Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: We turn our attention to the markets.
Speaker 3: This week.
Speaker 2: USCPI nembers reinforcing concerns about inflation.
Speaker 1: The financial stories that shape our worth, a.
Speaker 2: Really different reaction to the market. Some more indications of
Speaker 2: just how hot the US economy really is.
Speaker 1: Through 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 Zell Sharman and founder of
Speaker 2: Atrey Group Investments, Bloomberg.
Speaker 1: Wall Street with David Weston from Bloomberg Radio this week.
Speaker 2: There may have been a lot going on, but it
Speaker 2: seemed like all Global Wall Street could talk about were
Speaker 2: those on again, off again talks at the White House
Speaker 2: of the dead Ceiling I Speaker McCarthy kept insisting there
Speaker 2: would be no default provided there were spending guts. We're
Speaker 2: not going to default, but we have to spend less
Speaker 2: than we spent last year. House Minority Leader Hakim Jefferies
Speaker 2: responded that the cuts McCarthy was demanding just go too far.
Speaker 4: House Republicans are determined to either extract deep, painful cuts
Speaker 4: that will hurt the health, the safety, or the well
Speaker 4: being of everyday Americans or crash the economy, and.
Speaker 2: President Biden conceded that there would have to be some
Speaker 2: spending cuts, but that there had to be revenue increases
Speaker 2: as well.
Speaker 5: We've got to get something you can sell to both sides,
Speaker 5: and we need to cut spending.
Speaker 3: But are they revenue matters?
Speaker 2: And through it all, Wall Street insiders like Steve Schwartzman
Speaker 2: continue to insist that in the end they'll work it out.
Speaker 3: Tomhow this is someone of micheal wills and desire to
Speaker 3: not blink in the whole world is watching.
Speaker 2: But despite all the budgets, storm and drawing, there were
Speaker 2: some other things worth paying attention to this week, like
Speaker 2: China's move against Micron selling its chips there.
Speaker 6: Broadly, this action appears inconsistent with the PRC's assertions that
Speaker 6: it is open for business and committed to a transparent
Speaker 6: regulatory framework.
Speaker 2: FED minutes from the last meeting showed how uncertain the
Speaker 2: Central Bank is about where it is heading next.
Speaker 5: But mined show FED officials were more divided than usual
Speaker 5: at their May meeting as they debated uncertainties about bank problems, inflation,
Speaker 5: and the debt limit.
Speaker 2: And Nvidia shot the lights out with revenue projections as
Speaker 2: the world stampedes to AI.
Speaker 6: When you look at the data center market, it is
Speaker 6: white hot. People that are developing data centers don't even
Speaker 6: get them developed before one of the fangs leases for
Speaker 6: thirty years.
Speaker 2: The US economic numbers came in stronger than anticipated, with
Speaker 2: personal and business spending up and the year over your
Speaker 2: PCE core deflators stubbornly up at four point seven percent.
Speaker 2: But the markets for the week pretty much reacted to
Speaker 2: those two other stories, the debt, ceialing negotiations and what
Speaker 2: AI means for tech, with the S and P five
Speaker 2: hundred upo point three two percent for the week ending
Speaker 2: of just over that forty two hundred number of people
Speaker 2: have been focused on and two hundred points above our
Speaker 2: Bloomberg Elves median estimate for the end of the year
Speaker 2: four thousand. Vanasak was up a whopping two point five percent,
Speaker 2: while the yield on the tenure added another twelve basis
Speaker 2: points and in the week just under three point eight percent.
Speaker 2: To take us through the week. In the markets, Welcome
Speaker 2: now Lori Kalvacinas, she's RBC Capital Markets Head of US
Speaker 2: Equity Strategy, and Jillian Teent Financial Times chair of the
Speaker 2: editorial board and editor at large US. So welcome back
Speaker 2: to both of you.
Speaker 7: Laurie.
Speaker 2: Let me start with you and what's going on with
Speaker 2: the markets. Given all of the nervousness on some front
Speaker 2: about the debt, it's surprising, least to me, the equity
Speaker 2: markets didn't really react all that much, did they.
Speaker 8: They didn't. I would say the market's generally been reacting
Speaker 8: by rotating as opposed to pulling money out. And if
Speaker 8: you talk to US based equity investors, they'll tell you, hey, look,
Speaker 8: we've seen this story before. The stakes are high, but
Speaker 8: we think a deal is going to get done. So
Speaker 8: they've moved out of cyclicals and into things like tech
Speaker 8: and defensives, which is generally what you see in debt
Speaker 8: sealing drawdowns. But at the same time, we're hearing from
Speaker 8: the big kind of non US investors that they've been
Speaker 8: very worried about this. They don't know our politics as well,
Speaker 8: So I would say kind of the steadier and the
Speaker 8: more kind of even keeled local investors are taking it
Speaker 8: in stride. That doesn't mean they don't care, that doesn't
Speaker 8: mean the markets won't react if we don't end up
Speaker 8: getting a deal. But there is a patience here that
Speaker 8: makes sense.
Speaker 2: So so, Laurie, what about that recession question, because we
Speaker 2: have been hearing these predictions of a recession in twenty
Speaker 2: twenty three, it was going to be the second quarter,
Speaker 2: it's going to be the third quarter, and it's a
Speaker 2: fourth quarter. Is it just a matter of timing or
Speaker 2: is there a question even whether there will be a recession.
Speaker 8: I think there's a question, a legitimate one, about whether
Speaker 8: or not we're even going to get it, or if
Speaker 8: you end up getting something similar to twenty fifteen twenty sixteen,
Speaker 8: which was pretty close but not quite. And I think
Speaker 8: what's interesting, and I see this more from the lens
Speaker 8: of earnings, is that we're in an asynchronous cycle in
Speaker 8: terms of the economy. There are different industries and different sectors.
Speaker 8: They're going through different processes at different points in time.
Speaker 8: If you think about sort of your inflation, you know
Speaker 8: sort of beneficiaries, the beneficiaries of higher interest rates, things
Speaker 8: like financials and energy they saw big upward revisions last year,
Speaker 8: while tech companies, growth companies, supply chain centric sectors were
Speaker 8: all seen downward revisions. Now the tables have turned everything
Speaker 8: that was getting hurt last year as in a recovery,
Speaker 8: and things that were benefiting from inflation and interest rates
Speaker 8: stramping are seen their downward revision cycle. That's a very
Speaker 8: very confusing cross current, but if you spread the pain
Speaker 8: out a bit, you could actually skate by without a
Speaker 8: true sort of recession happening.
Speaker 2: One more before we turn to everybody's favorite topic, which
Speaker 2: is of course artificial intelligence. But Jillian, to you, you
Speaker 2: mentioned the FED and what the FED is likely to do.
Speaker 2: We got some strong numbers in this week, actually indicating
Speaker 2: both on the inflation staying up but also the economy
Speaker 2: being quite strong. Where do you think the FED is heading?
Speaker 2: Do you think they're going to continue to rise at all?
Speaker 2: And by the way, if you want to, you can
Speaker 2: give us the job's number for next Friday. It's okay.
Speaker 3: Well, if I did that, i'd be a trader.
Speaker 9: I think the FED is under pressure to keep raising,
Speaker 9: keep tightening. It may skip that for this coming meeting
Speaker 9: and do a wait and see stance, but I certainly
Speaker 9: don't think it's going to cut any time soon. And
Speaker 9: I'm actually think the market projections of twenty five bases
Speaker 9: point rise now is quite reasonable given the fat that
Speaker 9: we still haven't seen a significant decline in the inflation rate,
Speaker 9: and the economy hasn't yet shown signs of being in recession.
Speaker 9: I think in many ways, a more interesting issue that
Speaker 9: the Fed's also facing, though, is, you know, is it
Speaker 9: going to give any hint of rethinking the inflation target
Speaker 9: going forward again. One of the messages that came back
Speaker 9: from being down in the South earlier this week and
Speaker 9: talking to people is that a lot of the commercial
Speaker 9: real estate sector are constantly asking FED officials, you know,
Speaker 9: are you going to change the inflation target. There's a
Speaker 9: kind of desperate hope amongst many in that sector that
Speaker 9: actually the rate rises will stop because the inflation target changes. Now,
Speaker 9: the fled's been very keen to squash that quite forcefully,
Speaker 9: but that question is going to liner and linger, particularly
Speaker 9: if the inflation keeps coming in higher than people had expected.
Speaker 2: I'm going to turn to that subject, which is everyone's
Speaker 2: favorite subject and now is generative AI. And if it
Speaker 2: weren't our favorite preessional subject before. When Vidio came out
Speaker 2: with those earnings projections, it was really pretty extraordinary. We
Speaker 2: have people saying this is as big as electricity or
Speaker 2: fire or the invention of the wheel overestimating what this
Speaker 2: generative AI mean for us all.
Speaker 9: Well, the reason why the Navidio stot hoped sodomatically and
Speaker 9: came up with the extordy ownings is very much down
Speaker 9: to the dazzle factor, but also the confusion factor. Because
Speaker 9: investors know that something big is happening, they don't really
Speaker 9: understand the technology. They don't understand the degree to which
Speaker 9: companies that our AI companies actually have a moat that
Speaker 9: can defend them from you know, new rivals, and so
Speaker 9: there's a lot of uncertaintly there. The one thing that's
Speaker 9: crystal clear though, is that this is going to require
Speaker 9: a lot of computing power and a lot of chips.
Speaker 9: So people are grasping on anything they can see the
Speaker 9: shiny new thing to try and have a play at
Speaker 9: this whole wave. In terms of the significance of generative
Speaker 9: AI is obviously very significant. You know, we've had AI
Speaker 9: for a very long time. It's all part of our
Speaker 9: everyday experience. But you know, for me, one of the
Speaker 9: ways to explain what's going on is that as an anthropologist,
Speaker 9: I always used to joke that the one thing that
Speaker 9: AI couldn't do is have a sense of human and
Speaker 9: tell jokes, because jokes are fundamentally rooted in culture, which
Speaker 9: is hard to describe and hard to define and often
Speaker 9: very contradictory. And most of the traditional platforms inside computers
Speaker 9: looked for logic and patterns and things like that. What
Speaker 9: you'll start to see with platforms like Generator of AI
Speaker 9: are machines that are so sophisticated and so good at
Speaker 9: watching people and replicating human behavior even if it's not logical,
Speaker 9: and behaving like an anthropologist not a scientist, that you're
Speaker 9: starting to get AI platforms which are almost beginning to
Speaker 9: tell jokes. So it's really quite a big change in
Speaker 9: terms of what's happening. The big question though, is what
Speaker 9: it means in terms of real world applications and company valuations.
Speaker 2: So as a loyal turn to you here and how
Speaker 2: big this could be? Is this a new lease on
Speaker 2: life for all of tech essentially?
Speaker 8: So, look, I think this is another thing you can
Speaker 8: put in the category of rallies that have been deserved.
Speaker 8: I know it's sort of trendy to go out and say,
Speaker 8: you know, the market is toppy and this is just
Speaker 8: all this AI hype and it's not deserved. I think
Speaker 8: there's a paucity of growth stories out there right now,
Speaker 8: and when you think about the conversation on reshoring that's
Speaker 8: been going on and talking to a lot of investors
Speaker 8: about that in recent months, is kind of the only
Speaker 8: big interesting growth narrative out there. Well, now we've got
Speaker 8: something to keep it company, which is AI. Ultimately, my
Speaker 8: gut is that this is going to be another productivity enhancer,
Speaker 8: something very cool, something very interesting that enhances productivity. Is
Speaker 8: it going to completely transform society? I'm not quite sure.
Speaker 8: I'm in that camp, But in terms of the market
Speaker 8: and why it's getting so excited, I think it's because
Speaker 8: there hasn't been a lot of other things in this
Speaker 8: kind of category of secular growth stories to get excited
Speaker 8: about recently.
Speaker 2: Julian, I'm going to ask you to do something very unfair.
Speaker 2: You have a terrific column in the Financial Times ABOUTIA
Speaker 2: I believe it's called in Ukraine. Could you just give
Speaker 2: us thirty or forty five seconds of that because I
Speaker 2: thought it was really extraordinary. I'd love you to come
Speaker 2: back and really explain it more detail.
Speaker 9: As an Idea is an app that Ukrainians thought three
Speaker 9: years ago to enable Ukrainian citizens to do all the
Speaker 9: usual government functions that any of us ever have to do,
Speaker 9: not by going to an office and filling in paper storms,
Speaker 9: but on your phone with app. And initially it seemed
Speaker 9: like just a very minor tool that a few people
Speaker 9: might use for things like vaccinations, status in COVID. But
Speaker 9: these days seventy percent of Ukrainian phones have this app.
Speaker 9: Half the population is using it. They're doing almost everything
Speaker 9: to do with the government on this cell phone app.
Speaker 9: And the key point is that not only has it
Speaker 9: meant that Ukraine's kept functioning even as refugees have flooded
Speaker 9: everywhere because they've all got their passports and stuff on
Speaker 9: their phone, but it's also meant that they have one
Speaker 9: way potentially to try and cut down in corruption. And
Speaker 9: the crucial thing to understand, the reason why it's so
Speaker 9: important this week is because they're trying to take it.
Speaker 9: The USAID is trying to take it and export it
Speaker 9: to other countries.
Speaker 2: A tech export from Ukraine. How about that, and particularly
Speaker 2: if it deals with DMV, I'd be all for it.
Speaker 2: Many Thanks to Lori Calvascino of RBC Cattle Markets and
Speaker 2: Julian tat Has, the Financial Times coming up could your
Speaker 2: friendly neighborhood chat Ai beat the stock market. We're going
Speaker 2: to hear from investing guru David Booth's Dimensional Fund ad Advisors.
Speaker 2: He has some doubts about it. He's not sure that
Speaker 2: you can beat the market within. That's going to come
Speaker 2: up next on Wall Street Weeedons.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: Private equity, it's come a long way since Henry Cravis
Speaker 2: and George Roberts put it on the map with that
Speaker 2: twenty five billion dollar buyout of R JR. Nabisco back
Speaker 2: in nineteen eighty eight, made famous in Barbarians at the Gate.
Speaker 1: I'm talking about putting a mountain of money into everybody's
Speaker 1: pocket right now.
Speaker 2: And it has evolved since Democrats tried to make Mitt
Speaker 2: Romney's role in running Bain Capital and issue in the
Speaker 2: twenty twelve presidential campaign.
Speaker 3: It's a very healthy and positive debate.
Speaker 5: That doesn't mean the private equity world is going to
Speaker 5: enjoy it very much.
Speaker 2: Today, private equity is a massive asset class with over
Speaker 2: eleven trillion dollars invested and another three trillion dollars and
Speaker 2: so called dry powder waiting to be deployed. Although higher
Speaker 2: rates slowed things down at the end of last year,
Speaker 2: it's just beginning to show signs of coming back.
Speaker 10: Fourth quarter of twenty two you had nothing today, you
Speaker 10: actually had the markets loosening out for the right deals.
Speaker 2: Leaving us all to look for that right deal and
Speaker 2: to take us into the world of private equity. We
Speaker 2: welcome to people who are in it from HGGC. We have,
Speaker 2: first of all Steve Young, who's the chairman of HGGC
Speaker 2: as well as the co founder, and we also have
Speaker 2: Rich Lawson who's the CEO and also co founder of HGGC.
Speaker 2: So welcome, gentlemen. It's great to have you here. First
Speaker 2: of all, give us a sense of how HGGC fits
Speaker 2: into this world of private equity. Steve, if you want
Speaker 2: to go first, from.
Speaker 11: The very beginning, from our roots, we decided that we
Speaker 11: wanted to do private equity differently, and we believe that
Speaker 11: across the table were people that were founders, you know,
Speaker 11: financial sponsors, management teams. Across the table as somebody who
Speaker 11: cares more about who I am than the last dollar
Speaker 11: and what I bring to the table than.
Speaker 1: The last dollar.
Speaker 11: Fundamental principle is that partnership investing.
Speaker 3: Will we'll wile of the world.
Speaker 11: And fifteen years ago that was a little bit of
Speaker 11: a bet. Today partnership investing has taken over the world.
Speaker 11: And so for us, the differentiation that we make is
Speaker 11: that we live here, we seek your reference across the table.
Speaker 11: We need your reference at the end of this engagement
Speaker 11: where because that's how we're going to go forward, because
Speaker 11: that's all we do is partnership investing. Where others will
Speaker 11: say we're partnership investors, but they rent here, they rent
Speaker 11: here for the time, and they don't really it's not
Speaker 11: rooted to who they are rich.
Speaker 2: This partnership investing sounds really nice, and like I understand
Speaker 2: why you might attract a lot of heels that way,
Speaker 2: can you make as much money? Because that's not, let's
Speaker 2: be frank, the model historically associated with private equity. We
Speaker 2: think it was coming in and buying it, tripping a
Speaker 2: lot of costs out and reselling it.
Speaker 6: Where we focus is in the middle market, so medium
Speaker 6: sized businesses. So for us, as a seven billion dollar
Speaker 6: private equity firm, where we tend to see the opportunity
Speaker 6: to create real appha is buying good businesses in the
Speaker 6: middle market as traditionally defined with the goal of transforming
Speaker 6: them into great companies.
Speaker 3: So rich.
Speaker 2: It sounds like when you come in, it's not the
Speaker 2: management team that you're replacing. You don't come in by definition.
Speaker 2: You've picked companies that have good management teams. So what
Speaker 2: is it you're providing? Is it capital? Basically, and typically
Speaker 2: in private equity, we think of leveraging up your capital
Speaker 2: is equity as I understand.
Speaker 6: It, we would think about it in sort of three
Speaker 6: different deal market types. One is buy and built with
Speaker 6: very important in this type of macro environment. The second
Speaker 6: would be in business transformation, helping up upgrading core capabilities
Speaker 6: and processes. And third is growth enablement, maybe changing the
Speaker 6: go to market process, the go to market motion, helping
Speaker 6: businesses called global But again we're taking very distinctly medium
Speaker 6: sized companies call it a billion dollars of enterprise value below,
Speaker 6: and we're creating multi billion dollar enterprises over the course
Speaker 6: of a partnership with the owners of that business.
Speaker 2: Steve, I understand you focus on the middle market, if
Speaker 2: I can call it that. Are there particular sectors that
Speaker 2: you tend to be attracted to or see deals from.
Speaker 11: We live in Palo Alto, California. That's our that's our
Speaker 11: our base of operations. So we've been in technology for
Speaker 11: twenty five thirty years. So we're going to do some technology,
Speaker 11: no question. But how tech has informed places like business services,
Speaker 11: financial services, and even some consumer in particular places is
Speaker 11: where we will kind of trade. We won't go further
Speaker 11: than that, but that's a pretty wide swath, but we
Speaker 11: are gaining, uh through our thematic sourcing efforts, uh, some
Speaker 11: real expertise in our shop and uh, you know, we'll
Speaker 11: we are.
Speaker 3: Now trying for the first time.
Speaker 11: You think I've been in kind of working to do
Speaker 11: a sports angle and sports investing from the very beginn
Speaker 11: income my previous life, but I I took my my heroes,
Speaker 11: Roger Staubach's uh uh he told me that, you know
Speaker 11: when I when I first retired, So what should I do?
Speaker 11: What's your what your recommendation is just run? And so
Speaker 11: I ran. And so I felt a little bit awkward,
Speaker 11: you know, reinvesting back into sports. But now I've kind
Speaker 11: of matured in my private equity life that I've been
Speaker 11: in longer than I played football.
Speaker 2: Well, I was going to ask you that, Steve, obviously,
Speaker 2: given we all think of you as a forty nine
Speaker 2: ers hold on. That's the way we know Steve Young.
Speaker 2: Given that do you get more deal flow out of sports?
Speaker 2: So people tend to come to you. And I know
Speaker 2: you've done a lot of work actually with other former
Speaker 2: professional athletes to help them in their business ventures.
Speaker 11: So one of my passions is to try to pay
Speaker 11: it forward and trying to create trying to create a
Speaker 11: repository of transition stories from professional life into the next
Speaker 11: phase of their lives. And I've always talked about that
Speaker 11: as a hard ending to a passion for people and
Speaker 11: then finding out that they're middle aged and they.
Speaker 3: Don't have it.
Speaker 11: You know, I was great at something and the next
Speaker 11: day I'm not good at anything. And so how do
Speaker 11: those transition stories and how to pay it forward for
Speaker 11: other athletes Today, I'm really passionate about trying to figure
Speaker 11: out how to tell those stories about people who have
Speaker 11: transition good and bad.
Speaker 2: Rich Palin, the last time I checked is in Silicon Valley.
Speaker 2: We had Silicon Valley Bank has the failure of Silicon
Speaker 2: Value Bank and some of the other regional banks. Has
Speaker 2: it affected your business.
Speaker 6: In a way, It's sort of excel rated the opportunity
Speaker 6: around this tilt towards partnership, we find that that really
Speaker 6: large and growing ecosystem of venture backed businesses are looking
Speaker 6: for outcomes. Right, you have an ecosystem of venture capital
Speaker 6: and growth equity investors. You have wonderful entrepreneurs that are
Speaker 6: around these businesses. But if you think about what Steve
Speaker 6: had mentioned, the essence of what we do, we're looking
Speaker 6: for folks that in the kind of businesses that we're
Speaker 6: transforming from good companies or good businesses to great companies
Speaker 6: is numerous owners. And so what we found, David, is
Speaker 6: that because of what's happened with the macro environment with
Speaker 6: SVB and others, you have this really large universe of
Speaker 6: smaller companies that would have typically raised a series CDF
Speaker 6: and gone public that have now said, maybe it might
Speaker 6: be better to join forces with one of our core
Speaker 6: active portfolio companies.
Speaker 1: Rich.
Speaker 2: One of the precipitating causes of what happened at Silico
Speaker 2: ELI back the higher interest rates that really took down
Speaker 2: the valuations of a lot of private equity companies. Is
Speaker 2: it affecting your business?
Speaker 3: Rich?
Speaker 2: The diminishment I assume of the valuations given what's going
Speaker 2: with a discount rate.
Speaker 6: In uncertain macro environments, business quality becomes more important than ever.
Speaker 6: And because these companies tend to be more resilient in
Speaker 6: the face of macro pressures, the type of businesses that
Speaker 6: we look for invest in and help support transform. Even
Speaker 6: if they do get impacted in the near term, you
Speaker 6: will see them rebound quickly.
Speaker 2: Steve, I can't let a Super Bowl Most Valuable Player
Speaker 2: quarterback go without asking one question about valuations and professional
Speaker 2: sports teams. They are through the roof as we talk
Speaker 2: to people. It is just extraordinary. And I talked to
Speaker 2: some of the investors to say they're going to keep going.
Speaker 2: What do you make about some of the valuations we're
Speaker 2: seeing now on some of the pro teams.
Speaker 11: My stat might be a little bit off, but it's
Speaker 11: not a lot off. Seventy five of the top one
Speaker 11: hundred shows on television the highest rated shows on television,
Speaker 11: Seventy five of the top one hundred were NFL football games.
Speaker 11: Think of the power in that stat. Equity values have
Speaker 11: twenty times in the last twenty years. And you know
Speaker 11: people say players have played too much. Quarterbacks are making
Speaker 11: sixty million dollars a year. As far as equity value
Speaker 11: growth in the last twenty years. Quarterback salary growth has
Speaker 11: not is only half of it, and so I'm not
Speaker 11: saying this should be paid more. I'm just saying that
Speaker 11: equity values are through the roof because of the power
Speaker 11: of live television. And you've seen that around the sports
Speaker 11: world and NBA it manage League Baseball was on its
Speaker 11: back twenty years ago. I'm overstating it, but you know
Speaker 11: now flourishing because life television runs the world, and the
Speaker 11: NFL runs life television by a long way. So you
Speaker 11: talk about the power of the NFL, that power only grows.
Speaker 11: And that's why you think, you know, a forty nine
Speaker 11: or team that's worth eight to ten billion dollars could
Speaker 11: be twenty billion, could be I mean the upper ends
Speaker 11: are you know, who knows. But the NFL has done
Speaker 11: a great job of building equity value, that's for sure.
Speaker 2: General, I can't thank you enough for joining us here
Speaker 2: on Wall Street Week. That is Steve Young, of course,
Speaker 2: as well as Rich Lawson of HGGC.
Speaker 1: Coming up.
Speaker 2: There's a big fight in Washington over the depth sit
Speaker 2: what should there be? We ask Nobel Prize winning economist
Speaker 2: Paul Krugman, what.
Speaker 3: Really bothers me. Where we are right now is that
Speaker 3: the programs that apparently are safer saying are programs for
Speaker 3: the elderly.
Speaker 2: 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 10: I thought Hamilton had it right. He said a national
Speaker 10: debt could be a national blessing, and the national debt
Speaker 10: having a liquid market there provides a good benchmark for
Speaker 10: the private sector. It probably underpins the role of the
Speaker 10: dollar in the world. It allows the Fed to conduct
Speaker 10: monetary policy easily. I think we have to keep in
Speaker 10: mind the costs of paying down the day. There is
Speaker 10: among some people single minded focus on it, but there's
Speaker 10: no free lunch in this world.
Speaker 2: That was Larry Lindsay, President George W. Bush's director of
Speaker 2: the National Economic Council back in two thousand and one.
Speaker 2: That was a time when the concern was not about
Speaker 2: how big the federal debt was, but that we might
Speaker 2: actually pay it all off. To explain today what we
Speaker 2: should and should not be worried about when it comes
Speaker 2: to the debt and the deficits were running up, we
Speaker 2: welcome to Dow Doctor Paul Krugman. He's distinguished Professor of
Speaker 2: economics at the City University of New York and the
Speaker 2: recipient of the Nobel Prize in the Economic Sciences. So,
Speaker 2: doctor Kruman, thank you so much for being with us.
Speaker 2: We hear a lot of talk from politicians in Washington,
Speaker 2: as we should about the debt. We don't hear as much.
Speaker 2: I don't hear about the economics of it all. Once
Speaker 2: you give us your analysis of what we should be
Speaker 2: concerned about with the debt and what we should not
Speaker 2: be as concerned.
Speaker 3: About, Okay, there is a pretty strong case the debt
Speaker 3: is just a number that the United States absent loitical
Speaker 3: games over the debt ceiling, which is a really uniquely
Speaker 3: American dysfunction. Aside from that, there's no hint that financial
Speaker 3: markets are concerned about America's ability to service its debt.
Speaker 3: There's no real sign that the debt is putting any
Speaker 3: strain on the economy. There are. US debt is very
Speaker 3: high for by our own historical standards. The only time
Speaker 3: we've been close to this level was in the immediate
Speaker 3: aftermath of World War Two. But it's not that high
Speaker 3: compared with what a lot of other countries have experienced
Speaker 3: over the years without any kind of crisis. So the
Speaker 3: numbers are enormous, but everything about the US economy is enormous.
Speaker 3: So you say thirty one trillion dollars and you do
Speaker 3: your best doctor evil imitation. But it's not at all
Speaker 3: clear that the debt is a top priority you know
Speaker 3: that it's a catastrophic issue, or even that it even
Speaker 3: belongs in the top five or maybe even the top
Speaker 3: ten of ISI she's to concern the United States.
Speaker 2: So maybe not catastrophic, but is it a growing problem?
Speaker 2: In this sense, the debt itself is just one number.
Speaker 2: What about when you put it together with another number,
Speaker 2: which is debt service? Because as I understand it, part
Speaker 2: of the question is how fast is debt service costs growing?
Speaker 2: We have had essentially zero cost of debt service. Those
Speaker 2: are going up. Now does that pose a real risk?
Speaker 3: The idea that having to that were then we're in
Speaker 3: some kind of debt spiral where we have to borrow
Speaker 3: to pay interest and then we have to I mean,
Speaker 3: the numbers don't support that at all. The numbers don't
Speaker 3: suggest that anything like that is going to be a
Speaker 3: problem for the foreseeable future. So no, I mean it's
Speaker 3: just it's we've gone from a point where money was
Speaker 3: you know, free, or even in real terms, possibly we
Speaker 3: were being the faraoh government was being paid to take
Speaker 3: on debt to one where it costs something, but it's
Speaker 3: still pretty small.
Speaker 2: So let's talk about some of the proposals about it.
Speaker 2: How to raising the death too much, and that is
Speaker 2: some capping of spending, particularly discretionary spending. What are the
Speaker 2: possible consequences of that if in fact we do freeze
Speaker 2: or reduce spending off of twenty twenty two levels.
Speaker 3: What really bothers me where we are right now is
Speaker 3: that the programs that apparently are sacrisanc Are programs for
Speaker 3: the elderly, Medicare, social Security are off the table. They're
Speaker 3: being protected, and a lot of the stuff that discretionary
Speaker 3: is really things like programs that support children, to support education,
Speaker 3: that support nutrition for the young, which is the future.
Speaker 3: So what's happening right now is that in the effort
Speaker 3: to hold down headline spending right now, we're actually kind
Speaker 3: of disinvesting in the country's future. And that's that's pretty alarming.
Speaker 2: So that is a terribly important and very unpopular point.
Speaker 2: Going back to the politics for a moment here, and
Speaker 2: that is when you say let's cut things for the elder.
Speaker 2: That's very popular. I'm elderly at this point. But at
Speaker 2: the same time, we're not really investing in future growth,
Speaker 2: as I understand, by paying more, for example, on social security,
Speaker 2: whereas investing in education or children or infrastructure could increase
Speaker 2: the future growth. To what extent do we need to
Speaker 2: concerned about growing ourselves out of whatever debt issues we have.
Speaker 3: Well, to a large extent, that's going to happen anyway.
Speaker 3: I mean when I say you need to adjust for inflation,
Speaker 3: you really also need to ask about growth. And you know,
Speaker 3: the example I always like to use is, you know,
Speaker 3: how did we pay off the debt from World War Two?
Speaker 3: And the answers we didn't. We had slightly higher debt
Speaker 3: when John F. Kennedy took office that we did on
Speaker 3: you know, when we declared victory over Japan, but the
Speaker 3: debt had dwindled. It was it was less than half
Speaker 3: the share of GDP that had been at the end
Speaker 3: of World War Two because we had a growing economy
Speaker 3: and a little bit of inflation over that period. And
Speaker 3: this large we're still in a world where we really
Speaker 3: are already set to, if not exactly grow out of
Speaker 3: our debt, at least not have it grow very much
Speaker 3: uncontrollably unless we do some really even more irresponsible things
Speaker 3: that we do now. So and look, if you want
Speaker 3: to try to accelerate economic growth, there's not a lot
Speaker 3: of things that we know work. Investing more in children's
Speaker 3: health nutrition is one of the things that we do
Speaker 3: know works, but it works with a very long leg.
Speaker 3: It's something that will show up thirty years from now
Speaker 3: in a better economy. Aside from that, if you asked
Speaker 3: what can we do to make the economy growth a
Speaker 3: lot faster over the next ten years, the answer is
Speaker 3: nobody knows the answer to that.
Speaker 2: So, professor, you referred to the size of the debt,
Speaker 2: going back to GDP right now, the rejections, I think
Speaker 2: we're somewhere our line ninety seven ninety eight percent of
Speaker 2: GDP something like that right now, and the rejection from CBO,
Speaker 2: as you know, go up to undred and twenty percent,
Speaker 2: and maybe keep going. At what point do we become
Speaker 2: concerned about that? You say, now, it's not a problem,
Speaker 2: But when does it become a problem. When would you
Speaker 2: start saying, wait a second, we're running into trouble.
Speaker 3: It's hard to come up with a number. And you know,
Speaker 3: we've looked at Japan with two hundred percent of GDP,
Speaker 3: and j Pan has lots of problems, but unwillingness of
Speaker 3: the market to buy Japanese government bonds is not is
Speaker 3: not one of them. I always I like to point
Speaker 3: out that the if we go back to, you know,
Speaker 3: the Industrial Revolution in Great Britain, first half the nineteenth century,
Speaker 3: Britain had debt that was one hundred and eighty percent
Speaker 3: of GDP at the end of the Napoleonic Wars. By
Speaker 3: eighteen fifty it was only down to one hundred and
Speaker 3: thirty percent of GDP. And this is the you know,
Speaker 3: this is the Industrial Revolution, this is the birth of
Speaker 3: the modern age taking place under what anybody now would say, Oh,
Speaker 3: that must be a crippling debt burden. So, you know,
Speaker 3: is there any there must be somehow we can't have
Speaker 3: our death, can't exceed our total national wealth. But we're
Speaker 3: nowhere close to that. And I don't see any number
Speaker 3: anywhere in these projections that is one that based on history,
Speaker 3: would lead you to be concerned.
Speaker 2: One of the things we hear about from some quarters
Speaker 2: at least is a concern about the strength of the dollar,
Speaker 2: that in fact the globe will lose some confidence in
Speaker 2: our fiscal abilities here in the United States, and we
Speaker 2: have seen sort of a dilution of the dollar as
Speaker 2: the reserve currency of the world. Fewer transactions that I
Speaker 2: and stand today are being transacted in dollars than before.
Speaker 2: You've written about the fact that you don't think there's
Speaker 2: another currency that will overtake it, but that perhaps will
Speaker 2: become more of a plurality. Is that a likely development
Speaker 2: and is so what would be the consequences.
Speaker 3: I always say that the big problem is not that
Speaker 3: something else might take the dollar's place. The problem is
Speaker 3: that there may be nothing else that can take the
Speaker 3: dollar's place. When you think about the alternatives. The Euro
Speaker 3: is unfortunately, because of eurocrises and divergences, there's not a
Speaker 3: Euro bond market. They're just there's an Italian bond market,
Speaker 3: a German bond market. So that's a fragmented market, which
Speaker 3: means that eurosecurities are not liquid in the way that
Speaker 3: dollar securities are. China has capital controls, It has an
Speaker 3: authoritarian regime given to making erratic sudden changes in policy,
Speaker 3: who wants to use R and B as a as
Speaker 3: their key asset. Japan is just too small an economy.
Speaker 3: So you know, it's not that the US derives a
Speaker 3: huge advantage from the fact that the dollar is the
Speaker 3: currency in the world. It's that the world there is
Speaker 3: a huge advantage from the fact that there are safe,
Speaker 3: highly liquid assets that can be used as collateral, that
Speaker 3: can be used as the sort of underpinning of the
Speaker 3: whole world financial system. And those safe liquid assets are
Speaker 3: US treasury securities. And if we manage to destroy the credibility,
Speaker 3: then the whole world, including US, but not the whole
Speaker 3: world's suffice. It's not that somebody gains at our advantage.
Speaker 3: It's that we undermined the whole system.
Speaker 2: Okay, professor, thank you so very much for joining us
Speaker 2: as Professor Paul Krugman of the City University of New
Speaker 2: York coming up would arose by any other name, smell
Speaker 2: as sweet. Some people seem to think so, including maybe
Speaker 2: even the FED. That's the next one Wall Street Week
Speaker 2: on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radios.
Speaker 2: So AI may or may not be helping one on
Speaker 2: the stock market at least right now. But the question
Speaker 2: is what could it do for the longer term and
Speaker 2: respect to investments, And for that we turn to a
Speaker 2: truly gifted investor. He is David Booth. He is, of course,
Speaker 2: the founder and chair of Dimensional Fund Advisors. David, thank
Speaker 2: you so much for being with us, wrote a column
Speaker 2: in The Financial Times expressing some, if I can put it,
Speaker 2: skepticism about whether all of this generative AI may help
Speaker 2: us be better stock pickers. How do you see it?
Speaker 7: AI is going to be incredibly useful in a lot
Speaker 7: of areas because it can process such enormous amounts of information,
Speaker 7: and that's really what what selecting securities is all about,
Speaker 7: is trying to figure out how much undiscounted information is
Speaker 7: out there. So at first blush, it looks like it
Speaker 7: could be incredibly useful, although regardless of how elaborate and
Speaker 7: extensive your AI is is not as elaborate and extensive
Speaker 7: as the market. You think of the stock market as
Speaker 7: just being We think of it as this being this
Speaker 7: enormous information processing machine that everyone in the world's out
Speaker 7: there trying to buy and sell securities, and it's their
Speaker 7: action that causes prices to be settled at reasonable at
Speaker 7: reasonable levels.
Speaker 2: So finally, one more thought, what's in a name? Shakespeare
Speaker 2: had Romeo asked that question to suggest that this perceived
Speaker 2: difference between his monocues and his beloved Juliet's capulets shouldn't
Speaker 2: come between them. But in today's world, how a person,
Speaker 2: or a product, or even a country is perceived can
Speaker 2: be all important. Take for example, Korean car company Hyundai.
Speaker 2: Once perceived as a reliable and expensive, rather boring alternative
Speaker 2: to high priced and flashier European alternatives, it has gotten
Speaker 2: a whole new lease on life, creating adventurous designs for
Speaker 2: the EV world, making it a formidable competitor even to Tesla,
Speaker 2: causing The Wall Street Journal this week to ask, how
Speaker 2: did Hyundai get so cool?
Speaker 3: It's a EV rhymes with Kevin, and it's not just.
Speaker 2: Hyundai that's looking to freshen up its brand. Consider Facebook,
Speaker 2: with Mark Zuckerbert going so far as to rename his
Speaker 2: entire company and had bid to make up some lost
Speaker 2: ground to TikTok, though the arc of his space shot
Speaker 2: to the metaverse make it bent a bit by the
Speaker 2: gravitational pull of generative AI.
Speaker 5: AI is already crucial to the foundations of the metaverse
Speaker 5: and will be even more so in the future.
Speaker 2: All this rebranding has now apparently made it all the
Speaker 2: way to the Oval Office, as the New York Times
Speaker 2: caught Speaker of the House McCarthy as well as House
Speaker 2: Minority Leader Hakim Jeffries holding an important debt ceiling meeting
Speaker 2: with the President wearing those flashy dressed sneakers. But before
Speaker 2: we get too terribly excited, it would be well to
Speaker 2: remember some famous instances where attempts to rebrand fell well
Speaker 2: short of the mark, Starting with the audio industry itself.
Speaker 2: Does anyone remember the campaign in the late eighties to
Speaker 2: make us think that the Oldsmobile was really for young people?
Speaker 1: In short, the new Cutlass Supreme is your further as Oldsmobile.
Speaker 2: And has anyone seen any Oldsmobiles around lately? Or how
Speaker 2: about that so called new Coke who was going to
Speaker 2: revive a time honored brand.
Speaker 3: New Coke is catching on? Is better?
Speaker 7: You said?
Speaker 2: The word rebranding has been known to extend even to
Speaker 2: the world of geopolitics, a Secuary of State Hillary Clinton
Speaker 2: did with her famous campaign to turn things around with Russia.
Speaker 3: We want to reset our relationship.
Speaker 2: Looking back on it now in the light of Ukraine,
Speaker 2: it's not clear exactly what the world got out of
Speaker 2: that particular rebranding. Even the central banks are getting into
Speaker 2: the game, with the debate raging this week about whether
Speaker 2: the FED would execute a pause or a skip at
Speaker 2: its June meeting.
Speaker 3: I'm not a massive fan of these linguistic acrobatics that
Speaker 3: central banks end up getting themselves into.
Speaker 2: But maybe the place where we need rebranding the most
Speaker 2: is in how Washington deals with things like budgets and deficits,
Speaker 2: oh and oh yes, the full faith and credit of
Speaker 2: the United States America. But that may take more than
Speaker 2: just a new logo or new shoes with white soles.
Speaker 2: For that, we may need a fundamental rethinking.
Speaker 6: The point is, we need a new spending process.
Speaker 7: That does it.
Speaker 2: For this episode of Wall Street Week, I'm David Weston.
Speaker 2: This is Bloomberg. See you next week.