1 00:00:00,520 --> 00:00:03,760 Speaker 1: This is Bloomberg Wall Street Week. We turn our attention 2 00:00:03,840 --> 00:00:07,600 Speaker 1: to the markets this week. Us CPI never's reinforcing concerns 3 00:00:07,600 --> 00:00:10,800 Speaker 1: about inflation. The financial stories that chief are worth a 4 00:00:10,840 --> 00:00:13,760 Speaker 1: really different reaction to Mark. It's more indications of just 5 00:00:13,960 --> 00:00:16,360 Speaker 1: how hot the U. S economy really is. Through the 6 00:00:16,400 --> 00:00:19,799 Speaker 1: eyes of the most influential voices Larry Summers, the former 7 00:00:19,800 --> 00:00:22,880 Speaker 1: Treator Secretary, Katherine Keating, CEO of v n Y Moms, 8 00:00:22,960 --> 00:00:26,239 Speaker 1: Sam's l Sharmon and founder of Equity Group Investment. In 9 00:00:26,320 --> 00:00:30,280 Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio 10 00:00:30,560 --> 00:00:34,120 Speaker 1: Easy does it whether it's fed rate hikes or China 11 00:00:34,200 --> 00:00:37,199 Speaker 1: letting up on code restrictions or steering clear of a 12 00:00:37,280 --> 00:00:40,479 Speaker 1: rail strip. This is Bloomberg Wall Street Week. I'm David Weston, 13 00:00:41,880 --> 00:00:44,680 Speaker 1: this week's special contributor to Larry Summers on the jobs 14 00:00:44,760 --> 00:00:48,680 Speaker 1: numbers and Chair Poll's take on inflation. Mike Arroghetti of 15 00:00:48,760 --> 00:00:52,839 Speaker 1: Aery's Management on the remarkable growth in private credit. Private 16 00:00:52,840 --> 00:00:56,080 Speaker 1: credit has ended out perform when rates are going up. 17 00:00:56,680 --> 00:00:59,960 Speaker 1: And Tom montag And and Finucan on their new Tea 18 00:01:00,080 --> 00:01:03,920 Speaker 1: PG venture into the world of carbon credits. We saw 19 00:01:03,960 --> 00:01:20,240 Speaker 1: an opportunity to improve the whole market. It was a 20 00:01:20,240 --> 00:01:23,720 Speaker 1: week of searching for the happy medium, as China began 21 00:01:23,840 --> 00:01:26,880 Speaker 1: the week in an uproar over COVID restrictions. Put in 22 00:01:26,920 --> 00:01:31,000 Speaker 1: perspective by former US Ambassador to China, Gary Locke, this 23 00:01:31,160 --> 00:01:35,959 Speaker 1: is clearly the worst sense genumen square. But things ended 24 00:01:35,959 --> 00:01:38,840 Speaker 1: the week a bit more calm for China after authorities 25 00:01:38,920 --> 00:01:42,040 Speaker 1: signaled some easing in the COVID policy, as urged by 26 00:01:42,080 --> 00:01:45,880 Speaker 1: World Bank President David Melpass I think they could use 27 00:01:45,920 --> 00:01:50,120 Speaker 1: a recalibration more targeting of their of their lockdowns. We 28 00:01:50,160 --> 00:01:53,200 Speaker 1: started the week with a looming rail strike, but President 29 00:01:53,240 --> 00:01:56,680 Speaker 1: Biden and Congress sought to calm things down by stepping 30 00:01:56,680 --> 00:01:59,840 Speaker 1: in and imposing a deal on the parties. The US 31 00:02:00,400 --> 00:02:03,040 Speaker 1: is passing the bill to avert the strike by those 32 00:02:03,040 --> 00:02:06,840 Speaker 1: freight rail workers, and consumers seemed to be seeking their 33 00:02:06,880 --> 00:02:10,480 Speaker 1: own happy medium as they started their holiday shopping. It 34 00:02:10,639 --> 00:02:14,080 Speaker 1: was kind of muted Black Friday. You know. It was 35 00:02:15,360 --> 00:02:20,280 Speaker 1: solid customer traffic overall, but not strong, all of which 36 00:02:20,320 --> 00:02:23,120 Speaker 1: brought us to FED Chair Powell, who struck a balance, 37 00:02:23,160 --> 00:02:25,760 Speaker 1: or at least tried to, between raising rates too much 38 00:02:26,160 --> 00:02:29,480 Speaker 1: and not raising them enough. We need to raise interest 39 00:02:29,560 --> 00:02:32,000 Speaker 1: rates to a level that is sufficiently restrictive to return 40 00:02:32,040 --> 00:02:36,000 Speaker 1: inflation to two. There's considerable uncertainty about what rate will 41 00:02:36,000 --> 00:02:41,000 Speaker 1: be sufficient. But then the US job numbers came in 42 00:02:41,080 --> 00:02:44,160 Speaker 1: on Friday, and there was nothing modern about those two 43 00:02:44,440 --> 00:02:47,840 Speaker 1: sixty three thousand jobs created November, and employers are paying 44 00:02:47,840 --> 00:02:50,680 Speaker 1: more for every one of them, with average hourly wages 45 00:02:50,720 --> 00:02:54,800 Speaker 1: up a whopping point three point six percent month over month, 46 00:02:55,000 --> 00:02:58,760 Speaker 1: and that's five point up year over year. The markets 47 00:02:58,760 --> 00:03:00,920 Speaker 1: took a look at all the and didn't like it 48 00:03:01,040 --> 00:03:03,520 Speaker 1: one bit, that's at least at first, But by the 49 00:03:03,600 --> 00:03:05,840 Speaker 1: end of the day on Friday had settled back down 50 00:03:06,120 --> 00:03:09,200 Speaker 1: and overall the SP five gained over one for the 51 00:03:09,240 --> 00:03:11,880 Speaker 1: week and the NAZAC was up over two percent, while 52 00:03:11,880 --> 00:03:14,280 Speaker 1: the yield on the ten year fell to under three 53 00:03:14,280 --> 00:03:17,000 Speaker 1: point five percent for the week after starting out at 54 00:03:17,040 --> 00:03:19,680 Speaker 1: nearly three point seven. Here to help us sort through 55 00:03:19,680 --> 00:03:23,000 Speaker 1: this all, welcome now, Greg Peters back to Wall Street 56 00:03:23,000 --> 00:03:25,840 Speaker 1: week co ce io for fixed income at PIGIM, and 57 00:03:25,960 --> 00:03:30,040 Speaker 1: Christina Hooper welcome back from Investco. She's chief marketing strategis there. 58 00:03:30,040 --> 00:03:31,880 Speaker 1: So Christine, let me start with you. I think the 59 00:03:32,320 --> 00:03:34,960 Speaker 1: J Paul was trying to calm things down, but I'm 60 00:03:34,960 --> 00:03:38,200 Speaker 1: not sure he accomplished that. He did not accomplish that, 61 00:03:38,320 --> 00:03:41,160 Speaker 1: but that's the market's fault, not his fault. I think 62 00:03:41,200 --> 00:03:44,560 Speaker 1: he was very clear, uh in telling us what we 63 00:03:44,600 --> 00:03:47,320 Speaker 1: already knew, which is that the FETE is likely to 64 00:03:47,360 --> 00:03:50,840 Speaker 1: downshift a fifty basis points in December, but the terminal 65 00:03:50,920 --> 00:03:53,760 Speaker 1: rate is very unclear and we have a ways to 66 00:03:53,800 --> 00:03:57,200 Speaker 1: go in terms of taming inflation. Really the only positive 67 00:03:57,320 --> 00:04:01,000 Speaker 1: was around housing and talking about the rolling over there. 68 00:04:01,440 --> 00:04:03,800 Speaker 1: But other than that, I think he was a straight 69 00:04:03,840 --> 00:04:09,040 Speaker 1: shooter about setting the table for what uncertainty there is 70 00:04:09,160 --> 00:04:11,360 Speaker 1: in terms of where the terminal rate is and where 71 00:04:11,360 --> 00:04:14,720 Speaker 1: the FED pauses. But Greg he also set the table 72 00:04:14,760 --> 00:04:17,239 Speaker 1: for being really concerned about wage inflation because he talked 73 00:04:17,279 --> 00:04:20,160 Speaker 1: about the really dislocation partaken on the Jolts numbers, and 74 00:04:20,200 --> 00:04:22,960 Speaker 1: then those numbers came in on Friday and we're exactly 75 00:04:22,960 --> 00:04:26,640 Speaker 1: what he was hoping would not happen. I think. Yeah, 76 00:04:26,680 --> 00:04:29,279 Speaker 1: So the strong nonfarm pay will report and the recent 77 00:04:29,320 --> 00:04:32,800 Speaker 1: economic data actually is a blunt reminder actually that the 78 00:04:32,920 --> 00:04:35,560 Speaker 1: data are in charge. So it doesn't matter if you're 79 00:04:35,600 --> 00:04:40,480 Speaker 1: abundant or fulil manager or even FED share Powell. It's 80 00:04:40,520 --> 00:04:43,200 Speaker 1: all driven by the data. So for him or anyone 81 00:04:43,240 --> 00:04:47,680 Speaker 1: to proclaim that, you know, rate rises are pausing or pivoting, 82 00:04:48,040 --> 00:04:50,920 Speaker 1: it's just really kind of a fool's Errand because you're 83 00:04:51,000 --> 00:04:54,440 Speaker 1: driven by the data, and the data is what's driving 84 00:04:54,480 --> 00:04:58,520 Speaker 1: the FED uh and should drive the market absolutely if 85 00:04:58,560 --> 00:05:01,000 Speaker 1: if you don't mind my adding back in June, the 86 00:05:01,040 --> 00:05:03,560 Speaker 1: FED communicated that it was going to only hype by 87 00:05:03,600 --> 00:05:06,560 Speaker 1: fifty basis points. Then two data points came out within 88 00:05:06,680 --> 00:05:09,719 Speaker 1: days of the FED meeting. We got um CPI, we 89 00:05:09,839 --> 00:05:14,240 Speaker 1: got Michigan inflation expectations, and they pivoted to seventy basis point. 90 00:05:14,440 --> 00:05:17,000 Speaker 1: So Greg is absolutely right. The data is going to 91 00:05:17,080 --> 00:05:20,160 Speaker 1: drive this and that really renders Powell speech pretty irrelevant. 92 00:05:20,160 --> 00:05:22,880 Speaker 1: So so Greg, if the data are driving the Federal Reserve, 93 00:05:23,000 --> 00:05:25,640 Speaker 1: what's driving investors? If you're an investor, what do you 94 00:05:25,680 --> 00:05:29,919 Speaker 1: make of these data? And where do you go? You know? 95 00:05:29,960 --> 00:05:33,279 Speaker 1: What is this circular reference problem that we have? It's 96 00:05:33,640 --> 00:05:35,960 Speaker 1: it's it's clear to me at least that the markets 97 00:05:35,960 --> 00:05:38,920 Speaker 1: are focusing less on the data and more on what 98 00:05:38,960 --> 00:05:42,080 Speaker 1: the FED has to say. The challenge, I think is 99 00:05:42,120 --> 00:05:44,960 Speaker 1: that the rhetoric coming out of the FED is quite 100 00:05:44,960 --> 00:05:47,080 Speaker 1: disparate and not all over the place, So the message 101 00:05:47,160 --> 00:05:51,000 Speaker 1: being what is quite mixed. But to me, it's really 102 00:05:51,600 --> 00:05:54,760 Speaker 1: hard for me to swallow that. You know, rates have rallied, 103 00:05:54,839 --> 00:05:58,960 Speaker 1: risk assets have also rallied um and we have an 104 00:05:59,000 --> 00:06:01,400 Speaker 1: even senior recession yet and we haven't seen the peak 105 00:06:01,440 --> 00:06:04,720 Speaker 1: in rates. And we've had one data print David of 106 00:06:05,240 --> 00:06:08,359 Speaker 1: lower infl UH and lower inflation. So you're a fixed 107 00:06:08,360 --> 00:06:11,279 Speaker 1: income guy, Greg, what do you do in fixed income 108 00:06:11,360 --> 00:06:15,240 Speaker 1: given that circumstances? Yeah, so I think it's been this 109 00:06:15,240 --> 00:06:18,680 Speaker 1: this this obviously very difficult market for fix income. If 110 00:06:18,680 --> 00:06:22,799 Speaker 1: you think about where the tenure started this endeavor post COVID, 111 00:06:22,920 --> 00:06:25,760 Speaker 1: it was fifty basis points right, So you know we're 112 00:06:25,760 --> 00:06:27,920 Speaker 1: at three and a half now. I do think fields 113 00:06:27,960 --> 00:06:31,839 Speaker 1: move higher here as we repriced more rate hikes. But 114 00:06:31,960 --> 00:06:35,120 Speaker 1: I have to tell you, uh, you know we we've 115 00:06:35,120 --> 00:06:37,919 Speaker 1: repriced is such a dramatic degree that I see a 116 00:06:37,960 --> 00:06:42,560 Speaker 1: tremendous amount of value fixingcome yields higher all equal is 117 00:06:42,600 --> 00:06:45,920 Speaker 1: a good thing. Spreads wider all of equal a good thing. 118 00:06:46,080 --> 00:06:49,600 Speaker 1: So while we can't time it, I feel really bullish 119 00:06:49,680 --> 00:06:52,240 Speaker 1: on the outlook for fixed income. Thank you so much, 120 00:06:52,240 --> 00:06:55,760 Speaker 1: Investco Christina Hooper and p jims Greg Peters coming up. 121 00:06:55,839 --> 00:06:58,640 Speaker 1: Bank of America veterans Tom Montag and and Finukein joined 122 00:06:58,640 --> 00:07:01,320 Speaker 1: Wall Street Week for an exclusive explanation of their brand 123 00:07:01,400 --> 00:07:04,280 Speaker 1: new carbon credit venture backed by TPG. That's next on 124 00:07:04,360 --> 00:07:09,360 Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street 125 00:07:09,400 --> 00:07:19,720 Speaker 1: Week with David Weston from Bloomberg Radio. This is Wall 126 00:07:19,760 --> 00:07:22,160 Speaker 1: Street Week. I'm David Weston. Global. Wall Street got some 127 00:07:22,240 --> 00:07:25,040 Speaker 1: big news this week. It's two of its most prominent citizens, 128 00:07:25,040 --> 00:07:28,200 Speaker 1: Tom Montag, the former CEO of Bank of America, and 129 00:07:28,200 --> 00:07:31,160 Speaker 1: and For Nuken, the former vice chair of Bank America, 130 00:07:31,240 --> 00:07:33,600 Speaker 1: got together and announced a big new venture fact in 131 00:07:33,640 --> 00:07:36,960 Speaker 1: parted by TPG and involves carbon credits. Were delighted to 132 00:07:37,040 --> 00:07:39,160 Speaker 1: say to welcome them now to Wall Street Week for 133 00:07:39,160 --> 00:07:41,720 Speaker 1: an exclusive discussion about this new venture. So thank you 134 00:07:41,840 --> 00:07:43,800 Speaker 1: very much, Ana and Tom for being here. And let 135 00:07:43,840 --> 00:07:46,000 Speaker 1: me start with you. You're the chair of this new venture. 136 00:07:46,360 --> 00:07:48,400 Speaker 1: Explain where it came from. How long you've been working 137 00:07:48,440 --> 00:07:52,880 Speaker 1: on this? Thanks Steven, and good to be here. So, uh, 138 00:07:53,040 --> 00:07:55,920 Speaker 1: this is an evolution actually of work that Tom and 139 00:07:55,960 --> 00:07:59,640 Speaker 1: I did at Bank of America, Uh, for our own company. 140 00:07:59,680 --> 00:08:02,800 Speaker 1: But So for our clients, whereas more and more companies 141 00:08:02,840 --> 00:08:05,720 Speaker 1: are looking to become carbon neutral, which is the first 142 00:08:05,760 --> 00:08:10,480 Speaker 1: step becoming at zero, they do an audit, they review 143 00:08:10,520 --> 00:08:13,880 Speaker 1: what they can do, and there's a delta between everything 144 00:08:13,920 --> 00:08:18,400 Speaker 1: they could do and what is carbon neutrality. And the 145 00:08:18,920 --> 00:08:22,640 Speaker 1: sort of basic practice has been to fill in that 146 00:08:22,720 --> 00:08:26,640 Speaker 1: delta for the short term with carbon credits. But they 147 00:08:26,640 --> 00:08:30,200 Speaker 1: are not plentiful. They have had some controversy around them 148 00:08:30,200 --> 00:08:34,240 Speaker 1: because looking back, UH they've not been well vetted and 149 00:08:34,320 --> 00:08:38,920 Speaker 1: they may not be as as um as good as 150 00:08:38,920 --> 00:08:42,480 Speaker 1: they could be. So we saw an opportunity to improve 151 00:08:42,559 --> 00:08:46,320 Speaker 1: the whole market. Want to fill what clients need to 152 00:08:46,400 --> 00:08:49,800 Speaker 1: put money into the developing world, in other words, cash 153 00:08:50,320 --> 00:08:57,000 Speaker 1: into protecting forests for UH removal as well. So this 154 00:08:57,120 --> 00:09:01,880 Speaker 1: is carbon reduction, carbon rem NOEL carb and removal. And 155 00:09:03,200 --> 00:09:05,120 Speaker 1: in order to do that, we needed to set up 156 00:09:05,120 --> 00:09:09,200 Speaker 1: a system that would be UH much more I think 157 00:09:09,280 --> 00:09:12,560 Speaker 1: acceptable to not only companies but to the n g 158 00:09:12,679 --> 00:09:15,520 Speaker 1: O world. So what I'm talking about is that these 159 00:09:15,559 --> 00:09:21,200 Speaker 1: credits would be vetted through proprietary quality guard rails, they 160 00:09:21,200 --> 00:09:25,240 Speaker 1: would have third party ratings, it would be a methodology, 161 00:09:25,760 --> 00:09:29,560 Speaker 1: methodology that's transparent and so people could feel comfortable with 162 00:09:29,679 --> 00:09:32,480 Speaker 1: this new product. So, so time you're giving the CEO 163 00:09:32,520 --> 00:09:35,320 Speaker 1: of this, you've spent a career really in and around 164 00:09:35,360 --> 00:09:37,720 Speaker 1: the markets, whether Goldman Sacks or a Bank of America. 165 00:09:37,920 --> 00:09:40,040 Speaker 1: Are you making a market in these carbon credits? Is 166 00:09:40,040 --> 00:09:41,480 Speaker 1: that the way it's going to you're putting together people 167 00:09:41,520 --> 00:09:44,040 Speaker 1: who put them together with the people who need them. 168 00:09:44,160 --> 00:09:46,000 Speaker 1: We're making a market in the sense David, that we're 169 00:09:46,000 --> 00:09:48,960 Speaker 1: actually you know, we're offering a product that they can buy. Uh, 170 00:09:49,040 --> 00:09:52,920 Speaker 1: it's not yet a tradeable product. At some point it maybe, 171 00:09:53,120 --> 00:09:55,320 Speaker 1: but at this point, you know, we as and said 172 00:09:55,320 --> 00:09:59,120 Speaker 1: were we just we have we've established rubicon carbon kind 173 00:09:59,120 --> 00:10:01,360 Speaker 1: of solutions, Penny in the first product we have it. 174 00:10:01,400 --> 00:10:04,680 Speaker 1: This is what we called rubicon carbon tons, and that 175 00:10:04,840 --> 00:10:07,840 Speaker 1: is what we are offering to enterprises around the country. 176 00:10:07,880 --> 00:10:10,719 Speaker 1: We'll tell us what's in that Rubicon carbon ton when 177 00:10:10,720 --> 00:10:13,880 Speaker 1: it's available, what is in there. So what we've done 178 00:10:13,920 --> 00:10:15,760 Speaker 1: is that you know our three words if you go 179 00:10:15,800 --> 00:10:20,080 Speaker 1: to our website rubicon carbon dot com, our scale, confidence 180 00:10:20,240 --> 00:10:23,880 Speaker 1: and innovation. And so we basically have already purchased a 181 00:10:24,000 --> 00:10:27,480 Speaker 1: number of carbon credits and we sell them to you 182 00:10:27,600 --> 00:10:30,520 Speaker 1: in a basically a portfolio and the port there's two 183 00:10:30,559 --> 00:10:33,439 Speaker 1: different portfolios. There'll be a third, uh, and they'll probably 184 00:10:33,440 --> 00:10:36,000 Speaker 1: be more over time. We have a nature based portfolio 185 00:10:36,080 --> 00:10:38,480 Speaker 1: and an emissions based portfolio, and we will have a 186 00:10:38,640 --> 00:10:42,640 Speaker 1: removals and each one of those underlying those rubicon carbon 187 00:10:42,679 --> 00:10:46,599 Speaker 1: tons in nature has numerous projects that we've already purchased 188 00:10:47,600 --> 00:10:51,400 Speaker 1: and we curate is constantly. So we we've hired Dr 189 00:10:51,480 --> 00:10:54,360 Speaker 1: Jen Jenkins as our chief sustainability officer, and not only 190 00:10:54,400 --> 00:10:56,200 Speaker 1: do we look at them when they come in, but 191 00:10:56,280 --> 00:10:59,200 Speaker 1: we're always looking at and curating what's in there. So 192 00:10:59,240 --> 00:11:03,440 Speaker 1: you would buy the right to retire carbon credits in 193 00:11:03,440 --> 00:11:06,520 Speaker 1: the portfolio of your choice at any time that you 194 00:11:06,559 --> 00:11:10,320 Speaker 1: wish so. And do you essentially certify the in fact 195 00:11:10,320 --> 00:11:12,480 Speaker 1: these credits exist and that they're legitimate? And you and 196 00:11:12,520 --> 00:11:14,360 Speaker 1: I have talked in the past about things like greenwashing. 197 00:11:14,480 --> 00:11:16,800 Speaker 1: Does this address that problem to some extent? And do 198 00:11:16,840 --> 00:11:21,560 Speaker 1: you need the government to certify it? Well, let's just 199 00:11:21,600 --> 00:11:24,600 Speaker 1: go back here for a minute. I think the problem 200 00:11:24,600 --> 00:11:30,599 Speaker 1: with carbon credits is more retrospective than it is current. Retrospectively, 201 00:11:31,520 --> 00:11:36,439 Speaker 1: it was a nascent industry early on, small players and 202 00:11:36,720 --> 00:11:41,040 Speaker 1: um standards were not set, so Yeah, in some question 203 00:11:42,240 --> 00:11:47,240 Speaker 1: places they were questionable, but today we have much more transparency. 204 00:11:47,320 --> 00:11:51,920 Speaker 1: We're working with NGOs, we are not only will work 205 00:11:52,000 --> 00:11:57,240 Speaker 1: with those that certify and verify. Today we're essentially taking 206 00:11:57,280 --> 00:12:01,599 Speaker 1: another step and we are doing our own project level diligence. 207 00:12:01,640 --> 00:12:05,000 Speaker 1: So this is sort of an insurance on top of 208 00:12:05,040 --> 00:12:08,800 Speaker 1: an insurance, and actually beyond that, we're going to be 209 00:12:08,840 --> 00:12:12,319 Speaker 1: doing some work in terms of insurance itself and risk management. 210 00:12:12,840 --> 00:12:15,760 Speaker 1: So if you are a client and you came to us, 211 00:12:15,920 --> 00:12:18,760 Speaker 1: I think that you would have much more confidence. First 212 00:12:18,800 --> 00:12:24,079 Speaker 1: of all, the projects themselves are forward looking, not retrospective. 213 00:12:24,520 --> 00:12:27,920 Speaker 1: We recognize what the issues were in the years gone by. 214 00:12:28,080 --> 00:12:33,040 Speaker 1: We're not buying renewable projects in O E c D countries, 215 00:12:33,160 --> 00:12:37,679 Speaker 1: meaning we're not trying to UH make renewables in America, 216 00:12:37,800 --> 00:12:41,120 Speaker 1: which are actually cheaper and easy to get to part 217 00:12:41,120 --> 00:12:44,360 Speaker 1: of the credit basket. What we are doing is looking 218 00:12:44,400 --> 00:12:47,840 Speaker 1: to the developing world to help, and I think everybody 219 00:12:47,880 --> 00:12:52,280 Speaker 1: needs removables, So we'll be transparent, will be easy to use. 220 00:12:52,840 --> 00:12:57,920 Speaker 1: The credits are verified, certified, and we're taking a second 221 00:12:57,920 --> 00:13:01,440 Speaker 1: look at them through uh gent I CANS Group. I 222 00:13:01,480 --> 00:13:04,880 Speaker 1: think that this is a sort of end to end process. 223 00:13:05,320 --> 00:13:08,640 Speaker 1: We are working with developers, were working with bropers and 224 00:13:08,679 --> 00:13:11,640 Speaker 1: we may actually source credits ourselves in the years to come. 225 00:13:11,840 --> 00:13:13,200 Speaker 1: And let me come back to you and talk about 226 00:13:13,240 --> 00:13:16,240 Speaker 1: the future of this business as as it were. How 227 00:13:16,240 --> 00:13:18,960 Speaker 1: big is the bread box? Well, let's just talk about 228 00:13:18,960 --> 00:13:23,840 Speaker 1: how big is the need? Uh? By any dimension, we 229 00:13:23,880 --> 00:13:26,839 Speaker 1: are looking at a need a delta of three and 230 00:13:26,920 --> 00:13:30,520 Speaker 1: a half to four trillion dollars a year needed to 231 00:13:30,840 --> 00:13:36,440 Speaker 1: create and NED zero world by and UH, the scientists, 232 00:13:36,440 --> 00:13:39,880 Speaker 1: the NGO's governments would like to see us get halfway 233 00:13:39,920 --> 00:13:45,360 Speaker 1: there by so or at least they're just simply isn't 234 00:13:45,760 --> 00:13:49,720 Speaker 1: enough money to do that in the current equation. Governments 235 00:13:49,760 --> 00:13:52,559 Speaker 1: can't do it, philanthropy can't do it, and businesses are 236 00:13:52,559 --> 00:13:54,840 Speaker 1: really not set up to do it. You will see 237 00:13:54,880 --> 00:13:56,679 Speaker 1: more of that in the years to come. But we're 238 00:13:56,720 --> 00:13:59,880 Speaker 1: talking about four trillion dollars a year that is needed 239 00:14:00,000 --> 00:14:04,000 Speaker 1: to fill this delta. Meanwhile, through uh, some commitments that 240 00:14:04,040 --> 00:14:06,199 Speaker 1: have been made, you know, about ninety percent of the 241 00:14:06,240 --> 00:14:09,120 Speaker 1: world is committed to some form of net zero. But 242 00:14:09,360 --> 00:14:13,360 Speaker 1: the Glasgow Financial Alliance for Net Zero, otherwise known as 243 00:14:13,440 --> 00:14:18,560 Speaker 1: Chief FANS, is a collection of five financial firms who 244 00:14:18,559 --> 00:14:21,280 Speaker 1: have committed to be net zero. For financial firms to 245 00:14:21,320 --> 00:14:24,000 Speaker 1: be net zero, all of their clients have to be 246 00:14:24,080 --> 00:14:27,520 Speaker 1: net zero. That means not just big corporates, but middle 247 00:14:27,560 --> 00:14:32,840 Speaker 1: market companies, small businesses, and ultimately consumers. So imagine that 248 00:14:32,960 --> 00:14:37,360 Speaker 1: kind of um task ahead of us to help clients 249 00:14:37,400 --> 00:14:43,360 Speaker 1: and customers become first carbon neutral, ultimately net zero. Well, 250 00:14:43,360 --> 00:14:45,520 Speaker 1: speaking for myself, I find it very exciting and we'll 251 00:14:45,560 --> 00:14:47,520 Speaker 1: be really curious to see how it develops. Thank you 252 00:14:47,560 --> 00:14:49,960 Speaker 1: so much for sharing with us. That's Tom montag and 253 00:14:49,960 --> 00:14:53,400 Speaker 1: and for Nuken of Rubicon Carbon. Coming up, we're gonna 254 00:14:53,400 --> 00:14:55,920 Speaker 1: explore the large and growing world of private credit with 255 00:14:56,080 --> 00:14:59,240 Speaker 1: Mike Arrighetti of Aries Management. That's next on Walter Read 256 00:14:59,360 --> 00:15:06,600 Speaker 1: on Bloomberg. This is Bloomberg Wall Street Week with David 257 00:15:06,640 --> 00:15:18,240 Speaker 1: Weston from Bloomberg Radio. Okay, credit, it's what makes the 258 00:15:18,280 --> 00:15:21,680 Speaker 1: business world go round, and years of fiscal and monetary 259 00:15:21,720 --> 00:15:24,880 Speaker 1: stimulus have made sure there's plenty of credit to go around. 260 00:15:25,320 --> 00:15:27,840 Speaker 1: But now the Fed and other central banks would like 261 00:15:27,920 --> 00:15:30,400 Speaker 1: there to be just a little less lending so we 262 00:15:30,400 --> 00:15:36,040 Speaker 1: can get inflation down. History cautions strongly against prematurely loosening policy. 263 00:15:36,280 --> 00:15:38,640 Speaker 1: We will stay the course until the job is done, 264 00:15:38,760 --> 00:15:42,080 Speaker 1: which is hitting deals, particularly when it comes to private equity. 265 00:15:42,280 --> 00:15:46,840 Speaker 1: What effects deal making is uncertainty. Uncertainty is the enemy 266 00:15:47,040 --> 00:15:49,560 Speaker 1: of deal making. But it turns out that as the 267 00:15:49,600 --> 00:15:52,760 Speaker 1: government regulates lending from the banks more the world of 268 00:15:52,840 --> 00:15:56,600 Speaker 1: private credit has exploded. And more you regulate parts of 269 00:15:56,640 --> 00:15:58,680 Speaker 1: the financial system, the money tends to flow to the 270 00:15:58,720 --> 00:16:01,600 Speaker 1: unregulated parts of the finance national system. Having all that 271 00:16:01,840 --> 00:16:04,600 Speaker 1: credit going on outside of the regulated part of the 272 00:16:04,640 --> 00:16:07,440 Speaker 1: economy is not ideal. But that leaves the question whether 273 00:16:07,600 --> 00:16:10,200 Speaker 1: private credit will be able to step in as the 274 00:16:10,200 --> 00:16:14,680 Speaker 1: banks pull back. Private credit is really important, but private 275 00:16:14,680 --> 00:16:17,920 Speaker 1: credit has also pulled back a little bit, not because 276 00:16:17,960 --> 00:16:22,520 Speaker 1: of uh, the availability of financing or because they're stuck 277 00:16:22,560 --> 00:16:26,400 Speaker 1: with bad loans like some of the large banks are, 278 00:16:26,800 --> 00:16:32,800 Speaker 1: but because of the enormous uncertainty. And to take us 279 00:16:32,840 --> 00:16:35,240 Speaker 1: into this large and growing world of private credit, we 280 00:16:35,280 --> 00:16:37,600 Speaker 1: welcome now one of the leaders in the area. He 281 00:16:37,840 --> 00:16:41,120 Speaker 1: is Mike Arreghetti, CEO of Areas Management. So Mike, thank 282 00:16:41,160 --> 00:16:43,160 Speaker 1: you so much. Welcome to Wall Street. Were great to 283 00:16:43,200 --> 00:16:45,040 Speaker 1: have you here, Thank you very much. We hear so 284 00:16:45,160 --> 00:16:47,440 Speaker 1: much about private credit these days and how big it is, 285 00:16:47,480 --> 00:16:49,720 Speaker 1: how big it's gotten give us your sense of just 286 00:16:49,800 --> 00:16:52,240 Speaker 1: how big it is right now and why it's gotten 287 00:16:52,320 --> 00:16:55,680 Speaker 1: this big. So when we talk about private credit, let 288 00:16:55,680 --> 00:16:59,640 Speaker 1: me just zoom out quickly. We're talking about lending that 289 00:16:59,760 --> 00:17:03,080 Speaker 1: is happening outside of the banking system, and that could 290 00:17:03,160 --> 00:17:09,439 Speaker 1: be in corporate, real estate, infrastructure, consumer. I think a 291 00:17:09,440 --> 00:17:12,320 Speaker 1: lot of the recent dialogue that that folks are paying 292 00:17:12,320 --> 00:17:15,679 Speaker 1: attention to is more along the opportunity and corporate lending. 293 00:17:16,160 --> 00:17:18,920 Speaker 1: That's the most devolved and the most developed market built 294 00:17:18,960 --> 00:17:22,560 Speaker 1: here in the US and globally. In terms of sizing, 295 00:17:23,080 --> 00:17:25,600 Speaker 1: no one white knows just because a lot of this 296 00:17:25,680 --> 00:17:29,240 Speaker 1: is in private hands. But order of magnetitude, the private 297 00:17:29,280 --> 00:17:32,280 Speaker 1: credit market for corporate than the US is about one brillion. 298 00:17:33,320 --> 00:17:37,240 Speaker 1: Juxtaposed that with CNI loans in the banking system, that 299 00:17:37,240 --> 00:17:39,960 Speaker 1: that due to two and a half times that uh 300 00:17:40,000 --> 00:17:42,520 Speaker 1: and almost at parity in terms of size. But the 301 00:17:42,600 --> 00:17:45,439 Speaker 1: leverage loan and HIH yield market. So what effect is 302 00:17:45,480 --> 00:17:49,280 Speaker 1: the increasing interest rates had the private credit business? Obviously 303 00:17:49,280 --> 00:17:51,399 Speaker 1: it's affecting a lot of business right now. It's harder 304 00:17:51,400 --> 00:17:53,320 Speaker 1: to get loans if you can get them at all, 305 00:17:53,359 --> 00:17:56,159 Speaker 1: They're more expensive. Yeah, I think private credit has tended 306 00:17:56,200 --> 00:17:59,639 Speaker 1: to outperform when rates are going up for two main reasons. 307 00:17:59,720 --> 00:18:02,960 Speaker 1: Number one, the structure of the loans are short duration 308 00:18:03,040 --> 00:18:06,760 Speaker 1: and floating rate, though they typically reprice every thirty to 309 00:18:06,920 --> 00:18:09,479 Speaker 1: ninety days, so as rates are going up, the return 310 00:18:09,560 --> 00:18:13,080 Speaker 1: is going up. Um that. Obviously, in an environment where 311 00:18:13,080 --> 00:18:15,800 Speaker 1: we're seeing a lot of building the equity markets and 312 00:18:15,920 --> 00:18:19,840 Speaker 1: valuations are challenged in the high grade markets, private credit 313 00:18:19,920 --> 00:18:22,040 Speaker 1: is a place where people can actually go to benefit 314 00:18:22,160 --> 00:18:26,400 Speaker 1: from from rising rates. The flip side of that, obviously 315 00:18:26,480 --> 00:18:29,480 Speaker 1: is that as rates are going up, debt service becomes 316 00:18:29,480 --> 00:18:32,960 Speaker 1: more challenging or leverage borrowers, and so part of the 317 00:18:33,000 --> 00:18:37,120 Speaker 1: conversation today is as you're generating this bess return, at 318 00:18:37,160 --> 00:18:41,960 Speaker 1: what point does the incremental interest rate challenge the companies? 319 00:18:42,119 --> 00:18:45,399 Speaker 1: I would say, as we sit here today, uh, still 320 00:18:45,680 --> 00:18:49,920 Speaker 1: really strong fundamental economic performance within the portfolios and not 321 00:18:50,119 --> 00:18:52,480 Speaker 1: any signs of stress really making their way through as 322 00:18:52,520 --> 00:18:54,119 Speaker 1: a result of the rate high might just pick up 323 00:18:54,160 --> 00:18:55,679 Speaker 1: on a couple of things you said there, because I 324 00:18:55,720 --> 00:18:58,159 Speaker 1: talked to one investor who said there's no such thing 325 00:18:58,200 --> 00:19:01,119 Speaker 1: as truly bulletproof in business, but these are close to it. 326 00:19:01,320 --> 00:19:02,919 Speaker 1: And I guess it's because of the two things you 327 00:19:03,000 --> 00:19:05,919 Speaker 1: mentioned the short duration and also the fact you've got 328 00:19:05,920 --> 00:19:08,560 Speaker 1: floating rates, so if interest rates go up, you're protected. Well, 329 00:19:08,600 --> 00:19:10,960 Speaker 1: I hope that person he spoke to is an area's 330 00:19:11,000 --> 00:19:13,280 Speaker 1: investor already, but if they're not, I hope to watch 331 00:19:13,560 --> 00:19:17,440 Speaker 1: this show of bulletproof. Is always something that you don't 332 00:19:17,440 --> 00:19:19,520 Speaker 1: want to talk about an investment, but I would agree 333 00:19:19,520 --> 00:19:23,040 Speaker 1: at this point in the cycle, private credit is a 334 00:19:23,080 --> 00:19:26,680 Speaker 1: good place to be floating rate. As we said, short duration, 335 00:19:26,720 --> 00:19:30,040 Speaker 1: but also senior succored. So if you think about where 336 00:19:30,080 --> 00:19:34,600 Speaker 1: these exposures sit in a company's balance sheet or relative 337 00:19:34,640 --> 00:19:38,240 Speaker 1: to the value of an asset, today, most private credit 338 00:19:38,320 --> 00:19:42,360 Speaker 1: loans are sitting in the top half of the capital structure, 339 00:19:42,400 --> 00:19:47,879 Speaker 1: which means that there's institutional equity supporting those loans dollar 340 00:19:48,000 --> 00:19:51,119 Speaker 1: for dollar. So there's a significant amount of equity valuation 341 00:19:51,320 --> 00:19:54,240 Speaker 1: that would have to deterior rate before you begin to 342 00:19:54,280 --> 00:19:57,560 Speaker 1: have a conversation about principle US on private credit. Mike, 343 00:19:57,600 --> 00:20:00,840 Speaker 1: you mentioned areas investors, and I wonder whether you're having, 344 00:20:00,840 --> 00:20:04,119 Speaker 1: if anything, an easier time in getting investors these days, 345 00:20:04,160 --> 00:20:07,000 Speaker 1: because interest rates going up necessarily affect the value of 346 00:20:07,040 --> 00:20:09,439 Speaker 1: equities just because of the discount rate. It makes it 347 00:20:09,520 --> 00:20:14,120 Speaker 1: less attractive. Has private credit has become more attractive relative 348 00:20:14,200 --> 00:20:16,879 Speaker 1: to equities as an alternative investment I think so. You 349 00:20:16,920 --> 00:20:20,560 Speaker 1: know in areas managers posted three fifty billion dollars of 350 00:20:20,600 --> 00:20:23,880 Speaker 1: assets globally, and we have funds that we offer across 351 00:20:23,920 --> 00:20:27,600 Speaker 1: the alternative spectrum, including private equity. I would say, as 352 00:20:27,600 --> 00:20:33,040 Speaker 1: a general observation investor, appetite for door play equity product 353 00:20:33,160 --> 00:20:36,360 Speaker 1: is pretty muted right now, simply because, as you point out, 354 00:20:36,680 --> 00:20:39,520 Speaker 1: valuations are challenged and if you think about the drivers 355 00:20:39,520 --> 00:20:42,280 Speaker 1: a return in that market, earnings growth is going to 356 00:20:42,320 --> 00:20:46,800 Speaker 1: be muted. Availability of leverage is difficult. Cost of capitals 357 00:20:46,840 --> 00:20:48,720 Speaker 1: by Mike, thank you so much for joining us in 358 00:20:48,760 --> 00:20:51,040 Speaker 1: Wall Street Week. As Mike Arri got it, he CEO 359 00:20:51,520 --> 00:20:56,360 Speaker 1: of Arias Management, coming up. We wrap up the week 360 00:20:56,400 --> 00:21:00,480 Speaker 1: with our special contributy to Larry Summers of Harvard. That's 361 00:21:00,480 --> 00:21:10,880 Speaker 1: next on Wall Street Week on Bloomberg. This is Wall 362 00:21:10,880 --> 00:21:13,280 Speaker 1: Street Week. I'm David Weston. We're joined now once again 363 00:21:13,280 --> 00:21:15,240 Speaker 1: by a very special contributor to Wall Street Week. He 364 00:21:15,359 --> 00:21:17,480 Speaker 1: is Larry Summers of Harvard. So, Larry, I have to say, 365 00:21:17,800 --> 00:21:19,680 Speaker 1: until Friday, I thought the big story was going to 366 00:21:19,800 --> 00:21:22,120 Speaker 1: be what j Powell had to say. And then those 367 00:21:22,200 --> 00:21:24,520 Speaker 1: jobs nevers came in, And obviously the number of jobs 368 00:21:24,600 --> 00:21:27,960 Speaker 1: is really impressive, but also the average hourly wage. Wow, 369 00:21:28,920 --> 00:21:31,240 Speaker 1: look what we saw was a seven and a half 370 00:21:31,280 --> 00:21:35,160 Speaker 1: percent annual rate wage increase for the month, a six 371 00:21:35,200 --> 00:21:38,480 Speaker 1: percent wage increase for the last three months, at a 372 00:21:38,520 --> 00:21:42,399 Speaker 1: five percent increase for the year. So it's high, and 373 00:21:42,600 --> 00:21:47,200 Speaker 1: it's rising, and the labor market is strong, and we're 374 00:21:47,280 --> 00:21:51,760 Speaker 1: still in unprecedented territory in terms of the gap between 375 00:21:51,880 --> 00:21:55,440 Speaker 1: vacancies and jobs. And I think that what that's got 376 00:21:55,440 --> 00:21:57,920 Speaker 1: to tell you is that we had a long way 377 00:21:57,960 --> 00:22:01,960 Speaker 1: to go to get an inflation down where the FED 378 00:22:02,040 --> 00:22:05,800 Speaker 1: has said that it wants it uh to be. We 379 00:22:05,800 --> 00:22:08,000 Speaker 1: don't know where this is, how this is all going 380 00:22:08,119 --> 00:22:12,280 Speaker 1: to play out, but for my money, the best single 381 00:22:12,359 --> 00:22:17,160 Speaker 1: measure of core underlying inflation is to look at wages. 382 00:22:17,960 --> 00:22:23,479 Speaker 1: It's interesting. That's what Paul Krugman acknowledged today when he 383 00:22:23,520 --> 00:22:28,040 Speaker 1: said that he was shaken in his views by these numbers. 384 00:22:28,119 --> 00:22:31,040 Speaker 1: And I think what this is telling us is that 385 00:22:31,160 --> 00:22:34,280 Speaker 1: the Fed's got a long way to go, and so 386 00:22:34,440 --> 00:22:35,880 Speaker 1: how is that going to happen? I mean, we heard 387 00:22:35,960 --> 00:22:38,440 Speaker 1: J Powell talk about the Jolts numbers, for example, say 388 00:22:38,440 --> 00:22:40,639 Speaker 1: we've got a big gap between the people trying to 389 00:22:40,680 --> 00:22:42,639 Speaker 1: get people to work and the people actually working. As 390 00:22:42,640 --> 00:22:44,680 Speaker 1: long as you have that, you've got this pressure. He said, 391 00:22:44,720 --> 00:22:47,080 Speaker 1: we've got to get demand down so that in fact 392 00:22:47,119 --> 00:22:49,120 Speaker 1: we are not seeking as many people in the workforce, 393 00:22:49,280 --> 00:22:51,160 Speaker 1: But how do they get done. It's not getting done yet. 394 00:22:51,720 --> 00:22:54,040 Speaker 1: It's not getting done yet. And what that says is 395 00:22:54,119 --> 00:22:58,160 Speaker 1: we're probably gonna need increases in interest rates. I suspect 396 00:22:58,200 --> 00:23:01,040 Speaker 1: they're going to need more increased as an interest rates, 397 00:23:01,119 --> 00:23:05,680 Speaker 1: and the market is now judging or than they're now saying. Look, 398 00:23:06,080 --> 00:23:10,520 Speaker 1: every every time they revise their forecast of inflation up, 399 00:23:10,920 --> 00:23:14,919 Speaker 1: and they regard revised their forecast of ultimate unemployment up 400 00:23:14,960 --> 00:23:17,760 Speaker 1: as well. And gosh, we've all been at the airport 401 00:23:17,880 --> 00:23:19,719 Speaker 1: and they say it's leaving at seven thirty, and then 402 00:23:19,760 --> 00:23:21,359 Speaker 1: they say it's leaving at eight thirty, and then they 403 00:23:21,400 --> 00:23:23,680 Speaker 1: say it's leaving at nine thirty. And when I see 404 00:23:23,680 --> 00:23:26,200 Speaker 1: that happen, I think it's leaving at eleven. And it's 405 00:23:26,200 --> 00:23:31,399 Speaker 1: something like that with these economic uh forecasts. So I 406 00:23:31,440 --> 00:23:34,879 Speaker 1: hope I'm wrong, but my sense is that inflation is 407 00:23:34,920 --> 00:23:38,919 Speaker 1: going to be a little more sustained than what people 408 00:23:38,960 --> 00:23:43,560 Speaker 1: are looking for. And my sense, uh also is that 409 00:23:44,000 --> 00:23:49,240 Speaker 1: it's much harder than many people think to achieve a 410 00:23:49,359 --> 00:23:53,360 Speaker 1: soft landing because there are all these mechanisms that kick in. 411 00:23:53,400 --> 00:23:57,800 Speaker 1: At a certain point, consumers run out of their savings 412 00:23:57,840 --> 00:24:01,159 Speaker 1: and then you have a wily coyote kind of moment 413 00:24:01,200 --> 00:24:04,600 Speaker 1: where consumption falls off. At a certain point, people start 414 00:24:04,640 --> 00:24:07,080 Speaker 1: putting their houses on the market, and then you see 415 00:24:07,119 --> 00:24:10,320 Speaker 1: how house prices falling, and then other people rush to 416 00:24:10,400 --> 00:24:12,719 Speaker 1: put them on the market. At a certain point, you 417 00:24:12,760 --> 00:24:15,960 Speaker 1: see credit drying up. And when credit dries up, people 418 00:24:16,000 --> 00:24:21,320 Speaker 1: can't pay back. Uh, they're old, they're old borrowing. So 419 00:24:21,600 --> 00:24:24,480 Speaker 1: there is this proposition We've talked about it before on 420 00:24:24,520 --> 00:24:27,919 Speaker 1: the show, David. It's called Psalm's rule that says that 421 00:24:27,960 --> 00:24:30,520 Speaker 1: when the unemployment rate goes up by half a percent, 422 00:24:30,920 --> 00:24:33,920 Speaker 1: it goes up by more than two percent. And that's 423 00:24:33,960 --> 00:24:38,040 Speaker 1: because once you get into a negative situation, there's an 424 00:24:38,080 --> 00:24:42,080 Speaker 1: avalanche aspect, and I think we have a real risk 425 00:24:42,160 --> 00:24:45,919 Speaker 1: that that's going to happen at some point. So to 426 00:24:45,920 --> 00:24:48,640 Speaker 1: continue your airport analogy, when is the plane going to leave? 427 00:24:48,680 --> 00:24:50,880 Speaker 1: Because we heard j Powell this week say don't pay 428 00:24:50,920 --> 00:24:52,840 Speaker 1: as much attention to how fast we're going, because every 429 00:24:52,920 --> 00:24:55,480 Speaker 1: jumped in the fact he was pretty clearly seeking fifty basis. 430 00:24:56,520 --> 00:24:58,760 Speaker 1: He said, pay attention to the terminal rate. I'm not 431 00:24:58,760 --> 00:25:00,800 Speaker 1: sure the markets did that. So where do you think 432 00:25:00,800 --> 00:25:03,879 Speaker 1: the term rate is now? Look, I've been saying that 433 00:25:04,119 --> 00:25:07,000 Speaker 1: relative to the five, it's priced into the market a 434 00:25:07,000 --> 00:25:09,920 Speaker 1: little below five. I think that's got to be low, 435 00:25:10,720 --> 00:25:13,679 Speaker 1: or likely to be low, because I always try to 436 00:25:13,720 --> 00:25:17,560 Speaker 1: look for possible errors, and four seems almost impossible, and 437 00:25:17,760 --> 00:25:20,840 Speaker 1: six is certainly a scenario we can write. And that 438 00:25:20,880 --> 00:25:23,840 Speaker 1: tells me that five is not a good best uh 439 00:25:24,440 --> 00:25:27,919 Speaker 1: guess for where it's going to be. In terms of 440 00:25:27,960 --> 00:25:30,800 Speaker 1: what will happen, I guess. I think there's an old 441 00:25:30,880 --> 00:25:34,000 Speaker 1: saying that things happen faster than you think they will, 442 00:25:35,320 --> 00:25:37,520 Speaker 1: don't happen as fast as you think they will, and 443 00:25:37,560 --> 00:25:40,359 Speaker 1: then they happen faster than you thought they could. And 444 00:25:40,400 --> 00:25:42,440 Speaker 1: I think that may be the way it is with 445 00:25:43,200 --> 00:25:45,639 Speaker 1: the downturn. I don't know when it's going to come, 446 00:25:46,080 --> 00:25:48,240 Speaker 1: but when it kicks in, I suspect it will be 447 00:25:48,280 --> 00:25:50,720 Speaker 1: fairly forceful. I got an email, as you know, Larry, 448 00:25:50,720 --> 00:25:53,199 Speaker 1: this week from a loyal viewer of Walter, particularly a 449 00:25:53,200 --> 00:25:55,479 Speaker 1: loyal viewer of yours, saying, I really love hearing from 450 00:25:55,520 --> 00:25:57,920 Speaker 1: Larious Summers, and he asked the question, he said, what's 451 00:25:57,960 --> 00:26:00,440 Speaker 1: so magic about the two percent? I mean, why can't 452 00:26:00,440 --> 00:26:03,440 Speaker 1: we live with three percent or four percent for that matter. 453 00:26:05,280 --> 00:26:08,880 Speaker 1: First of all, I think it's important to understand that, 454 00:26:09,520 --> 00:26:14,360 Speaker 1: having failed for a while to hit two percent, it's 455 00:26:14,440 --> 00:26:18,159 Speaker 1: kind of problematic then to declare that it's no longer 456 00:26:18,200 --> 00:26:21,440 Speaker 1: our goal, even if it was a somewhat arbitrary goal 457 00:26:21,480 --> 00:26:25,360 Speaker 1: in the first place. Second, we've already backed away from 458 00:26:25,359 --> 00:26:29,040 Speaker 1: the two percent in a sense, we've been for years 459 00:26:29,440 --> 00:26:33,399 Speaker 1: well above two percent, and nobody's saying we should swing 460 00:26:33,440 --> 00:26:37,040 Speaker 1: below two percent, so it all averages out to be two. 461 00:26:37,640 --> 00:26:41,720 Speaker 1: So in some sense, we're already not really trying for 462 00:26:41,800 --> 00:26:45,000 Speaker 1: a two percent average inflation target. We're trying for a 463 00:26:45,000 --> 00:26:50,040 Speaker 1: two percent minimum inflation UH target, and that's different than 464 00:26:50,119 --> 00:26:54,159 Speaker 1: what we originally set out to So we've already eased. Third. 465 00:26:54,600 --> 00:26:58,200 Speaker 1: If we settle in for a three percent inflation target, 466 00:26:58,480 --> 00:27:01,200 Speaker 1: then where do we think it's gonna go. Presumably there's 467 00:27:01,200 --> 00:27:04,200 Speaker 1: gonna be a low point of inflation in this cycle, David, 468 00:27:04,720 --> 00:27:08,560 Speaker 1: and from that low point it will rise. So saying 469 00:27:08,720 --> 00:27:12,720 Speaker 1: three percent as a target for what we're disinflating too, 470 00:27:13,359 --> 00:27:17,439 Speaker 1: isn't saying three percent as an average for UH the 471 00:27:17,520 --> 00:27:20,960 Speaker 1: next cycle. So what I think we should do is 472 00:27:21,040 --> 00:27:26,440 Speaker 1: stay with the two target, recognize in as I think 473 00:27:26,480 --> 00:27:31,719 Speaker 1: is surely right UH that uh, that's gonna be a 474 00:27:31,800 --> 00:27:36,320 Speaker 1: low point, not at average, But I think that's all right. 475 00:27:36,800 --> 00:27:38,920 Speaker 1: There was news that went beyond these economy this weekend. 476 00:27:38,920 --> 00:27:41,000 Speaker 1: It had to do with China. We had demonstrations at 477 00:27:40,960 --> 00:27:42,800 Speaker 1: the beginning of the week. They seem to be settling 478 00:27:42,800 --> 00:27:44,520 Speaker 1: down a little bit because there's easing off on the 479 00:27:44,560 --> 00:27:47,680 Speaker 1: COVID restrictions, but it's pretty clear that the Chinese economy 480 00:27:47,720 --> 00:27:50,400 Speaker 1: is struggling some in part because of those restrictions. Give 481 00:27:50,480 --> 00:27:52,439 Speaker 1: us a sense of what the risks are there for 482 00:27:52,480 --> 00:27:54,440 Speaker 1: the global economy because of what's going on to China 483 00:27:54,520 --> 00:27:58,000 Speaker 1: right now. Look, it's possible that we're going to gain 484 00:27:58,040 --> 00:28:01,840 Speaker 1: a little strength because it's white possible that they are 485 00:28:01,880 --> 00:28:05,760 Speaker 1: going to open up a bit in response to these 486 00:28:05,960 --> 00:28:09,440 Speaker 1: UH protests, and then the Chinese economy is going to 487 00:28:09,560 --> 00:28:12,359 Speaker 1: go faster, and when it goes faster, that will be 488 00:28:12,400 --> 00:28:15,199 Speaker 1: an impetus to commodity prices that will help parts of 489 00:28:15,200 --> 00:28:19,439 Speaker 1: the global economy. I think the challenge for them is 490 00:28:19,600 --> 00:28:22,840 Speaker 1: that they've only got one fifth as many intensive care 491 00:28:22,960 --> 00:28:25,920 Speaker 1: units per person and a third as many nurses as 492 00:28:25,920 --> 00:28:29,520 Speaker 1: we do per person, and they don't have much immunity, 493 00:28:29,960 --> 00:28:33,520 Speaker 1: and so it could spread like wildfire, and they could 494 00:28:33,520 --> 00:28:37,760 Speaker 1: have a very scary situation, and that's their tension. Really, 495 00:28:37,800 --> 00:28:40,200 Speaker 1: they can save the economy or they can save their 496 00:28:40,240 --> 00:28:44,080 Speaker 1: populations uh near perfect health. But I don't think they're 497 00:28:44,120 --> 00:28:45,880 Speaker 1: gonna be able to do both well. And to your point, 498 00:28:45,960 --> 00:28:47,760 Speaker 1: Larreas seems to be that we can sit here and 499 00:28:47,760 --> 00:28:49,760 Speaker 1: say you should ease up some of your cover destrictions. 500 00:28:49,880 --> 00:28:51,719 Speaker 1: They have to be data dependent in their own way. 501 00:28:51,760 --> 00:28:53,640 Speaker 1: It depends on how many infections they get, how many 502 00:28:53,680 --> 00:28:56,520 Speaker 1: intensive care units have used. They may have to adjust 503 00:28:56,720 --> 00:28:59,120 Speaker 1: their approach. They're surely going to have to adjust. They're 504 00:28:59,160 --> 00:29:02,880 Speaker 1: surely going to have to tight trate uh their approach 505 00:29:03,640 --> 00:29:05,880 Speaker 1: over time, and I don't think it's gonna be easy. 506 00:29:06,320 --> 00:29:08,320 Speaker 1: I do think sooner or later they're going to have 507 00:29:08,400 --> 00:29:11,080 Speaker 1: to do this, and they're not gaining a lot by 508 00:29:11,200 --> 00:29:14,600 Speaker 1: postponing it. So I think a managed exit from zero 509 00:29:14,680 --> 00:29:17,400 Speaker 1: COVID is probably the right thing for them to do, 510 00:29:17,560 --> 00:29:19,720 Speaker 1: and I think the protesters have probably pushed them in 511 00:29:19,720 --> 00:29:22,800 Speaker 1: that direction, and that's probably a good thing for them 512 00:29:22,960 --> 00:29:25,400 Speaker 1: and for the global economy. But it's going to be 513 00:29:25,480 --> 00:29:27,840 Speaker 1: a very rough patch. It's so great to have you 514 00:29:27,960 --> 00:29:29,200 Speaker 1: here and have you here in New York as the 515 00:29:29,200 --> 00:29:30,560 Speaker 1: wonder world to be with you. Thank you so much. 516 00:29:30,720 --> 00:29:34,120 Speaker 1: That is our very special contributor, Larry Summers of Harvard. Finally, 517 00:29:34,240 --> 00:29:37,880 Speaker 1: one more thought, the power of no. All of us 518 00:29:37,920 --> 00:29:40,360 Speaker 1: like to hear people agree with us, so we're none 519 00:29:40,360 --> 00:29:42,920 Speaker 1: too happy when people go the other way, when they 520 00:29:42,920 --> 00:29:45,320 Speaker 1: tell us that we are just playing wrong, like former 521 00:29:45,440 --> 00:29:48,520 Speaker 1: Vice President Mike Pence recently did to Senator Elizabeth Warren 522 00:29:48,560 --> 00:29:52,000 Speaker 1: on the subject of abortion counseling Senator Warren, you couldn't 523 00:29:52,040 --> 00:29:56,520 Speaker 1: be more wrong. But sometimes being told no is exactly 524 00:29:56,520 --> 00:29:59,320 Speaker 1: what we need, whether we want it or not. Take 525 00:29:59,360 --> 00:30:02,080 Speaker 1: for example, as an amputent and his ill fated decision 526 00:30:02,080 --> 00:30:06,000 Speaker 1: to invade Ukraine, something that hasn't gone particularly well for him. 527 00:30:06,040 --> 00:30:10,160 Speaker 1: A bunch of countries are watching him make mistake after 528 00:30:10,240 --> 00:30:13,880 Speaker 1: mistake and not wanting to associate themselves with, as Donald 529 00:30:13,880 --> 00:30:17,000 Speaker 1: Trump would say, a loser, and people at least those 530 00:30:17,040 --> 00:30:20,280 Speaker 1: outside of Russia suspect Prutent's problems are the result of 531 00:30:20,360 --> 00:30:23,320 Speaker 1: his being surrounded by yes men. I don't think there's 532 00:30:23,360 --> 00:30:27,240 Speaker 1: any question that Russian intelligence got this wrong. Or consider 533 00:30:27,320 --> 00:30:30,040 Speaker 1: the plight of President Z of China as he enters 534 00:30:30,080 --> 00:30:33,800 Speaker 1: his historic third term as president. A month ago, he 535 00:30:33,840 --> 00:30:37,200 Speaker 1: emerged triumphant at the end of his twentieth Party Congress 536 00:30:37,200 --> 00:30:40,120 Speaker 1: with his hand picked team. As described by Very Lovely 537 00:30:40,400 --> 00:30:43,400 Speaker 1: of the Peterson Institute, we now have what we might 538 00:30:43,440 --> 00:30:45,680 Speaker 1: think of as all the King's men. But this week 539 00:30:45,840 --> 00:30:50,520 Speaker 1: President g was confronted with demonstrations protesting his zero COVID policy. 540 00:30:50,800 --> 00:30:54,600 Speaker 1: This is a big deal, these political protests, because they're 541 00:30:54,600 --> 00:30:58,000 Speaker 1: happening across the country at the same time in multiple occasions. 542 00:30:58,160 --> 00:31:00,400 Speaker 1: You just have to wonder whether that hand and picked 543 00:31:00,440 --> 00:31:03,800 Speaker 1: team is exactly what President ge needs right now. And 544 00:31:03,800 --> 00:31:05,760 Speaker 1: when it comes to the power of no maybe that 545 00:31:05,880 --> 00:31:08,479 Speaker 1: is exactly what former President Donald Trump could use down 546 00:31:08,520 --> 00:31:11,440 Speaker 1: at marral Lago about now, as he managed to hold 547 00:31:11,440 --> 00:31:14,040 Speaker 1: a dinner party that included yea who has been accused 548 00:31:14,040 --> 00:31:16,080 Speaker 1: of being anti Semitic, and let him bring along with 549 00:31:16,120 --> 00:31:19,080 Speaker 1: him a friend who everyone agrees is anti Semitic. Nick 550 00:31:19,120 --> 00:31:25,479 Speaker 1: flentis avowed Nazi sympathizers, white nationalist, anti semi I mean, 551 00:31:25,520 --> 00:31:27,719 Speaker 1: let we go through the list, and it long lasts. 552 00:31:27,760 --> 00:31:30,120 Speaker 1: It looks like Mr Trump maybe getting a taste of 553 00:31:30,280 --> 00:31:33,640 Speaker 1: no from leaders in his own party. From Senate Minority 554 00:31:33,720 --> 00:31:38,320 Speaker 1: Leader Mitch McConnell, there is no room in the Republican 555 00:31:38,480 --> 00:31:45,160 Speaker 1: Party for anti semitism or white supremacy. To the likely 556 00:31:45,280 --> 00:31:47,880 Speaker 1: next Speaker of the House, Kevin McCarthy, I don't think 557 00:31:47,920 --> 00:31:50,840 Speaker 1: anybody should be spending any time with Nick Flinch as 558 00:31:50,880 --> 00:31:53,360 Speaker 1: he has no place in this Republican Party. To Mr 559 00:31:53,400 --> 00:31:57,040 Speaker 1: Trump's former Vice president himself, Mike Pence, I think the 560 00:31:57,040 --> 00:32:02,720 Speaker 1: President demonstrated profoundly poor judgment uh in in giving those 561 00:32:02,760 --> 00:32:06,000 Speaker 1: individuals a seat at the table. It may not be 562 00:32:06,120 --> 00:32:08,880 Speaker 1: what we want to hear, but sometimes no is the 563 00:32:08,920 --> 00:32:12,520 Speaker 1: best answer. That is, if we are listening, that does it. 564 00:32:12,600 --> 00:32:14,800 Speaker 1: For this episode of Wall Street Week, I'm David Weston. 565 00:32:14,920 --> 00:32:16,720 Speaker 1: This is Bloomberg. See you next week.