WEBVTT - Bloomberg Wall Street Week: Summers & Ferguson 0:00:00.120 --> 0:00:03.360 This is Bloomberg wool Street Week. What's the state of 0:00:03.400 --> 0:00:06.360 corporate governance? Its deficit is a real issue. The US 0:00:06.400 --> 0:00:09.719 economy continues to send nixed signals to the financial stories 0:00:09.800 --> 0:00:12.719 that cheap our word fed action to con concerns over 0:00:12.760 --> 0:00:16.360 dollar liquidity and encouraging China data. The town's reaction to 0:00:16.440 --> 0:00:18.960 news on Breakfast through the eyes of the most influential 0:00:19.040 --> 0:00:22.599 voices Larry Summers, the former Treasury Secretary, Star CEO, Kevin 0:00:22.680 --> 0:00:26.400 Johnson sec Chairman j Clayton, Bloomberg wool Street Week, we'd 0:00:26.520 --> 0:00:30.320 David Weston on Bloomberg Radio. Welcome to Wall Street Week 0:00:30.320 --> 0:00:33.280 on Bloomberg Radio. I'm David Weston. Coming up this hour, 0:00:33.440 --> 0:00:37.040 we'll bring you a conversation on geopolitics with Harvard's Michelle Flournoy, 0:00:37.400 --> 0:00:41.159 plus what has in store for the world of philanthropy. 0:00:41.240 --> 0:00:44.159 But first, it was the bull market that defied a 0:00:44.240 --> 0:00:48.680 euro crisis, political earthquakes and shaky corporate earnings, and central 0:00:48.680 --> 0:00:51.680 banks danced to a dobish beat. Now we under the 0:00:51.720 --> 0:00:54.520 next decade, with interest rates at record lows and an 0:00:54.560 --> 0:00:57.320 asset bubble that many fear is ready to pop. Let's 0:00:57.360 --> 0:01:00.280 bring in our roundtable now We're joined by Larry Summers Warmer, 0:01:00.360 --> 0:01:04.640 US Treasury Secretary and Roger Ferguson, President and CEO of 0:01:04.680 --> 0:01:08.280 the Teacher's Insurance and Annuity Association. Larry, it gives a 0:01:08.319 --> 0:01:10.400 sense of this decade that just happened, a big run 0:01:10.480 --> 0:01:13.920 up in the markets, particularly equity. What drove that. Part 0:01:13.920 --> 0:01:16.040 of what drove it was how weak the markets were 0:01:16.080 --> 0:01:19.319 at the beginning of the decade as a consequence of 0:01:19.319 --> 0:01:22.399 the financial crisis. Part of what drove it was we 0:01:22.520 --> 0:01:27.080 had the longest recovery we have ever had. But crucially 0:01:27.120 --> 0:01:31.160 what drove it was that interest rates fell so low 0:01:31.840 --> 0:01:35.560 that uh people applied a much lower discount factor to 0:01:35.680 --> 0:01:40.280 future earnings, and that inflated the price of all assets, 0:01:40.319 --> 0:01:43.840 whether it was stocks, whether it was real estate, anything 0:01:43.880 --> 0:01:49.320 that promised future cash flows became more valuable as interest 0:01:49.400 --> 0:01:52.240 rates came down. So Roger, that raised the question, obviously, 0:01:52.360 --> 0:01:55.720 are we inflating asset values through lower interest rates? So look, 0:01:55.760 --> 0:01:58.240 I agree with Larry that without a doubt, the big 0:01:58.320 --> 0:02:01.400 driver was the moving interest rate both here and around 0:02:01.440 --> 0:02:04.560 the world. Question are we inflating values? I think it's 0:02:04.560 --> 0:02:07.280 too strong to say that that implies some massive bubble, 0:02:07.320 --> 0:02:10.239 that's about to burst. However, what we have seeing, David 0:02:10.440 --> 0:02:13.079 is that the p multiples have started to increase as well, 0:02:13.160 --> 0:02:15.800 which is suggesting that every dollar of earnings is getting 0:02:15.800 --> 0:02:18.040 a bigger and bigger return. So I've been a little 0:02:18.040 --> 0:02:20.639 cautious when we're inflating, but I agree completely with Larry 0:02:20.720 --> 0:02:23.800 that low interest rates were the major drivers for markets. 0:02:23.919 --> 0:02:26.360 Is the market overbought when it comes to equities, I 0:02:26.360 --> 0:02:29.360 don't think it's clear that it is. I think that 0:02:30.080 --> 0:02:33.360 given what's happened to interest rates, which in my view 0:02:33.480 --> 0:02:38.440 is heavily driven by wheel events in the economy, more 0:02:38.520 --> 0:02:42.040 saving because more of the money is going to affluent people, 0:02:42.639 --> 0:02:45.440 less investment because the price of capital goods has come 0:02:45.480 --> 0:02:47.839 down so far. I think those are the reasons why 0:02:47.919 --> 0:02:50.200 you have lower interest rates. And when you have lower 0:02:50.200 --> 0:02:55.240 interest rates, you have higher higher multiples. I'm not sure 0:02:55.320 --> 0:02:59.880 that it represents some fundamental imbalance. This certainly isn't a 0:03:00.120 --> 0:03:03.080 moment like the moment at the beginning of the decade 0:03:03.440 --> 0:03:07.440 when markets look cheap, and I think we've got to 0:03:07.480 --> 0:03:12.040 recognize that because interest rates are much lower, and maybe 0:03:12.120 --> 0:03:14.960 risk premiums are the same as they always are, that 0:03:15.080 --> 0:03:19.360 returns going forward are going to be substantially lower than 0:03:19.400 --> 0:03:21.280 they have been over the last decade. And that is 0:03:21.280 --> 0:03:23.200 the question. If lower interest rates and starting from a 0:03:23.200 --> 0:03:25.160 low base drove the last decade, what's going to drive 0:03:25.200 --> 0:03:27.760 the next decade. I think it's gonna depend on the news, 0:03:27.840 --> 0:03:29.799 and we don't know whether the surprises are going to 0:03:29.880 --> 0:03:32.600 be positive or negative. But I think if things work 0:03:32.639 --> 0:03:35.880 out as everybody expects them to, then you're gonna be 0:03:35.960 --> 0:03:41.760 looking at equity returns that are much lower than people 0:03:41.800 --> 0:03:47.840 have become accustomed to over most much of the last generation. Uh. 0:03:48.280 --> 0:03:52.520 My guests would be that if you invest your money 0:03:52.560 --> 0:03:55.960 in part in stocks and in part in bonds, you're 0:03:55.960 --> 0:03:58.880 gonna be looking at returns perhaps in the five six 0:03:58.960 --> 0:04:03.440 percent range um, which is much lower than people experienced 0:04:03.480 --> 0:04:06.040 over the last decade. And that's probably going to be 0:04:06.120 --> 0:04:09.080 an unpleasant surprise for some people. So, Roger, you're responsible 0:04:09.080 --> 0:04:10.840 for a lot of money for a lot of pensions. 0:04:10.840 --> 0:04:13.600 People are gonna count on that money over the long term. 0:04:13.680 --> 0:04:16.160 What is that thesis that Larry set out? What does 0:04:16.160 --> 0:04:19.000 that tell you about investing? Well, first, a point I 0:04:19.040 --> 0:04:20.640 would have made that I didn't hear that. I make 0:04:20.680 --> 0:04:22.800 the thing that's going to drive markets over the next 0:04:22.800 --> 0:04:26.000 several years. It's what's driven them the last several First 0:04:26.040 --> 0:04:28.440 question is our interest face is going to main low, right, 0:04:28.480 --> 0:04:31.000 and so the expectation that the Fed and other central 0:04:31.000 --> 0:04:33.000 banks will be on hold for a period of time. 0:04:33.360 --> 0:04:35.720 I think it's going to continue to support equity valuations 0:04:35.720 --> 0:04:38.880 and other valuations. I think Larry is absolutely right. The 0:04:38.960 --> 0:04:41.800 return that the average investor can expect an equity market, 0:04:41.880 --> 0:04:44.000 so the next two or three, five, maybe ten years, 0:04:44.400 --> 0:04:46.000 is going to be somewhat lower than we had in 0:04:46.040 --> 0:04:48.479 the past. Um, that does not mean that it's gonna 0:04:48.560 --> 0:04:50.479 sort of burst. It does mean that one should expect 0:04:50.480 --> 0:04:53.360 slightly lower returns. The answer to all that, though, when 0:04:53.360 --> 0:04:55.760 I think about pensions is you want to have broad diversification, 0:04:56.600 --> 0:04:59.840 so equity fixed income, but certainly alternatives will be another 0:05:00.200 --> 0:05:02.040 to look and they're going to want to play the 0:05:02.040 --> 0:05:05.160 big global themes as well. What do you think. I mean, 0:05:05.160 --> 0:05:06.280 one of the things that strikes me in the last 0:05:06.279 --> 0:05:09.039 ten years, there's a delta they've been cutting interest rates 0:05:09.600 --> 0:05:12.919 is just static low interest rates enough. That's the key point. 0:05:13.640 --> 0:05:18.160 Roger's right about diversification. Rogers says they're going to be 0:05:18.279 --> 0:05:21.760 slightly lower over the next decade. I think it's gonna 0:05:21.800 --> 0:05:25.120 be a good deal more than UH slightly lower. I 0:05:25.160 --> 0:05:28.560 think that people will do fine if they earn five 0:05:28.680 --> 0:05:33.839 or six percent on their money. I think that people 0:05:33.880 --> 0:05:37.440 are going to realize that it's not going to be 0:05:37.520 --> 0:05:41.039 the kind of happy decade that we saw. I think 0:05:41.040 --> 0:05:45.200 the happy decade came in part from the positive surprise 0:05:45.320 --> 0:05:50.920 of falling interest rates that drove up on prices definition ly, 0:05:51.520 --> 0:05:54.880 and it drove up stock prices because falling interest rates 0:05:54.960 --> 0:05:59.400 meant higher multiples. We might see continued low interest rates, 0:05:59.800 --> 0:06:03.320 but they're written that much room for interest rates to 0:06:03.520 --> 0:06:07.480 fall starting from a ten year of one point eight. 0:06:07.920 --> 0:06:10.160 So I don't think it's going to be nearly as 0:06:10.240 --> 0:06:13.520 bullish a period over the next decade as it has 0:06:13.600 --> 0:06:18.880 been uh in the last, and since the level of 0:06:18.960 --> 0:06:24.440 interest rates is a kind of fundamental determinant of everything, um, 0:06:24.480 --> 0:06:28.800 I don't think that. I think the versification is absolutely 0:06:28.839 --> 0:06:32.000 the right strategy, but I don't think people are going 0:06:32.040 --> 0:06:38.000 to be able to avoid the reality that returns are 0:06:38.040 --> 0:06:39.880 going to be lower in the future than they have 0:06:40.000 --> 0:06:42.680 been in the past. We'll be back with Larry Summers 0:06:42.760 --> 0:06:46.080 and Roger Ferguson after a decade of growth. It's clear 0:06:46.240 --> 0:06:49.680 global central bankers fear are reckoning to come, but our 0:06:49.760 --> 0:06:53.880 monetary policy makers out of ammunition. We'll discuss with our roundtable. Next. 0:06:54.200 --> 0:06:57.320 I'm David Weston and this is Bloomberg Wall Street Week. 0:07:04.640 --> 0:07:08.880 This is Bloomberg Wall Street Week with David Weston from 0:07:09.000 --> 0:07:12.640 Bloomberg Radio. We continue our round table with Larry Summers, 0:07:12.680 --> 0:07:16.120 former U S. Treasury Secretary, and Roger Ferguson, President and 0:07:16.200 --> 0:07:19.680 CEO of t I a A. Central banks may no 0:07:19.760 --> 0:07:22.360 longer be the only game in town. That was the 0:07:22.400 --> 0:07:26.240 sobering message from the American Economic Association's annual conference in 0:07:26.280 --> 0:07:29.720 San Diego, a decade after the financial crisis rocked the 0:07:29.720 --> 0:07:33.559 global economy. Policymakers confront a risky world of what could 0:07:33.560 --> 0:07:36.960 be perpetually low growth, something Larry Summers warned about in 0:07:36.960 --> 0:07:38.680 his speech to the I m F back in two 0:07:38.720 --> 0:07:42.400 thousand thirteen. So, Larry, I guess congratulations that you were right, 0:07:42.520 --> 0:07:45.200 but I'm not sure you wanted to be right. Secular 0:07:45.240 --> 0:07:50.520 stagnation isn't good news. It suggests much more profound trade 0:07:50.520 --> 0:07:56.000 offs between rapid economic growth and financial stability and fiscal 0:07:56.040 --> 0:07:59.720 prudence than we thought we had and raises all kinds 0:07:59.720 --> 0:08:05.360 of questions for macroeconomic policy going forward. But look what's 0:08:05.400 --> 0:08:09.400 happened relative to the time when I put forth that 0:08:09.560 --> 0:08:14.960 secular stagnation hypothesis in is, we've had bigger deficits than 0:08:15.040 --> 0:08:19.520 people thought. We've had lower interest rates than people expected, 0:08:20.040 --> 0:08:23.280 We've had more credit growth and higher asset prices than 0:08:23.320 --> 0:08:26.720 people expected. So the accelerator has been on the floor, 0:08:27.560 --> 0:08:30.920 but the car hasn't gone very fast. We've had lower 0:08:30.960 --> 0:08:35.560 growth and lower inflation than people expected. And what that 0:08:35.679 --> 0:08:40.040 suggests is that the underlying energy that the private sector 0:08:40.200 --> 0:08:46.160 generates is much less than it used to be. That 0:08:46.240 --> 0:08:50.640 we've been able to give some energy, but only by 0:08:50.720 --> 0:08:55.880 having rising debt to GDP ratios, only by having quite 0:08:55.960 --> 0:09:01.240 extraordinary monetary policies and low interest rate. And there's a 0:09:01.360 --> 0:09:04.720 question how long that lasts. And there's also a question 0:09:04.800 --> 0:09:08.719 of what the long run side effects of that are. 0:09:09.320 --> 0:09:13.000 You know, people say that the so called to WE 0:09:13.400 --> 0:09:18.360 neutral interest rate has declined by two or three percentage points. 0:09:18.480 --> 0:09:21.679 What I've been able to show in some recent research 0:09:22.320 --> 0:09:25.280 is that if we hadn't been running up the national 0:09:25.360 --> 0:09:29.640 debt globally, that probably that real not neutral interest rate 0:09:29.760 --> 0:09:33.120 would have declined by four or five or six or 0:09:33.120 --> 0:09:38.880 seven even uh percentage points. So there's a fundamental structural 0:09:39.120 --> 0:09:43.160 challenge around the fact that people are living longer more 0:09:43.240 --> 0:09:46.600 the money is going to people who have high savings rates. 0:09:47.120 --> 0:09:50.840 And at the same time, as you see with my 0:09:50.960 --> 0:09:54.320 cell phone that costs five dollars and has a hundred 0:09:54.320 --> 0:09:57.559 times as much computing power as the whole Apollo project, 0:09:58.120 --> 0:10:01.760 capital goods are getting cheaper cheaper, and so the money 0:10:01.840 --> 0:10:07.520 slashes into existing assets, leading to asset price inflation. But 0:10:07.760 --> 0:10:10.839 with limited economic energy. It's a little bit like the 0:10:10.960 --> 0:10:16.440 plight of Japan or some you might even call it 0:10:16.520 --> 0:10:20.280 a monetary black hole. So Roger, as an investor, how 0:10:20.320 --> 0:10:22.960 do you process all that? Basically, I think that Larry 0:10:23.000 --> 0:10:25.319 saying we've kept it growing but basically running up the 0:10:25.360 --> 0:10:27.920 credit card. No, look, I think Larry's points are certainly 0:10:27.920 --> 0:10:30.560 well taken in terms of what happened in the last decade. 0:10:31.120 --> 0:10:33.320 The way you process it is to say two things. 0:10:33.600 --> 0:10:35.920 One is is there going to be a fundamental change 0:10:35.920 --> 0:10:39.320 anytime soon? In particular, you know what we haven't talked 0:10:39.400 --> 0:10:41.080 very much about is one of the things that's kept 0:10:41.160 --> 0:10:44.840 rates so low as inflation and so inflation for variety 0:10:44.880 --> 0:10:46.960 of reasons has been a no show, which has allowed 0:10:46.960 --> 0:10:50.520 central banks to continue to be very very accommodative and 0:10:50.559 --> 0:10:53.120 to drive down interest rates. So the way you play 0:10:53.120 --> 0:10:56.000 it is, first, is that picture gonna change? Our interestate 0:10:56.080 --> 0:10:58.280 is going to start picking up anytime? Is gonna have 0:10:58.280 --> 0:11:00.920 to worry about. Secondly, as I said before, you know 0:11:00.920 --> 0:11:02.640 what are the asset classes are going to benefit or 0:11:02.679 --> 0:11:04.920 not benefit? And so you're gonna have to be thinking, 0:11:05.000 --> 0:11:07.720 you know, much more cleverly about you know, how you differentiate. 0:11:08.080 --> 0:11:10.520 You also are looking for is this has been a 0:11:10.520 --> 0:11:12.840 global phenomenon? Is the US still the best place to be? 0:11:13.000 --> 0:11:14.960 Or should we be looking at different emerging markets? How 0:11:15.000 --> 0:11:17.240 should we think about it? So again, I think this 0:11:17.320 --> 0:11:19.559 is the time where you move from the broad general 0:11:20.280 --> 0:11:22.360 down to a much one now much more focused, much 0:11:22.360 --> 0:11:24.400 more particular theory. It just strikes me that you are 0:11:24.440 --> 0:11:26.960 an investor, but you also were vice share the FED. 0:11:27.679 --> 0:11:31.400 Have the central banks basically done what they could do? Essentially? 0:11:31.440 --> 0:11:34.440 I mean they've really kept a lot of simulus monetary 0:11:34.440 --> 0:11:36.520 students and have they basically done everything they can do? 0:11:36.559 --> 0:11:38.839 So Look, I think the general consensus and I share it, 0:11:39.200 --> 0:11:42.240 is that the last recovery depended much too heavily on 0:11:42.360 --> 0:11:45.760 central banks. Um. Uh heaven here in the US where 0:11:45.800 --> 0:11:48.480 we had some fiscal stimulus. In hindsight, a lot of 0:11:48.480 --> 0:11:50.440 folks think maybe we should have done more and kept 0:11:50.440 --> 0:11:53.640 it going. Certainly, for one looks in Europe. Um clearly 0:11:53.800 --> 0:11:56.679 that we'd say central banks are asked to do too much. 0:11:56.760 --> 0:11:58.560 So yeah, I think too much weight has been put 0:11:58.559 --> 0:12:01.480 on the shoulders of central banks. They responded by doing 0:12:01.480 --> 0:12:03.760 a couple of things. One is using their regular tools 0:12:03.880 --> 0:12:07.640 I called interest rates, and then to using some unusual 0:12:07.640 --> 0:12:11.000 tools and new tools qualtitative easing for sure, building up 0:12:11.000 --> 0:12:13.360 the size of their balance sheets, going in and buying 0:12:14.080 --> 0:12:18.000 a variety of fixed income securities. And then they polished 0:12:18.080 --> 0:12:20.400 up the use of forward guidance. You know what was it? 0:12:20.480 --> 0:12:22.720 They said? So when you look at the debate that's 0:12:22.720 --> 0:12:25.640 going on, the question is that enough? And will that 0:12:25.679 --> 0:12:27.880 be sufficient the next time around? And I think that's 0:12:27.920 --> 0:12:30.400 really a question that we former and current central bankers 0:12:30.440 --> 0:12:32.440 are worried about. This is something that was the topic 0:12:32.440 --> 0:12:34.280 of discussion out the a A that conference that you 0:12:34.320 --> 0:12:37.160 attended in San Diego. One of the things that you raised, 0:12:37.280 --> 0:12:39.400 I believe others have raised as well as something called 0:12:39.400 --> 0:12:44.679 semi automatic stabilizers. Basically, as I understand, automatic fiscal injection 0:12:45.000 --> 0:12:48.360 when certain things turned south. Is that a realistic alternative? 0:12:48.520 --> 0:12:52.320 It better be um ben Burn Ankie gave a speech 0:12:52.320 --> 0:12:55.160 out there which I think was a kind of last 0:12:55.280 --> 0:12:59.960 hurrah for the central bankers. He argued that monetary policialed 0:13:00.000 --> 0:13:02.880 be able to do it the next time. I think 0:13:02.880 --> 0:13:07.240 that's pretty unlikely, given that in recessions we usually cut 0:13:07.280 --> 0:13:11.640 interest rates by five percentage points, and interest rates today 0:13:11.720 --> 0:13:16.480 or below U two, and I just don't believe that 0:13:16.960 --> 0:13:21.880 quantitative easing and that stuff is worth anything like another 0:13:22.559 --> 0:13:25.240 three percentage points. So I think we're gonna have to 0:13:25.320 --> 0:13:32.000 rely on putting money in people's pockets, on direct government spending. 0:13:32.480 --> 0:13:36.200 I think that's okay in a country where public investment 0:13:36.360 --> 0:13:41.640 and infrastructure are decaying so badly. But I think that's 0:13:41.679 --> 0:13:46.080 where we're going to have to look for our countercyclical energy. 0:13:46.200 --> 0:13:50.280 And what Olivier Blanchard and I were talking about when 0:13:50.280 --> 0:13:55.360 we discussed UH semi automatic stabilizers was the idea that 0:13:55.720 --> 0:14:00.280 rather than relying on Congress to organize itself to act 0:14:00.400 --> 0:14:04.400 each time there's an economic downturn. We should do more 0:14:04.520 --> 0:14:10.559 with rules that would lock in changes in spending. Perhaps 0:14:10.600 --> 0:14:14.880 greater assistance to states, perhaps more assistance for people who 0:14:14.880 --> 0:14:21.880 are unemployed, perhaps working off a backlog of infrastructure investments, 0:14:21.920 --> 0:14:27.480 perhaps giving temporary tax credits for those uh who spend, 0:14:28.040 --> 0:14:30.840 And that that kind of fiscal stimulus is going to 0:14:30.920 --> 0:14:33.120 have to be a larger part of the story. And 0:14:33.520 --> 0:14:35.560 I think it's very I think central brankers have a 0:14:35.680 --> 0:14:38.760 very difficult road to walk because on the one hand, 0:14:38.800 --> 0:14:41.320 they don't want to say they're out of gas and 0:14:41.360 --> 0:14:45.200 they can't solve the problem. On the other hand, they'd 0:14:45.280 --> 0:14:49.280 better be giving some warning if they want fiscal policy 0:14:49.360 --> 0:14:52.480 to be ready next time. And I think that's reality 0:14:52.520 --> 0:14:55.040 that it's going to need to be. Larry Summers and 0:14:55.120 --> 0:14:58.480 Roger Ferguson will stay with us. Coming up, we turn 0:14:58.560 --> 0:15:01.360 to the world of philanthropy for a fresh perspective on 0:15:01.400 --> 0:15:04.920 what holds in store. We're joined by the chief investment 0:15:04.920 --> 0:15:08.760 officer for Carnegie, Kim Lube. That's next. I'm David Weston, 0:15:08.840 --> 0:15:15.760 and this is Bloomberg Wall Street Week. This is Bloomberg 0:15:15.760 --> 0:15:20.240 Wall Street Week with David Weston from Bloomberg Radio. We 0:15:20.320 --> 0:15:23.800 continue our roundtable with Larry Summer's former US Treasury Secretary, 0:15:23.840 --> 0:15:27.160 and Roger Ferguson, President and CEO of t I a A. 0:15:27.720 --> 0:15:31.280 It's been a roller coaster start to global markets as 0:15:31.320 --> 0:15:35.200 investors grapple with America's killing of a Runnyan military leader, Solomony, 0:15:35.360 --> 0:15:38.640 and it's aftermath. So over and above things like prospects 0:15:38.640 --> 0:15:42.040 for economic growth, changes in monetary policy, and government spending, 0:15:42.360 --> 0:15:45.680 investors have to be considering geopolitics that can change in 0:15:45.720 --> 0:15:49.040 an instant. Michelle Flournoy has made a career of analyzing 0:15:49.040 --> 0:15:52.560 and understanding forces just such as these. She served as 0:15:52.640 --> 0:15:55.720 Under Secretary of Policy that was under Defense Secretaries Robert 0:15:55.720 --> 0:15:59.640 Gates and Leon Panetta. Michelle's currently senior fellow at Harvard's 0:15:59.640 --> 0:16:02.200 Bell for Center and a senior adviser to the Boston 0:16:02.240 --> 0:16:05.480 Consulting Group. She joins us, now give us your take today. 0:16:05.600 --> 0:16:08.560 Is it a constantly changing story? But it really was 0:16:08.640 --> 0:16:11.240 a lot of upheople last week it seems to have 0:16:11.280 --> 0:16:14.520 calmed down. Is that a false dawn? Well, I do 0:16:14.640 --> 0:16:17.200 think the circuit breaker has been thrown on the most 0:16:17.240 --> 0:16:21.760 recent cycle of escalation between Iran and the United States. 0:16:21.800 --> 0:16:24.520 But I think we would be foolish to think that 0:16:24.560 --> 0:16:29.600 this is over. The fundamental issues that the United States 0:16:29.640 --> 0:16:32.920 and Iran are in conflict over have not gone away. 0:16:33.000 --> 0:16:35.080 So I think what we're likely to see is a 0:16:35.160 --> 0:16:39.600 reversion to sort of previous approaches. You we've heard that 0:16:39.640 --> 0:16:43.760 the Trump administration is going to go ahead and increased sanctions, 0:16:43.800 --> 0:16:47.520 sort of doubling down on their maximum pressure campaign, And 0:16:47.560 --> 0:16:50.040 for Ron's part, I think you can expect them to 0:16:50.120 --> 0:16:54.280 revert to their traditional playbook, which is really using more 0:16:54.480 --> 0:16:59.880 covert and clandestine means that give them some measure of deniabile. 0:17:00.280 --> 0:17:04.320 Whether it's cyber attacks or whether it's use of proxies 0:17:04.359 --> 0:17:07.399 to launch attacks on their behalf. Those are the kinds 0:17:07.400 --> 0:17:10.120 of things we're going to see in the future unless 0:17:10.200 --> 0:17:13.440 we see some kind of breakthrough that gets the parties 0:17:13.480 --> 0:17:16.199 back into negotiations, and I don't see any sign of 0:17:16.280 --> 0:17:19.560 that as yet. So Michelle, thanks for that set up. 0:17:19.560 --> 0:17:22.240 A curious question or question on my part is um 0:17:22.600 --> 0:17:25.399 markets are very focused on headline risk right now. I 0:17:25.400 --> 0:17:28.000 think there's a general side relief if in fact, the 0:17:28.000 --> 0:17:31.280 Iranians go back to more covert activities, and may be 0:17:31.400 --> 0:17:33.760 that that nothing will be visible and markets will therefore 0:17:33.840 --> 0:17:37.000 be pretty calm. So what's the possibility that Uranians will 0:17:37.000 --> 0:17:39.880 do something over the next few weeks months that were 0:17:39.920 --> 0:17:43.080 really royal markets, because it will be surprising, will be large, 0:17:43.119 --> 0:17:46.440 will be visible, and it will be clearly a direct 0:17:46.520 --> 0:17:51.000 challenge to the United States position. I think that's possible 0:17:51.200 --> 0:17:54.040 because you know, where the redline has now been drawn 0:17:54.240 --> 0:17:58.280 is the killing of Americans. UM So I think iron 0:17:58.400 --> 0:18:02.640 understands that. But you know, I don't think it's out 0:18:02.640 --> 0:18:05.880 of the question that we could see another attack on 0:18:06.040 --> 0:18:12.159 either oil tankers in the Gulf or oil infrastructure in 0:18:12.280 --> 0:18:17.360 the region that would rattle the markets, because I think 0:18:17.400 --> 0:18:23.320 Iran understands that our partners in the region are vulnerable. Uh, 0:18:23.600 --> 0:18:26.800 you know, they could they could certainly take advantage of 0:18:26.840 --> 0:18:30.800 that and launch attacks against that infrastructure again if they 0:18:30.880 --> 0:18:34.959 felt they weren't getting the right attention from the Europeans, 0:18:35.000 --> 0:18:38.280 from the US, they weren't getting support to try to 0:18:38.640 --> 0:18:43.800 lessen the sanctions on them which have been crippling. Taking 0:18:43.800 --> 0:18:49.080 out Sulamine was a choice Michelle that President Bush rejected 0:18:49.119 --> 0:18:53.200 and that President Obama rejected in a choice that President 0:18:53.240 --> 0:18:59.960 Trump made. Are we more or less secure as Americans? Uh? Today? 0:19:00.480 --> 0:19:06.240 With him dead. Um, But the consequences of of our 0:19:06.320 --> 0:19:10.119 having engaged for the first time in forty years, fifty 0:19:10.119 --> 0:19:14.600 seventy years in assassination of the senior official of another government, 0:19:15.280 --> 0:19:17.840 would you say Americans are more or less secure today 0:19:18.240 --> 0:19:21.959 as a consequence of what's happened. He was a terrible 0:19:22.040 --> 0:19:25.080 man with the blood of hundreds, if not thousands of 0:19:25.119 --> 0:19:29.119 Americans and many others on his hands. So in that sense, 0:19:29.160 --> 0:19:32.720 he was a legitimate target. But he I think other 0:19:32.800 --> 0:19:36.360 presidents had the opportunity decided not to take him out 0:19:36.880 --> 0:19:41.480 because of the second and third order strategic consequences of 0:19:41.480 --> 0:19:45.040 doing so. He was not only the head of designated 0:19:45.119 --> 0:19:49.200 terrorist organization, he was also this arguably the second most 0:19:49.200 --> 0:19:54.160 powerful Iranian government official. And so what this has done 0:19:54.800 --> 0:20:00.840 has basically now set the precedent of assassin senating a 0:20:00.920 --> 0:20:03.919 government official of a country with whom we are not 0:20:04.040 --> 0:20:07.840 formally at war. So what is to stop Iran from 0:20:07.920 --> 0:20:11.600 assassinating a forced r U S General or a National 0:20:11.680 --> 0:20:15.800 Security Council member when they next visit the region. It 0:20:15.920 --> 0:20:22.040 sets a terrible president, It opens an Pandora's box on assassination. Furthermore, 0:20:22.119 --> 0:20:24.399 the way in which it was done on a rocky 0:20:24.480 --> 0:20:28.960 soil without any coordination with the Iraqis has now set 0:20:29.000 --> 0:20:32.880 off a set of issues there where we may very 0:20:32.920 --> 0:20:36.040 well get pushed out of a rock and at a 0:20:36.119 --> 0:20:38.960 time when we still have work to be done with 0:20:39.040 --> 0:20:42.200 our allies in terms of fighting ISIS and making sure 0:20:42.280 --> 0:20:46.679 that they do not regenerate and start attacking US interests 0:20:46.800 --> 0:20:50.359 and facilities around the region. Thanks to Harvard Senior Fellow 0:20:50.400 --> 0:20:53.880 Michelle Flournoy, Larry Summers, and Roger Ferguson, We'll stay with us. 0:20:54.080 --> 0:20:56.800 Coming up, we turned to the world of philanthropy for 0:20:56.840 --> 0:21:00.200 a fresh perspective on what hold in store, which ooined 0:21:00.200 --> 0:21:03.840 by the Chief Investment Officer for Carnegie, Kim lu. That's next. 0:21:04.119 --> 0:21:07.000 I'm David Weston and this is Bloomberg Wall Street Week. 0:21:15.520 --> 0:21:19.760 This is Bloomberg Wall Street Week with David Weston from 0:21:19.840 --> 0:21:23.200 Bloomberg Radio. We continue our round table with Larry Summers, 0:21:23.200 --> 0:21:27.520 former US Treasury Secretary, and Roger Ferguson, President CEO of 0:21:27.640 --> 0:21:30.440 t I a A. Each week we welcome a guest 0:21:30.440 --> 0:21:32.639 with a somewhat different perspective on the big stories that 0:21:32.680 --> 0:21:35.200 we're covering. This week, it's the perspective of one of 0:21:35.240 --> 0:21:39.000 the most prominent foundations in the country, the Carnegie Corporation 0:21:39.080 --> 0:21:42.600 of New York. Kim Lu is Carnegie's Chief Investment Officer, 0:21:42.840 --> 0:21:45.920 responsible for investment management and oversight of some three point 0:21:45.960 --> 0:21:49.280 five billion dollars in assets. Earlier in her career, ms 0:21:49.440 --> 0:21:52.400 Lu managed private equity for the Ford Foundation, and last 0:21:52.440 --> 0:21:55.360 year Institutional Investor named her c i O of the Year. 0:21:55.720 --> 0:21:58.080 She joins us. Now, from the point of view of 0:21:58.080 --> 0:22:00.960 a foundation, how is what you do different from what 0:22:01.000 --> 0:22:03.679 we're talking about? How is it the same? So one 0:22:03.720 --> 0:22:06.000 of the things that I heard that was particularly concerning, 0:22:06.040 --> 0:22:08.440 because I think it's true, is when Roger was talking 0:22:08.480 --> 0:22:12.520 about the fact that expectations for returns over the comington 0:22:12.800 --> 0:22:16.119 years is probably going to be significantly less, and Larry 0:22:16.160 --> 0:22:18.440 made the same point, And so there is consensus around 0:22:18.480 --> 0:22:20.600 the fact that because interest rates are so low, the 0:22:20.640 --> 0:22:24.240 expectation is that returns maybe more modest. And for a foundation, 0:22:24.720 --> 0:22:27.600 that's death by a thousand cuts, because we are mandated 0:22:27.640 --> 0:22:30.480 to give away five percent a year. So unless we 0:22:30.520 --> 0:22:33.200 can feel pretty confident that we can receive a five 0:22:33.240 --> 0:22:38.639 percent return, then that is a slow declining of our portfolio. 0:22:38.800 --> 0:22:41.560 And really it really puts our grantees at risk because 0:22:41.600 --> 0:22:44.160 we'd have less and less to provide for them over time, 0:22:44.400 --> 0:22:47.119 and so that is a much worse scenario, quite frankly 0:22:47.160 --> 0:22:49.800 for us than if we had a big decline, because 0:22:49.800 --> 0:22:52.280 if we had a decline, we reset our payout and 0:22:52.320 --> 0:22:54.520 then we'd slowly see it rise back up again. But 0:22:54.960 --> 0:22:57.159 right now there's a general expectation that we're going to 0:22:57.400 --> 0:23:01.600 bleed assets slowly over time, and so um pretty concerning 0:23:01.600 --> 0:23:03.760 it for the foundation community. Okay, what are your options? 0:23:03.800 --> 0:23:06.679 Do you take on more risk, do you change your 0:23:06.720 --> 0:23:08.720 liquidity or duration? I mean, what can you do to 0:23:08.760 --> 0:23:13.119 address that issue? We're looking for more active management, and 0:23:13.160 --> 0:23:16.800 we're looking for picking be its sectors or opportunities that 0:23:16.840 --> 0:23:21.280 we think offer us the opportunity to outperform. Traditionally, foundations 0:23:21.280 --> 0:23:24.960 and endowments have put a lot of their assets in alternatives, 0:23:25.040 --> 0:23:28.040 and that has been possible because we are long term 0:23:28.040 --> 0:23:30.840 investors and so we don't have to worry about the 0:23:30.920 --> 0:23:33.480 short term nature of the market. We spend much less 0:23:33.520 --> 0:23:36.040 time thinking about what's going on in the stock market 0:23:36.040 --> 0:23:38.359 and in the bond market in any one time, and 0:23:38.400 --> 0:23:41.000 the fact we can make investments in things that we 0:23:41.080 --> 0:23:44.680 think are underpriced and just hold them until they realize 0:23:44.720 --> 0:23:47.960