Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: We turn our attention to the markets this week. USCPI
Speaker 2: en neembors reinforcing concerns about inflation. The financial stories that
Speaker 2: shape are worth a really different reaction to market. Some
Speaker 2: more indications of just how hot the US economy really.
Speaker 3: Is rude the eyes of the most influential voices.
Speaker 2: Katherine Keating, CEO of B and Y Moan, Ryan Winnahan,
Speaker 2: a Bank of America, Sam zel Sharmon and founder of
Speaker 2: Equat Group Investments.
Speaker 3: Bloomberg Wall Street Week with David Weston.
Speaker 1: From Bloomberg Radio.
Speaker 2: Drones hit Moscow, lower numbers hit China, and Washington works
Speaker 2: hard not to hit the debt ceiling. This is Bloomberg
Speaker 2: Wall Street Week. I'm David Weston. This week's secial CONTRIBA
Speaker 2: Larry Summers of Harvard on the stubbornly strong labor market
Speaker 2: and what it means for inflation.
Speaker 4: There's something about the underlying strength of the economy that
Speaker 4: they're missing.
Speaker 2: And former IBM CEO Sam Palmersano on just how big
Speaker 2: generative AI could get and what could stop it.
Speaker 5: You need some kind of a cognition, a capability which it.
Speaker 6: Does not have.
Speaker 2: Global Wall Street started the week watching drone hits in Moscow,
Speaker 2: perhaps as a precursor to a counter offensive in Ukraine.
Speaker 7: We're able to reach you right in the heart of Russia,
Speaker 7: and these attacks are really about sort of like sending
Speaker 7: that message.
Speaker 2: So it's quite embarrassing for Russia that this is happening.
Speaker 2: We spent another week on the debt ceiliing in Washington,
Speaker 2: but this time it wasn't about getting a deal, but
Speaker 2: about getting it all behind us, at least for a
Speaker 2: couple of years. We're going to deal with the debt ceiling.
Speaker 2: I think things are going as planned.
Speaker 5: Tonight we all made history because this is the biggest
Speaker 5: cut and savings this Congress has ever voted.
Speaker 2: For, and as expected, not everyone was happy.
Speaker 1: Now one would again should vote for this deal.
Speaker 2: Not once China got some bad economic news, raising more
Speaker 2: questions about the speed of its recovery.
Speaker 8: China's manufacturing activity contracted for a second straight month in May.
Speaker 7: It's more evidence that the post COVID recovery has slowed
Speaker 7: in the world's second largest economy.
Speaker 2: But here in the United States, the jobs, well, it
Speaker 2: just kept on going, adding three hundred and thirty nine
Speaker 2: thousand new jobs in the month of May that was
Speaker 2: way more than the one hundred and ninety five thousand
Speaker 2: that was estimated, while unemployment actually rose up from three
Speaker 2: point four percent to three point seven percent, which set
Speaker 2: the markets off to the races, with the S and
Speaker 2: P five hundred up one point eight three percent for
Speaker 2: the week, almost all of it on Friday alone. The
Speaker 2: Nasdaq was up a bit more, adding two point oh
Speaker 2: four percent for the week, while the bond markets almost
Speaker 2: did a round trip, starting the week just under three
Speaker 2: point eight percent on the ten year yield, dipping well
Speaker 2: below three point six percent at one point, and then
Speaker 2: coming back to just under three point seven percent on
Speaker 2: Friday as people return to thinking about possible rate hikes
Speaker 2: to take us through the week in the market, is
Speaker 2: welcome now, Barbara reinhardtch she's Voye Capital, head of asset Allocation,
Speaker 2: and Aaron Brown PIMCO Multi Assets Strategy portfolio Manager, So
Speaker 2: welcome back to both of you. Great to have you here. Barbara.
Speaker 2: Let me start with you, but what we're seeing in
Speaker 2: the markets. We saw some numbers on Friday and then
Speaker 2: you get the commer roll looks pretty strong. Ata when
Speaker 2: it comes to jobs. How are the markets reacting to
Speaker 2: all this information.
Speaker 8: It was a strange employment report, right, so it didn't
Speaker 8: coincide with necessarily some of the other data that we're
Speaker 8: looking at, looking at such as and if I be
Speaker 8: hiring intentions the home based data, they would have told
Speaker 8: you that the labor market would have been a lot
Speaker 8: weaker than the number that we had printed today. But
Speaker 8: the good news is and that what the equity market
Speaker 8: held onto is the gentle decline in average hourly earnings.
Speaker 8: And that is good news on the inflation side, because
Speaker 8: you've had very sticky inflation. It's been coming down, but
Speaker 8: coming down probably slower than what people expected. But to
Speaker 8: see the easing in the wage data is a very
Speaker 8: good positive development.
Speaker 2: Barbara, we've heard an awful lot about this lag and
Speaker 2: the effects from monetary policy. How long a lag should
Speaker 2: we expect, because boy, it doesn't see you're showing up
Speaker 2: very profoundly so far.
Speaker 8: So it tends to be about you know, when the
Speaker 8: Federal Reserve started hiking industrates, it was about twenty about
Speaker 8: fourteen months ago. There tends to be a lag of
Speaker 8: about twenty four months between when the Fed starts hiking
Speaker 8: and when you start to see a dramatic slowdown in inflation.
Speaker 8: That means we should have at least the rest of
Speaker 8: this year into the first quarter of twenty four before
Speaker 8: you start to see a significant slow down in inflation.
Speaker 8: Look when you look at things like the sticky price
Speaker 8: CPI or the underlying inflation gauge, they were at, you know,
Speaker 8: between six and seven percent just six months ago. They're
Speaker 8: down now to about three and a half to four
Speaker 8: and a half percent, well above the Fed's target, but
Speaker 8: they're going in the right direction. In order to get
Speaker 8: down to the two percent on inflation, which is the
Speaker 8: fed's target, you likely need to see a little bit
Speaker 8: more time go by.
Speaker 2: Think about this, David.
Speaker 8: The real issue is that the FED hikes the seventy
Speaker 8: five basis points that they did over the course of
Speaker 8: three or four meetings last year. They happened in the
Speaker 8: third and fourth quarters of last year. You need at
Speaker 8: least twelve months for that to start to be felt
Speaker 8: by the economy and start to see the slowdown you're
Speaker 8: seeing in some of the data change indexes. You're starting
Speaker 8: to see some slowing. Certainly not indicative of the labor
Speaker 8: market this morning on that report, but I would say
Speaker 8: that data can change and can change relatively quickly.
Speaker 2: It's not just US investors who drive US market. We
Speaker 2: also pay attention to foreign investors in US securities. And
Speaker 2: Torsten Slock of Apollo is here with one of his
Speaker 2: charts to show where foreign investors are putting their money.
Speaker 9: So before the pandemic, that was appetite among foreigners for
Speaker 9: buying in particular US government bonds and also US equities.
Speaker 9: Foreigners have also historically bought a lot of US credit,
Speaker 9: but broadly speaking, the trends were that foreigners had appetide
Speaker 9: for buying both US fixed income and buying US equities.
Speaker 9: So over the months ahead, we still have that the
Speaker 9: federal serve is doing quantitive tightening to the tune of
Speaker 9: roughly sixty billion dollars every single month.
Speaker 2: At the same time, we.
Speaker 9: Also have a budget deficit which is roughly around five
Speaker 9: percent of GDP, and that amounts to roughly in round numbers,
Speaker 9: about one hundred billion dollars in issuings of treasuries every
Speaker 9: single month. Combining both QT and the budget deficit. With
Speaker 9: this new issue, and on the other side of this
Speaker 9: that Celing deal now potentially being quite substantial, it does
Speaker 9: raise questions about who is it that will be buying treasuries,
Speaker 9: in particular in an environment where the hedging costs for
Speaker 9: foreigners continue to be quite elevated.
Speaker 2: Aaron Brown up PIMCO and Barbara Ryan Hart a boy
Speaker 2: are still with us. Er, let me start with you here.
Speaker 2: We've been following this after the death Sente got put
Speaker 2: behind this unfortunately did this way. There's the question we're
Speaker 2: replenishing the larder essentially in the US treasure to get
Speaker 2: their stock back up. It's going to be a lot
Speaker 2: of tea bills. Do we have the buyers for those
Speaker 2: T bills?
Speaker 7: Yeah, it's Torsten mentioned. I mean the challenge is from
Speaker 7: a foreigner's perspective. If you're a Japanese investor and you're
Speaker 7: looking to buy ten year government bonds, after the FX
Speaker 7: hedging cost measured by this sort of three month you know,
Speaker 7: FX forward hedge, it will cost you negative two percent.
Speaker 7: Your yield that you're getting is about negative two point
Speaker 7: two percent on a ten year bond. You can buy
Speaker 7: jgbs for about forty basis points. So from a foreigner's perspective,
Speaker 7: it's better to buy the local bonds than to take
Speaker 7: into account the FX hedging costs and buy a US
Speaker 7: treasury bond, even though US treasuries at least from a
Speaker 7: yield perspective in the US is yielding. More so, it's
Speaker 7: really unattractive right now just because of FX hedging costs
Speaker 7: to buy US government bonds from a foreigner's perspective. You know,
Speaker 7: there's another prop a wrinkle that I'm going to throw into,
Speaker 7: you know, the challenge that we have with perspective supply.
Speaker 7: Not only do we need to refill the cofer of
Speaker 7: the t GA and we have to fund the physical deficit,
Speaker 7: but also keep in mind from an international perspective, you
Speaker 7: have you're going to start to have the TLG or
Speaker 7: ros also that are going to you know, start adding
Speaker 7: to additional supply uh in in Europe as well. So
Speaker 7: you have a lot of government supply that's going to
Speaker 7: be you know, hitting the market in the second half
Speaker 7: of this year, which is going to you know, create
Speaker 7: a challenge certainly, you know, in terms of or raise
Speaker 7: the question in terms of who's going to be the
Speaker 7: incremental guy or for that the problem with the debt
Speaker 7: ceiling being passed, and I mean it's good from a
Speaker 7: political perspective and good from a stability perspective, but it
Speaker 7: does mean that you now have have to refill those coffers.
Speaker 7: They're gonna be a significant amount of issuance over the
Speaker 7: next couple of months, and the Treasury is saying that
Speaker 7: they want to rebuild to about six hundred billion dollars
Speaker 7: that TGA, which is means a significant amount of issuance
Speaker 7: over the next three to four months.
Speaker 2: So Barbro, i'mos gonna. I hadn't thought about the Teltro issue.
Speaker 2: But whatever it is, what's you going to do to
Speaker 2: liquid in the marketplace? And what could that mean as
Speaker 2: a fract many that money's got to come from some place.
Speaker 8: It does, but a lot of times you're talking about
Speaker 8: cash buyers moving over to a different cash instrument. In
Speaker 8: the past twenty years, there have been four times that
Speaker 8: the Treasury General Account has had to raise significant amount
Speaker 8: of assets like it is this time. Each time it
Speaker 8: was able to do it without an issue. We don't
Speaker 8: rule out that something could potentially be and miss this
Speaker 8: time and cause some indigestion, But the FED is very
Speaker 8: well versed in the plumbing of the treasury market, and
Speaker 8: we don't think that it's necessarily going to be a
Speaker 8: very big issue for the front end market. Plus also
Speaker 8: think about this, You're now getting interest rates that are
Speaker 8: almost in excess of headline inflation to be parked in
Speaker 8: tea bills. So it's just a very attractive investment for
Speaker 8: many investors. And many of the bank depositors are looking
Speaker 8: at the table market thinking I can go over to
Speaker 8: money markets and get much better of interest. So I
Speaker 8: think there's going to be a lot of natural buyers.
Speaker 2: Thank you so very much to Barbara Reinhardt, Avoye Capital
Speaker 2: and Aaron Brown of Pimpco. Now, this week we marked
Speaker 2: the one hundredth birthday of Henry Kissinger, the man who
Speaker 2: laid the foundation for the most important economic relationship in
Speaker 2: the world. That was, of course, the one between the
Speaker 2: United States and China. So we went back and found
Speaker 2: an interview Doctor Kissinger did with Lewis Rockaiser back in
Speaker 2: nineteen ninety when Chinese GDP was a mere three hundred
Speaker 2: and sixty billion dollars compared to the eighteen trillion dollars
Speaker 2: that it is today.
Speaker 5: Do you think we still have important economic opportunities in China?
Speaker 10: I think we do, and I'm in favor of maintaining
Speaker 10: a working relationship with China. It is too important the
Speaker 10: country it had made good procreates in economic refem and
Speaker 10: I think we should not likely sacrifice the relationship with
Speaker 10: the country with the longest continuing history in Asia, with
Speaker 10: the cultural influence that it has.
Speaker 2: This is Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: Artificial intelligence it's been with us for longer than we think.
Speaker 2: Bank of America's Brian moynihan says they've been using it
Speaker 2: for at least five years.
Speaker 5: We have this thing called Erica, which is a virtual
Speaker 5: artificial intelligence, virtual assistant, natural language processing predictive technology that
Speaker 5: we've been running for four or five.
Speaker 2: Years, and people like JP Morgan's Jamie Diamond insist that
Speaker 2: it is transformational. AI is real. This is not no,
Speaker 2: that's not crypto ed. This is a technology which is staggering,
Speaker 2: with AI pioneer Samuel Altman telling Congress we think it
Speaker 2: can be a printing press moment. We have to work
Speaker 2: together to make it so. But now there are those
Speaker 2: who are warning about some of the downsides with tech.
Speaker 2: Veterans like Carly Fiorina, agreeing with Open AI. Samuel Altman
Speaker 2: that there needs to be regulation.
Speaker 9: Big tech has to say we alone are not in charge,
Speaker 9: and we alone cannot control.
Speaker 2: And a group of AI industry leaders this week wrote
Speaker 2: an open letter warning that what they are building could
Speaker 2: lead to a risk of extinction and to take us
Speaker 2: through some of the possible impediments to general of AI,
Speaker 2: as well as the risks involved. Welcome to Sam Palmasano.
Speaker 2: He is now the chairman of the Center for Global Enterprise,
Speaker 2: but of course for many years he was the chair
Speaker 2: and CEO of IBM. So Sam, welcome back to Wall Street.
Speaker 2: We've really great to have you here. Let's start, first
Speaker 2: of all with exactly how big this generative AI could be.
Speaker 2: We've seen Nvidia this week really explode in its market capitalisation.
Speaker 2: Is it over hyped? Do you think? Is it as
Speaker 2: big as people say?
Speaker 1: David?
Speaker 6: But first of all, thank you for having me. Now,
Speaker 6: I think it's that big.
Speaker 5: This is transformational technology, but it's always but I mean
Speaker 5: I always draw the analogy to the Internet because if
Speaker 5: you think back where it began exchanging technical documents around
Speaker 5: the world in the seventies to what has become today
Speaker 5: fifty years later, a lot happened in innovation and development
Speaker 5: and regulation and guidance, etc. All that has to happen
Speaker 5: with generative AI or large language models.
Speaker 6: But it is that transformation transformational because.
Speaker 5: Like the browser for the Internet made it kind of
Speaker 5: user friendly for people to actually get in there and
Speaker 5: look up information or search, this will do the same
Speaker 5: thing as far as AI is concerned, for people to
Speaker 5: use natural language to interface to it and get responses
Speaker 5: that are very much like human being responses.
Speaker 2: So if it is transformational, as you say, what are
Speaker 2: we going to need to have it be that transformational?
Speaker 2: What are some of the key inputs. Let's start, for example,
Speaker 2: with microchips. That's what's driving in Vidiot or large degree
Speaker 2: and maybe some other chip manufacturers as well. What is
Speaker 2: the need there?
Speaker 5: Well, basically this is going to be it requires massive infrastruction. Sure,
Speaker 5: and today you think about as hyperscalers as the term,
Speaker 5: or cloud computing service providers like Amazon, Google, Microsoft, etc.
Speaker 5: Having said that, this is huge demands on capacity and
Speaker 5: performance of that capacity. Therefore, the chips and the advantage
Speaker 5: that Nvidia has is these things graphical processing units that
Speaker 5: are called GPUs. Those technologies themselves are much better performers
Speaker 5: than the classic Intel chip, which referred to as X
Speaker 5: eighty six technology. So fundamentally you need that level of
Speaker 5: performance to run this like these natural language models, because
Speaker 5: they are so large, the data setsor is so large
Speaker 5: and requires so many interconnections that you.
Speaker 6: Need the performance to be acceptable to the end user.
Speaker 2: One of the things we hear about is energy. Also,
Speaker 2: we didn't seem that long ago we're talking about crypto
Speaker 2: mining and how what a big drain that was for
Speaker 2: energy back China really cut back on some of the
Speaker 2: mining there in China. What is the demand potentially in
Speaker 2: this transformational gener of AI LM, what is the demand
Speaker 2: for energy?
Speaker 5: Oh, it's the same as all these large cloud service
Speaker 5: data centers.
Speaker 6: I mean it's massive. I mean you could model those
Speaker 6: as if they're nuclear reactors. That so much energy they consume.
Speaker 5: Now, there's a lot that can be done, I mean,
Speaker 5: quite honestly, around the utilization of the infrastructure to cut
Speaker 5: the energy costs. There's ways you can use green energy
Speaker 5: to supplement the classical forms of electricity in those sorts
Speaker 5: of things. But there are lots of techniques associated with
Speaker 5: how to reduce that.
Speaker 6: But energy is going.
Speaker 5: To be significant there's no doubt about it already is
Speaker 5: I mean, it has been for years in these large
Speaker 5: whether they were supercomputers in the old days or now
Speaker 5: the cloud infrastructure providers, it's the same issue.
Speaker 6: They require significant amounts of energy.
Speaker 2: So, Sam, we've heard an awful lot about the wonderful
Speaker 2: things that generative AI could bring us, not least of
Speaker 2: which is increased productivity. They're remarkable of projections here of
Speaker 2: trillions of dollars of increased production because of a general AI.
Speaker 2: Then we had a letter that came out this week
Speaker 2: from a group of AIX first people who know about
Speaker 2: this warning about the risks and even saying there's a
Speaker 2: risk of extinction if we're not careful. Is that overblown?
Speaker 5: Well, okay, let me tell you what the risk are.
Speaker 5: I don't know if it's extinction, but the risk are.
Speaker 5: Quite Honestly, this technology makes you feel like you're actually
Speaker 5: getting something that's correct, you know, right, But it's not.
Speaker 6: It's not valid.
Speaker 5: And what it's doing basically at the engineering design is
Speaker 5: connecting large scale words together, but there's no checking to
Speaker 5: the source of the words. There's no fact checking as
Speaker 5: the conclusions these words reach. In some cases it's a
Speaker 5: terrific essay that it's prepared. Maybe it's a great book
Speaker 5: that it's written, or a wonderful poem. But at the
Speaker 5: end of the day, if you need accuracy, and you
Speaker 5: have to have accuracy, like in healthcare, if you were
Speaker 5: depending upon your diagnostics, you would not use chat GBT.
Speaker 5: I mean you want to have a doctor or some
Speaker 5: human of some kind that looked at the conclusion that
Speaker 5: it reached, even though it probably read all the medical
Speaker 5: journals like we did in Watson Health. You need some
Speaker 5: kind of a.
Speaker 6: Cognition capability, which it does not have.
Speaker 5: I think people get confused by what it does have
Speaker 5: because it's so easy to use.
Speaker 6: I mean, it's very, very attractive, there's no doubt about it.
Speaker 5: But it needs to be enhanced with some of these
Speaker 5: capabilities that will address the concerns that are in that article.
Speaker 6: Today about worrying about it. It could be like nuclear warfare
Speaker 6: in the future. I mean, if you think.
Speaker 5: About applications that could have a short term impact that
Speaker 5: you would like to have facts but don't have any facts.
Speaker 5: Take political propaganda as an example of that, our political campaigns.
Speaker 5: I mean, you'd like to have some facts and all
Speaker 5: that information but we all know they don't exist, and
Speaker 5: I'm not sure that proponents of all that information really
Speaker 5: want the facts out there anyway.
Speaker 2: Sam, is that risk? Is that weakness about actually truth checking?
Speaker 2: Is that inherent in large language models? Is it inherent
Speaker 2: in general AI or is it something with new iterations?
Speaker 2: Actually it could take over yourself so it could actually
Speaker 2: check itself.
Speaker 6: It needs to be done.
Speaker 5: Is the self checking, like you said, that does not
Speaker 5: exist today. I make the argument that the inventors of
Speaker 5: this technology that are raising all these alarms knew about
Speaker 5: these alarms, and they could have written some of these checkers,
Speaker 5: these tracing of the information or transparency of the data
Speaker 5: into the actual technology itself. Now, however, you know, I
Speaker 5: understand that they raised the concerns. They are very very
Speaker 5: valid concerns. However, if you are the inventor or the
Speaker 5: guys coming up with this technology, you knew this and
Speaker 5: you could have prepared for this.
Speaker 6: But now it has to be done.
Speaker 5: I mean, it's great technology, it's transformational, but now it
Speaker 5: has to be done, and it will be done, and
Speaker 5: there's going to be lots of small innovative companies that
Speaker 5: are going to take advantage of that gap.
Speaker 6: And add that capability.
Speaker 2: What's the government to do?
Speaker 5: It depends, you know, right, this is a great dilemma.
Speaker 5: And I take you back to the early days of
Speaker 5: the Internet. I mean, in the early days of the Internet,
Speaker 5: the government decided to take a light hand of guidance
Speaker 5: to the Internet, and the reason being that they would
Speaker 5: like to see the innovation could grow and accelerate before
Speaker 5: they actually put the.
Speaker 6: Say, the regulations in place.
Speaker 5: And they're still trying to do that today as you
Speaker 5: look at data privacy and those kinds of issues, which are.
Speaker 6: Very very valid issues.
Speaker 5: And this is the same thing I think in the beginning,
Speaker 5: how do you regulate something that you don't know what
Speaker 5: it is?
Speaker 6: And we really don't know.
Speaker 5: We have concerns about what it could be, but that's
Speaker 5: not what it is today. So my suggestion to the
Speaker 5: people that are raising all these concerns is they work
Speaker 5: with that obviously, the technologists, the private sector, of the academic,
Speaker 5: university's government regulations and come up with guardrails. Guardrails, not regulations,
Speaker 5: because once you put this in law or code, it
Speaker 5: never gets reversed. And I don't think we know enough
Speaker 5: today to put that in a responsible way, put that
Speaker 5: in place. I know some of the founders of the
Speaker 5: technology are calling for that. I understand that. I understand
Speaker 5: why they're raising those concerns. However, it's the actual details
Speaker 5: that matter in this case, and you're trading off innovation
Speaker 5: because you could solve massive societal problems with this technology.
Speaker 2: Okay, Sam, it's always such a pleasure to have you
Speaker 2: here on Wall Street. We've got Sam Palma Sinho. He
Speaker 2: is now the chairman of the Center for Global Enterprise.
Speaker 2: Coming up, we wrap up the week with our special contributor,
Speaker 2: Larry Summers of Harvard. That's next time, Wall Street Week
Speaker 2: on Bloomberg. This is Wall Street Week. I'm David Weston.
Speaker 2: We're joined once again by a very special contributor. Here
Speaker 2: he is Larry Summers of Harvard. So, Larry, we have
Speaker 2: to start with those jobs numbers that came out on Friday,
Speaker 2: a lot more than expected at three hundred and thirty
Speaker 2: nine thousand jobs. At the same time, we also had
Speaker 2: an increase in wages, and we had an increase in unemployment.
Speaker 2: What do you make of this surprise number? I think
Speaker 2: for most.
Speaker 4: People, look, I think these are strong numbers. In Toto
Speaker 4: three hundred and thirty nine thousand jobs is a lot.
Speaker 4: There were upper revisions for the previous two months. We've
Speaker 4: always known that the monthly unemployment rate is a very
Speaker 4: noisy series. That's especially true in May when you got
Speaker 4: all the seasonal adjustments going on with respect to the
Speaker 4: kids who are leaving school and looking.
Speaker 1: For summer jobs.
Speaker 4: So I think you have to read this report as strong.
Speaker 4: I think the forecasting communities got to do a little
Speaker 4: soul searching. They've been low on this report for fourteen months.
Speaker 1: In a row.
Speaker 4: That has got to suggest that there's something about the
Speaker 4: underlying strength of the economy that they're missing, Or another
Speaker 4: way to put it is that they are exaggerating the
Speaker 4: impact and efficacy of monetary policy in slowing the economy down.
Speaker 4: So I read these as a strong report, and I
Speaker 4: think the general tendency of the data has been very
Speaker 4: much towards saying that the economy, at least for this while,
Speaker 4: has a fair amount of robustness in it.
Speaker 2: Going beyond the jobs numbers out this week, the other
Speaker 2: big development of the economy, I dare say, is that
Speaker 2: package that did make it through actually the Congress, that
Speaker 2: took care of the debt sealing problem. I wonder what
Speaker 2: you make of that package, and maybe more specifically, what
Speaker 2: it means for the fiscal policy of the United States
Speaker 2: of America.
Speaker 4: David, Before I say something about the debt limit issues,
Speaker 4: I want to just say that with that behind us,
Speaker 4: with these employment figures, with the general evidence of robustness
Speaker 4: in the economy, I think the lower risk strategy is
Speaker 4: for the FED to raise rates in June. It's a
Speaker 4: close call, and if they don't raise rates in June,
Speaker 4: I think they have to be open to the possibility
Speaker 4: that they may have to raise rates by fifty basis
Speaker 4: points in July if the economy continues to stay way
Speaker 4: hot and if inflation figures are robust. I saw that
Speaker 4: some of the governors have been saying that maybe the
Speaker 4: FED can move to a mode of raising rates by
Speaker 4: twenty five basis points only every other meeting. It's certainly
Speaker 4: possible that that's a mode that they can move into,
Speaker 4: but for there to be any sense of commitment to that,
Speaker 4: given the risks, would I think be repeating the kind
Speaker 4: of mistakes that the FED has made repeatedly over the
Speaker 4: last several years. I vacillated after the first run of
Speaker 4: serious banking issues, but seeing where we are now seeing
Speaker 4: the general picture in markets, I think we are again
Speaker 4: in a situation where the risks of overheating the economy
Speaker 4: are the primary risks that the FED needs to be
Speaker 4: mindful of. And of course that's just reinforced by the
Speaker 4: fact that we've put the debt limit and the potential
Speaker 4: loss of confidence from it very much behind us by
Speaker 4: reaching this deal. Look, the thing I'm worried about coming
Speaker 4: out of this deal is.
Speaker 1: Not what happens in the near term.
Speaker 4: The irs provisions there, I think are really a serious error,
Speaker 4: and we're missing a chance to catch lots of people
Speaker 4: who have just cheated on their taxes, who are going.
Speaker 1: To go undiscovered.
Speaker 4: And because we're not investing enough, we're gonna probably have
Speaker 4: even more people playing the audit lottery. And that's a mistake,
Speaker 4: best serious mistake. But I think the really big issue
Speaker 4: that focus is going to need to turn to is
Speaker 4: the long run fiscal picture of the country. CBO says
Speaker 4: that we're headed to a projected deficit more than twice
Speaker 4: as large as the one we had when we set
Speaker 4: off the Simpson Bowls process, more than seventy five percent
Speaker 4: larger than the one that was there when Bill Clinton
Speaker 4: came in as president, And there are all sorts of
Speaker 4: reasons to think that the CBO estimate is way optimistic.
Speaker 4: I don't believe for a moment that three month treasury
Speaker 4: bill rates are going to average two point three percent
Speaker 4: over the next decade. I don't believe for a moment
Speaker 4: that defense spending as a share of GDP is going
Speaker 4: to fall by twenty percent over the next decade. If
Speaker 4: anybody believes that one hundred percent of the Trump tax
Speaker 4: cuts are going to be terminated when they come up
Speaker 4: for renewal in twenty twenty five, I'd be happy to
Speaker 4: make them a bet, or even happier to sell them
Speaker 4: a bridge, because they're very gullible. So I think if
Speaker 4: you look at the numbers in the right serious way,
Speaker 4: you're looking at projected budget deficit that could approach or
Speaker 4: exceed ten percent of GDP.
Speaker 2: Well that's fascinating there, because I don't want to say
Speaker 2: you're sounding a little bit like Kevin McCarthy, but you
Speaker 2: are concerned about the deficit and the debt. Let me
Speaker 2: talk to you about how we should look at that problem.
Speaker 2: You just talked about the ratio of the debt to
Speaker 2: the GDP. You wrote a paper with Jason Furman a
Speaker 2: few years back saying it really is the question of
Speaker 2: the size of the debt service against GDP. There's a
Speaker 2: report in Bloomberg this week. He said, that's with Janet
Speaker 2: Yell in the treasure sectory's looking at and then if
Speaker 2: she looks at that regio, it's not that disturbing. Should
Speaker 2: we be looking at it through that lens?
Speaker 4: Look when you look at it in terms of debt service, David,
Speaker 4: what that depends on, obviously, is what the level of
Speaker 4: the interest rate is. And if you believe CBO that
Speaker 4: the one month or three month treasury rate is going
Speaker 4: to stay below two and a half for ten years,
Speaker 4: then you can be serene about debt service. But that's
Speaker 4: a kind of assume, a can opener approach, my guests,
Speaker 4: Given all the debt that we're accumulating, given what the
Speaker 4: Fed's going to have to do to contain inflation, is
Speaker 4: that rates are going to have to be substantially higher
Speaker 4: than that.
Speaker 1: And if you take a.
Speaker 4: More realistic approach, you are looking at debt service levels that,
Speaker 4: whether you use the nominal interest or the real interest rate,
Speaker 4: are getting very close to the levels that Furman, and
Speaker 4: I said would would be dangerous. So I think it's
Speaker 4: absolutely right to focus on debt service as the issue.
Speaker 4: But we have in part because of all the massive
Speaker 4: QE where the FED, which is after all an arm
Speaker 4: of the government, has brought up all the long term bonds.
Speaker 4: We're now running the country's finances like a homeowner with
Speaker 4: a floating rate mortgage.
Speaker 2: So Larry finally put this all together. If you would
Speaker 2: take the really robust jobs numbers that we've talked about,
Speaker 2: put it together with what you're admonishing the FED, they
Speaker 2: should be at least willing to put on the table
Speaker 2: fifty basis point rate hikes in order to get our
Speaker 2: arms around inflation. Given how strong the economy is. Where
Speaker 2: are you now on recession? Because people are talking about
Speaker 2: recession for a long time. You've been talking about I've
Speaker 2: been talking about a lot of people. Have we keep
Speaker 2: putting out the time for it. Where are you on
Speaker 2: the likelier recession? When is it hit?
Speaker 4: David? I still think that it is soft landings are
Speaker 4: very unlikely, that it's unlikely that inflation will come down
Speaker 4: to the two range without an economic downturn, And in
Speaker 4: a way, it's a policy choice when that downturn comes
Speaker 4: and we have put it, we have put it off.
Speaker 4: The worry is that when you delay taking your medication
Speaker 4: and then you only take part of your medication until
Speaker 4: you feel better, you don't really get cured and there
Speaker 4: ends up being more pain down the road. It sure
Speaker 4: doesn't look to me like we're going near recession before
Speaker 4: the end of the summer. And if I had to
Speaker 4: guess right now, I think the FED will end up
Speaker 4: doing enough to restrain inflation and that's going to mean
Speaker 4: a quite soft economy sometime in twenty twenty four.
Speaker 1: But the dynamics are very difficult to gauge.
Speaker 2: Okay, Larry, it's always such a pleasure having with us.
Speaker 2: That's Larry Summers of Harvard, our special contributor here on
Speaker 2: Wall Street Week. Coming up, What do you do when
Speaker 2: you can't believe your own eyes or ears or even
Speaker 2: your own lawyer. That's next time, Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston, Investigat It
Speaker 2: takes into account environmental, social and governance issues. Has been
Speaker 2: all the rage with Bloomberg estimating that ESG funds will
Speaker 2: reach over fifty trillion dollars worldwide by twenty twenty five.
Speaker 2: But the issue has become increasingly politicized in the United
Speaker 2: States in sharp contrast with Europe and with Canada. To
Speaker 2: explain that gap and where it could take us, welcome
Speaker 2: dow Eileen O'Connor, Rockefeller Foundations, Senior vice president for Strategic
Speaker 2: Communications and Policies. So, Aileen, thank you so much for
Speaker 2: joining us. What are you hearing in terms of a
Speaker 2: divergence possible divergence between Europe and the United States.
Speaker 11: Well, there's incredible frustration of US pension funds because they
Speaker 11: understand that this is actually bad for business and particularly
Speaker 11: bad for their investors. And we're already seeing that in
Speaker 11: some conservative states where there's proposed ANTIEESG legislation, some of those,
Speaker 11: even Republican pension fund managers are pushing back and saying
Speaker 11: that it's going to cost their pensioners billions of dollars,
Speaker 11: both in fees to convert and to pull out of investments,
Speaker 11: but also in losses over the next few years. And
Speaker 11: the reason for this is that if the United States
Speaker 11: businesses don't start investing in the technologies that going to
Speaker 11: abate greenhouse gas emissions and also adapt to a warming climate.
Speaker 11: We are going to be losing out as a country
Speaker 11: and as an economy because Europe and Asia and particularly
Speaker 11: China are investing in these technologies because they understand that
Speaker 11: climate change is very real, that human activity and fossil
Speaker 11: fuels are major causes, as well as some of the
Speaker 11: ways we grow our food and use other technologies, and
Speaker 11: so they are now already converting their energy systems. They
Speaker 11: are investing in battery storage, electric vehicles, electric stoves.
Speaker 6: And other things.
Speaker 11: And the United States business if there is a chilling
Speaker 11: effect by this ANTIESD legislation, it's business that's going to
Speaker 11: lose out and also consumers and the economy in general.
Speaker 2: Before you even get to the investment, so you can
Speaker 2: talk to it and just about talking about it, because
Speaker 2: we're having difficulty sometimes getting people even to come on
Speaker 2: and talk about the issue because it's so politicized and
Speaker 2: there's actually partisan politics going on with people's houses. They're
Speaker 2: sending up picket lines and people's houses. Are you having
Speaker 2: a difficult time getting even be able to discuss it publicly?
Speaker 11: Yes, I'm also was a corporate lawyer, and I've been
Speaker 11: speaking to some of my former partners who are representing
Speaker 11: companies and who are basically afraid to talk about the
Speaker 11: fact that these investments are good investments. I mean, over
Speaker 11: the years, investing in new technology says driven down the
Speaker 11: cost of solar and is driving down the cost of
Speaker 11: battery storage. These are very good investments and they will
Speaker 11: actually lead to economic growth. The other thing is these
Speaker 11: businesses know that they have to also know they have
Speaker 11: to address climate change, because they have to address the
Speaker 11: risk of climate change.
Speaker 6: We already know that even this year.
Speaker 11: Alone, we've had seven billion dollar climate weather events, that's
Speaker 11: what Noah calls them. They actually caused over a billion
Speaker 11: dollars worth of loss and damage to businesses and to
Speaker 11: people in the United States. And those instances are rising
Speaker 11: tremendously over the last few years. And so that is
Speaker 11: another thing that.
Speaker 6: Businesses want to do.
Speaker 11: They want to make profit, but they want to avoid
Speaker 11: costs obviously, and so that's a risk that they are
Speaker 11: also looking at. And I would also say that you know, interestingly,
Speaker 11: Norway's sovereign Wealth fund is really taking that risk seriously.
Speaker 11: They're basically saying that they're not going to invest in
Speaker 11: companies that don't take mitigation of climate risk into account
Speaker 11: when they're making investments. They will actually deep disinvest from
Speaker 11: those companies, is what they're saying in a.
Speaker 2: Statement, I think it's really great to talk to you.
Speaker 2: Thank you so much. That's Eileen O'Connor of the Rockefeller
Speaker 2: Foundation list that does it for this episode of Wall
Speaker 2: Street Week, I'm David Weston. This is Bloomberg. See you
Speaker 2: next week.