Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is Wall Street Week. I'm David Weston bringing you
Speaker 2: stories of capitalism. President Trump has made it a priority
Speaker 2: to get gas prices down below two dollars a gallon.
Speaker 2: What are the chances he'll meet his goal and at
Speaker 2: what cost? Plus money makes the world go round, and
Speaker 2: particularly the money wealthy people bring to their home countries,
Speaker 2: which is why the United Kingdom has to be careful
Speaker 2: about changing incentives to move abroad. And the growing world
Speaker 2: of alternative investments is on the brink of adding another
Speaker 2: asset class investing in the four hundred billion dollar business
Speaker 2: of law firms. But we start with China and the
Speaker 2: United States and how bad things could get from two
Speaker 2: different perspectives. Macroacon Instant special contributor Larry Summers of Harvard
Speaker 2: and economic historian Neil Ferguson of the Hoover Institution. The
Speaker 2: world's biggest economies, the United States and China, have had
Speaker 2: a complicated economic and geopolitical relationship that relies on competition
Speaker 2: and cooperation.
Speaker 3: At the same time, I'm in favor of maintaining a
Speaker 3: working relationship with China. It is too important a country.
Speaker 3: It had made good progress in the economic reform, and
Speaker 3: I think we should not lightly sacrifice the relationship with
Speaker 3: the country with the longest continuing history in Asia, with
Speaker 3: the cultural influence.
Speaker 4: That it has.
Speaker 2: China joined the World Trade Organization in two thousand and one,
Speaker 2: setting the stage for a tumultuous relationship between the United
Speaker 2: States and China that continues today.
Speaker 5: We have a trillion down a trade everythy with China,
Speaker 5: hundreds of millions of downas a year we lose with China,
Speaker 5: and unless we solve that problem, I'm not going to
Speaker 5: make a deal now. I would like to deal with China,
Speaker 5: but they have to solve this surplus.
Speaker 4: With the tariff program, we had a plan, we have
Speaker 4: a process, and now we have a mechanism with our
Speaker 4: Chinese counterparts to prevent an escalation. Again. We're going to
Speaker 4: go into a series of negotiations. They're going to be
Speaker 4: fulsome and we have a lot to talk about. But
Speaker 4: I think over the next ninety days we can accomplish
Speaker 4: a lot.
Speaker 2: President Trump has continued the efforts of his first administration
Speaker 2: to make the economic relationship between the two countries fair,
Speaker 2: initially imposing tariffs as high as one hundred and forty
Speaker 2: five percent before suspending them pending negotiations. Neil Ferguson has
Speaker 2: called it a second Cold War.
Speaker 6: It's eighteen years since I used the term chi America
Speaker 6: for the first time, and the argument back then was
Speaker 6: China and the United States are in a symbiotic relationship,
Speaker 6: but it's not symmetrical. The US does the importing, China
Speaker 6: does the exporting, the US does the consuming, and China
Speaker 6: does the saving. And the argument that I made back
Speaker 6: in two thousand and seven was that this was not
Speaker 6: really sustainable and that at some point Chimerica would turn
Speaker 6: out to be a chimera. It actually took longer than
Speaker 6: I expected to turn sour, but certainly by twenty seventeen
Speaker 6: eighteen we had the beginnings of Cold War II, when
Speaker 6: the rise of China finally elicited a response from the
Speaker 6: United States. The interesting thing, David, is that somehow Chimerica
Speaker 6: and Cold War two seemed capable of coexisting, because despite
Speaker 6: a trade war and a tech war both continued by
Speaker 6: the Biden administration and ramped up by Donald Trump in
Speaker 6: his second term, the United States still imports an enormous
Speaker 6: amount from China. The relationship has been extraordinarily persistent despite
Speaker 6: the growing conflict and the escalation of Cold War two.
Speaker 7: I'd call it hostile codependence. We're codependent with them, We
Speaker 7: depend on them, they depend on us, But our interests
Speaker 7: in the way the world is shaped going forward are
Speaker 7: very different. There can only be one leader in technology,
Speaker 7: so there are also important zero sum competitive aspects in
Speaker 7: the relationship, and the challenge is going to be to
Speaker 7: manage it.
Speaker 2: As much as Larry Summers agrees that the US and
Speaker 2: China need each other, he does think we may be
Speaker 2: wrong about the extent of Chinese economic power.
Speaker 7: I think the big change that from my mind, people
Speaker 7: are underestimating is that China has immense challenges ahead of it. Yes,
Speaker 7: they have done very well in a number of key technology,
Speaker 7: but their population is going to shrink, their debts are immense.
Speaker 7: Their economic adjustment towards a more consumption oriented economy would
Speaker 7: force the Communist Party to give up a lot of power,
Speaker 7: which I don't think they're going to do. You know, David,
Speaker 7: here's a rule. When the American elite tell their children
Speaker 7: to learn a language, it's time to bet against the
Speaker 7: country in question. That was right about Russia in nineteen
Speaker 7: fifty nine. That was right about Japan in nineteen eighty nine,
Speaker 7: and I think it's been right about China in recent years.
Speaker 7: And so I think the key priority for the United
Speaker 7: States is to maintain our strength, but also not to
Speaker 7: put so much pressure on China that we elicit as
Speaker 7: spasmodic response. Neil's the historian, and he's the great expert,
Speaker 7: but many people see this through the prism of Germany
Speaker 7: and Britain before the First World War. I think it's
Speaker 7: also helpful to think about Japan and the United States
Speaker 7: before the Second World War, where a very successful set
Speaker 7: of American economic policies in holding back the Japanese economy
Speaker 7: pushed the Japanese into nationalists desperation, and that was behind
Speaker 7: Pearl Harbor. So I think in the United States we
Speaker 7: need to be very careful and not see this in
Speaker 7: terms of trying to win some great victory against China,
Speaker 7: and not forgetting that codependence probably an inevitability.
Speaker 2: After growing over fourteen percent a year as recently as
Speaker 2: twenty seventeen, China's growth has slumped to an estimated four
Speaker 2: percent in twenty twenty five according to the IMF. But
Speaker 2: the US may not have the economic upper hand China.
Speaker 6: Is a much larger economy relative to the United States
Speaker 6: than any previous challenger. On a current dollar basis, it's
Speaker 6: got to within around seventy percent of US GDP. More strikingly,
Speaker 6: China's manufacturing value added is now twice that of the
Speaker 6: United States, And if you just go back twenty years,
Speaker 6: the roles were reversed. US manufacturing value added around at
Speaker 6: the time that China joined the World Trade Organization was
Speaker 6: roughly twice that of China's. Let's view this from China's
Speaker 6: advantage point. How did the Chinese see the American response
Speaker 6: to their rise. They see it as a rather brutal
Speaker 6: trade war that began with Donald Trump's first term and
Speaker 6: has escalated dramatically at the beginning of his second term.
Speaker 6: But that escalation turned into a game of chicken. And
Speaker 6: in that game of chicken, it was Donald Trump who swerved.
Speaker 6: It was Trump who had to step down, who had
Speaker 6: to pull back from the incredibly high tariffs that he
Speaker 6: imposed in a series of steps on China after being
Speaker 6: sworn in for a second term. So the Chinese look
Speaker 6: at the United States, and I think they often say
Speaker 6: to themselves, these guys have really passed their peak, and
Speaker 6: they don't have a keyherence strategy to deal with us.
Speaker 7: I'm a bit more optimistic than Neil about the relative
Speaker 7: strength of the two economies.
Speaker 8: I think a.
Speaker 7: Large GDP achieved simply by having a large number of
Speaker 7: people doesn't always make you stronger. Ask yourself if Mexico
Speaker 7: was part of the United States, we would have a
Speaker 7: higher GDP as a country, But I think we'd actually,
Speaker 7: in toto and aggregate, probably have a weaker economy in
Speaker 7: terms of our ability to project power. So I am
Speaker 7: a bit more optimistic about the hand the United States
Speaker 7: has to play than Neil, but a bit more disappointed
Speaker 7: by the skill with which we are playing it. I
Speaker 7: share his concern about a potentially very dangerous situation in Taiwan,
Speaker 7: though I would caution that probably to maintain deterrence, it's
Speaker 7: not that we need a capacity to win. We need
Speaker 7: a capacity to inflict enormous and problematic and risky damage
Speaker 7: while maintaining credibility to deter imprudence. And I think that's
Speaker 7: a bit more achievable than Neil suggests.
Speaker 6: Well, there's certainly a risk. I've argued for some time
Speaker 6: that a Taiwan semiconductor crisis would be the equivalent of
Speaker 6: the Cuban missile crisis in Cold War two. But let's
Speaker 6: remember that there's something very distinctive about the US China
Speaker 6: relationship that makes it quite different from the twentieth century
Speaker 6: conflicts and challenges that Larry talked about. China really had
Speaker 6: caught up or was very close to catching up in
Speaker 6: key domains, including artificial intelligence and constant computing. China has
Speaker 6: shown that technological containment of the sort that Jake Sullivan
Speaker 6: recommended when he was National Security Advisor hasn't really worked.
Speaker 7: I am far more worried about dependent shawan China for
Speaker 7: debt than I am dependent on China for rare earths
Speaker 7: or any other specific.
Speaker 2: Product, whether it's competition to technology or dependence on foreign
Speaker 2: investment in US debt. Both Larry and Neil agree that
Speaker 2: the tax and spending bill currently working its way through
Speaker 2: Congress will do little to improve the United States position
Speaker 2: when it comes to China.
Speaker 7: It's not a big, beautiful bill. It's a prescription for
Speaker 7: deadly dangerous. To Cline, it's ill advised, it's imprudent. It
Speaker 7: fails to recognize at all a basic truth that the
Speaker 7: world's greatest debtor is unlikely to stay the world's greatest power.
Speaker 7: We are making a very serious mistake by continuing on
Speaker 7: the phiscal path that we are on. And it's not
Speaker 7: even clear that if we're given more rope, if the
Speaker 7: debts are allowed to grow, that may just be ultimately
Speaker 7: increasing hour of vulnerability. Neil and I are in complete
Speaker 7: agreement on that.
Speaker 6: Well, these relationships are complex, but you could simplify the
Speaker 6: story a bit by just saying, as long as the
Speaker 6: United States consistently runs a large budget deficit, it's probably
Speaker 6: going to run a rather large current account deficit, and
Speaker 6: attacking bilateral trade imbalances is unlikely to overcome that fundamental problem.
Speaker 6: There's nothing in President Trump's big beautiful bill that's currently
Speaker 6: going through Congress that seems likely to reduce the US
Speaker 6: federal deficit from around six or thereabouts percent of GDP up.
Speaker 2: Next is Milan starting to look a bit more British
Speaker 2: a story of how the wealthy are responding to changes
Speaker 2: in British tax law. This is a story about setting goals,
Speaker 2: goals that are realistic, but also that are the right ones.
Speaker 2: Our colleagues Alex Steele and Michael McKee take a look
Speaker 2: at the President's goal of getting gasoline below two bucks
Speaker 2: a gallon.
Speaker 9: A cornerstone of President Trump's economic agenda is lower gasoline prices.
Speaker 10: Energy is going down.
Speaker 5: I see that we had a couple of states where
Speaker 5: gasolene was it a dollar and ninety eight cents a gallon.
Speaker 9: A dollar ninety nine might be a stretch. Now, if
Speaker 9: President Trump gets his wish of forty dollars oil, it
Speaker 9: could be a reality.
Speaker 11: The number one thing that sets the price of gasoline
Speaker 11: is the price of crude oil. And as we've seen
Speaker 11: gasoline prices drop over the past year or so, the
Speaker 11: thing that's driven above all is a price of crude
Speaker 11: oil coming down. So simple as that really.
Speaker 9: Ed Crooks is vice chair of the America's at Wood Mackenzie,
Speaker 9: a leading data and analytics firm. Crooks says, it's possible
Speaker 9: we get another oil price crash like the one we
Speaker 9: had in twenty sixteen, which dragged oil down to twenty
Speaker 9: six dollars a barrel and pump prices to a dollar seventy.
Speaker 11: It's certainly possible that we can get back to a
Speaker 11: point like the situation we were in twenty fifteen twenty sixteen,
Speaker 11: where we had very low oil prices down below forty
Speaker 11: dollars a barrel, and that led to very cheap gasoline.
Speaker 11: So we might have a period maybe a year or
Speaker 11: two with very low oil prices, very low gasoline prices.
Speaker 9: Why is it always feel like prices that the pump
Speaker 9: go up faster than they go down.
Speaker 11: There is some evidence on that. If you think about it, though,
Speaker 11: take a step back, you think about the big picture.
Speaker 11: Then people will say, well, because of these movements, because
Speaker 11: gasoline prices going up fast than they come down, therefore,
Speaker 11: refiners must be making fantastic profits.
Speaker 9: The reality is the price of oil only accounts for
Speaker 9: half of the price of a gallon of gasoline. About
Speaker 9: thirty percent is an equally split between federal and state
Speaker 9: taxes and distribution and marketing moving the gasoline around the
Speaker 9: country and selling it at the gas station. The rest
Speaker 9: are those refining costs and profits.
Speaker 11: Refining is not a hugely lucrative business. In fact, particularly
Speaker 11: right now, profit margins and refining have been squeezed right down.
Speaker 11: It's really hard to make a good return in the
Speaker 11: refining business.
Speaker 9: No one knows that better than Andy Walls, president of Downstream,
Speaker 9: Midstream and Chemicals at Chevron.
Speaker 8: We're trying to buy low and sell high. Is It's
Speaker 8: just like if you were to run a restaurant. The
Speaker 8: raw maateurs you buy and the meals you sell to people,
Speaker 8: that's there the restaurant's crackspread. Same exact concept in refining.
Speaker 9: It's Andy's job to make sure the one point eight
Speaker 9: million barrels of oil products a day that Chevron produces
Speaker 9: flows safely, efficiently, and profitably. More than half of that
Speaker 9: comes from the US. I mean, this is huge. Give
Speaker 9: me some perspective on how bingosal is.
Speaker 8: Yeah, So the whole property is about three thousand acres.
Speaker 8: Most of the processing stuff is on about one thousand acres.
Speaker 8: So it's a really big facility and a lot of
Speaker 8: complex things going on here.
Speaker 9: Chevron's refinery in Pasca Goula, Mississippi, runs twenty four to seven,
Speaker 9: takes thirty five different types of crude and turns it
Speaker 9: mostly into gasoline, diesel fuel for jets, ships, railroads and
Speaker 9: farm equipment, and even propane what you may use for
Speaker 9: your barbecue.
Speaker 8: We're either breaking down molecules, putting molecules back together. We're
Speaker 8: taking some product out of it. Maybe it's sulfur, maybe
Speaker 8: it's a metal. We're squeezing it, we're making it very hot.
Speaker 8: But we're doing a lot of chemical things to take
Speaker 8: a raw material and turn it into a thing like gasoline.
Speaker 9: The oil is separated, pressurized, and heated more than a
Speaker 9: dozen times to keep changing the molecules. It's complicated work
Speaker 9: with razor thin margins.
Speaker 8: And I wish I had more control over margins. I
Speaker 8: really don't. It's based on supply and demand, and if
Speaker 8: margins are good, we really want to run. If margins
Speaker 8: are bad, we still need to run.
Speaker 11: And so I think when people kind of take that
Speaker 11: jump to say this is outrageous the oil companies ripping
Speaker 11: us off and they're making so much money out of refining,
Speaker 11: that's not really accurate at all.
Speaker 9: If refiner greed isn't a hurdle to sub two dollars
Speaker 9: gasoline supply, it might be. Over the past decade, ten
Speaker 9: refiners have closed, either because of damage or because they
Speaker 9: transitioned to process renewable fuels.
Speaker 12: Refineris have been closing down, as you know in the
Speaker 12: US Alon line. Dell shut down earlier this year. So
Speaker 12: this is another problem that, yes, while crude oil prices
Speaker 12: are going to be low. It's not necessarily the same
Speaker 12: case for what we you and I consume, which is
Speaker 12: gasoline and diesel.
Speaker 9: Emory to Sen is the founder and director of Market
Speaker 9: Intelligence and Energy Aspects, a global data and intelligence firm.
Speaker 9: Sen is one of the most prolific voices in the industry.
Speaker 12: The one thing I'm very very confident about is on
Speaker 12: that refined products markets because the volume of refineries we
Speaker 12: are continuing to shut down and just modest demand growth
Speaker 12: for gasoline, diesel and jet will lead us to some
Speaker 12: significantly higher pump prices.
Speaker 9: COVID also did permanent damage to the industry.
Speaker 8: Yeah, COVID was a challenging time for our industry.
Speaker 13: That was hard.
Speaker 8: Running the plant at minimum was hard. In fact, it
Speaker 8: ended up making several refineries in the United States close.
Speaker 8: It was either impossible, uneconomic or super difficult, and we
Speaker 8: lost a lot of refiners in the US and they're
Speaker 8: probably never going to come back. Once you close a refiner,
Speaker 8: I think it's kind of it's kind of the end
Speaker 8: of the line, and it's sad, but that's what happens.
Speaker 9: So what does that do for a supply demand dynamic
Speaker 9: When it comes to say gasoline.
Speaker 8: It makes it tighter. Yeah, if somebody that used to
Speaker 8: make gasoline is no longer making it, others have to
Speaker 8: pick up the slack and have.
Speaker 14: To do it.
Speaker 9: The US hasn't seen a new large refiner since nineteen
Speaker 9: seventy seven. Smaller ones have been built and existing plans
Speaker 9: have expanded. US capacity is now at eighteen point four
Speaker 9: million barrels a day. The real problem is coming. California
Speaker 9: will see almost one fifth of its crude processing capacity
Speaker 9: vanish in the next twelve months after Valero and Phillip
Speaker 9: sixty six IDL combined two hundred and eighty four thousand
Speaker 9: barrels of daily refining capacity.
Speaker 12: The problem is from twenty twenty seven on was if
Speaker 12: you look at our refining kind of global landscape, it
Speaker 12: only gets worse. We've got more closures coming because refining
Speaker 12: is such a slow moving industry right seven years it
Speaker 12: kind of takes to build, and there are no new
Speaker 12: bills in the West anyways. So I think we are
Speaker 12: in for a period of very high refined products prices,
Speaker 12: even if crude doesn't go out, by the way, regardless
Speaker 12: of what you think crude's going to do, And you
Speaker 12: could disagree with me and say, oh no, demand's not
Speaker 12: going to be great, and you know, shale will bounce
Speaker 12: back whatever. We can disagree on that.
Speaker 9: Two dollars gasoline is definitely not a good sign for
Speaker 9: the oil industry. The US is now the largest producer
Speaker 9: in the world, a different dynamic than previous oil sell offs.
Speaker 11: The crude price that you'd need to get gasoline down
Speaker 11: to dollar ninety nine is one that would be absolutely
Speaker 11: miserable for people in the US oil industry. For oil producers,
Speaker 11: it's certainly a level that would lead to job cutsits
Speaker 11: level that would lead to rigs being laid down, people
Speaker 11: drilling less, and so on.
Speaker 13: Most Americans agree they would like lower gasoline prices, but
Speaker 13: that might not actually be good for the country.
Speaker 11: I think, though, you've got to think about gasoline as
Speaker 11: being a bit like a health check brometer, temperature check.
Speaker 11: If you do see gasoline prices really kind of starting
Speaker 11: to plumb the depths and go significantly below where they
Speaker 11: are today, that's probably a sign that oil is not
Speaker 11: well in the world economy.
Speaker 15: We need to think about what's this cycle going to
Speaker 15: look like. Because again, it was not some fundamental shift
Speaker 15: in the market for oil that caused this particular cycle
Speaker 15: to be intensified. It was some tariff policies that may
Speaker 15: or may not be permanent. We don't know how that's
Speaker 15: all going to shake out. The most typical economic reaction
Speaker 15: to uncertainty is to do nothing. You don't buy that car,
Speaker 15: don't buy that house, don't bring out that new product,
Speaker 15: don't make that investment, all of those things. We tend
Speaker 15: to just lay back and do nothing. If the uncertainty
Speaker 15: as to some extent, I think it was a global
Speaker 15: demand coming back pretty quickly. This may be a fairly
Speaker 15: short cycle if that happens.
Speaker 13: Ray Perryman is an economist who's been studying the economic
Speaker 13: effects of oil prices for forty years.
Speaker 15: Most recent study indicated that today if you take the
Speaker 15: oil that's produced in the Permian and then you look
Speaker 15: at the downstream, the upstream, and everything else that happens
Speaker 15: with the oil produced in this region, if responsible for
Speaker 15: about a million jobs to the United States.
Speaker 13: Texas is an intersection of the economic fallout from low
Speaker 13: oil prices and producers taking their foot off the gas.
Speaker 13: Kirk Edwards is an oil and gas producer who is
Speaker 13: seeing the ripple effects in the Permian basin firsthand.
Speaker 16: It's the rest of the country that benefits from the
Speaker 16: gasoline price. Again, people in the middle of Odessa. We
Speaker 16: would rather see higher gasoling process because it means the
Speaker 16: oil process is good and the economy is going to
Speaker 16: be good. But it is a side effect for everybody,
Speaker 16: because everybody has to use gasoline in their cars right
Speaker 16: now to go to work and fly and do things
Speaker 16: like that.
Speaker 13: And that's where we turn next week on Wall Street
Speaker 13: Week when we go to Midland Odessa, the heart of
Speaker 13: the Permian Basin.
Speaker 2: Up next is Milan starting to look a bit more British,
Speaker 2: a story of how the wealthy are responding to changes
Speaker 2: in British tax law. This is a story about the
Speaker 2: rich and famous, or at least about the rich and
Speaker 2: their migratory habits. Global elites are constantly on the move,
Speaker 2: but where they choose to call home or dessert is
Speaker 2: often dictated less by lifestyle than by what they pay
Speaker 2: in taxes. As our London colleague Lizzie Burden reports in
Speaker 2: this global Shuffle of Fortune's, one Italian city is coming
Speaker 2: out on top.
Speaker 1: Nestled away on a leafy street in one of Milan's
Speaker 1: most stylish neighborhoods, lies the former home of famed fashion
Speaker 1: executive Santo Versace. Take a step inside and you'll enter
Speaker 1: The Wild, the private club catering to Milan's rapidly growing
Speaker 1: wealthy class.
Speaker 17: About Milan, it's an hour and a half by plane
Speaker 17: from London. You can drive to the south of France
Speaker 17: in two and a half hours. You can drive to
Speaker 17: the beach in a couple of hours. You can be
Speaker 17: in sam Ritz in an hour.
Speaker 11: And a half.
Speaker 1: Gary Landsberg's been heavily involved in private clubs in London.
Speaker 17: So my first foray into private clubs was with a
Speaker 17: great club, the Arts Club, which was founded in eighteen
Speaker 17: sixty three by Charles Dickens, and I was fortunate enough
Speaker 17: to be able to with my partners acquire the business.
Speaker 17: It's got an amazing history and clubs go back to
Speaker 17: the late eighteen hundreds in London. You have Brooks, Whites,
Speaker 17: all these amazing clubs, Boodles.
Speaker 1: But Gary opened The Wild last year, a club emblematic
Speaker 1: of a global wealth movement into places like Milan, Monaco
Speaker 1: and the Middle East away from London private clubs.
Speaker 17: If you go back to the eighteen hundreds, I think
Speaker 17: there were like three hundred clubs at the time, there
Speaker 17: was a lot and you know over the years Aviv
Speaker 17: in twenty twenty five. In London people still like going
Speaker 17: to private clubs, but unfortunately a lot of the clear
Speaker 17: untail have actually left.
Speaker 1: And that's due in part to the UK government abolishing
Speaker 1: the so called non dom regime.
Speaker 11: We will raise specific taxes.
Speaker 8: We want to win the non dom status completely.
Speaker 2: I think that the super rich trips paid their tax.
Speaker 18: It is a term relatively unique to the UK and
Speaker 18: it's short for non domiciled, so it refers to people
Speaker 18: who have or until very recently have had special tax
Speaker 18: treatment because they were considered non domiciled in the UK,
Speaker 18: meaning that their permanent home is in a different country.
Speaker 1: Nina Scerrow is the CEO at the Center for Economics
Speaker 1: and Business Research in London. Previously a non dom would
Speaker 1: avoid UK tax on foreign income and pay a small
Speaker 1: fee after a few years. Now they won't pay tax
Speaker 1: for the first four years, but then there'll be tax
Speaker 1: like everybody else on their worldwide income.
Speaker 18: In short, it's the beginning of the end of the
Speaker 18: non arm regime. So it is a big tightening of
Speaker 18: the of the rules. The previous big change was in
Speaker 18: twenty seventeen under the Conservative government, where they essentially capped
Speaker 18: the period of fifteen years. They said, if you've been
Speaker 18: here for fifteen of the past twenty years, you can't
Speaker 18: really genuinely say that you're not a non arm But
Speaker 18: this is now making the rules all the title.
Speaker 1: Manchester United owner Jim Ratcliffe famously relocated from Britain to
Speaker 1: Monaco in twenty twenty, in a move that was expected
Speaker 1: to save him four billion pounds in tax payments.
Speaker 10: I wasn't a fan of the non dome change. I
Speaker 10: thought that was very foolish. I mean, you've got sixty
Speaker 10: zersand very wealthy people in London. I do want to
Speaker 10: encourage them to leave and make any sense to me
Speaker 10: because they all bring, you know, enormous value to that economy.
Speaker 1: And now he's being joined by fellow football club owners,
Speaker 1: banking executives and real estate in departing Britain. Last year,
Speaker 1: the UK had a net loss of almost eleven thousand millionaires,
Speaker 1: a one hundred and fifty seven percent jump from a
Speaker 1: year before, which was already the highest number in a decade.
Speaker 17: I think the numbers that will come out in twenty
Speaker 17: twenty five will be shocking, really I think will be shocking.
Speaker 17: The trickle down effect on the economy is huge. Everyone
Speaker 17: who leaves will have people that work from whether it's
Speaker 17: in their business, in their office, in their home.
Speaker 19: And how is it directly impacting your business your investment strategy.
Speaker 17: Well, I think you know, for someone that was pretty
Speaker 17: much heavily invested in London, I'm completely divested from London.
Speaker 17: I have nothing here. I have a few real estate investments,
Speaker 17: but I'm certainly not looking at this stage to invest
Speaker 17: back in to London in the short term.
Speaker 1: But the government is confident it's made the right decision.
Speaker 19: Are you concerned that your non dom tax changes will
Speaker 19: cost more than they raise?
Speaker 20: No, I'm not concerned. We made a Manifesto commitment to
Speaker 20: ensure that non doms do pay their fair share of
Speaker 20: tax in the UK, but combined with a temporary repatriation
Speaker 20: facility which makes it easier for people to bring money
Speaker 20: into the UK without facing punative tax. This is a
Speaker 20: highly mobile group of people. But as well as people
Speaker 20: leaving the UK for a whole variety of reasons, we
Speaker 20: have every year thousands of people, including some of the
Speaker 20: wealthiest people, come to the UK because they can see
Speaker 20: that this is a great place to do business, a
Speaker 20: great place to grow a business.
Speaker 1: The government's Independent Office for Budget Responsibility estimates that twelve
Speaker 1: percent of non doms will leave the UK, but that
Speaker 1: the new regime will offset that by raising almost thirty
Speaker 1: four billion pounds over the next five years. Nina Scerrow
Speaker 1: isn't so sure.
Speaker 18: I think there is a very very good reason to
Speaker 18: think that the government departments are underestimating the extent to
Speaker 18: which people are going to either leave the UK or
Speaker 18: people that would have come to the UK otherwise aren't
Speaker 18: going to common What we have found is that tipping
Speaker 18: point where is the government making money is the government
Speaker 18: losing money? Net is around one in four. So if
Speaker 18: more than a quarter of non doms people currently claiming
Speaker 18: the status are no longer in the UK, that is
Speaker 18: the point at which the government actually starts losing money.
Speaker 18: And looking at the obr's own estimates and some other
Speaker 18: external estimates for how many people might consider leaving the
Speaker 18: UK as a result, twenty five percent is very very
Speaker 18: much within the realm of possibilities. So if you're asking yourself,
Speaker 18: do I want to go to the UK? Do I
Speaker 18: want to stay in the UK? Is this a good
Speaker 18: place to start a business, to grow a business. There
Speaker 18: is more and more ticks in the no column.
Speaker 19: Are you saying that it could affect London status as
Speaker 19: a global financial hoob?
Speaker 11: Yeah?
Speaker 18: And I think absolutely changes to non doms is putting
Speaker 18: a bit of a damper on the status of London globally.
Speaker 18: And that's kind of a continuation, a little bit of
Speaker 18: a trend.
Speaker 1: So if not London, why That's where Marco Characto comes in.
Speaker 21: I'm an Italian tax lawyer, so specialized on tax and
Speaker 21: in that field that it means ever, taxation of corporation,
Speaker 21: taxation of individuals. I would say that my personal practice
Speaker 21: increased towards taxation of individuals in the past years because
Speaker 21: of the new rules.
Speaker 1: The new rules to which he refers are Italy's flat
Speaker 1: tax regime. Individuals pay a flat two hundred thousand euros
Speaker 1: a year on foreign income for up to fifteen years,
Speaker 1: a figure that was doubled last year. We've got all
Speaker 1: of the fiscal pressures, not just in Italy but across.
Speaker 19: Europe and around the world. How likely is it that
Speaker 19: this flat tax can endure? Because of course it's already
Speaker 19: gone u from one hundred thousand to two hundred thousand
Speaker 19: can it last?
Speaker 21: The decision of the government back in August twenty twenty
Speaker 21: four to double the tax from one hundred thousand to
Speaker 21: two hundred thousand has been indeed considered by foreign observers
Speaker 21: from my field as a confirmation of the willingness of
Speaker 21: the government to keep the regime, rather than an indicator
Speaker 21: that the gin might be unstable. Consider that this regime
Speaker 21: is there since twenty seventeen, has never been changed apart
Speaker 21: from this increase, which as an inflation component, because don't
Speaker 21: forget it was introduced eighty years ago, so there was
Speaker 21: an inflationary period. And also there was the willingness of
Speaker 21: the government to contain discussions or debates about the fairness
Speaker 21: of this regime because by increasing and doubling the tax,
Speaker 21: they have willingly restricted the amount of a network individual's
Speaker 21: moving to Milan, thereby reducing the discussion about the furnace.
Speaker 1: Cerato spent most of his life in Milan and has
Speaker 1: watched the city evolved well.
Speaker 21: Milana changed a lot in the last fifty years. At
Speaker 21: the beginning it was an industrial seat. During their years,
Speaker 21: it became a service city. It attracted a lot of people,
Speaker 21: so fifty years ago, most of the people, at least
Speaker 21: the people were wealthy, were MILLENISA. Now it's very difficult
Speaker 21: to find somebody who is purely Milanisa.
Speaker 1: Yet an influx poses its own problems. Real estate in
Speaker 1: Milan has comfortably outpaced wage growth over the past decade,
Speaker 1: with prices rising forty nine percent, while other major Italian
Speaker 1: cities have stayed largely flat or even decreased.
Speaker 17: It's quite small city, it's quite condensed, so they don't
Speaker 17: have a lot of huge developments going on. There's been
Speaker 17: a big influx of expats. They all pretty much want
Speaker 17: to live in the same area, which makes it quite
Speaker 17: difficult first for them to find actually spaces, and second
Speaker 17: of all, because there's not a lot of supply and
Speaker 17: there's a huge amount of demand. What's happening in the
Speaker 17: local community actually is getting out priced because they haven't
Speaker 17: seen She's like this before. The good quality mel real
Speaker 17: estate is certainly seeing a huge increase in values.
Speaker 19: Would you say that Italy is more aware that it's
Speaker 19: in a global competition to attract high network individuals than,
Speaker 19: for example, the UK government.
Speaker 21: I'm not so sure the government is so keen in
Speaker 21: entering into a global competition protect these people. They just
Speaker 21: realized that it's good to have people from abroad with
Speaker 21: high pending capacity making investment. This regime was introduced by
Speaker 21: a left wing government. This counter government is a right
Speaker 21: wing Meanwhile, there weare I think seven governments of different colors.
Speaker 21: All the different parties looked at this regime and decided
Speaker 21: to keep it. So paradoxically, the political instability of Italy
Speaker 21: has been the best test to consider this as a
Speaker 21: stable tax regen.
Speaker 1: Italy's government might not consider itself in a competition to
Speaker 1: attract the wealthy, but it is doing just that, and
Speaker 1: Lansburg says the UK faces an uphill battle to load
Speaker 1: them back.
Speaker 17: You'll get the results of twenty five in twenty six.
Speaker 17: They'll start talking about it. They'll start probably tweaking with
Speaker 17: it by twenty seven, and then everyone will be worried
Speaker 17: about an election in I think twenty nine. And if
Speaker 17: you've kind of been around long enough, you kind of
Speaker 17: see the patterns, and you know, I think you know
Speaker 17: they're they're not going to turn the ship round today, and.
Speaker 1: In the meantime they can always look east to Italy.
Speaker 21: I keep repeating my clients that Italy is a very
Speaker 21: bed place to work if you're in Italian professional or employee,
Speaker 21: because you pay a lot of taxes on your income.
Speaker 21: But it's a very nice place to die because there
Speaker 21: is a net of the flat tax regime. There is
Speaker 21: a very favorable regime on inhericans and gifts.
Speaker 2: Coming next, and you thought lawyers were only a drag
Speaker 2: on the bottom line, Now they may be the next
Speaker 2: big alternative for your investments. Next on Wall Street Week,
Speaker 2: this is a story about turning a cost center into
Speaker 2: an investment opportunity. For generations, lawyers have been a necessary
Speaker 2: cost to be managed and minimized, but now that may
Speaker 2: be changing.
Speaker 22: The legal industry as a whole has become a big business,
Speaker 22: and we've got firms. I think there are fifty eight
Speaker 22: firms that have more than a billion dollars in revenue.
Speaker 2: Lisa Smith is head of the Washington, d c. Office
Speaker 2: of Fairfax Associates, which advises law firms on business strategy.
Speaker 22: The investment opportunity is high. I think the question is
Speaker 22: is how to how to add value, How outside investors
Speaker 22: could add value.
Speaker 2: In the past, when you were looking for exciting new
Speaker 2: investment opportunities, American law firms weren't on the top of
Speaker 2: the list. There's no question that the overall market is big,
Speaker 2: with revenues estimated to total just over three hundred and
Speaker 2: forty three billion dollars in twenty twenty two, up almost
Speaker 2: one hundred billion dollars from ten years before, according to
Speaker 2: the Saint Louis fed But until recently, all that money
Speaker 2: was more or less kept within the protected guild of
Speaker 2: those who'd gone to law school and been called to
Speaker 2: the bar. We lawyers worked for Wall Street, but we
Speaker 2: were something separate and distinct from Wall Street. Just ask
Speaker 2: Professor David Wilkins of Harvard Law School.
Speaker 23: So you and I went to law school because we
Speaker 23: didn't want to do business. It's not just that we
Speaker 23: were not going to business school. It was a sort
Speaker 23: of an oppositional idea, as I think your Justice pile
Speaker 23: one said, but at least distant from business.
Speaker 2: As much as we tend to think of the legal
Speaker 2: profession as tied to traditions going back hundreds of years
Speaker 2: in Anglo Saxon jurisprudence, it has made some fundamental changes
Speaker 2: through the years, starting with who was let into the tribe.
Speaker 2: So we're in this wonderful Casperson Room, which is filled
Speaker 2: largely with the portraits of old white men. But this
Speaker 2: is a big exception.
Speaker 16: Tell us about this.
Speaker 23: It is this is the first class of women who
Speaker 23: came to Harvard Law School, which is both a thing
Speaker 23: to celebrate and also a little to be embarrassed about,
Speaker 23: because these women did not come until nineteen fifty. In
Speaker 23: other words, Harvard Law School had no women prior to
Speaker 23: nineteen fifty, and this is a portrait of that remarkable
Speaker 23: group of women, many of whom went on to do
Speaker 23: quite remarkable things. It's important for us to remember, in
Speaker 23: other words, that it wasn't so long ago that the
Speaker 23: definition of merit did not include fifty percent of the population.
Speaker 2: Social pressures led to changes in the setae sixties and seventies,
Speaker 2: but now it's a new kind of pressure, the financial kind,
Speaker 2: that is pointing to fundamental changes in the way lawyers
Speaker 2: do their work, brought on by an enormous growth in
Speaker 2: the size and complexity of the matters lawyers are taking.
Speaker 14: On the cost of litigation, the time litigation takes, the
Speaker 14: amount of investment a either a law firm.
Speaker 24: Or the plaintive has to make to even be able
Speaker 24: to figure out is that a good enough case?
Speaker 14: How can I win this case?
Speaker 7: It just is.
Speaker 24: Cost prohibitive for the average person and frankly for the
Speaker 24: average firm, because a law firm that takes a contingency case,
Speaker 24: that's not their only contingency case.
Speaker 2: Boris Zeisser is a partner at shirlti Roth, where he
Speaker 2: is cohed of its finance and derivatives practice.
Speaker 24: I think it's the need for the capital, given how
Speaker 24: expensive it is to litigate, that has created this, this
Speaker 24: need for this, for this outside investment.
Speaker 2: As the cases have gotten bigger and more expensive, so
Speaker 2: have the law firms that handle them.
Speaker 23: Top law firm partners are being recruited from one law
Speaker 23: firm to another, and they're being paid something like twenty
Speaker 23: million dollars a year, guaranteed for five years. I used
Speaker 23: to joke that law firm partners are paid like middle relievers.
Speaker 23: They're now being paid like starting pitchers. You start to
Speaker 23: have that in global enterprises, in dozens of locations with
Speaker 23: tens of thousands of people. If you count all the
Speaker 23: you know, the people who are not lawyers who work
Speaker 23: in these organizations, and pretty soon you realize that if
Speaker 23: you're running one of these things, you need not only
Speaker 23: the skills of an excellent lawyer, you need to also
Speaker 23: understand how to manage a complex business.
Speaker 2: The information in the practice of law has already brought
Speaker 2: with it outside investment, largely in the form of litigation finance,
Speaker 2: where investors take an interest in individual cases or groups
Speaker 2: of cases.
Speaker 23: Litigation funding is just the securitization of litigation assets, and
Speaker 23: again it started out as a kind of cottage industry,
Speaker 23: mostly focused frankly on plaintiffs firms who are looking for
Speaker 23: ways to defray the big investment. Increasingly, what we're going
Speaker 23: to see is by the way companies bringing them in
Speaker 23: to bundle cases together. So just like subprime mortgages, for
Speaker 23: better and for worse, we are now seeing litigation as
Speaker 23: an aggregate asset in which people are bundling cases together
Speaker 23: because from the company's point of view, it's an aggregate risk.
Speaker 2: But now there's the possibility of pri financing, not just
Speaker 2: for individual cases or groups of cases, but for the
Speaker 2: law firms themselves.
Speaker 24: Law firms borrow money all the time, and there are
Speaker 24: restrictions in every state on how a law firm can
Speaker 24: take on capital, if you want to call it generically.
Speaker 24: The more recent development was that a few years ago.
Speaker 24: Arizona and Utah as well have created a new structure,
Speaker 24: alternative business structure ABS. It's actually not new. It's new
Speaker 24: in the United States. It has actually existed in the
Speaker 24: UK for over a decade, but it's new here. And
Speaker 24: what that allows a law.
Speaker 14: Firm to do.
Speaker 24: It's still a law firm. It's important to understand an
Speaker 24: ABS is still a law firm, but it's a law
Speaker 24: firm that has obtained a license, has gone through a
Speaker 24: rigorous licensing process with a committee that operates under the
Speaker 24: auspices of the Supreme Court of that state.
Speaker 23: The best example of this is in the UK, which
Speaker 23: shortly after the global financial crisis, began to deregulate what
Speaker 23: its legal structures and markets could look like. One of
Speaker 23: the things that they did was take off the restriction
Speaker 23: that the only capital that could be an a llegal
Speaker 23: organization had to come from lawyers. In other words, you
Speaker 23: couldn't have external capital. They also took off the restriction
Speaker 23: that only lawyers could be partners in legal organizations. Now
Speaker 23: you can have multidisciplinary partnerships. That's meant, for example, the
Speaker 23: Big four accountancy firms are now licensed to practice law
Speaker 23: in the UK.
Speaker 2: The prospect of attracting outside investmental law firms may be
Speaker 2: attractive for the partners and the firms, but it's not
Speaker 2: without its complications. Nearly all states in the US forbid
Speaker 2: lawyers from sharing ownership with non lawyers or even sharing fees,
Speaker 2: except under certain limited circumstances.
Speaker 23: It's not just any business. In other words, it's not
Speaker 23: the same as running a manufacturing company or even running
Speaker 23: an investment bank or edgement, because the people who are
Speaker 23: at the core of this business, who are lawyers, also
Speaker 23: have a set of professional obligations that are not just
Speaker 23: maximizing shareholder profit or short term return. They have larger
Speaker 23: duties and responsibilities to protect and preserve the rule of law,
Speaker 23: which is core to American business, to American society, to
Speaker 23: our freedoms as a nation, to democracy.
Speaker 2: For the profession, the question comes down to whether it
Speaker 2: can pursue both the raising of outside capital and adhere
Speaker 2: to the professional obligations each lawyer pledges to uphold when
Speaker 2: we are sworn into the bar, or as Seisser thinks
Speaker 2: that it can.
Speaker 24: There is a real difference between in the practice of law,
Speaker 24: I think in the business of law and quite frankly,
Speaker 24: having somebody who's not a lawyer, who has the financial
Speaker 24: acumen to help a law firm be more efficient, more profitable,
Speaker 24: function more smoothly, take advantage of the technological whether it's
Speaker 24: AI or any other technological advancement. I think only in
Speaker 24: yours to the benefit of the clients, and the lawyers
Speaker 24: are still subject to the same disciplinary rules, ethics rules.
Speaker 24: Nothing changes based on.
Speaker 2: That, despite some concerns about what it could do to
Speaker 2: the profession. It looks like private investment of various forms
Speaker 2: is coming to law. But is it a good investment?
Speaker 2: As with most investments, the answer is a resounding maybe.
Speaker 24: I would say, could Could it be a good investment? Well,
Speaker 24: it could be. You know, not every investment is ends
Speaker 24: up being a good investment, but that's also in some
Speaker 24: ways similar to investing in any other service business.
Speaker 2: Professor Wilkins recently put the question whether law firms could
Speaker 2: be good investments to some lawyers who also are venture capitalists.
Speaker 23: We did a wonderful two hours on exactly this, in
Speaker 23: which both of the venture capitalists said, I'd be very
Speaker 23: hesitant to invest in a law firm for exactly the
Speaker 23: reasons that you sit.
Speaker 2: And those reasons that make investing in law tricky include
Speaker 2: the fact that the major drivers of revenue, partners and
Speaker 2: their clients can simply walk out the door.
Speaker 24: Lawyers are free to leave. But can it be efficient
Speaker 24: enough and profitable enough to retain the talent that it
Speaker 24: needs in order to thrive and will the investment actually
Speaker 24: help it do those things?
Speaker 22: I think that's the biggest risk factor, and there's I
Speaker 22: think that and that raises the question of what value
Speaker 22: outside of the people side could an investor bring. Is
Speaker 22: it technology know how? Is it building a brand where
Speaker 22: the brand is bigger than the individual partners? And so
Speaker 22: I think there's the question that private equity in particular
Speaker 22: needs to be able to answer, which is what's the
Speaker 22: know how that they're bringing that firms can't do themselves.
Speaker 2: Whatever the risks are hurdles, it looks like private investments
Speaker 2: in the business of law are inevitable. It may not
Speaker 2: be in the room yet, but it's certainly knocking on
Speaker 2: the door of the legal establishment.
Speaker 22: I mean I get calls probably once a month from
Speaker 22: a private equity firm looking to understand the legal industry.
Speaker 22: So there's no question that they are interested in this,
Speaker 22: and they're trying to figure out how to make it work.
Speaker 22: I think unless it can be two plus two equals five,
Speaker 22: there's really no reason to do it. And I think
Speaker 22: that's where you also see the rub.
Speaker 2: That does it for us. Here at Wall Street Week,
Speaker 2: I'm David Weston. See you next week for more stories
Speaker 2: of adolism.