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Speaker 1: This is Bloomberg Wall Street Week.

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Speaker 2: We turn our attention to the markets this week. USCPI

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Speaker 2: en neembors reinforcing concerns about inflation. The financial stories that

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Speaker 2: shape are worth a really different reaction to market. Some

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Speaker 2: more indications of just how hot the US economy really.

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Speaker 3: Is rude the eyes of the most influential voices.

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Speaker 2: Katherine Keating, CEO of B and Y Moan, Ryan Winnahan,

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Speaker 2: a Bank of America, Sam zel Sharmon and founder of

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Speaker 2: Equat Group Investments.

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Speaker 3: Bloomberg Wall Street Week with David Weston.

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Speaker 1: From Bloomberg Radio.

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Speaker 2: Drones hit Moscow, lower numbers hit China, and Washington works

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Speaker 2: hard not to hit the debt ceiling. This is Bloomberg

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Speaker 2: Wall Street Week. I'm David Weston. This week's secial CONTRIBA

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Speaker 2: Larry Summers of Harvard on the stubbornly strong labor market

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Speaker 2: and what it means for inflation.

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Speaker 4: There's something about the underlying strength of the economy that

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Speaker 4: they're missing.

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Speaker 2: And former IBM CEO Sam Palmersano on just how big

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Speaker 2: generative AI could get and what could stop it.

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Speaker 5: You need some kind of a cognition, a capability which it.

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Speaker 6: Does not have.

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Speaker 2: Global Wall Street started the week watching drone hits in Moscow,

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Speaker 2: perhaps as a precursor to a counter offensive in Ukraine.

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Speaker 7: We're able to reach you right in the heart of Russia,

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Speaker 7: and these attacks are really about sort of like sending

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Speaker 7: that message.

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Speaker 2: So it's quite embarrassing for Russia that this is happening.

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Speaker 2: We spent another week on the debt ceiliing in Washington,

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Speaker 2: but this time it wasn't about getting a deal, but

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Speaker 2: about getting it all behind us, at least for a

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Speaker 2: couple of years. We're going to deal with the debt ceiling.

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Speaker 2: I think things are going as planned.

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Speaker 5: Tonight we all made history because this is the biggest

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Speaker 5: cut and savings this Congress has ever voted.

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Speaker 2: For, and as expected, not everyone was happy.

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Speaker 1: Now one would again should vote for this deal.

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Speaker 2: Not once China got some bad economic news, raising more

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Speaker 2: questions about the speed of its recovery.

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Speaker 8: China's manufacturing activity contracted for a second straight month in May.

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Speaker 7: It's more evidence that the post COVID recovery has slowed

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Speaker 7: in the world's second largest economy.

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Speaker 2: But here in the United States, the jobs, well, it

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Speaker 2: just kept on going, adding three hundred and thirty nine

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Speaker 2: thousand new jobs in the month of May that was

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Speaker 2: way more than the one hundred and ninety five thousand

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Speaker 2: that was estimated, while unemployment actually rose up from three

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Speaker 2: point four percent to three point seven percent, which set

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Speaker 2: the markets off to the races, with the S and

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Speaker 2: P five hundred up one point eight three percent for

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Speaker 2: the week, almost all of it on Friday alone. The

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Speaker 2: Nasdaq was up a bit more, adding two point oh

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Speaker 2: four percent for the week, while the bond markets almost

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Speaker 2: did a round trip, starting the week just under three

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Speaker 2: point eight percent on the ten year yield, dipping well

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Speaker 2: below three point six percent at one point, and then

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Speaker 2: coming back to just under three point seven percent on

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Speaker 2: Friday as people return to thinking about possible rate hikes

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Speaker 2: to take us through the week in the market, is

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Speaker 2: welcome now, Barbara reinhardtch she's Voye Capital, head of asset Allocation,

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Speaker 2: and Aaron Brown PIMCO Multi Assets Strategy portfolio Manager, So

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Speaker 2: welcome back to both of you. Great to have you here. Barbara.

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Speaker 2: Let me start with you, but what we're seeing in

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Speaker 2: the markets. We saw some numbers on Friday and then

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Speaker 2: you get the commer roll looks pretty strong. Ata when

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Speaker 2: it comes to jobs. How are the markets reacting to

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Speaker 2: all this information.

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Speaker 8: It was a strange employment report, right, so it didn't

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Speaker 8: coincide with necessarily some of the other data that we're

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Speaker 8: looking at, looking at such as and if I be

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Speaker 8: hiring intentions the home based data, they would have told

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Speaker 8: you that the labor market would have been a lot

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Speaker 8: weaker than the number that we had printed today. But

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Speaker 8: the good news is and that what the equity market

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Speaker 8: held onto is the gentle decline in average hourly earnings.

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Speaker 8: And that is good news on the inflation side, because

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Speaker 8: you've had very sticky inflation. It's been coming down, but

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Speaker 8: coming down probably slower than what people expected. But to

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Speaker 8: see the easing in the wage data is a very

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Speaker 8: good positive development.

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Speaker 2: Barbara, we've heard an awful lot about this lag and

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Speaker 2: the effects from monetary policy. How long a lag should

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Speaker 2: we expect, because boy, it doesn't see you're showing up

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Speaker 2: very profoundly so far.

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Speaker 8: So it tends to be about you know, when the

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Speaker 8: Federal Reserve started hiking industrates, it was about twenty about

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Speaker 8: fourteen months ago. There tends to be a lag of

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Speaker 8: about twenty four months between when the Fed starts hiking

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Speaker 8: and when you start to see a dramatic slowdown in inflation.

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Speaker 8: That means we should have at least the rest of

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Speaker 8: this year into the first quarter of twenty four before

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Speaker 8: you start to see a significant slow down in inflation.

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Speaker 8: Look when you look at things like the sticky price

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Speaker 8: CPI or the underlying inflation gauge, they were at, you know,

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Speaker 8: between six and seven percent just six months ago. They're

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Speaker 8: down now to about three and a half to four

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Speaker 8: and a half percent, well above the Fed's target, but

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Speaker 8: they're going in the right direction. In order to get

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Speaker 8: down to the two percent on inflation, which is the

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Speaker 8: fed's target, you likely need to see a little bit

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Speaker 8: more time go by.

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Speaker 2: Think about this, David.

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Speaker 8: The real issue is that the FED hikes the seventy

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Speaker 8: five basis points that they did over the course of

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Speaker 8: three or four meetings last year. They happened in the

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Speaker 8: third and fourth quarters of last year. You need at

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Speaker 8: least twelve months for that to start to be felt

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Speaker 8: by the economy and start to see the slowdown you're

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Speaker 8: seeing in some of the data change indexes. You're starting

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Speaker 8: to see some slowing. Certainly not indicative of the labor

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Speaker 8: market this morning on that report, but I would say

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Speaker 8: that data can change and can change relatively quickly.

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Speaker 2: It's not just US investors who drive US market. We

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Speaker 2: also pay attention to foreign investors in US securities. And

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Speaker 2: Torsten Slock of Apollo is here with one of his

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Speaker 2: charts to show where foreign investors are putting their money.

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Speaker 9: So before the pandemic, that was appetite among foreigners for

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Speaker 9: buying in particular US government bonds and also US equities.

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Speaker 9: Foreigners have also historically bought a lot of US credit,

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Speaker 9: but broadly speaking, the trends were that foreigners had appetide

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Speaker 9: for buying both US fixed income and buying US equities.

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Speaker 9: So over the months ahead, we still have that the

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Speaker 9: federal serve is doing quantitive tightening to the tune of

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Speaker 9: roughly sixty billion dollars every single month.

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Speaker 2: At the same time, we.

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Speaker 9: Also have a budget deficit which is roughly around five

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Speaker 9: percent of GDP, and that amounts to roughly in round numbers,

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Speaker 9: about one hundred billion dollars in issuings of treasuries every

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Speaker 9: single month. Combining both QT and the budget deficit. With

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Speaker 9: this new issue, and on the other side of this

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Speaker 9: that Celing deal now potentially being quite substantial, it does

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Speaker 9: raise questions about who is it that will be buying treasuries,

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Speaker 9: in particular in an environment where the hedging costs for

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Speaker 9: foreigners continue to be quite elevated.

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Speaker 2: Aaron Brown up PIMCO and Barbara Ryan Hart a boy

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Speaker 2: are still with us. Er, let me start with you here.

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Speaker 2: We've been following this after the death Sente got put

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Speaker 2: behind this unfortunately did this way. There's the question we're

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Speaker 2: replenishing the larder essentially in the US treasure to get

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Speaker 2: their stock back up. It's going to be a lot

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Speaker 2: of tea bills. Do we have the buyers for those

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Speaker 2: T bills?

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Speaker 7: Yeah, it's Torsten mentioned. I mean the challenge is from

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Speaker 7: a foreigner's perspective. If you're a Japanese investor and you're

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Speaker 7: looking to buy ten year government bonds, after the FX

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Speaker 7: hedging cost measured by this sort of three month you know,

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Speaker 7: FX forward hedge, it will cost you negative two percent.

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Speaker 7: Your yield that you're getting is about negative two point

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Speaker 7: two percent on a ten year bond. You can buy

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Speaker 7: jgbs for about forty basis points. So from a foreigner's perspective,

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Speaker 7: it's better to buy the local bonds than to take

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Speaker 7: into account the FX hedging costs and buy a US

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Speaker 7: treasury bond, even though US treasuries at least from a

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Speaker 7: yield perspective in the US is yielding. More so, it's

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Speaker 7: really unattractive right now just because of FX hedging costs

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Speaker 7: to buy US government bonds from a foreigner's perspective. You know,

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Speaker 7: there's another prop a wrinkle that I'm going to throw into,

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Speaker 7: you know, the challenge that we have with perspective supply.

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Speaker 7: Not only do we need to refill the cofer of

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Speaker 7: the t GA and we have to fund the physical deficit,

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Speaker 7: but also keep in mind from an international perspective, you

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Speaker 7: have you're going to start to have the TLG or

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Speaker 7: ros also that are going to you know, start adding

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Speaker 7: to additional supply uh in in Europe as well. So

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Speaker 7: you have a lot of government supply that's going to

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Speaker 7: be you know, hitting the market in the second half

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Speaker 7: of this year, which is going to you know, create

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Speaker 7: a challenge certainly, you know, in terms of or raise

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Speaker 7: the question in terms of who's going to be the

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Speaker 7: incremental guy or for that the problem with the debt

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Speaker 7: ceiling being passed, and I mean it's good from a

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Speaker 7: political perspective and good from a stability perspective, but it

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Speaker 7: does mean that you now have have to refill those coffers.

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Speaker 7: They're gonna be a significant amount of issuance over the

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Speaker 7: next couple of months, and the Treasury is saying that

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Speaker 7: they want to rebuild to about six hundred billion dollars

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Speaker 7: that TGA, which is means a significant amount of issuance

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Speaker 7: over the next three to four months.

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Speaker 2: So Barbro, i'mos gonna. I hadn't thought about the Teltro issue.

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Speaker 2: But whatever it is, what's you going to do to

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Speaker 2: liquid in the marketplace? And what could that mean as

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Speaker 2: a fract many that money's got to come from some place.

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Speaker 8: It does, but a lot of times you're talking about

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Speaker 8: cash buyers moving over to a different cash instrument. In

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Speaker 8: the past twenty years, there have been four times that

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Speaker 8: the Treasury General Account has had to raise significant amount

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Speaker 8: of assets like it is this time. Each time it

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Speaker 8: was able to do it without an issue. We don't

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Speaker 8: rule out that something could potentially be and miss this

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Speaker 8: time and cause some indigestion, But the FED is very

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Speaker 8: well versed in the plumbing of the treasury market, and

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Speaker 8: we don't think that it's necessarily going to be a

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Speaker 8: very big issue for the front end market. Plus also

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Speaker 8: think about this, You're now getting interest rates that are

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Speaker 8: almost in excess of headline inflation to be parked in

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Speaker 8: tea bills. So it's just a very attractive investment for

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Speaker 8: many investors. And many of the bank depositors are looking

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Speaker 8: at the table market thinking I can go over to

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Speaker 8: money markets and get much better of interest. So I

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Speaker 8: think there's going to be a lot of natural buyers.

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Speaker 2: Thank you so very much to Barbara Reinhardt, Avoye Capital

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Speaker 2: and Aaron Brown of Pimpco. Now, this week we marked

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Speaker 2: the one hundredth birthday of Henry Kissinger, the man who

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Speaker 2: laid the foundation for the most important economic relationship in

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Speaker 2: the world. That was, of course, the one between the

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Speaker 2: United States and China. So we went back and found

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Speaker 2: an interview Doctor Kissinger did with Lewis Rockaiser back in

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Speaker 2: nineteen ninety when Chinese GDP was a mere three hundred

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Speaker 2: and sixty billion dollars compared to the eighteen trillion dollars

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Speaker 2: that it is today.

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Speaker 5: Do you think we still have important economic opportunities in China?

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Speaker 10: I think we do, and I'm in favor of maintaining

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Speaker 10: a working relationship with China. It is too important the

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Speaker 10: country it had made good procreates in economic refem and

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Speaker 10: I think we should not likely sacrifice the relationship with

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Speaker 10: the country with the longest continuing history in Asia, with

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Speaker 10: the cultural influence that it has.

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Speaker 2: This is Wall Street Week on Bloomberg.

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Speaker 3: This is Bloomberg Wall Street Week with David Weston from

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Speaker 3: Bloomberg Radio.

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Speaker 2: Artificial intelligence it's been with us for longer than we think.

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Speaker 2: Bank of America's Brian moynihan says they've been using it

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Speaker 2: for at least five years.

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Speaker 5: We have this thing called Erica, which is a virtual

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Speaker 5: artificial intelligence, virtual assistant, natural language processing predictive technology that

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Speaker 5: we've been running for four or five.

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Speaker 2: Years, and people like JP Morgan's Jamie Diamond insist that

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Speaker 2: it is transformational. AI is real. This is not no,

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Speaker 2: that's not crypto ed. This is a technology which is staggering,

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Speaker 2: with AI pioneer Samuel Altman telling Congress we think it

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Speaker 2: can be a printing press moment. We have to work

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Speaker 2: together to make it so. But now there are those

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Speaker 2: who are warning about some of the downsides with tech.

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Speaker 2: Veterans like Carly Fiorina, agreeing with Open AI. Samuel Altman

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Speaker 2: that there needs to be regulation.

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Speaker 9: Big tech has to say we alone are not in charge,

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Speaker 9: and we alone cannot control.

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Speaker 2: And a group of AI industry leaders this week wrote

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Speaker 2: an open letter warning that what they are building could

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Speaker 2: lead to a risk of extinction and to take us

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Speaker 2: through some of the possible impediments to general of AI,

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Speaker 2: as well as the risks involved. Welcome to Sam Palmasano.

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Speaker 2: He is now the chairman of the Center for Global Enterprise,

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Speaker 2: but of course for many years he was the chair

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Speaker 2: and CEO of IBM. So Sam, welcome back to Wall Street.

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Speaker 2: We've really great to have you here. Let's start, first

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Speaker 2: of all with exactly how big this generative AI could be.

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Speaker 2: We've seen Nvidia this week really explode in its market capitalisation.

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Speaker 2: Is it over hyped? Do you think? Is it as

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Speaker 2: big as people say?

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Speaker 1: David?

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Speaker 6: But first of all, thank you for having me. Now,

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Speaker 6: I think it's that big.

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Speaker 5: This is transformational technology, but it's always but I mean

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Speaker 5: I always draw the analogy to the Internet because if

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Speaker 5: you think back where it began exchanging technical documents around

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Speaker 5: the world in the seventies to what has become today

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Speaker 5: fifty years later, a lot happened in innovation and development

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Speaker 5: and regulation and guidance, etc. All that has to happen

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Speaker 5: with generative AI or large language models.

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Speaker 6: But it is that transformation transformational because.

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Speaker 5: Like the browser for the Internet made it kind of

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Speaker 5: user friendly for people to actually get in there and

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Speaker 5: look up information or search, this will do the same

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Speaker 5: thing as far as AI is concerned, for people to

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Speaker 5: use natural language to interface to it and get responses

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Speaker 5: that are very much like human being responses.

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Speaker 2: So if it is transformational, as you say, what are

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Speaker 2: we going to need to have it be that transformational?

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Speaker 2: What are some of the key inputs. Let's start, for example,

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Speaker 2: with microchips. That's what's driving in Vidiot or large degree

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Speaker 2: and maybe some other chip manufacturers as well. What is

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Speaker 2: the need there?

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Speaker 5: Well, basically this is going to be it requires massive infrastruction. Sure,

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Speaker 5: and today you think about as hyperscalers as the term,

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Speaker 5: or cloud computing service providers like Amazon, Google, Microsoft, etc.

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Speaker 5: Having said that, this is huge demands on capacity and

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Speaker 5: performance of that capacity. Therefore, the chips and the advantage

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Speaker 5: that Nvidia has is these things graphical processing units that

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Speaker 5: are called GPUs. Those technologies themselves are much better performers

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Speaker 5: than the classic Intel chip, which referred to as X

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Speaker 5: eighty six technology. So fundamentally you need that level of

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Speaker 5: performance to run this like these natural language models, because

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Speaker 5: they are so large, the data setsor is so large

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Speaker 5: and requires so many interconnections that you.

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Speaker 6: Need the performance to be acceptable to the end user.

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Speaker 2: One of the things we hear about is energy. Also,

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Speaker 2: we didn't seem that long ago we're talking about crypto

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Speaker 2: mining and how what a big drain that was for

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Speaker 2: energy back China really cut back on some of the

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Speaker 2: mining there in China. What is the demand potentially in

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Speaker 2: this transformational gener of AI LM, what is the demand

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Speaker 2: for energy?

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Speaker 5: Oh, it's the same as all these large cloud service

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Speaker 5: data centers.

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Speaker 6: I mean it's massive. I mean you could model those

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Speaker 6: as if they're nuclear reactors. That so much energy they consume.

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Speaker 5: Now, there's a lot that can be done, I mean,

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Speaker 5: quite honestly, around the utilization of the infrastructure to cut

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Speaker 5: the energy costs. There's ways you can use green energy

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Speaker 5: to supplement the classical forms of electricity in those sorts

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Speaker 5: of things. But there are lots of techniques associated with

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Speaker 5: how to reduce that.

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Speaker 6: But energy is going.

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Speaker 5: To be significant there's no doubt about it already is

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Speaker 5: I mean, it has been for years in these large

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Speaker 5: whether they were supercomputers in the old days or now

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Speaker 5: the cloud infrastructure providers, it's the same issue.

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Speaker 6: They require significant amounts of energy.

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Speaker 2: So, Sam, we've heard an awful lot about the wonderful

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Speaker 2: things that generative AI could bring us, not least of

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Speaker 2: which is increased productivity. They're remarkable of projections here of

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Speaker 2: trillions of dollars of increased production because of a general AI.

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Speaker 2: Then we had a letter that came out this week

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Speaker 2: from a group of AIX first people who know about

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Speaker 2: this warning about the risks and even saying there's a

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Speaker 2: risk of extinction if we're not careful. Is that overblown?

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Speaker 5: Well, okay, let me tell you what the risk are.

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Speaker 5: I don't know if it's extinction, but the risk are.

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Speaker 5: Quite Honestly, this technology makes you feel like you're actually

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Speaker 5: getting something that's correct, you know, right, But it's not.

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Speaker 6: It's not valid.

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Speaker 5: And what it's doing basically at the engineering design is

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Speaker 5: connecting large scale words together, but there's no checking to

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Speaker 5: the source of the words. There's no fact checking as

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Speaker 5: the conclusions these words reach. In some cases it's a

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Speaker 5: terrific essay that it's prepared. Maybe it's a great book

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Speaker 5: that it's written, or a wonderful poem. But at the

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Speaker 5: end of the day, if you need accuracy, and you

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Speaker 5: have to have accuracy, like in healthcare, if you were

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Speaker 5: depending upon your diagnostics, you would not use chat GBT.

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Speaker 5: I mean you want to have a doctor or some

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Speaker 5: human of some kind that looked at the conclusion that

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Speaker 5: it reached, even though it probably read all the medical

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Speaker 5: journals like we did in Watson Health. You need some

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Speaker 5: kind of a.

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Speaker 6: Cognition capability, which it does not have.

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Speaker 5: I think people get confused by what it does have

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Speaker 5: because it's so easy to use.

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Speaker 6: I mean, it's very, very attractive, there's no doubt about it.

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Speaker 5: But it needs to be enhanced with some of these

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Speaker 5: capabilities that will address the concerns that are in that article.

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Speaker 6: Today about worrying about it. It could be like nuclear warfare

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Speaker 6: in the future. I mean, if you think.

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Speaker 5: About applications that could have a short term impact that

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Speaker 5: you would like to have facts but don't have any facts.

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Speaker 5: Take political propaganda as an example of that, our political campaigns.

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Speaker 5: I mean, you'd like to have some facts and all

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Speaker 5: that information but we all know they don't exist, and

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Speaker 5: I'm not sure that proponents of all that information really

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Speaker 5: want the facts out there anyway.

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Speaker 2: Sam, is that risk? Is that weakness about actually truth checking?

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Speaker 2: Is that inherent in large language models? Is it inherent

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Speaker 2: in general AI or is it something with new iterations?

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Speaker 2: Actually it could take over yourself so it could actually

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Speaker 2: check itself.

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Speaker 6: It needs to be done.

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Speaker 5: Is the self checking, like you said, that does not

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Speaker 5: exist today. I make the argument that the inventors of

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Speaker 5: this technology that are raising all these alarms knew about

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Speaker 5: these alarms, and they could have written some of these checkers,

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Speaker 5: these tracing of the information or transparency of the data

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Speaker 5: into the actual technology itself. Now, however, you know, I

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Speaker 5: understand that they raised the concerns. They are very very

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Speaker 5: valid concerns. However, if you are the inventor or the

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Speaker 5: guys coming up with this technology, you knew this and

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Speaker 5: you could have prepared for this.

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Speaker 6: But now it has to be done.

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Speaker 5: I mean, it's great technology, it's transformational, but now it

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Speaker 5: has to be done, and it will be done, and

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Speaker 5: there's going to be lots of small innovative companies that

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Speaker 5: are going to take advantage of that gap.

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Speaker 6: And add that capability.

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Speaker 2: What's the government to do?

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Speaker 5: It depends, you know, right, this is a great dilemma.

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Speaker 5: And I take you back to the early days of

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Speaker 5: the Internet. I mean, in the early days of the Internet,

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Speaker 5: the government decided to take a light hand of guidance

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Speaker 5: to the Internet, and the reason being that they would

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Speaker 5: like to see the innovation could grow and accelerate before

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Speaker 5: they actually put the.

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Speaker 6: Say, the regulations in place.

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Speaker 5: And they're still trying to do that today as you

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Speaker 5: look at data privacy and those kinds of issues, which are.

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Speaker 6: Very very valid issues.

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Speaker 5: And this is the same thing I think in the beginning,

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Speaker 5: how do you regulate something that you don't know what

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Speaker 5: it is?

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Speaker 6: And we really don't know.

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Speaker 5: We have concerns about what it could be, but that's

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Speaker 5: not what it is today. So my suggestion to the

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Speaker 5: people that are raising all these concerns is they work

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Speaker 5: with that obviously, the technologists, the private sector, of the academic,

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Speaker 5: university's government regulations and come up with guardrails. Guardrails, not regulations,

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Speaker 5: because once you put this in law or code, it

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Speaker 5: never gets reversed. And I don't think we know enough

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Speaker 5: today to put that in a responsible way, put that

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Speaker 5: in place. I know some of the founders of the

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Speaker 5: technology are calling for that. I understand that. I understand

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Speaker 5: why they're raising those concerns. However, it's the actual details

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Speaker 5: that matter in this case, and you're trading off innovation

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Speaker 5: because you could solve massive societal problems with this technology.

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Speaker 2: Okay, Sam, it's always such a pleasure to have you

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Speaker 2: here on Wall Street. We've got Sam Palma Sinho. He

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Speaker 2: is now the chairman of the Center for Global Enterprise.

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Speaker 2: Coming up, we wrap up the week with our special contributor,

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Speaker 2: Larry Summers of Harvard. That's next time, Wall Street Week

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Speaker 2: on Bloomberg. This is Wall Street Week. I'm David Weston.

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Speaker 2: We're joined once again by a very special contributor. Here

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Speaker 2: he is Larry Summers of Harvard. So, Larry, we have

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Speaker 2: to start with those jobs numbers that came out on Friday,

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Speaker 2: a lot more than expected at three hundred and thirty

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Speaker 2: nine thousand jobs. At the same time, we also had

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Speaker 2: an increase in wages, and we had an increase in unemployment.

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Speaker 2: What do you make of this surprise number? I think

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Speaker 2: for most.

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Speaker 4: People, look, I think these are strong numbers. In Toto

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Speaker 4: three hundred and thirty nine thousand jobs is a lot.

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Speaker 4: There were upper revisions for the previous two months. We've

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Speaker 4: always known that the monthly unemployment rate is a very

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Speaker 4: noisy series. That's especially true in May when you got

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Speaker 4: all the seasonal adjustments going on with respect to the

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Speaker 4: kids who are leaving school and looking.

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Speaker 1: For summer jobs.

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Speaker 4: So I think you have to read this report as strong.

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Speaker 4: I think the forecasting communities got to do a little

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Speaker 4: soul searching. They've been low on this report for fourteen months.

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Speaker 1: In a row.

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Speaker 4: That has got to suggest that there's something about the

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Speaker 4: underlying strength of the economy that they're missing, Or another

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Speaker 4: way to put it is that they are exaggerating the

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Speaker 4: impact and efficacy of monetary policy in slowing the economy down.

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Speaker 4: So I read these as a strong report, and I

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Speaker 4: think the general tendency of the data has been very

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Speaker 4: much towards saying that the economy, at least for this while,

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Speaker 4: has a fair amount of robustness in it.

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Speaker 2: Going beyond the jobs numbers out this week, the other

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Speaker 2: big development of the economy, I dare say, is that

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Speaker 2: package that did make it through actually the Congress, that

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Speaker 2: took care of the debt sealing problem. I wonder what

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Speaker 2: you make of that package, and maybe more specifically, what

442
00:22:30,119 --> 00:22:32,280
Speaker 2: it means for the fiscal policy of the United States

443
00:22:32,320 --> 00:22:32,840
Speaker 2: of America.

444
00:22:33,800 --> 00:22:38,080
Speaker 4: David, Before I say something about the debt limit issues,

445
00:22:38,520 --> 00:22:40,920
Speaker 4: I want to just say that with that behind us,

446
00:22:41,680 --> 00:22:47,960
Speaker 4: with these employment figures, with the general evidence of robustness

447
00:22:48,000 --> 00:22:52,719
Speaker 4: in the economy, I think the lower risk strategy is

448
00:22:52,760 --> 00:22:57,000
Speaker 4: for the FED to raise rates in June. It's a

449
00:22:57,040 --> 00:23:00,479
Speaker 4: close call, and if they don't raise rates in June,

450
00:23:00,880 --> 00:23:03,320
Speaker 4: I think they have to be open to the possibility

451
00:23:03,800 --> 00:23:06,560
Speaker 4: that they may have to raise rates by fifty basis

452
00:23:06,560 --> 00:23:11,760
Speaker 4: points in July if the economy continues to stay way

453
00:23:11,840 --> 00:23:17,880
Speaker 4: hot and if inflation figures are robust. I saw that

454
00:23:17,960 --> 00:23:20,879
Speaker 4: some of the governors have been saying that maybe the

455
00:23:20,920 --> 00:23:25,320
Speaker 4: FED can move to a mode of raising rates by

456
00:23:25,400 --> 00:23:29,520
Speaker 4: twenty five basis points only every other meeting. It's certainly

457
00:23:29,560 --> 00:23:33,080
Speaker 4: possible that that's a mode that they can move into,

458
00:23:33,160 --> 00:23:36,800
Speaker 4: but for there to be any sense of commitment to that,

459
00:23:37,480 --> 00:23:40,920
Speaker 4: given the risks, would I think be repeating the kind

460
00:23:40,920 --> 00:23:44,879
Speaker 4: of mistakes that the FED has made repeatedly over the

461
00:23:44,960 --> 00:23:53,159
Speaker 4: last several years. I vacillated after the first run of

462
00:23:53,359 --> 00:23:59,280
Speaker 4: serious banking issues, but seeing where we are now seeing

463
00:23:59,320 --> 00:24:02,959
Speaker 4: the general picture in markets, I think we are again

464
00:24:03,080 --> 00:24:07,840
Speaker 4: in a situation where the risks of overheating the economy

465
00:24:08,440 --> 00:24:13,399
Speaker 4: are the primary risks that the FED needs to be

466
00:24:13,840 --> 00:24:18,679
Speaker 4: mindful of. And of course that's just reinforced by the

467
00:24:18,760 --> 00:24:21,720
Speaker 4: fact that we've put the debt limit and the potential

468
00:24:21,760 --> 00:24:28,680
Speaker 4: loss of confidence from it very much behind us by

469
00:24:28,760 --> 00:24:33,639
Speaker 4: reaching this deal. Look, the thing I'm worried about coming

470
00:24:33,680 --> 00:24:36,960
Speaker 4: out of this deal is.

471
00:24:36,240 --> 00:24:38,760
Speaker 1: Not what happens in the near term.

472
00:24:38,960 --> 00:24:44,879
Speaker 4: The irs provisions there, I think are really a serious error,

473
00:24:44,920 --> 00:24:48,919
Speaker 4: and we're missing a chance to catch lots of people

474
00:24:48,960 --> 00:24:53,240
Speaker 4: who have just cheated on their taxes, who are going.

475
00:24:53,200 --> 00:24:55,000
Speaker 1: To go undiscovered.

476
00:24:55,080 --> 00:24:58,919
Speaker 4: And because we're not investing enough, we're gonna probably have

477
00:24:58,960 --> 00:25:03,480
Speaker 4: even more people playing the audit lottery. And that's a mistake,

478
00:25:04,400 --> 00:25:07,600
Speaker 4: best serious mistake. But I think the really big issue

479
00:25:07,680 --> 00:25:11,359
Speaker 4: that focus is going to need to turn to is

480
00:25:11,880 --> 00:25:16,080
Speaker 4: the long run fiscal picture of the country. CBO says

481
00:25:16,600 --> 00:25:21,159
Speaker 4: that we're headed to a projected deficit more than twice

482
00:25:21,200 --> 00:25:24,120
Speaker 4: as large as the one we had when we set

483
00:25:24,160 --> 00:25:29,800
Speaker 4: off the Simpson Bowls process, more than seventy five percent

484
00:25:29,960 --> 00:25:33,720
Speaker 4: larger than the one that was there when Bill Clinton

485
00:25:34,640 --> 00:25:38,440
Speaker 4: came in as president, And there are all sorts of

486
00:25:38,560 --> 00:25:44,280
Speaker 4: reasons to think that the CBO estimate is way optimistic.

487
00:25:44,640 --> 00:25:48,800
Speaker 4: I don't believe for a moment that three month treasury

488
00:25:48,840 --> 00:25:51,520
Speaker 4: bill rates are going to average two point three percent

489
00:25:52,080 --> 00:25:55,879
Speaker 4: over the next decade. I don't believe for a moment

490
00:25:56,320 --> 00:25:59,800
Speaker 4: that defense spending as a share of GDP is going

491
00:25:59,840 --> 00:26:06,200
Speaker 4: to fall by twenty percent over the next decade. If

492
00:26:06,240 --> 00:26:10,440
Speaker 4: anybody believes that one hundred percent of the Trump tax

493
00:26:10,520 --> 00:26:16,120
Speaker 4: cuts are going to be terminated when they come up

494
00:26:16,160 --> 00:26:19,560
Speaker 4: for renewal in twenty twenty five, I'd be happy to

495
00:26:19,600 --> 00:26:22,280
Speaker 4: make them a bet, or even happier to sell them

496
00:26:22,320 --> 00:26:25,919
Speaker 4: a bridge, because they're very gullible. So I think if

497
00:26:25,960 --> 00:26:29,359
Speaker 4: you look at the numbers in the right serious way,

498
00:26:29,880 --> 00:26:34,080
Speaker 4: you're looking at projected budget deficit that could approach or

499
00:26:34,119 --> 00:26:38,080
Speaker 4: exceed ten percent of GDP.

500
00:26:38,440 --> 00:26:40,680
Speaker 2: Well that's fascinating there, because I don't want to say

501
00:26:40,720 --> 00:26:42,760
Speaker 2: you're sounding a little bit like Kevin McCarthy, but you

502
00:26:42,800 --> 00:26:45,239
Speaker 2: are concerned about the deficit and the debt. Let me

503
00:26:45,320 --> 00:26:47,600
Speaker 2: talk to you about how we should look at that problem.

504
00:26:47,760 --> 00:26:51,000
Speaker 2: You just talked about the ratio of the debt to

505
00:26:51,119 --> 00:26:53,720
Speaker 2: the GDP. You wrote a paper with Jason Furman a

506
00:26:53,760 --> 00:26:55,920
Speaker 2: few years back saying it really is the question of

507
00:26:55,960 --> 00:26:58,560
Speaker 2: the size of the debt service against GDP. There's a

508
00:26:58,600 --> 00:27:00,440
Speaker 2: report in Bloomberg this week. He said, that's with Janet

509
00:27:00,520 --> 00:27:02,560
Speaker 2: Yell in the treasure sectory's looking at and then if

510
00:27:02,600 --> 00:27:05,359
Speaker 2: she looks at that regio, it's not that disturbing. Should

511
00:27:05,440 --> 00:27:08,119
Speaker 2: we be looking at it through that lens?

512
00:27:09,160 --> 00:27:12,840
Speaker 4: Look when you look at it in terms of debt service, David,

513
00:27:13,520 --> 00:27:16,560
Speaker 4: what that depends on, obviously, is what the level of

514
00:27:16,560 --> 00:27:20,400
Speaker 4: the interest rate is. And if you believe CBO that

515
00:27:20,600 --> 00:27:23,800
Speaker 4: the one month or three month treasury rate is going

516
00:27:23,840 --> 00:27:27,600
Speaker 4: to stay below two and a half for ten years,

517
00:27:28,000 --> 00:27:32,480
Speaker 4: then you can be serene about debt service. But that's

518
00:27:32,520 --> 00:27:37,320
Speaker 4: a kind of assume, a can opener approach, my guests,

519
00:27:37,400 --> 00:27:40,879
Speaker 4: Given all the debt that we're accumulating, given what the

520
00:27:40,920 --> 00:27:45,440
Speaker 4: Fed's going to have to do to contain inflation, is

521
00:27:45,520 --> 00:27:48,600
Speaker 4: that rates are going to have to be substantially higher

522
00:27:48,640 --> 00:27:49,040
Speaker 4: than that.

523
00:27:49,480 --> 00:27:50,480
Speaker 1: And if you take a.

524
00:27:50,400 --> 00:27:57,760
Speaker 4: More realistic approach, you are looking at debt service levels that,

525
00:27:58,000 --> 00:28:01,920
Speaker 4: whether you use the nominal interest or the real interest rate,

526
00:28:02,359 --> 00:28:05,879
Speaker 4: are getting very close to the levels that Furman, and

527
00:28:05,920 --> 00:28:12,800
Speaker 4: I said would would be dangerous. So I think it's

528
00:28:13,119 --> 00:28:19,840
Speaker 4: absolutely right to focus on debt service as the issue.

529
00:28:20,200 --> 00:28:24,720
Speaker 4: But we have in part because of all the massive

530
00:28:24,840 --> 00:28:28,560
Speaker 4: QE where the FED, which is after all an arm

531
00:28:28,600 --> 00:28:32,560
Speaker 4: of the government, has brought up all the long term bonds.

532
00:28:33,160 --> 00:28:37,480
Speaker 4: We're now running the country's finances like a homeowner with

533
00:28:37,560 --> 00:28:38,959
Speaker 4: a floating rate mortgage.

534
00:28:39,200 --> 00:28:41,160
Speaker 2: So Larry finally put this all together. If you would

535
00:28:41,200 --> 00:28:44,320
Speaker 2: take the really robust jobs numbers that we've talked about,

536
00:28:44,560 --> 00:28:46,760
Speaker 2: put it together with what you're admonishing the FED, they

537
00:28:46,760 --> 00:28:48,600
Speaker 2: should be at least willing to put on the table

538
00:28:48,800 --> 00:28:51,080
Speaker 2: fifty basis point rate hikes in order to get our

539
00:28:51,200 --> 00:28:53,960
Speaker 2: arms around inflation. Given how strong the economy is. Where

540
00:28:54,000 --> 00:28:56,400
Speaker 2: are you now on recession? Because people are talking about

541
00:28:56,440 --> 00:28:58,320
Speaker 2: recession for a long time. You've been talking about I've

542
00:28:58,320 --> 00:28:59,960
Speaker 2: been talking about a lot of people. Have we keep

543
00:29:00,080 --> 00:29:03,280
Speaker 2: putting out the time for it. Where are you on

544
00:29:03,320 --> 00:29:05,000
Speaker 2: the likelier recession? When is it hit?

545
00:29:05,920 --> 00:29:12,680
Speaker 4: David? I still think that it is soft landings are

546
00:29:12,800 --> 00:29:17,320
Speaker 4: very unlikely, that it's unlikely that inflation will come down

547
00:29:17,440 --> 00:29:23,600
Speaker 4: to the two range without an economic downturn, And in

548
00:29:23,640 --> 00:29:28,840
Speaker 4: a way, it's a policy choice when that downturn comes

549
00:29:29,400 --> 00:29:33,680
Speaker 4: and we have put it, we have put it off.

550
00:29:34,280 --> 00:29:37,920
Speaker 4: The worry is that when you delay taking your medication

551
00:29:38,840 --> 00:29:42,040
Speaker 4: and then you only take part of your medication until

552
00:29:42,080 --> 00:29:46,160
Speaker 4: you feel better, you don't really get cured and there

553
00:29:46,240 --> 00:29:50,360
Speaker 4: ends up being more pain down the road. It sure

554
00:29:50,400 --> 00:29:54,480
Speaker 4: doesn't look to me like we're going near recession before

555
00:29:54,520 --> 00:29:58,239
Speaker 4: the end of the summer. And if I had to

556
00:29:58,320 --> 00:30:01,920
Speaker 4: guess right now, I think the FED will end up

557
00:30:02,000 --> 00:30:06,520
Speaker 4: doing enough to restrain inflation and that's going to mean

558
00:30:06,560 --> 00:30:12,280
Speaker 4: a quite soft economy sometime in twenty twenty four.

559
00:30:12,800 --> 00:30:16,280
Speaker 1: But the dynamics are very difficult to gauge.

560
00:30:16,840 --> 00:30:18,760
Speaker 2: Okay, Larry, it's always such a pleasure having with us.

561
00:30:18,800 --> 00:30:21,640
Speaker 2: That's Larry Summers of Harvard, our special contributor here on

562
00:30:21,840 --> 00:30:26,800
Speaker 2: Wall Street Week. Coming up, What do you do when

563
00:30:26,840 --> 00:30:30,040
Speaker 2: you can't believe your own eyes or ears or even

564
00:30:30,280 --> 00:30:34,040
Speaker 2: your own lawyer. That's next time, Wall Street Week on Bloomberg.

565
00:30:36,240 --> 00:30:40,440
Speaker 3: This is Bloomberg Wall Street Week with David Weston from

566
00:30:40,560 --> 00:30:41,480
Speaker 3: Bloomberg Radio.

567
00:30:48,400 --> 00:30:50,760
Speaker 2: This is Wall Street Week. I'm David Weston, Investigat It

568
00:30:50,800 --> 00:30:54,160
Speaker 2: takes into account environmental, social and governance issues. Has been

569
00:30:54,240 --> 00:30:57,480
Speaker 2: all the rage with Bloomberg estimating that ESG funds will

570
00:30:57,480 --> 00:31:01,280
Speaker 2: reach over fifty trillion dollars worldwide by twenty twenty five.

571
00:31:01,640 --> 00:31:04,800
Speaker 2: But the issue has become increasingly politicized in the United

572
00:31:04,800 --> 00:31:08,040
Speaker 2: States in sharp contrast with Europe and with Canada. To

573
00:31:08,080 --> 00:31:10,560
Speaker 2: explain that gap and where it could take us, welcome

574
00:31:10,600 --> 00:31:14,240
Speaker 2: dow Eileen O'Connor, Rockefeller Foundations, Senior vice president for Strategic

575
00:31:14,240 --> 00:31:16,880
Speaker 2: Communications and Policies. So, Aileen, thank you so much for

576
00:31:17,000 --> 00:31:19,600
Speaker 2: joining us. What are you hearing in terms of a

577
00:31:19,680 --> 00:31:23,040
Speaker 2: divergence possible divergence between Europe and the United States.

578
00:31:23,040 --> 00:31:26,320
Speaker 11: Well, there's incredible frustration of US pension funds because they

579
00:31:26,440 --> 00:31:30,000
Speaker 11: understand that this is actually bad for business and particularly

580
00:31:30,040 --> 00:31:32,959
Speaker 11: bad for their investors. And we're already seeing that in

581
00:31:33,000 --> 00:31:38,240
Speaker 11: some conservative states where there's proposed ANTIEESG legislation, some of those,

582
00:31:38,480 --> 00:31:43,000
Speaker 11: even Republican pension fund managers are pushing back and saying

583
00:31:43,000 --> 00:31:46,640
Speaker 11: that it's going to cost their pensioners billions of dollars,

584
00:31:47,240 --> 00:31:50,959
Speaker 11: both in fees to convert and to pull out of investments,

585
00:31:50,960 --> 00:31:53,440
Speaker 11: but also in losses over the next few years. And

586
00:31:53,480 --> 00:31:55,920
Speaker 11: the reason for this is that if the United States

587
00:31:55,960 --> 00:31:59,479
Speaker 11: businesses don't start investing in the technologies that going to

588
00:31:59,520 --> 00:32:04,120
Speaker 11: abate greenhouse gas emissions and also adapt to a warming climate.

589
00:32:04,600 --> 00:32:06,840
Speaker 11: We are going to be losing out as a country

590
00:32:06,840 --> 00:32:10,680
Speaker 11: and as an economy because Europe and Asia and particularly

591
00:32:10,760 --> 00:32:14,640
Speaker 11: China are investing in these technologies because they understand that

592
00:32:14,760 --> 00:32:18,240
Speaker 11: climate change is very real, that human activity and fossil

593
00:32:18,240 --> 00:32:20,880
Speaker 11: fuels are major causes, as well as some of the

594
00:32:20,880 --> 00:32:24,720
Speaker 11: ways we grow our food and use other technologies, and

595
00:32:24,760 --> 00:32:27,760
Speaker 11: so they are now already converting their energy systems. They

596
00:32:27,800 --> 00:32:32,960
Speaker 11: are investing in battery storage, electric vehicles, electric stoves.

597
00:32:32,520 --> 00:32:33,280
Speaker 6: And other things.

598
00:32:33,360 --> 00:32:36,840
Speaker 11: And the United States business if there is a chilling

599
00:32:36,880 --> 00:32:41,240
Speaker 11: effect by this ANTIESD legislation, it's business that's going to

600
00:32:41,560 --> 00:32:44,680
Speaker 11: lose out and also consumers and the economy in general.

601
00:32:44,720 --> 00:32:46,280
Speaker 2: Before you even get to the investment, so you can

602
00:32:46,280 --> 00:32:48,200
Speaker 2: talk to it and just about talking about it, because

603
00:32:48,240 --> 00:32:50,560
Speaker 2: we're having difficulty sometimes getting people even to come on

604
00:32:50,640 --> 00:32:53,000
Speaker 2: and talk about the issue because it's so politicized and

605
00:32:53,040 --> 00:32:56,360
Speaker 2: there's actually partisan politics going on with people's houses. They're

606
00:32:56,360 --> 00:32:58,880
Speaker 2: sending up picket lines and people's houses. Are you having

607
00:32:58,880 --> 00:33:01,520
Speaker 2: a difficult time getting even be able to discuss it publicly?

608
00:33:01,880 --> 00:33:04,800
Speaker 11: Yes, I'm also was a corporate lawyer, and I've been

609
00:33:04,920 --> 00:33:08,360
Speaker 11: speaking to some of my former partners who are representing

610
00:33:08,440 --> 00:33:11,760
Speaker 11: companies and who are basically afraid to talk about the

611
00:33:11,800 --> 00:33:15,400
Speaker 11: fact that these investments are good investments. I mean, over

612
00:33:15,440 --> 00:33:19,200
Speaker 11: the years, investing in new technology says driven down the

613
00:33:19,240 --> 00:33:22,160
Speaker 11: cost of solar and is driving down the cost of

614
00:33:22,200 --> 00:33:25,640
Speaker 11: battery storage. These are very good investments and they will

615
00:33:25,680 --> 00:33:29,120
Speaker 11: actually lead to economic growth. The other thing is these

616
00:33:29,160 --> 00:33:32,760
Speaker 11: businesses know that they have to also know they have

617
00:33:32,880 --> 00:33:35,600
Speaker 11: to address climate change, because they have to address the

618
00:33:35,720 --> 00:33:37,200
Speaker 11: risk of climate change.

619
00:33:37,360 --> 00:33:39,320
Speaker 6: We already know that even this year.

620
00:33:39,200 --> 00:33:44,280
Speaker 11: Alone, we've had seven billion dollar climate weather events, that's

621
00:33:44,320 --> 00:33:47,520
Speaker 11: what Noah calls them. They actually caused over a billion

622
00:33:47,560 --> 00:33:50,440
Speaker 11: dollars worth of loss and damage to businesses and to

623
00:33:50,520 --> 00:33:53,880
Speaker 11: people in the United States. And those instances are rising

624
00:33:54,000 --> 00:33:57,440
Speaker 11: tremendously over the last few years. And so that is

625
00:33:57,480 --> 00:33:58,080
Speaker 11: another thing that.

626
00:33:58,120 --> 00:33:59,040
Speaker 6: Businesses want to do.

627
00:33:59,080 --> 00:34:01,040
Speaker 11: They want to make profit, but they want to avoid

628
00:34:01,080 --> 00:34:04,880
Speaker 11: costs obviously, and so that's a risk that they are

629
00:34:04,920 --> 00:34:07,920
Speaker 11: also looking at. And I would also say that you know, interestingly,

630
00:34:08,120 --> 00:34:11,880
Speaker 11: Norway's sovereign Wealth fund is really taking that risk seriously.

631
00:34:11,960 --> 00:34:14,839
Speaker 11: They're basically saying that they're not going to invest in

632
00:34:14,920 --> 00:34:19,800
Speaker 11: companies that don't take mitigation of climate risk into account

633
00:34:19,920 --> 00:34:24,080
Speaker 11: when they're making investments. They will actually deep disinvest from

634
00:34:24,120 --> 00:34:26,239
Speaker 11: those companies, is what they're saying in a.

635
00:34:26,160 --> 00:34:28,040
Speaker 2: Statement, I think it's really great to talk to you.

636
00:34:28,080 --> 00:34:30,600
Speaker 2: Thank you so much. That's Eileen O'Connor of the Rockefeller

637
00:34:30,640 --> 00:34:32,600
Speaker 2: Foundation list that does it for this episode of Wall

638
00:34:32,640 --> 00:34:35,360
Speaker 2: Street Week, I'm David Weston. This is Bloomberg. See you

639
00:34:35,480 --> 00:34:35,960
Speaker 2: next week.