14:10,600 --> 00:14:14,880 Speaker 1: greater assistance to states, perhaps more assistance for people who 245 00:14:14,880 --> 00:14:21,880 Speaker 1: are unemployed, perhaps working off a backlog of infrastructure investments, 246 00:14:21,920 --> 00:14:27,480 Speaker 1: perhaps giving temporary tax credits for those uh who spend, 247 00:14:28,040 --> 00:14:30,840 Speaker 1: And that that kind of fiscal stimulus is going to 248 00:14:30,920 --> 00:14:33,120 Speaker 1: have to be a larger part of the story. And 249 00:14:33,520 --> 00:14:35,560 Speaker 1: I think it's very I think central brankers have a 250 00:14:35,680 --> 00:14:38,760 Speaker 1: very difficult road to walk because on the one hand, 251 00:14:38,800 --> 00:14:41,320 Speaker 1: they don't want to say they're out of gas and 252 00:14:41,360 --> 00:14:45,200 Speaker 1: they can't solve the problem. On the other hand, they'd 253 00:14:45,280 --> 00:14:49,280 Speaker 1: better be giving some warning if they want fiscal policy 254 00:14:49,360 --> 00:14:52,480 Speaker 1: to be ready next time. And I think that's reality 255 00:14:52,520 --> 00:14:55,040 Speaker 1: that it's going to need to be. Larry Summers and 256 00:14:55,120 --> 00:14:58,480 Speaker 1: Roger Ferguson will stay with us. Coming up, we turn 257 00:14:58,560 --> 00:15:01,360 Speaker 1: to the world of philanthropy for a fresh perspective on 258 00:15:01,400 --> 00:15:04,920 Speaker 1: what holds in store. We're joined by the chief investment 259 00:15:04,920 --> 00:15:08,760 Speaker 1: officer for Carnegie, Kim Lube. That's next. I'm David Weston, 260 00:15:08,840 --> 00:15:15,760 Speaker 1: and this is Bloomberg Wall Street Week. This is Bloomberg 261 00:15:15,760 --> 00:15:20,240 Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. We 262 00:15:20,320 --> 00:15:23,800 Speaker 1: continue our roundtable with Larry Summer's former US Treasury Secretary, 263 00:15:23,840 --> 00:15:27,160 Speaker 1: and Roger Ferguson, President and CEO of t I a A. 264 00:15:27,720 --> 00:15:31,280 Speaker 1: It's been a roller coaster start to global markets as 265 00:15:31,320 --> 00:15:35,200 Speaker 1: investors grapple with America's killing of a Runnyan military leader, Solomony, 266 00:15:35,360 --> 00:15:38,640 Speaker 1: and it's aftermath. So over and above things like prospects 267 00:15:38,640 --> 00:15:42,040 Speaker 1: for economic growth, changes in monetary policy, and government spending, 268 00:15:42,360 --> 00:15:45,680 Speaker 1: investors have to be considering geopolitics that can change in 269 00:15:45,720 --> 00:15:49,040 Speaker 1: an instant. Michelle Flournoy has made a career of analyzing 270 00:15:49,040 --> 00:15:52,560 Speaker 1: and understanding forces just such as these. She served as 271 00:15:52,640 --> 00:15:55,720 Speaker 1: Under Secretary of Policy that was under Defense Secretaries Robert 272 00:15:55,720 --> 00:15:59,640 Speaker 1: Gates and Leon Panetta. Michelle's currently senior fellow at Harvard's 273 00:15:59,640 --> 00:16:02,200 Speaker 1: Bell for Center and a senior adviser to the Boston 274 00:16:02,240 --> 00:16:05,480 Speaker 1: Consulting Group. She joins us, now give us your take today. 275 00:16:05,600 --> 00:16:08,560 Speaker 1: Is it a constantly changing story? But it really was 276 00:16:08,640 --> 00:16:11,240 Speaker 1: a lot of upheople last week it seems to have 277 00:16:11,280 --> 00:16:14,520 Speaker 1: calmed down. Is that a false dawn? Well, I do 278 00:16:14,640 --> 00:16:17,200 Speaker 1: think the circuit breaker has been thrown on the most 279 00:16:17,240 --> 00:16:21,760 Speaker 1: recent cycle of escalation between Iran and the United States. 280 00:16:21,800 --> 00:16:24,520 Speaker 1: But I think we would be foolish to think that 281 00:16:24,560 --> 00:16:29,600 Speaker 1: this is over. The fundamental issues that the United States 282 00:16:29,640 --> 00:16:32,920 Speaker 1: and Iran are in conflict over have not gone away. 283 00:16:33,000 --> 00:16:35,080 Speaker 1: So I think what we're likely to see is a 284 00:16:35,160 --> 00:16:39,600 Speaker 1: reversion to sort of previous approaches. You we've heard that 285 00:16:39,640 --> 00:16:43,760 Speaker 1: the Trump administration is going to go ahead and increased sanctions, 286 00:16:43,800 --> 00:16:47,520 Speaker 1: sort of doubling down on their maximum pressure campaign, And 287 00:16:47,560 --> 00:16:50,040 Speaker 1: for Ron's part, I think you can expect them to 288 00:16:50,120 --> 00:16:54,280 Speaker 1: revert to their traditional playbook, which is really using more 289 00:16:54,480 --> 00:16:59,880 Speaker 1: covert and clandestine means that give them some measure of deniabile. 290 00:17:00,280 --> 00:17:04,320 Speaker 1: Whether it's cyber attacks or whether it's use of proxies 291 00:17:04,359 --> 00:17:07,399 Speaker 1: to launch attacks on their behalf. Those are the kinds 292 00:17:07,400 --> 00:17:10,120 Speaker 1: of things we're going to see in the future unless 293 00:17:10,200 --> 00:17:13,440 Speaker 1: we see some kind of breakthrough that gets the parties 294 00:17:13,480 --> 00:17:16,199 Speaker 1: back into negotiations, and I don't see any sign of 295 00:17:16,280 --> 00:17:19,560 Speaker 1: that as yet. So Michelle, thanks for that set up. 296 00:17:19,560 --> 00:17:22,240 Speaker 1: A curious question or question on my part is um 297 00:17:22,600 --> 00:17:25,399 Speaker 1: markets are very focused on headline risk right now. I 298 00:17:25,400 --> 00:17:28,000 Speaker 1: think there's a general side relief if in fact, the 299 00:17:28,000 --> 00:17:31,280 Speaker 1: Iranians go back to more covert activities, and may be 300 00:17:31,400 --> 00:17:33,760 Speaker 1: that that nothing will be visible and markets will therefore 301 00:17:33,840 --> 00:17:37,000 Speaker 1: be pretty calm. So what's the possibility that Uranians will 302 00:17:37,000 --> 00:17:39,880 Speaker 1: do something over the next few weeks months that were 303 00:17:39,920 --> 00:17:43,080 Speaker 1: really royal markets, because it will be surprising, will be large, 304 00:17:43,119 --> 00:17:46,440 Speaker 1: will be visible, and it will be clearly a direct 305 00:17:46,520 --> 00:17:51,000 Speaker 1: challenge to the United States position. I think that's possible 306 00:17:51,200 --> 00:17:54,040 Speaker 1: because you know, where the redline has now been drawn 307 00:17:54,240 --> 00:17:58,280 Speaker 1: is the killing of Americans. UM So I think iron 308 00:17:58,400 --> 00:18:02,640 Speaker 1: understands that. But you know, I don't think it's out 309 00:18:02,640 --> 00:18:05,880 Speaker 1: of the question that we could see another attack on 310 00:18:06,040 --> 00:18:12,159 Speaker 1: either oil tankers in the Gulf or oil infrastructure in 311 00:18:12,280 --> 00:18:17,360 Speaker 1: the region that would rattle the markets, because I think 312 00:18:17,400 --> 00:18:23,320 Speaker 1: Iran understands that our partners in the region are vulnerable. Uh, 313 00:18:23,600 --> 00:18:26,800 Speaker 1: you know, they could they could certainly take advantage of 314 00:18:26,840 --> 00:18:30,800 Speaker 1: that and launch attacks against that infrastructure again if they 315 00:18:30,880 --> 00:18:34,959 Speaker 1: felt they weren't getting the right attention from the Europeans, 316 00:18:35,000 --> 00:18:38,280 Speaker 1: from the US, they weren't getting support to try to 317 00:18:38,640 --> 00:18:43,800 Speaker 1: lessen the sanctions on them which have been crippling. Taking 318 00:18:43,800 --> 00:18:49,080 Speaker 1: out Sulamine was a choice Michelle that President Bush rejected 319 00:18:49,119 --> 00:18:53,200 Speaker 1: and that President Obama rejected in a choice that President 320 00:18:53,240 --> 00:18:59,960 Speaker 1: Trump made. Are we more or less secure as Americans? Uh? Today? 321 00:19:00,480 --> 00:19:06,240 Speaker 1: With him dead. Um, But the consequences of of our 322 00:19:06,320 --> 00:19:10,119 Speaker 1: having engaged for the first time in forty years, fifty 323 00:19:10,119 --> 00:19:14,600 Speaker 1: seventy years in assassination of the senior official of another government, 324 00:19:15,280 --> 00:19:17,840 Speaker 1: would you say Americans are more or less secure today 325 00:19:18,240 --> 00:19:21,959 Speaker 1: as a consequence of what's happened. He was a terrible 326 00:19:22,040 --> 00:19:25,080 Speaker 1: man with the blood of hundreds, if not thousands of 327 00:19:25,119 --> 00:19:29,119 Speaker 1: Americans and many others on his hands. So in that sense, 328 00:19:29,160 --> 00:19:32,720 Speaker 1: he was a legitimate target. But he I think other 329 00:19:32,800 --> 00:19:36,360 Speaker 1: presidents had the opportunity decided not to take him out 330 00:19:36,880 --> 00:19:41,480 Speaker 1: because of the second and third order strategic consequences of 331 00:19:41,480 --> 00:19:45,040 Speaker 1: doing so. He was not only the head of designated 332 00:19:45,119 --> 00:19:49,200 Speaker 1: terrorist organization, he was also this arguably the second most 333 00:19:49,200 --> 00:19:54,160 Speaker 1: powerful Iranian government official. And so what this has done 334 00:19:54,800 --> 00:20:00,840 Speaker 1: has basically now set the precedent of assassin senating a 335 00:20:00,920 --> 00:20:03,919 Speaker 1: government official of a country with whom we are not 336 00:20:04,040 --> 00:20:07,840 Speaker 1: formally at war. So what is to stop Iran from 337 00:20:07,920 --> 00:20:11,600 Speaker 1: assassinating a forced r U S General or a National 338 00:20:11,680 --> 00:20:15,800 Speaker 1: Security Council member when they next visit the region. It 339 00:20:15,920 --> 00:20:22,040 Speaker 1: sets a terrible president, It opens an Pandora's box on assassination. Furthermore, 340 00:20:22,119 --> 00:20:24,399 Speaker 1: the way in which it was done on a rocky 341 00:20:24,480 --> 00:20:28,960 Speaker 1: soil without any coordination with the Iraqis has now set 342 00:20:29,000 --> 00:20:32,880 Speaker 1: off a set of issues there where we may very 343 00:20:32,920 --> 00:20:36,040 Speaker 1: well get pushed out of a rock and at a 344 00:20:36,119 --> 00:20:38,960 Speaker 1: time when we still have work to be done with 345 00:20:39,040 --> 00:20:42,200 Speaker 1: our allies in terms of fighting ISIS and making sure 346 00:20:42,280 --> 00:20:46,679 Speaker 1: that they do not regenerate and start attacking US interests 347 00:20:46,800 --> 00:20:50,359 Speaker 1: and facilities around the region. Thanks to Harvard Senior Fellow 348 00:20:50,400 --> 00:20:53,880 Speaker 1: Michelle Flournoy, Larry Summers, and Roger Ferguson, We'll stay with us. 349 00:20:54,080 --> 00:20:56,800 Speaker 1: Coming up, we turned to the world of philanthropy for 350 00:20:56,840 --> 00:21:00,200 Speaker 1: a fresh perspective on what hold in store, which ooined 351 00:21:00,200 --> 00:21:03,840 Speaker 1: by the Chief Investment Officer for Carnegie, Kim lu. That's next. 352 00:21:04,119 --> 00:21:07,000 Speaker 1: I'm David Weston and this is Bloomberg Wall Street Week. 353 00:21:15,520 --> 00:21:19,760 Speaker 1: This is Bloomberg Wall Street Week with David Weston from 354 00:21:19,840 --> 00:21:23,200 Speaker 1: Bloomberg Radio. We continue our round table with Larry Summers, 355 00:21:23,200 --> 00:21:27,520 Speaker 1: former US Treasury Secretary, and Roger Ferguson, President CEO of 356 00:21:27,640 --> 00:21:30,440 Speaker 1: t I a A. Each week we welcome a guest 357 00:21:30,440 --> 00:21:32,639 Speaker 1: with a somewhat different perspective on the big stories that 358 00:21:32,680 --> 00:21:35,200 Speaker 1: we're covering. This week, it's the perspective of one of 359 00:21:35,240 --> 00:21:39,000 Speaker 1: the most prominent foundations in the country, the Carnegie Corporation 360 00:21:39,080 --> 00:21:42,600 Speaker 1: of New York. Kim Lu is Carnegie's Chief Investment Officer, 361 00:21:42,840 --> 00:21:45,920 Speaker 1: responsible for investment management and oversight of some three point 362 00:21:45,960 --> 00:21:49,280 Speaker 1: five billion dollars in assets. Earlier in her career, ms 363 00:21:49,440 --> 00:21:52,400 Speaker 1: Lu managed private equity for the Ford Foundation, and last 364 00:21:52,440 --> 00:21:55,360 Speaker 1: year Institutional Investor named her c i O of the Year. 365 00:21:55,720 --> 00:21:58,080 Speaker 1: She joins us. Now, from the point of view of 366 00:21:58,080 --> 00:22:00,960 Speaker 1: a foundation, how is what you do different from what 367 00:22:01,000 --> 00:22:03,679 Speaker 1: we're talking about? How is it the same? So one 368 00:22:03,720 --> 00:22:06,000 Speaker 1: of the things that I heard that was particularly concerning, 369 00:22:06,040 --> 00:22:08,440 Speaker 1: because I think it's true, is when Roger was talking 370 00:22:08,480 --> 00:22:12,520 Speaker 1: about the fact that expectations for returns over the comington 371 00:22:12,800 --> 00:22:16,119 Speaker 1: years is probably going to be significantly less, and Larry 372 00:22:16,160 --> 00:22:18,440 Speaker 1: made the same point, And so there is consensus around 373 00:22:18,480 --> 00:22:20,600 Speaker 1: the fact that because interest rates are so low, the 374 00:22:20,640 --> 00:22:24,240 Speaker 1: expectation is that returns maybe more modest. And for a foundation, 375 00:22:24,720 --> 00:22:27,600 Speaker 1: that's death by a thousand cuts, because we are mandated 376 00:22:27,640 --> 00:22:30,480 Speaker 1: to give away five percent a year. So unless we 377 00:22:30,520 --> 00:22:33,200 Speaker 1: can feel pretty confident that we can receive a five 378 00:22:33,240 --> 00:22:38,639 Speaker 1: percent return, then that is a slow declining of our portfolio. 379 00:22:38,800 --> 00:22:41,560 Speaker 1: And really it really puts our grantees at risk because 380 00:22:41,600 --> 00:22:44,160 Speaker 1: we'd have less and less to provide for them over time, 381 00:22:44,400 --> 00:22:47,119 Speaker 1: and so that is a much worse scenario, quite frankly 382 00:22:47,160 --> 00:22:49,800 Speaker 1: for us than if we had a big decline, because 383 00:22:49,800 --> 00:22:52,280 Speaker 1: if we had a decline, we reset our payout and 384 00:22:52,320 --> 00:22:54,520 Speaker 1: then we'd slowly see it rise back up again. But 385 00:22:54,960 --> 00:22:57,159 Speaker 1: right now there's a general expectation that we're going to 386 00:22:57,400 --> 00:23:01,600 Speaker 1: bleed assets slowly over time, and so um pretty concerning 387 00:23:01,600 --> 00:23:03,760 Speaker 1: it for the foundation community. Okay, what are your options? 388 00:23:03,800 --> 00:23:06,679 Speaker 1: Do you take on more risk, do you change your 389 00:23:06,720 --> 00:23:08,720 Speaker 1: liquidity or duration? I mean, what can you do to 390 00:23:08,760 --> 00:23:13,119 Speaker 1: address that issue? We're looking for more active management, and 391 00:23:13,160 --> 00:23:16,800 Speaker 1: we're looking for picking be its sectors or opportunities that 392 00:23:16,840 --> 00:23:21,280 Speaker 1: we think offer us the opportunity to outperform. Traditionally, foundations 393 00:23:21,280 --> 00:23:24,960 Speaker 1: and endowments have put a lot of their assets in alternatives, 394 00:23:25,040 --> 00:23:28,040 Speaker 1: and that has been possible because we are long term 395 00:23:28,040 --> 00:23:30,840 Speaker 1: investors and so we don't have to worry about the 396 00:23:30,920 --> 00:23:33,480 Speaker 1: short term nature of the market. We spend much less 397 00:23:33,520 --> 00:23:36,040 Speaker 1: time thinking about what's going on in the stock market 398 00:23:36,040 --> 00:23:38,359 Speaker 1: and in the bond market in any one time, and 399 00:23:38,400 --> 00:23:41,000 Speaker 1: the fact we can make investments in things that we 400 00:23:41,080 --> 00:23:44,680 Speaker 1: think are underpriced and just hold them until they realize 401 00:23:44,720 --> 00:23:47,960 Speaker 1: feel value without having to report one quarters and maybe 402 00:23:48,000 --> 00:23:50,919 Speaker 1: not even annually sometimes. And so what we mean by 403 00:23:50,960 --> 00:23:53,000 Speaker 1: the fact that we long term is that we don't 404 00:23:53,000 --> 00:23:54,920 Speaker 1: have to worry about what happens in the short term. 405 00:23:54,920 --> 00:23:57,320 Speaker 1: We can we can invest in things that maybe don't 406 00:23:57,359 --> 00:24:01,159 Speaker 1: actually produce substantial returns in the short term because we 407 00:24:01,240 --> 00:24:03,560 Speaker 1: believe that they're going to produce returns in the long run. 408 00:24:03,960 --> 00:24:08,360 Speaker 1: The problem because we have a lot less degrees of freedom, 409 00:24:08,480 --> 00:24:12,119 Speaker 1: because we have so much wrapped up in alternatives, is 410 00:24:12,160 --> 00:24:16,320 Speaker 1: that there's less ability to rebalance and to take advantage 411 00:24:16,359 --> 00:24:18,200 Speaker 1: of things that happen in the short run. We just 412 00:24:18,320 --> 00:24:21,160 Speaker 1: sort of have to set an asset allocation and stick 413 00:24:21,200 --> 00:24:24,200 Speaker 1: with it. For you, because I think is big and alternative. 414 00:24:24,600 --> 00:24:27,240 Speaker 1: We're very big and alternatives. I think we're bigg alternatives 415 00:24:27,320 --> 00:24:29,359 Speaker 1: for maybe some of the reasons that Kim talked about, 416 00:24:29,840 --> 00:24:32,360 Speaker 1: which is we're thinking about payouts over the next ten 417 00:24:33,119 --> 00:24:36,600 Speaker 1: years because we're retirement oriented company. And so I think 418 00:24:36,640 --> 00:24:38,480 Speaker 1: both of us share in common this notion that you 419 00:24:38,480 --> 00:24:41,320 Speaker 1: want an investment that is gonna somewhere with short term, 420 00:24:41,359 --> 00:24:43,600 Speaker 1: but it's always going to be long term, which leads 421 00:24:43,600 --> 00:24:45,240 Speaker 1: to a question. I think that the thing we have 422 00:24:45,320 --> 00:24:48,840 Speaker 1: in common is this notion of not needing immediate liquidity, 423 00:24:48,920 --> 00:24:50,760 Speaker 1: and you should talk about maybe there's how do you 424 00:24:50,800 --> 00:24:53,320 Speaker 1: think about liquidity, your liquidity needs, how you project out, 425 00:24:53,320 --> 00:24:56,760 Speaker 1: and how you drive, how that drives your investment thesis 426 00:24:56,760 --> 00:25:00,560 Speaker 1: and activity. So liquidity is in amazing really important for 427 00:25:00,640 --> 00:25:03,200 Speaker 1: us because we have no influence of capital, and so 428 00:25:04,040 --> 00:25:06,160 Speaker 1: because of that we have to plan for it. Now. 429 00:25:06,160 --> 00:25:09,320 Speaker 1: We are equity bias. The portfolio is invested in some 430 00:25:09,400 --> 00:25:12,960 Speaker 1: form of equities or equity like securities, with very little 431 00:25:13,119 --> 00:25:17,719 Speaker 1: in fixed income securities. The issue being that we we 432 00:25:17,800 --> 00:25:20,040 Speaker 1: make sure that we have sufficient liquidity to pay our 433 00:25:20,040 --> 00:25:22,680 Speaker 1: payout five percent a year, plus the cost of running 434 00:25:22,720 --> 00:25:26,520 Speaker 1: the office, plus the cost of rebalancing and meeting our 435 00:25:26,560 --> 00:25:29,480 Speaker 1: other liabilities, which is a significant number of unfunded commitments 436 00:25:29,520 --> 00:25:32,240 Speaker 1: as a result of having so much in alternatives, and 437 00:25:33,080 --> 00:25:35,400 Speaker 1: what we think of that as ballast for the portfolio 438 00:25:35,440 --> 00:25:39,280 Speaker 1: becomes an under normal circumstances, when the market doesn't behave 439 00:25:39,359 --> 00:25:42,920 Speaker 1: particularly well and the Fed wants to stimulate, they lower 440 00:25:42,960 --> 00:25:46,159 Speaker 1: interest rates, makes people go out and spend more money 441 00:25:46,520 --> 00:25:49,639 Speaker 1: and and makes bond prices go up. We sell the bonds, 442 00:25:49,720 --> 00:25:53,199 Speaker 1: We reinvest in equities. That's how we've rebalanced. Now we 443 00:25:53,240 --> 00:25:55,760 Speaker 1: are concerned about the fact that people will not actually 444 00:25:55,800 --> 00:25:58,520 Speaker 1: go out and spend because they feel like they have 445 00:25:58,600 --> 00:26:01,000 Speaker 1: to save more because interest rates are so low, and 446 00:26:01,080 --> 00:26:03,399 Speaker 1: rates are so low that it will not have as 447 00:26:03,400 --> 00:26:05,600 Speaker 1: big an impact, and so our fixed portfolio doesn't have 448 00:26:05,640 --> 00:26:07,639 Speaker 1: as much balance as it used to have, and so 449 00:26:07,680 --> 00:26:10,159 Speaker 1: that's a big concern. And there are a number of 450 00:26:10,200 --> 00:26:12,840 Speaker 1: things like that with which we have traditionally relied on 451 00:26:13,280 --> 00:26:16,000 Speaker 1: in order for us to portfolio construct for the long term, 452 00:26:16,280 --> 00:26:18,359 Speaker 1: which are not as dependable as they used to be, 453 00:26:18,400 --> 00:26:20,199 Speaker 1: and so we're concerned about what that means and how 454 00:26:20,200 --> 00:26:22,920 Speaker 1: we should think about things differently. I'd love to be wrong, 455 00:26:23,280 --> 00:26:26,800 Speaker 1: but I think you guys are way optimistic for the 456 00:26:26,840 --> 00:26:32,760 Speaker 1: next decade. On alternatives, it used to be that there 457 00:26:32,800 --> 00:26:37,040 Speaker 1: were only a limited number of alternatives trying to pick stocks, 458 00:26:37,520 --> 00:26:40,280 Speaker 1: and there were all kinds of households making bad trades, 459 00:26:40,920 --> 00:26:46,040 Speaker 1: and the alternative managers could make money there. For now 460 00:26:46,400 --> 00:26:50,560 Speaker 1: there's much less so called noise trading and many many 461 00:26:50,640 --> 00:26:55,040 Speaker 1: more alternative managers, and they're still all charging high fees. 462 00:26:55,720 --> 00:26:58,480 Speaker 1: Used to be you could give up liquidity and make 463 00:26:58,560 --> 00:27:02,359 Speaker 1: private equity investment and expect to get paid for the 464 00:27:02,359 --> 00:27:06,080 Speaker 1: fact that you've given up liquidity. Now there's trillions of 465 00:27:06,119 --> 00:27:10,879 Speaker 1: dollars in private equity investments, there aren't that many more deals, 466 00:27:10,960 --> 00:27:14,800 Speaker 1: so they're being bit up in UH price. Are you 467 00:27:14,880 --> 00:27:20,240 Speaker 1: really confident that by turning through alternatives you're going to 468 00:27:20,359 --> 00:27:25,119 Speaker 1: generate substantial out performance relative to stocks and bonds going 469 00:27:25,200 --> 00:27:28,919 Speaker 1: forward in the way that's admittedly been true in the past. 470 00:27:29,080 --> 00:27:32,760 Speaker 1: I wonder if the game isn't losing some of its edge. 471 00:27:33,119 --> 00:27:35,720 Speaker 1: I hope you're wrong too, but I do agree with you. 472 00:27:35,840 --> 00:27:37,959 Speaker 1: I do think the game has changed, and I do 473 00:27:38,040 --> 00:27:41,399 Speaker 1: think that what we've traditionally done is invest in alternatives 474 00:27:41,440 --> 00:27:45,439 Speaker 1: because we believe that we can create value out of 475 00:27:45,440 --> 00:27:48,959 Speaker 1: the noise. And you're absolutely right that there's far less 476 00:27:49,040 --> 00:27:51,560 Speaker 1: inefficiency than it used to be. There's so much capital 477 00:27:51,560 --> 00:27:53,879 Speaker 1: flowing into the market, there's so many different types of 478 00:27:53,880 --> 00:27:57,160 Speaker 1: people sort of leveraging all the different opportunities. We saw. 479 00:27:57,520 --> 00:28:01,520 Speaker 1: One of the advantages that that Carnegie has, which unfortunately 480 00:28:01,560 --> 00:28:03,720 Speaker 1: Roger doesn't have, is the fact that we're small. We're 481 00:28:03,760 --> 00:28:05,640 Speaker 1: only three and a half billion dollars. We can play 482 00:28:05,680 --> 00:28:08,720 Speaker 1: in spaces that are niche spaces that capital can flow, 483 00:28:08,720 --> 00:28:12,399 Speaker 1: and it's not worth it for some of the larger 484 00:28:12,440 --> 00:28:15,360 Speaker 1: managers to go into a market that's only can support 485 00:28:15,400 --> 00:28:18,080 Speaker 1: a hundred million dollar fund or seventy million dollar fund, 486 00:28:18,400 --> 00:28:20,640 Speaker 1: but we can play in that market. And so what 487 00:28:20,640 --> 00:28:23,040 Speaker 1: we're doing is we're tending to go smaller, we're tending 488 00:28:23,080 --> 00:28:26,360 Speaker 1: to go even more inefficient. It's a different risk profile, 489 00:28:26,880 --> 00:28:28,639 Speaker 1: so we need to think about it differently, and we 490 00:28:28,680 --> 00:28:31,920 Speaker 1: know that we are taking on more illiquidity risks because 491 00:28:31,960 --> 00:28:34,600 Speaker 1: we're going into these markets which do not have the 492 00:28:34,680 --> 00:28:36,600 Speaker 1: same level We've got to remember. We do have to 493 00:28:36,640 --> 00:28:40,240 Speaker 1: remember here that when you go to alternatives, you're usually 494 00:28:40,320 --> 00:28:47,440 Speaker 1: paying one two percent in fees and then you're paying returns. 495 00:28:47,840 --> 00:28:51,680 Speaker 1: And until you get those fees down, they've got to 496 00:28:51,800 --> 00:28:54,480 Speaker 1: they don't just have to outperform, they've got to outperform 497 00:28:54,600 --> 00:28:58,280 Speaker 1: a lot to outperform on an after tax fee basis, 498 00:28:58,320 --> 00:29:01,320 Speaker 1: because nowadays, as you know, you can get into index 499 00:29:01,360 --> 00:29:05,640 Speaker 1: funds and pay zero, nothing at all. And so I'm 500 00:29:05,680 --> 00:29:09,920 Speaker 1: just not sure that that for the general investor, alternatives 501 00:29:09,920 --> 00:29:13,440 Speaker 1: are going to be as good going forward as they 502 00:29:13,440 --> 00:29:15,280 Speaker 1: have been in the past. If we're looking for markets 503 00:29:15,320 --> 00:29:18,000 Speaker 1: where there may not be the efficiency that are just described. 504 00:29:18,080 --> 00:29:20,680 Speaker 1: What about emerging markets. There are emerging markets where there 505 00:29:20,680 --> 00:29:23,080 Speaker 1: isn't as much transparence that there isn't as much efficiency. 506 00:29:23,080 --> 00:29:26,480 Speaker 1: There's risk, But is that an opportunity. It is an opportunity, 507 00:29:26,520 --> 00:29:29,120 Speaker 1: but it is a challenging markets to play in because 508 00:29:29,240 --> 00:29:32,120 Speaker 1: what you need in those environments are good management teams. 509 00:29:32,280 --> 00:29:35,080 Speaker 1: You need people who are good investors. You need aligned 510 00:29:35,120 --> 00:29:38,520 Speaker 1: investments who who people who think in a similar way 511 00:29:38,600 --> 00:29:42,720 Speaker 1: about the relationship between their investors and the markets and 512 00:29:42,760 --> 00:29:44,920 Speaker 1: how they do things, and that's hard thing to find. 513 00:29:45,360 --> 00:29:47,680 Speaker 1: People have very different insentives and quite honestly, when you're 514 00:29:47,680 --> 00:29:50,320 Speaker 1: talking about emerging markets at this point, you're talking about China, 515 00:29:50,640 --> 00:29:55,160 Speaker 1: China of the emerging markets benchmark, and that is one 516 00:29:55,160 --> 00:29:56,880 Speaker 1: of the areas that we have to really start to 517 00:29:56,880 --> 00:29:59,720 Speaker 1: think about how markets are changing, because we've relied on 518 00:30:00,240 --> 00:30:02,880 Speaker 1: the fact that emerging markets could be differentiators, and we've 519 00:30:02,920 --> 00:30:05,040 Speaker 1: just said that we're going to invest in emerging markets 520 00:30:05,040 --> 00:30:08,680 Speaker 1: and that's gonna be a form of diversification. Increasingly, seeing 521 00:30:08,720 --> 00:30:12,520 Speaker 1: that the world is not dividing evenly between developed markets 522 00:30:12,520 --> 00:30:14,960 Speaker 1: and emerging markets, and there may be other ways we 523 00:30:14,960 --> 00:30:19,120 Speaker 1: should look at it, and possibly China is a form 524 00:30:19,120 --> 00:30:23,200 Speaker 1: of diversification. There's very likely to be a decoupling between 525 00:30:23,200 --> 00:30:26,240 Speaker 1: the United States and China because they are going to 526 00:30:26,280 --> 00:30:30,280 Speaker 1: make very different decisions about technology. And there are countries 527 00:30:30,320 --> 00:30:32,480 Speaker 1: who are going to line up behind China, and then 528 00:30:32,480 --> 00:30:34,520 Speaker 1: there are companies and countries that are going to line 529 00:30:34,560 --> 00:30:37,360 Speaker 1: up behind the United States. And I don't really know 530 00:30:37,400 --> 00:30:39,280 Speaker 1: who the winner is going to be. And we're gonna 531 00:30:39,320 --> 00:30:42,200 Speaker 1: have to decide how we're going to participate in those 532 00:30:42,240 --> 00:30:45,280 Speaker 1: markets and provide us with some opportunities. But there's clearly 533 00:30:45,320 --> 00:30:48,840 Speaker 1: a lot of risks. There is especially risks when um, 534 00:30:48,880 --> 00:30:52,240 Speaker 1: you know, we're concerned about what's going on there, and 535 00:30:52,280 --> 00:30:54,880 Speaker 1: we're concerned about the laws and the regulations and how 536 00:30:54,920 --> 00:30:57,440 Speaker 1: they will change in response to things that we do here. 537 00:30:57,960 --> 00:30:59,760 Speaker 1: And it isn't an inorder amount of risk, but it 538 00:30:59,840 --> 00:31:02,080 Speaker 1: is a big market. It's hard to ignore it. One 539 00:31:02,080 --> 00:31:03,640 Speaker 1: of the things looking back in the last decade is 540 00:31:03,680 --> 00:31:06,960 Speaker 1: the tide has risen pretty well with China. Looking forward 541 00:31:06,920 --> 00:31:09,440 Speaker 1: to the next decade, how far is that? How you're 542 00:31:09,480 --> 00:31:13,280 Speaker 1: going to keep going? Well? They are slowing, but even 543 00:31:13,280 --> 00:31:15,440 Speaker 1: though they're still slowing, they're still growing a lot faster. 544 00:31:15,480 --> 00:31:18,160 Speaker 1: Than we are, and if so, if you're looking for growth, 545 00:31:18,360 --> 00:31:20,320 Speaker 1: you need to go there. I also think that it's 546 00:31:20,360 --> 00:31:24,480 Speaker 1: it's not insignificant that it is a government that can 547 00:31:24,480 --> 00:31:27,040 Speaker 1: control a lot of things, and it can turn on 548 00:31:27,080 --> 00:31:29,440 Speaker 1: a dime in many respects, and so it can make 549 00:31:29,480 --> 00:31:32,719 Speaker 1: adjustments in ways that that are arguably more challenging for 550 00:31:32,840 --> 00:31:35,240 Speaker 1: us to make adjustments. Roder hoping an opportunities to China 551 00:31:35,240 --> 00:31:38,720 Speaker 1: in the next decade. I think, broadly speaking, you're right, 552 00:31:38,800 --> 00:31:41,840 Speaker 1: it is growing, it is still emerging. I think the 553 00:31:41,920 --> 00:31:45,800 Speaker 1: challenges have to do with transparency, the ability to you know, 554 00:31:46,440 --> 00:31:49,360 Speaker 1: get your money out depending on how you invest um 555 00:31:49,440 --> 00:31:52,360 Speaker 1: and you're very good point around, you know, having teams 556 00:31:52,360 --> 00:31:54,440 Speaker 1: to really understand what's going on. So I think it 557 00:31:54,560 --> 00:31:57,200 Speaker 1: is absolutely still a class who want us to look at. 558 00:31:57,360 --> 00:32:00,800 Speaker 1: But I'm a little more cautious maybe for those Thanks 559 00:32:00,840 --> 00:32:04,760 Speaker 1: to our roundtable Larry Summers, former US Treasury Secretary, Roger Ferguson, 560 00:32:04,840 --> 00:32:08,680 Speaker 1: President and CEO of t I A A. And Carnegie's 561 00:32:08,800 --> 00:32:11,960 Speaker 1: ce IO Kim Lou that's it for Wall Street Week 562 00:32:12,000 --> 00:32:15,440 Speaker 1: from Bloomberg Radio. Coming up next week of Sonny Beschloss 563 00:32:15,480 --> 00:32:17,720 Speaker 1: and Sam Paul Masana will join us around the table. 564 00:32:18,120 --> 00:32:20,480 Speaker 1: I'm David Weston, this is Bloomberg