Speaker 1: This is Bloomberg wool Street Week. What's the state of
Speaker 1: corporate governance? Its deficit is a real issue. The US
Speaker 1: economy continues to send nixed signals to the financial stories
Speaker 1: that cheap our word fed action to con concerns over
Speaker 1: dollar liquidity and encouraging China data. The town's reaction to
Speaker 1: news on Breakfast through the eyes of the most influential
Speaker 1: voices Larry Summers, the former Treasury Secretary, Star CEO, Kevin
Speaker 1: Johnson sec Chairman j Clayton, Bloomberg wool Street Week, we'd
Speaker 1: David Weston on Bloomberg Radio. Welcome to Wall Street Week
Speaker 1: on Bloomberg Radio. I'm David Weston. Coming up this hour,
Speaker 1: we'll bring you a conversation on geopolitics with Harvard's Michelle Flournoy,
Speaker 1: plus what has in store for the world of philanthropy.
Speaker 1: But first, it was the bull market that defied a
Speaker 1: euro crisis, political earthquakes and shaky corporate earnings, and central
Speaker 1: banks danced to a dobish beat. Now we under the
Speaker 1: next decade, with interest rates at record lows and an
Speaker 1: asset bubble that many fear is ready to pop. Let's
Speaker 1: bring in our roundtable now We're joined by Larry Summers Warmer,
Speaker 1: US Treasury Secretary and Roger Ferguson, President and CEO of
Speaker 1: the Teacher's Insurance and Annuity Association. Larry, it gives a
Speaker 1: sense of this decade that just happened, a big run
Speaker 1: up in the markets, particularly equity. What drove that. Part
Speaker 1: of what drove it was how weak the markets were
Speaker 1: at the beginning of the decade as a consequence of
Speaker 1: the financial crisis. Part of what drove it was we
Speaker 1: had the longest recovery we have ever had. But crucially
Speaker 1: what drove it was that interest rates fell so low
Speaker 1: that uh people applied a much lower discount factor to
Speaker 1: future earnings, and that inflated the price of all assets,
Speaker 1: whether it was stocks, whether it was real estate, anything
Speaker 1: that promised future cash flows became more valuable as interest
Speaker 1: rates came down. So Roger, that raised the question, obviously,
Speaker 1: are we inflating asset values through lower interest rates? So look,
Speaker 1: I agree with Larry that without a doubt, the big
Speaker 1: driver was the moving interest rate both here and around
Speaker 1: the world. Question are we inflating values? I think it's
Speaker 1: too strong to say that that implies some massive bubble,
Speaker 1: that's about to burst. However, what we have seeing, David
Speaker 1: is that the p multiples have started to increase as well,
Speaker 1: which is suggesting that every dollar of earnings is getting
Speaker 1: a bigger and bigger return. So I've been a little
Speaker 1: cautious when we're inflating, but I agree completely with Larry
Speaker 1: that low interest rates were the major drivers for markets.
Speaker 1: Is the market overbought when it comes to equities, I
Speaker 1: don't think it's clear that it is. I think that
Speaker 1: given what's happened to interest rates, which in my view
Speaker 1: is heavily driven by wheel events in the economy, more
Speaker 1: saving because more of the money is going to affluent people,
Speaker 1: less investment because the price of capital goods has come
Speaker 1: down so far. I think those are the reasons why
Speaker 1: you have lower interest rates. And when you have lower
Speaker 1: interest rates, you have higher higher multiples. I'm not sure
Speaker 1: that it represents some fundamental imbalance. This certainly isn't a
Speaker 1: moment like the moment at the beginning of the decade
Speaker 1: when markets look cheap, and I think we've got to
Speaker 1: recognize that because interest rates are much lower, and maybe
Speaker 1: risk premiums are the same as they always are, that
Speaker 1: returns going forward are going to be substantially lower than
Speaker 1: they have been over the last decade. And that is
Speaker 1: the question. If lower interest rates and starting from a
Speaker 1: low base drove the last decade, what's going to drive
Speaker 1: the next decade. I think it's gonna depend on the news,
Speaker 1: and we don't know whether the surprises are going to
Speaker 1: be positive or negative. But I think if things work
Speaker 1: out as everybody expects them to, then you're gonna be
Speaker 1: looking at equity returns that are much lower than people
Speaker 1: have become accustomed to over most much of the last generation. Uh.
Speaker 1: My guests would be that if you invest your money
Speaker 1: in part in stocks and in part in bonds, you're
Speaker 1: gonna be looking at returns perhaps in the five six
Speaker 1: percent range um, which is much lower than people experienced
Speaker 1: over the last decade. And that's probably going to be
Speaker 1: an unpleasant surprise for some people. So, Roger, you're responsible
Speaker 1: for a lot of money for a lot of pensions.
Speaker 1: People are gonna count on that money over the long term.
Speaker 1: What is that thesis that Larry set out? What does
Speaker 1: that tell you about investing? Well, first, a point I
Speaker 1: would have made that I didn't hear that. I make
Speaker 1: the thing that's going to drive markets over the next
Speaker 1: several years. It's what's driven them the last several First
Speaker 1: question is our interest face is going to main low, right,
Speaker 1: and so the expectation that the Fed and other central
Speaker 1: banks will be on hold for a period of time.
Speaker 1: I think it's going to continue to support equity valuations
Speaker 1: and other valuations. I think Larry is absolutely right. The
Speaker 1: return that the average investor can expect an equity market,
Speaker 1: so the next two or three, five, maybe ten years,
Speaker 1: is going to be somewhat lower than we had in
Speaker 1: the past. Um, that does not mean that it's gonna
Speaker 1: sort of burst. It does mean that one should expect
Speaker 1: slightly lower returns. The answer to all that, though, when
Speaker 1: I think about pensions is you want to have broad diversification,
Speaker 1: so equity fixed income, but certainly alternatives will be another
Speaker 1: to look and they're going to want to play the
Speaker 1: big global themes as well. What do you think. I mean,
Speaker 1: one of the things that strikes me in the last
Speaker 1: ten years, there's a delta they've been cutting interest rates
Speaker 1: is just static low interest rates enough. That's the key point.
Speaker 1: Roger's right about diversification. Rogers says they're going to be
Speaker 1: slightly lower over the next decade. I think it's gonna
Speaker 1: be a good deal more than UH slightly lower. I
Speaker 1: think that people will do fine if they earn five
Speaker 1: or six percent on their money. I think that people
Speaker 1: are going to realize that it's not going to be
Speaker 1: the kind of happy decade that we saw. I think
Speaker 1: the happy decade came in part from the positive surprise
Speaker 1: of falling interest rates that drove up on prices definition ly,
Speaker 1: and it drove up stock prices because falling interest rates
Speaker 1: meant higher multiples. We might see continued low interest rates,
Speaker 1: but they're written that much room for interest rates to
Speaker 1: fall starting from a ten year of one point eight.
Speaker 1: So I don't think it's going to be nearly as
Speaker 1: bullish a period over the next decade as it has
Speaker 1: been uh in the last, and since the level of
Speaker 1: interest rates is a kind of fundamental determinant of everything, um,
Speaker 1: I don't think that. I think the versification is absolutely
Speaker 1: the right strategy, but I don't think people are going
Speaker 1: to be able to avoid the reality that returns are
Speaker 1: going to be lower in the future than they have
Speaker 1: been in the past. We'll be back with Larry Summers
Speaker 1: and Roger Ferguson after a decade of growth. It's clear
Speaker 1: global central bankers fear are reckoning to come, but our
Speaker 1: monetary policy makers out of ammunition. We'll discuss with our roundtable. Next.
Speaker 1: I'm David Weston and this is Bloomberg Wall Street Week.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio. We continue our round table with Larry Summers,
Speaker 1: former U S. Treasury Secretary, and Roger Ferguson, President and
Speaker 1: CEO of t I a A. Central banks may no
Speaker 1: longer be the only game in town. That was the
Speaker 1: sobering message from the American Economic Association's annual conference in
Speaker 1: San Diego, a decade after the financial crisis rocked the
Speaker 1: global economy. Policymakers confront a risky world of what could
Speaker 1: be perpetually low growth, something Larry Summers warned about in
Speaker 1: his speech to the I m F back in two
Speaker 1: thousand thirteen. So, Larry, I guess congratulations that you were right,
Speaker 1: but I'm not sure you wanted to be right. Secular
Speaker 1: stagnation isn't good news. It suggests much more profound trade
Speaker 1: offs between rapid economic growth and financial stability and fiscal
Speaker 1: prudence than we thought we had and raises all kinds
Speaker 1: of questions for macroeconomic policy going forward. But look what's
Speaker 1: happened relative to the time when I put forth that
Speaker 1: secular stagnation hypothesis in is, we've had bigger deficits than
Speaker 1: people thought. We've had lower interest rates than people expected,
Speaker 1: We've had more credit growth and higher asset prices than
Speaker 1: people expected. So the accelerator has been on the floor,
Speaker 1: but the car hasn't gone very fast. We've had lower
Speaker 1: growth and lower inflation than people expected. And what that
Speaker 1: suggests is that the underlying energy that the private sector
Speaker 1: generates is much less than it used to be. That
Speaker 1: we've been able to give some energy, but only by
Speaker 1: having rising debt to GDP ratios, only by having quite
Speaker 1: extraordinary monetary policies and low interest rate. And there's a
Speaker 1: question how long that lasts. And there's also a question
Speaker 1: of what the long run side effects of that are.
Speaker 1: You know, people say that the so called to WE
Speaker 1: neutral interest rate has declined by two or three percentage points.
Speaker 1: What I've been able to show in some recent research
Speaker 1: is that if we hadn't been running up the national
Speaker 1: debt globally, that probably that real not neutral interest rate
Speaker 1: would have declined by four or five or six or
Speaker 1: seven even uh percentage points. So there's a fundamental structural
Speaker 1: challenge around the fact that people are living longer more
Speaker 1: the money is going to people who have high savings rates.
Speaker 1: And at the same time, as you see with my
Speaker 1: cell phone that costs five dollars and has a hundred
Speaker 1: times as much computing power as the whole Apollo project,
Speaker 1: capital goods are getting cheaper cheaper, and so the money
Speaker 1: slashes into existing assets, leading to asset price inflation. But
Speaker 1: with limited economic energy. It's a little bit like the
Speaker 1: plight of Japan or some you might even call it
Speaker 1: a monetary black hole. So Roger, as an investor, how
Speaker 1: do you process all that? Basically, I think that Larry
Speaker 1: saying we've kept it growing but basically running up the
Speaker 1: credit card. No, look, I think Larry's points are certainly
Speaker 1: well taken in terms of what happened in the last decade.
Speaker 1: The way you process it is to say two things.
Speaker 1: One is is there going to be a fundamental change
Speaker 1: anytime soon? In particular, you know what we haven't talked
Speaker 1: very much about is one of the things that's kept
Speaker 1: rates so low as inflation and so inflation for variety
Speaker 1: of reasons has been a no show, which has allowed
Speaker 1: central banks to continue to be very very accommodative and
Speaker 1: to drive down interest rates. So the way you play
Speaker 1: it is, first, is that picture gonna change? Our interestate
Speaker 1: is going to start picking up anytime? Is gonna have
Speaker 1: to worry about. Secondly, as I said before, you know
Speaker 1: what are the asset classes are going to benefit or
Speaker 1: not benefit? And so you're gonna have to be thinking,
Speaker 1: you know, much more cleverly about you know, how you differentiate.
Speaker 1: You also are looking for is this has been a
Speaker 1: global phenomenon? Is the US still the best place to be?
Speaker 1: Or should we be looking at different emerging markets? How
Speaker 1: should we think about it? So again, I think this
Speaker 1: is the time where you move from the broad general
Speaker 1: down to a much one now much more focused, much
Speaker 1: more particular theory. It just strikes me that you are
Speaker 1: an investor, but you also were vice share the FED.
Speaker 1: Have the central banks basically done what they could do? Essentially?
Speaker 1: I mean they've really kept a lot of simulus monetary
Speaker 1: students and have they basically done everything they can do?
Speaker 1: So Look, I think the general consensus and I share it,
Speaker 1: is that the last recovery depended much too heavily on
Speaker 1: central banks. Um. Uh heaven here in the US where
Speaker 1: we had some fiscal stimulus. In hindsight, a lot of
Speaker 1: folks think maybe we should have done more and kept
Speaker 1: it going. Certainly, for one looks in Europe. Um clearly
Speaker 1: that we'd say central banks are asked to do too much.
Speaker 1: So yeah, I think too much weight has been put
Speaker 1: on the shoulders of central banks. They responded by doing
Speaker 1: a couple of things. One is using their regular tools
Speaker 1: I called interest rates, and then to using some unusual
Speaker 1: tools and new tools qualtitative easing for sure, building up
Speaker 1: the size of their balance sheets, going in and buying
Speaker 1: a variety of fixed income securities. And then they polished
Speaker 1: up the use of forward guidance. You know what was it?
Speaker 1: They said? So when you look at the debate that's
Speaker 1: going on, the question is that enough? And will that
Speaker 1: be sufficient the next time around? And I think that's
Speaker 1: really a question that we former and current central bankers
Speaker 1: are worried about. This is something that was the topic
Speaker 1: of discussion out the a A that conference that you
Speaker 1: attended in San Diego. One of the things that you raised,
Speaker 1: I believe others have raised as well as something called
Speaker 1: semi automatic stabilizers. Basically, as I understand, automatic fiscal injection
Speaker 1: when certain things turned south. Is that a realistic alternative?
Speaker 1: It better be um ben Burn Ankie gave a speech
Speaker 1: out there which I think was a kind of last
Speaker 1: hurrah for the central bankers. He argued that monetary policialed
Speaker 1: be able to do it the next time. I think
Speaker 1: that's pretty unlikely, given that in recessions we usually cut
Speaker 1: interest rates by five percentage points, and interest rates today
Speaker 1: or below U two, and I just don't believe that
Speaker 1: quantitative easing and that stuff is worth anything like another
Speaker 1: three percentage points. So I think we're gonna have to
Speaker 1: rely on putting money in people's pockets, on direct government spending.
Speaker 1: I think that's okay in a country where public investment
Speaker 1: and infrastructure are decaying so badly. But I think that's
Speaker 1: where we're going to have to look for our countercyclical energy.
Speaker 1: And what Olivier Blanchard and I were talking about when
Speaker 1: we discussed UH semi automatic stabilizers was the idea that
Speaker 1: rather than relying on Congress to organize itself to act
Speaker 1: each time there's an economic downturn. We should do more
Speaker 1: with rules that would lock in changes in spending. Perhaps
Speaker 1: greater assistance to states, perhaps more assistance for people who
Speaker 1: are unemployed, perhaps working off a backlog of infrastructure investments,
Speaker 1: perhaps giving temporary tax credits for those uh who spend,
Speaker 1: And that that kind of fiscal stimulus is going to
Speaker 1: have to be a larger part of the story. And
Speaker 1: I think it's very I think central brankers have a
Speaker 1: very difficult road to walk because on the one hand,
Speaker 1: they don't want to say they're out of gas and
Speaker 1: they can't solve the problem. On the other hand, they'd
Speaker 1: better be giving some warning if they want fiscal policy
Speaker 1: to be ready next time. And I think that's reality
Speaker 1: that it's going to need to be. Larry Summers and
Speaker 1: Roger Ferguson will stay with us. Coming up, we turn
Speaker 1: to the world of philanthropy for a fresh perspective on
Speaker 1: what holds in store. We're joined by the chief investment
Speaker 1: officer for Carnegie, Kim Lube. That's next. I'm David Weston,
Speaker 1: and this is Bloomberg Wall Street Week. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. We
Speaker 1: continue our roundtable with Larry Summer's former US Treasury Secretary,
Speaker 1: and Roger Ferguson, President and CEO of t I a A.
Speaker 1: It's been a roller coaster start to global markets as
Speaker 1: investors grapple with America's killing of a Runnyan military leader, Solomony,
Speaker 1: and it's aftermath. So over and above things like prospects
Speaker 1: for economic growth, changes in monetary policy, and government spending,
Speaker 1: investors have to be considering geopolitics that can change in
Speaker 1: an instant. Michelle Flournoy has made a career of analyzing
Speaker 1: and understanding forces just such as these. She served as
Speaker 1: Under Secretary of Policy that was under Defense Secretaries Robert
Speaker 1: Gates and Leon Panetta. Michelle's currently senior fellow at Harvard's
Speaker 1: Bell for Center and a senior adviser to the Boston
Speaker 1: Consulting Group. She joins us, now give us your take today.
Speaker 1: Is it a constantly changing story? But it really was
Speaker 1: a lot of upheople last week it seems to have
Speaker 1: calmed down. Is that a false dawn? Well, I do
Speaker 1: think the circuit breaker has been thrown on the most
Speaker 1: recent cycle of escalation between Iran and the United States.
Speaker 1: But I think we would be foolish to think that
Speaker 1: this is over. The fundamental issues that the United States
Speaker 1: and Iran are in conflict over have not gone away.
Speaker 1: So I think what we're likely to see is a
Speaker 1: reversion to sort of previous approaches. You we've heard that
Speaker 1: the Trump administration is going to go ahead and increased sanctions,
Speaker 1: sort of doubling down on their maximum pressure campaign, And
Speaker 1: for Ron's part, I think you can expect them to
Speaker 1: revert to their traditional playbook, which is really using more
Speaker 1: covert and clandestine means that give them some measure of deniabile.
Speaker 1: Whether it's cyber attacks or whether it's use of proxies
Speaker 1: to launch attacks on their behalf. Those are the kinds
Speaker 1: of things we're going to see in the future unless
Speaker 1: we see some kind of breakthrough that gets the parties
Speaker 1: back into negotiations, and I don't see any sign of
Speaker 1: that as yet. So Michelle, thanks for that set up.
Speaker 1: A curious question or question on my part is um
Speaker 1: markets are very focused on headline risk right now. I
Speaker 1: think there's a general side relief if in fact, the
Speaker 1: Iranians go back to more covert activities, and may be
Speaker 1: that that nothing will be visible and markets will therefore
Speaker 1: be pretty calm. So what's the possibility that Uranians will
Speaker 1: do something over the next few weeks months that were
Speaker 1: really royal markets, because it will be surprising, will be large,
Speaker 1: will be visible, and it will be clearly a direct
Speaker 1: challenge to the United States position. I think that's possible
Speaker 1: because you know, where the redline has now been drawn
Speaker 1: is the killing of Americans. UM So I think iron
Speaker 1: understands that. But you know, I don't think it's out
Speaker 1: of the question that we could see another attack on
Speaker 1: either oil tankers in the Gulf or oil infrastructure in
Speaker 1: the region that would rattle the markets, because I think
Speaker 1: Iran understands that our partners in the region are vulnerable. Uh,
Speaker 1: you know, they could they could certainly take advantage of
Speaker 1: that and launch attacks against that infrastructure again if they
Speaker 1: felt they weren't getting the right attention from the Europeans,
Speaker 1: from the US, they weren't getting support to try to
Speaker 1: lessen the sanctions on them which have been crippling. Taking
Speaker 1: out Sulamine was a choice Michelle that President Bush rejected
Speaker 1: and that President Obama rejected in a choice that President
Speaker 1: Trump made. Are we more or less secure as Americans? Uh? Today?
Speaker 1: With him dead. Um, But the consequences of of our
Speaker 1: having engaged for the first time in forty years, fifty
Speaker 1: seventy years in assassination of the senior official of another government,
Speaker 1: would you say Americans are more or less secure today
Speaker 1: as a consequence of what's happened. He was a terrible
Speaker 1: man with the blood of hundreds, if not thousands of
Speaker 1: Americans and many others on his hands. So in that sense,
Speaker 1: he was a legitimate target. But he I think other
Speaker 1: presidents had the opportunity decided not to take him out
Speaker 1: because of the second and third order strategic consequences of
Speaker 1: doing so. He was not only the head of designated
Speaker 1: terrorist organization, he was also this arguably the second most
Speaker 1: powerful Iranian government official. And so what this has done
Speaker 1: has basically now set the precedent of assassin senating a
Speaker 1: government official of a country with whom we are not
Speaker 1: formally at war. So what is to stop Iran from
Speaker 1: assassinating a forced r U S General or a National
Speaker 1: Security Council member when they next visit the region. It
Speaker 1: sets a terrible president, It opens an Pandora's box on assassination. Furthermore,
Speaker 1: the way in which it was done on a rocky
Speaker 1: soil without any coordination with the Iraqis has now set
Speaker 1: off a set of issues there where we may very
Speaker 1: well get pushed out of a rock and at a
Speaker 1: time when we still have work to be done with
Speaker 1: our allies in terms of fighting ISIS and making sure
Speaker 1: that they do not regenerate and start attacking US interests
Speaker 1: and facilities around the region. Thanks to Harvard Senior Fellow
Speaker 1: Michelle Flournoy, Larry Summers, and Roger Ferguson, We'll stay with us.
Speaker 1: Coming up, we turned to the world of philanthropy for
Speaker 1: a fresh perspective on what hold in store, which ooined
Speaker 1: by the Chief Investment Officer for Carnegie, Kim lu. That's next.
Speaker 1: I'm David Weston and this is Bloomberg Wall Street Week.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio. We continue our round table with Larry Summers,
Speaker 1: former US Treasury Secretary, and Roger Ferguson, President CEO of
Speaker 1: t I a A. Each week we welcome a guest
Speaker 1: with a somewhat different perspective on the big stories that
Speaker 1: we're covering. This week, it's the perspective of one of
Speaker 1: the most prominent foundations in the country, the Carnegie Corporation
Speaker 1: of New York. Kim Lu is Carnegie's Chief Investment Officer,
Speaker 1: responsible for investment management and oversight of some three point
Speaker 1: five billion dollars in assets. Earlier in her career, ms
Speaker 1: Lu managed private equity for the Ford Foundation, and last
Speaker 1: year Institutional Investor named her c i O of the Year.
Speaker 1: She joins us. Now, from the point of view of
Speaker 1: a foundation, how is what you do different from what
Speaker 1: we're talking about? How is it the same? So one
Speaker 1: of the things that I heard that was particularly concerning,
Speaker 1: because I think it's true, is when Roger was talking
Speaker 1: about the fact that expectations for returns over the comington
Speaker 1: years is probably going to be significantly less, and Larry
Speaker 1: made the same point, And so there is consensus around
Speaker 1: the fact that because interest rates are so low, the
Speaker 1: expectation is that returns maybe more modest. And for a foundation,
Speaker 1: that's death by a thousand cuts, because we are mandated
Speaker 1: to give away five percent a year. So unless we
Speaker 1: can feel pretty confident that we can receive a five
Speaker 1: percent return, then that is a slow declining of our portfolio.
Speaker 1: And really it really puts our grantees at risk because
Speaker 1: we'd have less and less to provide for them over time,
Speaker 1: and so that is a much worse scenario, quite frankly
Speaker 1: for us than if we had a big decline, because
Speaker 1: if we had a decline, we reset our payout and
Speaker 1: then we'd slowly see it rise back up again. But
Speaker 1: right now there's a general expectation that we're going to
Speaker 1: bleed assets slowly over time, and so um pretty concerning
Speaker 1: it for the foundation community. Okay, what are your options?
Speaker 1: Do you take on more risk, do you change your
Speaker 1: liquidity or duration? I mean, what can you do to
Speaker 1: address that issue? We're looking for more active management, and
Speaker 1: we're looking for picking be its sectors or opportunities that
Speaker 1: we think offer us the opportunity to outperform. Traditionally, foundations
Speaker 1: and endowments have put a lot of their assets in alternatives,
Speaker 1: and that has been possible because we are long term
Speaker 1: investors and so we don't have to worry about the
Speaker 1: short term nature of the market. We spend much less
Speaker 1: time thinking about what's going on in the stock market
Speaker 1: and in the bond market in any one time, and
Speaker 1: the fact we can make investments in things that we
Speaker 1: think are underpriced and just hold them until they realize
Speaker 1: feel value without having to report one quarters and maybe
Speaker 1: not even annually sometimes. And so what we mean by
Speaker 1: the fact that we long term is that we don't
Speaker 1: have to worry about what happens in the short term.
Speaker 1: We can we can invest in things that maybe don't
Speaker 1: actually produce substantial returns in the short term because we
Speaker 1: believe that they're going to produce returns in the long run.
Speaker 1: The problem because we have a lot less degrees of freedom,
Speaker 1: because we have so much wrapped up in alternatives, is
Speaker 1: that there's less ability to rebalance and to take advantage
Speaker 1: of things that happen in the short run. We just
Speaker 1: sort of have to set an asset allocation and stick
Speaker 1: with it. For you, because I think is big and alternative.
Speaker 1: We're very big and alternatives. I think we're bigg alternatives
Speaker 1: for maybe some of the reasons that Kim talked about,
Speaker 1: which is we're thinking about payouts over the next ten
Speaker 1: years because we're retirement oriented company. And so I think
Speaker 1: both of us share in common this notion that you
Speaker 1: want an investment that is gonna somewhere with short term,
Speaker 1: but it's always going to be long term, which leads
Speaker 1: to a question. I think that the thing we have
Speaker 1: in common is this notion of not needing immediate liquidity,
Speaker 1: and you should talk about maybe there's how do you
Speaker 1: think about liquidity, your liquidity needs, how you project out,
Speaker 1: and how you drive, how that drives your investment thesis
Speaker 1: and activity. So liquidity is in amazing really important for
Speaker 1: us because we have no influence of capital, and so
Speaker 1: because of that we have to plan for it. Now.
Speaker 1: We are equity bias. The portfolio is invested in some
Speaker 1: form of equities or equity like securities, with very little
Speaker 1: in fixed income securities. The issue being that we we
Speaker 1: make sure that we have sufficient liquidity to pay our
Speaker 1: payout five percent a year, plus the cost of running
Speaker 1: the office, plus the cost of rebalancing and meeting our
Speaker 1: other liabilities, which is a significant number of unfunded commitments
Speaker 1: as a result of having so much in alternatives, and
Speaker 1: what we think of that as ballast for the portfolio
Speaker 1: becomes an under normal circumstances, when the market doesn't behave
Speaker 1: particularly well and the Fed wants to stimulate, they lower
Speaker 1: interest rates, makes people go out and spend more money
Speaker 1: and and makes bond prices go up. We sell the bonds,
Speaker 1: We reinvest in equities. That's how we've rebalanced. Now we
Speaker 1: are concerned about the fact that people will not actually
Speaker 1: go out and spend because they feel like they have
Speaker 1: to save more because interest rates are so low, and
Speaker 1: rates are so low that it will not have as
Speaker 1: big an impact, and so our fixed portfolio doesn't have
Speaker 1: as much balance as it used to have, and so
Speaker 1: that's a big concern. And there are a number of
Speaker 1: things like that with which we have traditionally relied on
Speaker 1: in order for us to portfolio construct for the long term,
Speaker 1: which are not as dependable as they used to be,
Speaker 1: and so we're concerned about what that means and how
Speaker 1: we should think about things differently. I'd love to be wrong,
Speaker 1: but I think you guys are way optimistic for the
Speaker 1: next decade. On alternatives, it used to be that there
Speaker 1: were only a limited number of alternatives trying to pick stocks,
Speaker 1: and there were all kinds of households making bad trades,
Speaker 1: and the alternative managers could make money there. For now
Speaker 1: there's much less so called noise trading and many many
Speaker 1: more alternative managers, and they're still all charging high fees.
Speaker 1: Used to be you could give up liquidity and make
Speaker 1: private equity investment and expect to get paid for the
Speaker 1: fact that you've given up liquidity. Now there's trillions of
Speaker 1: dollars in private equity investments, there aren't that many more deals,
Speaker 1: so they're being bit up in UH price. Are you
Speaker 1: really confident that by turning through alternatives you're going to
Speaker 1: generate substantial out performance relative to stocks and bonds going
Speaker 1: forward in the way that's admittedly been true in the past.
Speaker 1: I wonder if the game isn't losing some of its edge.
Speaker 1: I hope you're wrong too, but I do agree with you.
Speaker 1: I do think the game has changed, and I do
Speaker 1: think that what we've traditionally done is invest in alternatives
Speaker 1: because we believe that we can create value out of
Speaker 1: the noise. And you're absolutely right that there's far less
Speaker 1: inefficiency than it used to be. There's so much capital
Speaker 1: flowing into the market, there's so many different types of
Speaker 1: people sort of leveraging all the different opportunities. We saw.
Speaker 1: One of the advantages that that Carnegie has, which unfortunately
Speaker 1: Roger doesn't have, is the fact that we're small. We're
Speaker 1: only three and a half billion dollars. We can play
Speaker 1: in spaces that are niche spaces that capital can flow,
Speaker 1: and it's not worth it for some of the larger
Speaker 1: managers to go into a market that's only can support
Speaker 1: a hundred million dollar fund or seventy million dollar fund,
Speaker 1: but we can play in that market. And so what
Speaker 1: we're doing is we're tending to go smaller, we're tending
Speaker 1: to go even more inefficient. It's a different risk profile,
Speaker 1: so we need to think about it differently, and we
Speaker 1: know that we are taking on more illiquidity risks because
Speaker 1: we're going into these markets which do not have the
Speaker 1: same level We've got to remember. We do have to
Speaker 1: remember here that when you go to alternatives, you're usually
Speaker 1: paying one two percent in fees and then you're paying returns.
Speaker 1: And until you get those fees down, they've got to
Speaker 1: they don't just have to outperform, they've got to outperform
Speaker 1: a lot to outperform on an after tax fee basis,
Speaker 1: because nowadays, as you know, you can get into index
Speaker 1: funds and pay zero, nothing at all. And so I'm
Speaker 1: just not sure that that for the general investor, alternatives
Speaker 1: are going to be as good going forward as they
Speaker 1: have been in the past. If we're looking for markets
Speaker 1: where there may not be the efficiency that are just described.
Speaker 1: What about emerging markets. There are emerging markets where there
Speaker 1: isn't as much transparence that there isn't as much efficiency.
Speaker 1: There's risk, But is that an opportunity. It is an opportunity,
Speaker 1: but it is a challenging markets to play in because
Speaker 1: what you need in those environments are good management teams.
Speaker 1: You need people who are good investors. You need aligned
Speaker 1: investments who who people who think in a similar way
Speaker 1: about the relationship between their investors and the markets and
Speaker 1: how they do things, and that's hard thing to find.
Speaker 1: People have very different insentives and quite honestly, when you're
Speaker 1: talking about emerging markets at this point, you're talking about China,
Speaker 1: China of the emerging markets benchmark, and that is one
Speaker 1: of the areas that we have to really start to
Speaker 1: think about how markets are changing, because we've relied on
Speaker 1: the fact that emerging markets could be differentiators, and we've
Speaker 1: just said that we're going to invest in emerging markets
Speaker 1: and that's gonna be a form of diversification. Increasingly, seeing
Speaker 1: that the world is not dividing evenly between developed markets
Speaker 1: and emerging markets, and there may be other ways we
Speaker 1: should look at it, and possibly China is a form
Speaker 1: of diversification. There's very likely to be a decoupling between
Speaker 1: the United States and China because they are going to
Speaker 1: make very different decisions about technology. And there are countries
Speaker 1: who are going to line up behind China, and then
Speaker 1: there are companies and countries that are going to line
Speaker 1: up behind the United States. And I don't really know
Speaker 1: who the winner is going to be. And we're gonna
Speaker 1: have to decide how we're going to participate in those
Speaker 1: markets and provide us with some opportunities. But there's clearly
Speaker 1: a lot of risks. There is especially risks when um,
Speaker 1: you know, we're concerned about what's going on there, and
Speaker 1: we're concerned about the laws and the regulations and how
Speaker 1: they will change in response to things that we do here.
Speaker 1: And it isn't an inorder amount of risk, but it
Speaker 1: is a big market. It's hard to ignore it. One
Speaker 1: of the things looking back in the last decade is
Speaker 1: the tide has risen pretty well with China. Looking forward
Speaker 1: to the next decade, how far is that? How you're
Speaker 1: going to keep going? Well? They are slowing, but even
Speaker 1: though they're still slowing, they're still growing a lot faster.
Speaker 1: Than we are, and if so, if you're looking for growth,
Speaker 1: you need to go there. I also think that it's
Speaker 1: it's not insignificant that it is a government that can
Speaker 1: control a lot of things, and it can turn on
Speaker 1: a dime in many respects, and so it can make
Speaker 1: adjustments in ways that that are arguably more challenging for
Speaker 1: us to make adjustments. Roder hoping an opportunities to China
Speaker 1: in the next decade. I think, broadly speaking, you're right,
Speaker 1: it is growing, it is still emerging. I think the
Speaker 1: challenges have to do with transparency, the ability to you know,
Speaker 1: get your money out depending on how you invest um
Speaker 1: and you're very good point around, you know, having teams
Speaker 1: to really understand what's going on. So I think it
Speaker 1: is absolutely still a class who want us to look at.
Speaker 1: But I'm a little more cautious maybe for those Thanks
Speaker 1: to our roundtable Larry Summers, former US Treasury Secretary, Roger Ferguson,
Speaker 1: President and CEO of t I A A. And Carnegie's
Speaker 1: ce IO Kim Lou that's it for Wall Street Week
Speaker 1: from Bloomberg Radio. Coming up next week of Sonny Beschloss
Speaker 1: and Sam Paul Masana will join us around the table.
Speaker 1: I'm David Weston, this is Bloomberg