Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: I mean may not have an overall recession. We're having
Speaker 2: a rolling recession. A kind of role looks pretty strongly
Speaker 2: is when it comes to jobs.
Speaker 1: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI through.
Speaker 1: The eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: Gebro Lair of the Paulson Institute, Glen Hubbard of the
Speaker 2: Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio Time.
Speaker 3: In is everything for the FED, for the banking sector,
Speaker 3: and for asset managers. This is Bloomberg Wall Street Week.
Speaker 3: I'm Romain Bostic and for David Weston. This week Barkley
Speaker 3: CEO CS Bencotta Krishnan on his vision for investment banking.
Speaker 4: You bring it all together, and you're talking about us
Speaker 4: thinking about the next generation of leadership of the investment bank.
Speaker 3: Former Treasury Secretary Larry Summers on whether the FED spight
Speaker 3: the curb inflation is working.
Speaker 5: I found the Fed's action a little bit confusing.
Speaker 3: And CBR CEO Bob Selontek on how interest rates are
Speaker 3: reshaping America's biggest.
Speaker 6: Cities, San Francisco.
Speaker 7: That's probably the toughest story out there in office buildings.
Speaker 3: There was a big sigh of relief on Tuesday. From
Speaker 3: Wall Street to Main.
Speaker 8: Street to the hulls of the Federal Reserve.
Speaker 3: The Consumer Price Index released a rise of just four
Speaker 3: percent year over year.
Speaker 8: That's the smallest game.
Speaker 3: Going back to March of twenty twenty one, and it
Speaker 3: suggests that the lag effects of a fifteen month rate
Speaker 3: tightening cycle are lagged no more.
Speaker 9: I have been consistently in the camp that we would
Speaker 9: see some slowing in growth, put no recession, and that
Speaker 9: we could see inflation come down. And part of that
Speaker 9: is because I've had confidence in the Fed.
Speaker 3: Then on Wednesday, a fresh report on supply side inflation
Speaker 3: hit that showed producer prices rising at the slowest pace
Speaker 3: since twenty twenty, normalizing supply chains and a broad cooling
Speaker 3: and commodity costs Aiding that trend. Two big data points
Speaker 3: this week in a disinflationary trend that ultimately gave the
Speaker 3: Fed enough confidence to stand down after hiking rates ten
Speaker 3: straight times. The FMC decision to hold fire it was unanimous,
Speaker 3: and you can call it a pause if you want,
Speaker 3: but don't you dare call it a skip.
Speaker 1: I think that the skip, I shouldn't call it a skip.
Speaker 10: The decision makes sense.
Speaker 3: Pal making it clear that the US economy isn't out
Speaker 3: of the woods yet and more rate hikes could come.
Speaker 11: I still think and my colleagues agree that the risks
Speaker 11: to inflation are to the upside.
Speaker 3: Still, less than a day after the FED left borrowing
Speaker 3: costs unchanged, the European Central Bank raised its deposit rate
Speaker 3: to the highest in more than two decades. But investors,
Speaker 3: they're betting that after four percentage points worth the hikes,
Speaker 3: the ECB, along with other major central banks, they're finally
Speaker 3: at the final stages and they're onslot against the global
Speaker 3: inflation shock.
Speaker 12: We are determined to reach our target in a timely
Speaker 12: manner and to continue to apply the principles that have
Speaker 12: applied today, data dependency, the three elements of the reaction function,
Speaker 12: and moving meeting by meeting.
Speaker 3: Meanwhile, the European banking sector entering a new era, ubs
Speaker 3: completing the government broker takeover of its story.
Speaker 8: Swiss rival Credits sue.
Speaker 3: It's the biggest global banking merger since the two thousand
Speaker 3: and eight financial crisis, and time finally may be up
Speaker 3: for Chrispinoti, ousted from his London based investment firm, A
Speaker 3: makes sexual assault allegations. Od Asset Management now hiving off
Speaker 3: its funds and.
Speaker 8: Employees, a move that would likely signal.
Speaker 3: The end of the multi billion pound firm altogether. Clients
Speaker 3: and business partners up against the clock right now to
Speaker 3: get their money out.
Speaker 13: We're in the process of moving away from their basis.
Speaker 8: And back here.
Speaker 3: In the US, stocks scoring their best week since March,
Speaker 3: the S and P five hundred climbing more than two
Speaker 3: percent and the Nasdaq one hundred jumping by almost four
Speaker 3: That move higher in the US match by moves overseas,
Speaker 3: Japanese stocks pushing to their highest since nineteen ninety, the
Speaker 3: German Dacks closing at a record high, one of the
Speaker 3: main gauges tracking emerging market equities advancing for a third
Speaker 3: straight week.
Speaker 8: Even commodities got.
Speaker 3: Bought, posting their strongest weekly performance as a group going
Speaker 3: back to November. Joining US now to walk us through
Speaker 3: what happened this week and well, what could happen in
Speaker 3: the weeks ahead Sonala, Sig Franklin Templeton, Tick's income CIO,
Speaker 3: and Bloomberg Managing editor Tracy Alloway, the co host of
Speaker 3: the very popular Odd Lots podcasts. So I'll start with you,
Speaker 3: and I'll start with that FED meeting on Wednesday and.
Speaker 8: That press conference.
Speaker 3: Not necessarily a surprise what they did, but were you
Speaker 3: surprised at what Powell had to say?
Speaker 14: So, you know, I actually feel in some ways that
Speaker 14: Powell got a little bit of the short end of
Speaker 14: the state this time around. Historically been quite critical of
Speaker 14: the communication that the FED does, but I think this
Speaker 14: time around they paused for a very valid reason. They
Speaker 14: hadn't guided the market. Well valid in some people's minds.
Speaker 14: This FED doesn't like surprising the market, and it chose
Speaker 14: not to do so. However, I think they really made
Speaker 14: it clear that sometimes a pause is really just a pause,
Speaker 14: and that's what this meeting was. Prior to the meeting,
Speaker 14: there was a reasonable quantity of people who thought reasonable
Speaker 14: portion of the market which believed that the pause was
Speaker 14: really the end of the hiking cycle.
Speaker 9: It's not.
Speaker 14: That's abundantly clear, And I think that we saw action
Speaker 14: from the Bank of Canada from the Reserve Bank of Australia.
Speaker 14: Both in recent weeks have come back, recent months have
Speaker 14: come back from pauses, and so I think the market
Speaker 14: is beginning to be more realistic about what the Fed's
Speaker 14: outlook is.
Speaker 3: Yeah, how do you feel about that, Tracy? We say
Speaker 3: a pause is just a pause. And of course even
Speaker 3: j Powell had that Freudian skip during the press conference.
Speaker 3: There is there some distinction that we should be paying
Speaker 3: attention to here Freudian skip.
Speaker 15: Was that a Freudian slip of your own their romain
Speaker 15: or all day long?
Speaker 11: We think it will create some of the most valuable
Speaker 11: companies market's ever seen, and I think it's certainly driven
Speaker 11: companies like Cisco, given them the life that they've had.
Speaker 11: It's obviously also spectacularly volatile, but the market is pulled
Speaker 11: back in this sector since it became public, since it
Speaker 11: began in nineteen ninety five, it's pulled back thirty to
Speaker 11: fifty percent at least seven or eight times.
Speaker 8: All Right, A blast from the past there.
Speaker 3: Henry Blodgett, then the Internet analyst over at Merrill Lynch
Speaker 3: back in June of two thousand, when he appeared with
Speaker 3: Lewis Ruckheiser on Wall Street Week. Internet stocks were all
Speaker 3: the rage then, and to a certain extent, they're the
Speaker 3: rage now. It's all about AI, artificial intelligence. There are
Speaker 3: a lot of people trying to look for some parallels
Speaker 3: between the AI frenzy that we're seeing today and the
Speaker 3: dot com frenzy, if you will, that we saw back
Speaker 3: in the late nineties and early two thousand.
Speaker 8: Are you finding that parallel?
Speaker 15: There is no doubt that we are going to see
Speaker 15: shades of dot Com in some of the enthusiasm around AI.
Speaker 15: I mean I was looking at in videos valuation before
Speaker 15: I came on here. I think it's something like forty
Speaker 15: two price to sales at the moment, which is a lot.
Speaker 15: And we have seen some companies already start to pivot
Speaker 15: towards AI. So of course a lot of the crypto
Speaker 15: players that aren't doing so well at the moment are
Speaker 15: now talking a lot about this new technology. The one
Speaker 15: difference I think I was actually at an event with
Speaker 15: Mark Barribau, pgim's global equity head this week, and he
Speaker 15: was talking about the difference is a lot of the
Speaker 15: AI winners so far are incumbent companies. There are places
Speaker 15: like Nvidia, places like Microsoft. These are real companies with
Speaker 15: actual revenue, and from that perspective, we are in a
Speaker 15: different place to say, twenty twenty, twenty twenty one, where
Speaker 15: people were betting on the really speculative stuff. I know
Speaker 15: it's a low bar, but it does bear mentioning that
Speaker 15: to some extent, these are people betting on already incumbent,
Speaker 15: established companies.
Speaker 3: That's a good point, and Soanal I want to get
Speaker 3: your thoughts on that, particularly just in the context of
Speaker 3: investor sentiment and really this idea that there does seem
Speaker 3: to be a lot of folks out there who really
Speaker 3: sort of want to, I guess, grab on to that
Speaker 3: next big thing, and at least for right now, it
Speaker 3: seems like it might be AI.
Speaker 14: It does look like this is going to be the
Speaker 14: decade of AI. Really, if you think about the last
Speaker 14: decade as a decade of mobility, that you know, if
Speaker 14: you look at the two thousand and ten twenty twenty.
Speaker 14: I am not an equity specialist. I always make that case,
Speaker 14: but I do think that this decade that we're in
Speaker 14: right now is likely to be the decade of AI.
Speaker 14: I'm not the person to peak individual stocks clearly I'm
Speaker 14: the last person to do so. But if I look
Speaker 14: at the technology, it is something we're very excited about.
Speaker 14: Having said that, there are many other technologies. Whether you're
Speaker 14: looking at what's going on in the field of medicine
Speaker 14: with genomes, there's a lot happening and technology. More broadly,
Speaker 14: AI is very much the flavor of months. So that
Speaker 14: is the element which goes back to what we were
Speaker 14: talking about the dot com to some extent, I'd.
Speaker 3: Say absolutely, and Tracy, I mean, you bring up a
Speaker 3: good point here about kind of these established players in videos, Microsauce, Alphabet's,
Speaker 3: proven companies with relatively solid balance sheets here, but there
Speaker 3: is certainly some froth in this as well, a sort
Speaker 3: of a lot of second and third tier companies that
Speaker 3: have mentioned AI. Your colleague Joe Wisenthal, the co hosts
Speaker 3: of Odd Lots, I thought, had a great point when
Speaker 3: he talked about Kroger, a grocery store chain, where the
Speaker 3: CEO mentioned AI eight times on the conference call. I'm
Speaker 3: having a hard time making that connection, but I don't know,
Speaker 3: maybe they know something we don't.
Speaker 15: I mean, look, I do think there is a danger
Speaker 15: here that everyone starts using AI as basically a synonym
Speaker 15: for every type of software that's currently an existence. I
Speaker 15: can see that happening. However, when it comes to the
Speaker 15: Kroger earnings call, sure he said AI eight times, but
Speaker 15: the stock still went down, which to me suggests that
Speaker 15: people are still being somewhat rational about this. That said,
Speaker 15: there are plenty of pockets of irrationality in the market.
Speaker 15: So there's something called the bubble portfolio that GAM portfolio
Speaker 15: manager Paul McNamara put together many many years ago, and
Speaker 15: it contains a bunch of stuff like Tesla, Netflix, Chinese
Speaker 15: tech companies, real estate developers. That thing has shot back
Speaker 15: up I think something like thirty percent so far this year,
Speaker 15: which is about double the S and P performance. So
Speaker 15: clearly people are piling back in to some low quality names.
Speaker 15: That said, a lot of those names are coming off
Speaker 15: of significant lows. So what does it mean if a
Speaker 15: company goes from you know, ten bucks to twenty bucks.
Speaker 15: That's doubling a performance, but it's still relatively low compared
Speaker 15: to prior history.
Speaker 3: Thanks to both of you, a great conversation. Tracy Alloway,
Speaker 3: she's managing editor here at Bloomberg and co host of
Speaker 3: the Odd Lots podcast and Sonaltasi Franklin Templeton CIO for fixed.
Speaker 8: Income coming up.
Speaker 3: Whether or not bosses want their employees back in the office,
Speaker 3: the economy certainly does. Cbre CEO Bob Solentik says office
Speaker 3: vacancies might be.
Speaker 8: The new norm.
Speaker 7: You really are seeing a push from companies to get
Speaker 7: people back in. I do not think it's going to
Speaker 7: go back to where it was.
Speaker 8: That's next on Wall Street Week on Bloomberg.
Speaker 2: Commercial real Estate, Bloomberg estimates it to be a twenty
Speaker 2: trillion dollar market, one that benefited from years of low
Speaker 2: interest rates, but all that changed when the FED height
Speaker 2: rates at record speed.
Speaker 15: Rates go up, financial conditions titan, and then what happens
Speaker 15: is that consumption drops, investment drops, and then we get
Speaker 15: job destruction.
Speaker 2: Even as offices remained empty in the wake of the pandemic.
Speaker 5: It's shocking to me that the vacancy rate for commercial
Speaker 5: space in San fran is thirty.
Speaker 2: Five percent, hitting valuations hard.
Speaker 3: You're seeing the office buildings that had a six hundred
Speaker 3: million dollar valuation or a three hundred million dollar valuation
Speaker 3: being sold for maybe fifty or sixty.
Speaker 2: With the potential for the problem to spread to the
Speaker 2: banking sector, particularly for the regional banks responsible for much
Speaker 2: of the commercial real estate.
Speaker 16: I think you're going to see more bank failures, likely
Speaker 16: in the small bank So it's not going to be
Speaker 16: the big headlines and the size of the failures we
Speaker 16: had so far. But I think there's more problems under
Speaker 16: the surface.
Speaker 10: Well.
Speaker 2: Banking experts like Roger Cohen say it may be a
Speaker 2: more narrowly focused problem than some think.
Speaker 17: I think only a small slice of commercial real estate
Speaker 17: is really being effective, and that slice is office buildings
Speaker 17: in a few metropolitan areas, and even there there are
Speaker 17: vast differences in credit quality.
Speaker 2: And Steve Ross have related insists that the problem does
Speaker 2: not extend to the top tier of office buildings.
Speaker 13: Chennas today are looking to find class office buildings that
Speaker 13: are new, that embody all the latest and technology and
Speaker 13: where people want to work. It's really the class speed
Speaker 13: buildings where the carnage will take place.
Speaker 2: But any way you cut it, as banking goes, so
Speaker 2: goes commercial real estate.
Speaker 10: The key to commercial real estate today, though we'll be banking.
Speaker 5: If the industry can't get a construction loan, real estate
Speaker 5: will have a recession.
Speaker 2: And to take us into the world of commercial real estate,
Speaker 2: where it is now, where it's going. Welcome to someone
Speaker 2: who knows it terribly well. He's Bob Salentek.
Speaker 8: He is the.
Speaker 2: President and CEO of CBRE. Thank you so much for
Speaker 2: joining us.
Speaker 10: Bob.
Speaker 6: Great to have you here in Wall Street Week. Thanks
Speaker 6: for having me, David, really nice to be with you.
Speaker 2: So we hear a lot abot commercial real estate right now,
Speaker 2: not all of it good, a lot of focused on
Speaker 2: office buildings, but we've learned that commercial real estate is
Speaker 2: more than just office buildings.
Speaker 8: It's part of it, but not all of it.
Speaker 2: Give us a sense of overall how commercial real estate
Speaker 2: is doing well.
Speaker 7: Of course, office buildings are the most difficult part of
Speaker 7: the commercial real estate story today when you look at
Speaker 7: other asset classes, so for instance, industrial buildings, which is
Speaker 7: a big asset class, medical office buildings, hotels, life sciences buildings, multifamily,
Speaker 7: institutional quality apartment buildings. Basically very strong fundamentals. And when
Speaker 7: I say fundamentals, I mean the following well leased, in fact,
Speaker 7: some of them historically well leased, strong rental rates and
Speaker 7: upward pressure on rental rates in a lot of cases,
Speaker 7: not a lot of new supply coming on. That's what
Speaker 7: we mean by fundamentals, and when you get beyond office buildings,
Speaker 7: the fundamentals and the commercial real estate group of asset
Speaker 7: classes are generally very strong. And even within office buildings,
Speaker 7: there's a slice of office buildings. I'm going to say
Speaker 7: for thirty to forty percent of them, these newer, better configured,
Speaker 7: better infrastructure office buildings where companies are trying to create
Speaker 7: a really high quality experience for their employees to get
Speaker 7: them back in the office.
Speaker 6: Those assets are doing quite well.
Speaker 7: So the headlines, the headline grabbing stories of an eighty
Speaker 7: percent vacant office building, that's an anecdote. That's not a
Speaker 7: proxy for what's going on on a commercial real estate.
Speaker 2: So when you talk about the newer buildings, we're learning
Speaker 2: to call them a's or A pluses as oppos the
Speaker 2: b's and c's. Yes, but if you take a look
Speaker 2: at commercial estate, the office portion of it right now,
Speaker 2: how much of it's A, how much of it be
Speaker 2: how much of C?
Speaker 6: Would you say? In general?
Speaker 7: Well, I think if you look at true A or
Speaker 7: A plus, it's maybe a quarter of the a quarter
Speaker 7: of the space out there. But you could go down
Speaker 7: a little further and have some very nice buildings that
Speaker 7: if upgraded appropriately, would be true a's and then you
Speaker 7: probably have the bottom core quarter or so that are
Speaker 7: real problematic buildings that are either going to have to
Speaker 7: be mega redeveloped or probably scraped and turned into land sites.
Speaker 7: And then in between you have a variety of different
Speaker 7: kinds of buildings, some of which can be repurposed, maybe
Speaker 7: into multifamily all that's very difficult to do. Some of
Speaker 7: them will be upgraded to Class A buildings, and some
Speaker 7: of them will go the way of land also, so.
Speaker 2: You have different parts to commercial real estate, and then
Speaker 2: within the office part of commercial real estate, you've got
Speaker 2: different classes. Look at what about geography, because another thing
Speaker 2: that we have heard is that it depends on what
Speaker 2: metropolitan area you're talking about. San Francisco may be troubled
Speaker 2: New York, maybe not so great Chicago. But then there
Speaker 2: are others, whether it is Miami, for example, some parts
Speaker 2: of Texas are doing pretty well well.
Speaker 7: You mentioned San Francisco first, So that's probably the toughest
Speaker 7: story out there in office buildings, and it's for more
Speaker 7: reasons than just the tough to get people back in
Speaker 7: the office. First of all, everybody knows that's where so
Speaker 7: much concentration of tech occupancy is those companies have laid
Speaker 7: off a lot of people.
Speaker 6: But David, think about this.
Speaker 7: We all know that the technology companies that are going
Speaker 7: backwards with headcount now are going to go the other
Speaker 7: direction for sure in the long run. We know that's
Speaker 7: going to happen, and that part of what's going on
Speaker 7: is going to come back. And then, of course you
Speaker 7: do have the cyclical thing with the economy being down
Speaker 7: a little bit, and you have the secular thing with
Speaker 7: people not being back in the office as much, and
Speaker 7: technology companies kind.
Speaker 6: Of lead that charge. But by the way, if you.
Speaker 7: See what's going on now, the technology companies are talking
Speaker 7: about getting their people back into the office.
Speaker 2: Talking about it, but they're getting that done. I mean,
Speaker 2: we just this week passed the milestone in New York
Speaker 2: of fifty percent occupancy, and that is by use of
Speaker 2: the sort of security cards they know they're actually in
Speaker 2: the office. Is it ever going to come back to
Speaker 2: where it was before?
Speaker 7: Well, New York is a good example of quite a
Speaker 7: bit of the spectrum of what's going on. So in
Speaker 7: class A top quality buildings here in New York, you
Speaker 7: go over to Hudson Yards or you go to one
Speaker 7: Vanderbilt in Midtown across from a Grand Central station. These
Speaker 7: buildings are doing well and they're going to continue to
Speaker 7: do well. And they're doing well because they create a
Speaker 7: great story for the client or for the tenants and
Speaker 7: their people, a great experience for their people.
Speaker 6: Other buildings are suffering.
Speaker 7: More because they don't create that experience, but they're all
Speaker 7: slowly filling up. We did see a flat spot for
Speaker 7: quite a while I'm going to say from earlier this
Speaker 7: year till about now, but we're starting to see it
Speaker 7: rise a little bit again now, and you really are
Speaker 7: seeing a push from companies to get people back in.
Speaker 7: I do not think it's going to go back to
Speaker 7: where it was, and in fact, the work we've done
Speaker 7: would suggest that in the long run, companies are going
Speaker 7: to take maybe eighty percent of the space, maybe as
Speaker 7: little as seventy five percent of the space as they
Speaker 7: previously had.
Speaker 2: So I don't want to put words in your mouth,
Speaker 2: but I think what I'm hearing you say is by
Speaker 2: and large, looking at as far as you can, you say,
Speaker 2: maybe the market has largely discounted what it needs to
Speaker 2: discount at this point.
Speaker 7: Yeah, I think that's probably the case. Now we all
Speaker 7: need to figure out what's going to go on with
Speaker 7: the economy. Right now, the economy has performed better than
Speaker 7: we thought it was going to perform, quite a bit
Speaker 7: better around the world, in fact that there's now an
Speaker 7: expectation that we won't even have a recession in Europe.
Speaker 7: If we ended up with a worse recession than we
Speaker 7: think we're going to get, values would come down further
Speaker 7: because people would stop spending money of all types, including
Speaker 7: try to spend less on rents. But we think values
Speaker 7: have kind of hit the bottom are going to start recovering,
Speaker 7: and we think we believe that we're going to have
Speaker 7: a mild recession that's going to take place later this year,
Speaker 7: be relatively short, and you'll start to see things come back.
Speaker 7: By the way, there is a massive amount of capital
Speaker 7: on the sidelines that wants to invest in commercial real estate,
Speaker 7: and there is a massive amount of real estate that
Speaker 7: wants to be refinanced or sold, and everybody's uncertain about
Speaker 7: what's going on with values. And as soon as we
Speaker 7: have some certainty, as soon as we think interest rates
Speaker 7: and peaked and are coming down, you'll start to see
Speaker 7: those assets trade and get refinanced.
Speaker 2: As in so many places, you need the buyer and
Speaker 2: the cellar to agree on that price.
Speaker 7: Yeah, and you need them to be confident that it's
Speaker 7: kind of gotten where it's going to get to.
Speaker 3: That was David Weston with cbre CEO Bob Silentik.
Speaker 8: Coming up. Former Treasuries Secretary of Larry Summers.
Speaker 3: Gives us a reality check of the Fed's battle with inflation.
Speaker 5: I don't see the idea that we've got a durable
Speaker 5: reduction in inflation clearly established.
Speaker 8: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 3: Monetary policy dominated the week with great decisions from the
Speaker 3: US FED, the European Central Bank, and the People's Bank
Speaker 3: of China. Three big central bank meetings and three divergent outcomes.
Speaker 3: Let's get the view from Larry Summers, former US Treasury Secretary,
Speaker 3: President emeritus at Harvard University and now a special contributor
Speaker 3: to Wall Street Week. Larry, let's talk about the FED
Speaker 3: meeting more importantly, That FED pause not necessarily a surprise,
Speaker 3: but do you think it was appropriate?
Speaker 5: I'm not sure I found the Fed's action a little
Speaker 5: bit confusing. I understand the arguments for not hiking at
Speaker 5: this meeting, but those arguments wouldn't point towards signaling to
Speaker 5: further rate increases. They wouldn't point towards significantly revising the
Speaker 5: forecast towards a stronger economy and more inflation. I understand
Speaker 5: the arguments for having gone the other way, but I
Speaker 5: don't really understand the internal consistency of an approach of
Speaker 5: pausing at this meeting but then signaling to further rate
Speaker 5: hikes down the road, and signaling that they no longer
Speaker 5: expect unemployment to increase nearly as much as they used
Speaker 5: to expect it. So this meeting felt like it was
Speaker 5: driven as much by the internal political dynamics of the
Speaker 5: Fed as by any consistent and coherent reading of the
Speaker 5: economic situation, and that was a bit disturbing to me.
Speaker 3: They raised some of their economic projections, or at least
Speaker 3: they improved a little bit here, but you still have
Speaker 3: a market that seems to be betting on this idea
Speaker 3: of a recession, the idea that the FED itself may
Speaker 3: have actually overtightened, or at least is on its way
Speaker 3: to doing that.
Speaker 10: That would not be my best guess.
Speaker 5: I think it's very hard to read, but my best
Speaker 5: guess is that the consumer, which is seventy percent of
Speaker 5: the economy, appears to be running really quite strong. At
Speaker 5: this point. We've got very strong employment data, much faster
Speaker 5: than population growth. The indicators on wages are a bit mixed,
Speaker 5: but the ones that seem most reliable to me that
Speaker 5: adjusts for changes in the composition of the labor force
Speaker 5: are showing substantial strength. So I don't see the idea
Speaker 5: that we've got a durable reduction in inflation clearly established,
Speaker 5: nor do I see clear evidence of.
Speaker 10: A slowing coming.
Speaker 5: So in that context, I think the FED has probably
Speaker 5: got to maintain a posture of moving towards restraint. I
Speaker 5: don't think it's very serious what the precise timing is,
Speaker 5: and so if they don't move this time and end
Speaker 5: up lifting rates fifty basis points at the next two meetings,
Speaker 5: that's going to be okay as an outcome. But I
Speaker 5: think that they ought to decide what their balancing of
Speaker 5: risks is, and I was struck that the balancing of
Speaker 5: risks it was implicit in not moving today this time,
Speaker 5: was kind of inconsistent with the balancing of risks that
Speaker 5: was signaled by the two tightenings and by the forecast revisions.
Speaker 3: I want to go overseas to China. They had a
Speaker 3: much different policy meeting coming out of the People's Bank
Speaker 3: of China, a cut And there's been a lot of
Speaker 3: discussion here Larry about the health of the Chinese economy
Speaker 3: and light of the data we've gotten and a lot
Speaker 3: of some of the reports by Bloomberg and others that
Speaker 3: they are considering fiscal or at least some sort of
Speaker 3: economic stimulus measures to get that economy back going back again.
Speaker 5: You know, I think the Chinese have a very difficult
Speaker 5: set of challenges ahead of them. They're very serious financial
Speaker 5: overhangs coming out of what's happening in real estate. I
Speaker 5: take a somewhat more medium term view of it, and
Speaker 5: what's an economy about economies about people and it's about capital.
Speaker 5: And what we know is that the number of births
Speaker 5: in China has fallen by almost fifty percent in the
Speaker 5: last six years. Even though they eliminated the one child policy,
Speaker 5: the number of births has kept really falling. And we
Speaker 5: know that Bloomberg reported that the number of millionaires leaving
Speaker 5: China was kind of high by historical standards and high
Speaker 5: by global standards. Now that's a funny measure in a
Speaker 5: lot of ways. But if you look at measures of
Speaker 5: attempted capital flight from China, they look to be pretty strong.
Speaker 10: And if you look.
Speaker 5: At measures of capital inflow, what you saw from Sequoia
Speaker 5: where they were splitting off their China business a week
Speaker 5: or two ago, is indicative of a lot of things
Speaker 5: that are happening, whether it's supply of people, investment in
Speaker 5: new capital.
Speaker 10: I think you've got.
Speaker 5: Some fundamental bets that aren't running that positive in China,
Speaker 5: and that's going to be a challenge along with the
Speaker 5: nearer term issues for the Chinese economy, and so that's
Speaker 5: something that for them I'm worried about. I think that's
Speaker 5: something that's going to point towards there being more softness
Speaker 5: and commodity prices globally than many might have expected, and
Speaker 5: we've seen a certain amount of that in the oil market.
Speaker 3: Let's move over to the European Union, Larry. We got
Speaker 3: the ECB a rate decision, a hike as expected, and
Speaker 3: discussion from Christine Legard that the market should expect additional
Speaker 3: hikes here. When you look at economic conditions over there,
Speaker 3: and you look at monetary policy here, are they in sync?
Speaker 5: You know, I don't think the objective really is to
Speaker 5: have policies in sync. I think the objective is to
Speaker 5: have policies appropriate to particular circumstances and then to let
Speaker 5: exchange rates suggest. And I think the inflation issue is
Speaker 5: probably a more severe one in terms of Europe.
Speaker 10: They haven't moved nearly as.
Speaker 5: Far as we have in the face of somewhat greater threats.
Speaker 5: So I think the European actions were broadly appropriate, and
Speaker 5: I think they're going to very likely need to continue acting,
Speaker 5: especially given that I think that monetary policy in the
Speaker 5: United States is more likely to surprise in terms of
Speaker 5: tighter rates than it is to surprise in terms of
Speaker 5: greater ease.
Speaker 3: Before I let you go, Larry, I mean, I was
Speaker 3: just trolling through your Twitter feed here and I thought
Speaker 3: you tweeted out something related to a pain on the IRS.
Speaker 3: There's been a lot of discussion here about the funding
Speaker 3: for the IRS, about the funding and its capability of
Speaker 3: auditing folks, and more importantly, the return that it gets
Speaker 3: off of those audits.
Speaker 5: Look, we don't have many better investments in government. What
Speaker 5: this study, which is the most careful one done to
Speaker 5: date by my colleagues at Harvard, Nathan Hendron and Ben
Speaker 5: sprung Kaiser, along with government officials, finds is that a
Speaker 5: dollar invested in increased revenues, increased enforcement with respect to
Speaker 5: top one percent taxpayers, people who are audited at a
Speaker 5: rate of only a little more than one percent, people
Speaker 5: who in some cases file returns and the statute of
Speaker 5: limitations runs and the IRS doesn't even notice that a
Speaker 5: greater investment in those that area of tax audits can
Speaker 5: pay off twelve dollars at every extra revenue for every dollar.
Speaker 10: That is invested.
Speaker 5: And it's gotta be in that context penny wise and
Speaker 5: ton foolish to be underfunding.
Speaker 10: The irs.
Speaker 3: Larry, always wonderful to talk to you, Larry Summers. There,
Speaker 3: President emeritith Over at Harvard, former US Treasury Secretary and
Speaker 3: special contributor.
Speaker 10: Here to Wall Street Week.
Speaker 3: Coming up here a new wealth management giant on the block.
Speaker 3: We're going to hear from the Barkley CEO on what
Speaker 3: it means for his business.
Speaker 10: This is Bloomberg.
Speaker 1: This is Bloomberg Wall Street with David Western from Bloomberg Radio.
Speaker 3: This week, banking saw its biggest merger since the financial crisis,
Speaker 3: UBS completing its acquisition of Credit Suite, creating a global
Speaker 3: wealth management powerhouse. We heard from the Barkley ceocs VN
Speaker 3: Kara Christnan. He sat down with David Weston's talk about
Speaker 3: what it means for his bank.
Speaker 4: Credit Suite and UBS's merger has two important consequences. One
Speaker 4: for the financial system as a whole. It has stabilized
Speaker 4: it because a slightly wobbly GCPHI bank is no longer there.
Speaker 4: It's absorbed into UBS in a very solid transaction.
Speaker 10: The second is as UBS.
Speaker 4: Develops its business model, it will be for Barclays both
Speaker 4: an important client for our markets business and a competitor
Speaker 4: for us in investment banking. But that's the way all
Speaker 4: large banks are with each other these.
Speaker 2: Days, Magett, how do you keep score? I mean, one way,
Speaker 2: we look at his price to book and your price
Speaker 2: to book. Right now we're around point four to four.
Speaker 2: You're lagging behind most of your competitors. Do you pay
Speaker 2: attention price to book? And if so, how do you
Speaker 2: get that price to book back up?
Speaker 10: So?
Speaker 4: I pay a lot of attention to price to book.
Speaker 4: It's probably the single most important metric for a bank,
Speaker 4: and a bank's price to book is dependent on one
Speaker 4: of two things, improving the quality of your assets or
Speaker 4: improving your profitability. We have excellent assets, so it's our
Speaker 4: profitability and the scaling of our profitability that we are
Speaker 4: focused on. So within the UK consumer business and the
Speaker 4: investment bank, as I said, we are at scale and
Speaker 4: we look to continue to perform well. And then the
Speaker 4: other three businesses are areas where we would like to
Speaker 4: grow our scale. Our investment bank is about sixty percent
Speaker 4: of the bank. In a way, it's been very successful
Speaker 4: and what we would like to do is while keeping
Speaker 4: its momentum, growing the rest of the bank outside of
Speaker 4: the investment bank.
Speaker 2: How much is the nest mak are the bankers that
Speaker 2: you have because you have had some exodus to Jeffries
Speaker 2: to other places, you've remarked about it, Actually what is
Speaker 2: the issue there? Why are you losing investment bankers? Are
Speaker 2: you losing the ones you want to lose?
Speaker 4: So, first of all, we are losing a few investment bankers,
Speaker 4: but not that much more than what is normal annual turnover.
Speaker 4: I mean this is the period in the first few
Speaker 4: months of the second quarter when people have been paid
Speaker 4: their bonuses, and there's a little bit of musical chairs.
Speaker 4: As you know, it's a time order tradition in this industry.
Speaker 4: We made a management change in our investment bank. We
Speaker 4: spend a lot of time last year thinking about what
Speaker 4: we expected the banking landscape to be over the next decade.
Speaker 4: So what you've seen is rising interest rates, changing business models,
Speaker 4: the importance of sectors that are fairly new to the economy,
Speaker 4: not just technology, but sustainability, mobility, climate, tech. And then
Speaker 4: there is just the different players and the importance of
Speaker 4: the players in the banking market. The private equity groups
Speaker 4: have been very large. Private credit funds are becoming bigger.
Speaker 4: They're slightly dis intermediating what banks are doing. And we
Speaker 4: as we've began with a very American investment bank here
Speaker 4: in the US based from the Lehman acquisition of Barclays,
Speaker 4: and we've grown in Europe, we wanted to put more
Speaker 4: emphasis in Europe as well. So you bring it all
Speaker 4: together and you're talking about us thinking about the next
Speaker 4: generation of leadership of the investment bank, building on our
Speaker 4: strendths in debt capital markets, but growing in equity, is
Speaker 4: growing in m and A growing in Europe. And when
Speaker 4: you do that kind of organizational change, sometimes it has impacts.
Speaker 2: Well, you suggested something I was curious about. It is
Speaker 2: there a strategic shift in emphasis in the investment bank
Speaker 2: a little bit away from United States and toward Europe. Because,
Speaker 2: as I recall, your two coheads before were based in
Speaker 2: the United States. The two coheads now are you based
Speaker 2: in Europe.
Speaker 4: One is in Europe and one is here in the US.
Speaker 4: So it's not a shift so much as an expansion.
Speaker 4: It is to try to give more attention to Europe.
Speaker 4: Relatively speaking, the US remains critically important to US and
Speaker 4: the US businesses or some things, especially in the debt
Speaker 4: capital markets, where we are absolutely leading and we want
Speaker 4: to maintain that position.
Speaker 2: Absolutely in debt capital markets. What about equity? Are you
Speaker 2: shifting toward equity?
Speaker 4: We are trying to expand and grow our business in
Speaker 4: both equities and advisory.
Speaker 2: When you look at US expansion, where would you be
Speaker 2: expanding if you're expanding in I.
Speaker 4: Said, I would love to grow our credit card business
Speaker 4: even more, and then our investment banking and trading businesses.
Speaker 4: As I said, we are the largest non US bank,
Speaker 4: but there's always room to increase our market share and
Speaker 4: our reach.
Speaker 10: That does it.
Speaker 3: For this episode of Wall Street Week, I'm romain pastic.
Speaker 8: We'll see you next week.