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Speaker 1: This is Bloomberg Wall Street Week with David Weston from

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Speaker 1: Bloomberg Radio.

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Speaker 2: This is Wall Street Week. I'm David Weston, bringing you

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Speaker 2: stories of capitalism this week, reconciliation, what's needed to make

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Speaker 2: the tough decisions surrounding the national debt, and a look

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Speaker 2: at one of Wall Street's passion assets. We talk with collectors, advisors,

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Speaker 2: and auctioneers about the big business of fine art, but

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Speaker 2: we start with a story about demand, specifically the demand

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Speaker 2: for artificial intelligence. We know it will be big, and

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Speaker 2: that means we're going to need massive computing power from

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Speaker 2: data centers, and lots of them.

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Speaker 3: When you see the world's leading technology companies who are

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Speaker 3: as close to this as anybody, making the scale of

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Speaker 3: investments that they are, to me, that's an extraordinary sign

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Speaker 3: of the potential that they see in the future.

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Speaker 2: Eric Schwartz is CEO of cyrus I, one of the

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Speaker 2: largest data center owners and operators in the world. Schwartz

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Speaker 2: is at the forefront of a modern gold rush as

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Speaker 2: big tech companies scramble for the resources to turn electricity

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Speaker 2: into computing power. We wanted to see for ourselves what

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Speaker 2: the building blocks of the AI boom looked like. And

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Speaker 2: so we traveled to Texas, a state with one of

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Speaker 2: the highest numbers of data centers in the United States.

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Speaker 2: In a suburb north of Dallas, we met with Schwartz

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Speaker 2: at one of his firm's new facilities. It spans nearly

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Speaker 2: a million square feet. We toured the massive, high ceiling

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Speaker 2: building filled with row upon row of black cabinets shielding

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Speaker 2: racks of computers from prying eyes, all of which are

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Speaker 2: built a meter or so above ground level to permit

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Speaker 2: an elaborate system to pump cool air up into the

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Speaker 2: computer ax That explains the high ceilings, which let the

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Speaker 2: warm air rise to be recycled through the cooling system.

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Speaker 2: Schwartz says the race to build data centers like his

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Speaker 2: in Texas is only getting started, with Cyrus one in

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Speaker 2: the process of adding additional buildings and capacity next to

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Speaker 2: its current facilities.

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Speaker 3: The risk to us as a developer for those customers

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Speaker 3: is to ensure that we can keep up with their

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Speaker 3: demand and that we're delivering both capacity and service at

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Speaker 3: the levels they require. They're all operating mission critical infrastructure,

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Speaker 3: and their expectations are intensely high. We do our best

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Speaker 3: and are constantly investing to ensure that we can keep

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Speaker 3: up with those expectations. But our real challenge is to

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Speaker 3: make sure that we're keeping up with their requirements because

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Speaker 3: they're counting on this infrastructure to support the growth investments

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Speaker 3: that they're making.

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Speaker 2: Keeping up with those requirements is not going to be easy.

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Speaker 2: But the good news for the United States is that

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Speaker 2: it has a strong head start. There are more than

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Speaker 2: seven thousand data centers worldwide, with nearly two thousand in

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Speaker 2: America alone. US data center capacity grew almost a quarter

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Speaker 2: in the last year alone, with another seventy percent set

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Speaker 2: to come online from centers already under construction.

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Speaker 3: Today, the United States is a substantially larger data center

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Speaker 3: market than the other regions around the world, and that's

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Speaker 3: driven in part by the adoption of the Internet, by

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Speaker 3: the presence of the large technology companies who are based here,

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Speaker 3: but also by the fact that investment and progress against

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Speaker 3: artificial intelligence here in the United States is further advanced

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Speaker 3: than it is in other regions, and so right now

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Speaker 3: you'll see much stronger demanding growth in the United States.

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Speaker 3: Other countries around the world are very focused on the

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Speaker 3: implications of artificial intelligence and are concerned about making sure

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Speaker 3: that they have the infrastructure in their economies to keep up.

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Speaker 3: And so we're seeing and will continue to see efforts

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Speaker 3: by other countries around the world to support that type

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Speaker 3: of infrastructure in their countries to support their economies and

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Speaker 3: their growth.

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Speaker 2: Valtimore Slayzak is kkir's global head of Digital Infrastructure. His

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Speaker 2: firm is making big investments in data centers, including when

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Speaker 2: it teams with Global Infrastructure partners to buy Eric Schwartz's

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Speaker 2: Cyrus one for fifteen billion dollars back in twenty twenty two.

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Speaker 2: Like Schwartz, he sees big opportunities coming in Europe and

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Speaker 2: in Asia.

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Speaker 4: US is definitely, at least from our perspective, well ahead

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Speaker 4: in terms of the deployment of AI, and I think

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Speaker 4: it is a strategic element of I think the growth

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Speaker 4: going forward. If you just think about a couple of

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Speaker 4: maybe examples cloud companies, US cloud companies have about seventy

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Speaker 4: five percent global market share in terms of AI funding.

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Speaker 4: Eighty percent of it is coming in the United States.

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Speaker 4: So US is definitely leading the charge, so to speak,

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Speaker 4: in terms of deployment. But I think we see the

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Speaker 4: similar playbook being applied in Europe and in Asia Pacific.

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Speaker 4: But just to try to quantify the scale of it.

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Speaker 4: US data center market is about a fifteen gigabott market

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Speaker 4: growing to forty gigawatts. European market is about six gigabotte market,

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Speaker 4: likely going to triple or quadruple over the next four

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Speaker 4: or five years to twenty gigabotts, and then Asia Pacific

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Speaker 4: x China is on a similar trajectory, so the scale

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Speaker 4: is really different between US and those other markets.

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Speaker 2: Meeting that growing demand for data centers will not be easy.

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Speaker 2: There are a host of potential hurdles that people like

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Speaker 2: Christine Wood, headed the data center practice at Burns McDonald,

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Speaker 2: are finding ways to overcome.

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Speaker 5: We're looking at water availability, connectivity, location, demand, latency, and

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Speaker 5: then we secondarily look at the regulations, whether or not

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Speaker 5: they have zoning appropriate, zoning requirements, tax incentives, and really

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Speaker 5: if it makes a business business sense to be in

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Speaker 5: that specific location. And then once you go into more

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Speaker 5: of the design and construction, what we're starting to see

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Speaker 5: and what we have been doing, especially with our construction arm,

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Speaker 5: is that we really want to get ahead of some

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Speaker 5: of the labor and craft labor shortages that we see

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Speaker 5: out on site, and so we are designing data centers

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Speaker 5: that are more modular, have skid are able to work

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Speaker 5: within the craft shops of these different self performed contractors,

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Speaker 5: so that we can deploy these data centers more rapidly

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Speaker 5: and on a scalable basis.

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Speaker 2: But as big as those obstacles may be, the biggest

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Speaker 2: by far is finding the electricity of the centers require,

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Speaker 2: with Goldman Sachs estimating that they already consume one to

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Speaker 2: two percent of all the power supplied worldwide and that

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Speaker 2: that number could double by the end of the decade.

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Speaker 5: Power is becoming the long pole in the tent to

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Speaker 5: be able to find a data center site, and so

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Speaker 5: it really starts with that is the power puzzle that

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Speaker 5: we're seeing associated with the data center sites. And so

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Speaker 5: when we're walking through looking for great sites and supporting

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Speaker 5: our clients on the site due diligence is we're looking for.

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Speaker 5: Power is the number one item.

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Speaker 2: For data centers and their clients. Having enough power is necessary,

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Speaker 2: but not sufficient. The power also has to be there

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Speaker 2: without fail and without interruption of any kind.

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Speaker 3: No excuses. The infrastructure that it's operating here needs to

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Speaker 3: be available twenty four hours a day, three hundred and

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Speaker 3: sixty five days a year. Without interruption. So where it

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Speaker 3: starts is that for all of the equipment that we

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Speaker 3: have deployed here, whether it's the battery banks, whether it's

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Speaker 3: the cooling units, all of that, there is always a

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Speaker 3: backup for that equipment in the event that something were

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Speaker 3: to fail, and things always fail and you need to

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Speaker 3: have a backup to ensure that you don't have an interruption.

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Speaker 2: That backup at cyrus One's new Texas facility means layer

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Speaker 2: after layer of redundancy. The facility gets power straight from

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Speaker 2: the grid, but if that fails, batteries located behind the

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Speaker 2: data center kick in. Those batteries are kept fully charged

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Speaker 2: by a series of generators which are constantly running, and

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Speaker 2: if all else fails, behind the batteries are a role

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Speaker 2: of equally large diesel powered locomotive engines. If a power

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Speaker 2: outage lasts beyond the life of the batteries, the engines

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Speaker 2: take over to ensure there's nothing to stop the center's operation,

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Speaker 2: including its elaborate cooling system, no matter what the problem.

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Speaker 2: Eric Schwartz says this unprecedented need for a liable power

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Speaker 2: goes beyond just finding out where to get it and

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Speaker 2: how to make sure it's uninterrupted. It also demands an

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Speaker 2: upgrade if the entire way we generate and distribute power

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Speaker 2: in the United States and elsewhere.

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Speaker 3: So data centers are effectively technology factories, and like any factory,

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Speaker 3: we draw power to operate to operate the factory. And

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Speaker 3: so the challenge and the work that we do is

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Speaker 3: to work very closely with the utilities and the grid

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Speaker 3: operators to identify the right locations where we can connect

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Speaker 3: to that power and ultimately deliver it to our customers.

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Speaker 3: And this requires work and require there's a lot of collaboration.

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Speaker 3: But the United States in particular, then other countries as

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Speaker 3: well are investing in growing their power infrastructure, not only

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Speaker 3: for scale but for sustainability, and we're very focused on

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Speaker 3: making sure that we're locating in the right places.

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Speaker 4: Ultimately, what we think is will require a comprehensive solution.

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Speaker 4: So the technology companies themselves are large consumers of of

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Speaker 4: course this infrastructure, but that's not the only demand driver.

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Speaker 4: It's also unsharing, it's electrification. So there's other what I

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Speaker 4: would say are great signs of economic progress and growth

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Speaker 4: in the United States, and we should be really proud

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Speaker 4: of that, but it requires a new investment in generation

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Speaker 4: and in transmission right, it's something that we really haven't

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Speaker 4: seen over the last twenty years. So if you look

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Speaker 4: at the US grid over the last twenty years, effectively

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Speaker 4: stagnated in terms of the demand growth at about forty

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Speaker 4: one hundred TARO wide hours. What's really interesting that there's

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Speaker 4: been an interesting energy transition during that time. We've decommissioned

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Speaker 4: a lot of call plants that's dropped by a sixty

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Speaker 4: five percent, We've increased generation from natural gas by at

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Speaker 4: one hundred and seventy percent, and increased generation from renewables,

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Speaker 4: and so the grid itself has really gone a very

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Speaker 4: positive transformation. And so what do we think with this

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Speaker 4: level of growth. The expectation is that the men side

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Speaker 4: of energy will have to go up at a two

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Speaker 4: to three percent, which is really different than what the

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Speaker 4: industry had seen over the last twenty years. And so

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Speaker 4: it require new generation to be developed and likely increase

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Speaker 4: investments in the transmission infrastructure to help enable this. And

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Speaker 4: I think from our perspective, we believe that again this

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Speaker 4: partnership could really create a power powerful solution.

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Speaker 2: The source of the energy used to power data centers

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Speaker 2: has become a key part of the equation At a

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Speaker 2: time when the world is trying to wean itself off

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Speaker 2: of fossil fuels, it raises the question of whether meeting

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Speaker 2: the demand will come at the cost of warming the

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Speaker 2: planet even further, something that those commissioning new data centers

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Speaker 2: have very much in mind.

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Speaker 5: We continue to see our clients have a lot of

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Speaker 5: sustainability goals around renewable and green energy, which is really

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Speaker 5: really great to see, and so with that, you also

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Speaker 5: want to think about where that capacity is coming from.

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Speaker 5: With renewables, solar and wind come on and off the

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Speaker 5: grid because the sun's not always shining or the wind's

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Speaker 5: not always blowing, and so a lot of times, some

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Speaker 5: of the other power generation plants, especially nuclear, they can't

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Speaker 5: ramp up and down on the grid like solar and

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Speaker 5: wind can. And so you actually have some capacity available

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Speaker 5: at some of these nuclear power plants in order to

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Speaker 5: serve some of these data center customers. And then data

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Speaker 5: centers also are a really good marriage for that nuclear

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Speaker 5: plant because they have a constant load.

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Speaker 2: Cyrus One's customers are demanding that it find more ways

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Speaker 2: to get power from sustainable sources, but the company owner

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Speaker 2: KKR is seeking the same not just for Cyrus one,

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Speaker 2: but for its infrastructure investments overall spike in power demand.

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Speaker 2: What does that mean for the climate, Because at the

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Speaker 2: same time we were trying to get away from fossil fuels.

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Speaker 2: Try to say the climate, how do you put those

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Speaker 2: two together.

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Speaker 4: We're obviously a huge investor in energy transition and we're

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Speaker 4: big believers in that. I don't think that those are

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Speaker 4: necessarily mutually exclusive. It's part of a comprehensive solution. So

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Speaker 4: as I just mentioned investments in generation effectively decommissioned call plants,

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Speaker 4: investments and natural gas plants, those are not only things

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Speaker 4: that help affordability, but also energy security. So we believe,

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Speaker 4: as you know, through our portfolio, we've been a very

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Speaker 4: large investor in renewable We have ten renewal platforms across

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Speaker 4: the globe, invested over thirty four billion dollars in sustainability

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Speaker 4: since twenty and ten, and we think that's an important

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Speaker 4: part of this solution.

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Speaker 1: You're listening to Bloomberg Wall Straight Week with David Weston

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Speaker 1: from Bloomberg Radio. This is Bloomberg Wall Straight Week with

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Speaker 1: David Weston's from Bloomberg Radio.

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Speaker 2: This is a story about reconciliation, something we may not

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Speaker 2: set out to achieve, something we might even resist as

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Speaker 2: long as we can, but something that most of us

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Speaker 2: end up coming around to in the end, reconciling with

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Speaker 2: one another today for the sake of what our children

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Speaker 2: need tomorrow. There's no shortage of issues, important issues for

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Speaker 2: us to disagree about, like whether our economy needs the

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Speaker 2: government to tax less.

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Speaker 6: Cut taxes very substantially and create a great economy, or

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Speaker 6: spend more.

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Speaker 7: First time home buyers with twenty five thousand dollars, or.

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Speaker 2: What we should do about our southern border.

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Speaker 7: Allowing these millions and millions of people to come into

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Speaker 7: our country, and look at what's happening to the towns

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Speaker 7: all over the United States.

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Speaker 8: Have a broken immigration system and we need to fix it.

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Speaker 2: Every year in the Mountains of Colorado, the Aspen Economic

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Speaker 2: Strategy Group gathers leaders from business, government, and academia to

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Speaker 2: find common ground on important issue like these, seeking to

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Speaker 2: use evidence about the effects of policy to resolve policy

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Speaker 2: differences and to bring us closer to that reconciliation we

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Speaker 2: all need. So we went to Aspen to speak with

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Speaker 2: the group's executive director, Melissa Karney, who said that today

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Speaker 2: reconciliation faces a unique threat.

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Speaker 7: What's really interesting and I think challenging is our country

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Speaker 7: is definitely facing a reconsideration of an economic paradigm, and

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Speaker 7: from both parties, we're seeing a move towards more nationalist sentiment,

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Speaker 7: more protectionist sentiment, things that really move away from the

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Speaker 7: market based economic framework that's driven growth and dynamism for

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Speaker 7: so long. And so the agenda for this year is

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Speaker 7: really based on all, right, let's take this as given

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Speaker 7: to you. Political concerns, national security concerns, domestic discontent are

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Speaker 7: driving this reconsideration. And so we're pulling together people who

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Speaker 7: have studied these issues, who have worked on these issues,

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Speaker 7: who have been in government and grappled with these issues

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Speaker 7: for a very long time, to try and say, what

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Speaker 7: kind of trade policy should the US pursue. How can

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Speaker 7: we pursue industrial policy in a way that preserves and

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Speaker 7: promotes economic dynamism and economic growth while addressing the very

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Speaker 7: real national security and economic domestic challenges that are driving

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Speaker 7: this reconsideration.

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Speaker 2: One of the biggest issues in Aspen this year the

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Speaker 2: federal debt and what can be done about it. Since

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Speaker 2: the early two thousands, the United States has faced an

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Speaker 2: annual budget deficit as the government began spending more than

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Speaker 2: it collected through taxes. That deficit was made worse, first

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Speaker 2: by the Great Financial Crisis and then by the COVID

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Speaker 2: nineteen pandemic. In both instances, the US government stepped in

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Speaker 2: to rescue the economy, sending the federal debt surging from

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Speaker 2: nine point four trillion dollars before the Great Financial Crisis

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Speaker 2: to a whopping thirty five trillion dollars to day. And

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Speaker 2: the debt just keeps on coming, with the Congressional Budget

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Speaker 2: Office expecting it to go by an additional two trillion

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Speaker 2: dollars this year alone. But if there's any good news

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Speaker 2: about the deficit, it could be that its alarming size

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Speaker 2: might force America's leaders to do something about it, even

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Speaker 2: if it means coming together from very different places. First

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Speaker 2: rule of holes is to stop digging, and you have

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Speaker 2: to the people who are in those positions of consequence

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Speaker 2: responsibility have to understand that they have to govern with

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Speaker 2: a recognition of limits. Tim Geitner served as Treasury Secretary

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Speaker 2: and President Obama's decidedly democratic administration, but when it comes

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Speaker 2: to the federal deficit, he's not far away from former

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Speaker 2: Republican House Speaker, Kevin McCarthy.

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Speaker 9: You got to do something with the debt. You can't

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Speaker 9: maintain because what we did when COVID had and you

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Speaker 9: look in just hindsight, we didn't know what was going

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Speaker 9: to happen, so we up the spending knowing what was

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Speaker 9: coming out, but Congress never pulls it back. You've got

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Speaker 9: some entitlements that are so critical, but you want to

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Speaker 9: sustain those and be able to So you've got to

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Speaker 9: deal with it now, but you've got to do it

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Speaker 9: in a bipartisan manner. Otherwise one party attacks the other.

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Speaker 2: Like McCarthy, Tim Geidner sees, bipartisanship is the only way

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Speaker 2: to address a problem that's only becoming more complicated with

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Speaker 2: each passing year.

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Speaker 6: In some ways, it's a much harder challenge because we're

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Speaker 6: going to have to spend more in defense, and because

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Speaker 6: we have an aging population, it's going to be more

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Speaker 6: expensive to give them healthcare over time, and so we're

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Speaker 6: starting from a very bad place. They're going to have

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Speaker 6: to make some trade offs, and of course these are

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Speaker 6: things you know you can't do in a partisan basis.

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Speaker 6: You know, one of the great strengths of what Hank

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Speaker 6: is built here is you know, you do get people

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Speaker 6: from different parts of the polical spectrum who disagree on

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Speaker 6: fundamental things to come together and sit there and listen

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Speaker 6: to people deep expertise, to debate hard things, and to

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Speaker 6: try to recreate a place where you can have hard,

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Speaker 6: pragmatic conversations about those tough trade offs ahead.

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Speaker 2: That Hank is talking about is his predecessor as Treasure Secretary,

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Speaker 2: Hank Paulson, who served under President George W. Bush. Paulson

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Speaker 2: agrees with both Geitner and McCarthy that the debt is

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Speaker 2: a big problem, but he also sees a silver lining.

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Speaker 10: I would say, so I get asked all the time

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Speaker 10: about the economy, and I say, listen, don't ask me

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Speaker 10: about when the Fed's going to kind of interest rates

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Speaker 10: or what have you. Because we're in a great spot here.

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Speaker 10: But the one thing we know, the big cloud on

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Speaker 10: the horizon is our federal debt. It's unsustainable and if

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Speaker 10: not checked, it's altimately going to destroy our prosperity, which

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Speaker 10: can undermine our security, which is rooted in our economic strength.

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Speaker 10: And so the way I think about it, if you

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Speaker 10: want to look at the dark cloud right on the

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Speaker 10: negative side, that so many of us who have talked

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Speaker 10: about the deficit for so long it looks like we're

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Speaker 10: crying wolf, right, and so politicians and both parties sort

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Speaker 10: of are ignoring it. Right. But the longer we wait,

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Speaker 10: the more expensive it's going to be and the more

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Speaker 10: dangerous it's going to be to clean up this mess

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Speaker 10: before it strangles us. And so again, but that's the

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Speaker 10: bad news. Now what's the good news. The good news

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Speaker 10: is we're a rich country. Right there's a lot we

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Speaker 10: can do if we start working on it right away.

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Speaker 10: We're gonna need both revenues. We're gonna need taxes and

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Speaker 10: we're gonna need spending cuts. And people on each side

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Speaker 10: don't like to hear that, but there's plenty of ways

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Speaker 10: we can raise revenues and not impede growth by just

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Speaker 10: closing preferences and loopholes in the tax code. And believe me,

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Speaker 10: you can't deal with us without dealing with entitlements. But

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Speaker 10: you can clearly deal with entitlements through means testing and

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Speaker 10: other mechanisms while protecting those that need it the most.

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Speaker 10: So we can do both.

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Speaker 2: If Hank Paulson says we can get there, many of

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Speaker 2: us will believe him. He helped lead us out of

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Speaker 2: the Great Financial Crisis after all. But even if we

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Speaker 2: have a sense of where we need to go, what

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Speaker 2: are the steps between here and there? Paulson says part

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Speaker 2: of the answer is having a Treasury secretary who has

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Speaker 2: the trust of the president and ultimately those on both

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Speaker 2: sides of the isle.

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Speaker 10: The number one priority is, first and foremost, develop a

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Speaker 10: relationship of trust with the presidents, because Treasury secretary sounds

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Speaker 10: like it's a very important position, and it is, but

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Speaker 10: all the power really comes to what's delegated by the president,

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Speaker 10: and then the relationships they can build on both sides

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Speaker 10: of the isle. Right, So what you have to do

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Speaker 10: is you have to convince Democrats and Republicans come with

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Speaker 10: ways to bring them together. Regulators are independent, but you

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Speaker 10: can have a lot to say if you build relationships.

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Speaker 10: So I think a lot of it first and foremost

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Speaker 10: is building that relationship of trust, right with the president,

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Speaker 10: with both sides Democrats and Republicans in Congress, and with

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Speaker 10: your colleagues.

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Speaker 2: Pulson's successor agree Ease, but says a Treasury secretary needs

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Speaker 2: to balance working across the aisle with speaking truth to.

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Speaker 6: Power and with markets and with people around the world

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Speaker 6: that want to believe that they can trust in what

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Speaker 6: you say, and you'll make choices with integrity. But I

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Speaker 6: think Hank's absolutely right. The most important thing is that

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Speaker 6: you have to recognize you have to be in a

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Speaker 6: position where you are able to say what you think

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Speaker 6: is truth and what is important for the country to

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Speaker 6: do or not to do. And sometimes you have to

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Speaker 6: be the break and the constraint, and sometimes you have

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Speaker 6: to be the accelerator, the catalysts that try to move

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Speaker 6: a system that's hard to move to better choices.

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Speaker 10: I've always said, you don't want some other's Treasury secretary

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Speaker 10: who's a politician who wants some day to be president

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Speaker 10: of the United States, right, because there's a tendency to

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Speaker 10: say what people want to hear, right, And you need

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Speaker 10: to talk about what people need to hear. But you

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Speaker 10: need to have the support of your president to be

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Speaker 10: able to speak that way.

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Speaker 2: But let's face it, if we're politically easy to fix

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Speaker 2: our problem of rising down, we would have done it

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Speaker 2: long before.

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Speaker 11: Now.

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Speaker 2: Kevin McCarthy knows a thing or two about the intersection

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Speaker 2: of politics and policy.

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Speaker 9: The interesting part about government. You've got very best idea,

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Speaker 9: but that doesn't mean it passes. So you have to

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Speaker 9: understand policy and politics, and if you don't understand both,

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Speaker 9: you're not going to be successful at either.

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Speaker 2: And when it comes to the politics of the debt,

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Speaker 2: Kevin McCarthy favors taking a chapter from history from other

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Speaker 2: times when Congress needed to take big action that was

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Speaker 2: politically fraud.

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Speaker 9: The way to really tackle it is to look at

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Speaker 9: the way we handled after the Soviet Union collapsed in

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Speaker 9: the ninety right. We had all these military bases, but

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Speaker 9: the member of Congress is not going to vote to

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Speaker 9: shut it down, so they created what was called a

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Speaker 9: brack a base realignment and closure. So if we create

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Speaker 9: something like this where all parties get to appoint some

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Speaker 9: they have to one package has to be able to

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Speaker 9: come out of that committee, no amendments. You voted up

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Speaker 9: or voted down. So at the end of the day,

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Speaker 9: that decision will be made on both parties doing it together.

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Speaker 9: Don't criticize each other, but that decision now. And these

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Speaker 9: big problems that are macro problems, you can't solve them

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Speaker 9: by one party, and our government is not designed where

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Speaker 9: one party rules. You have to have compromise.

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Speaker 2: In the end, it's not that we need to be

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Speaker 2: reconciled to doing something about the national debt. It's not

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Speaker 2: really about what needs to be done. It's not even

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Speaker 2: about how we could go about it. It comes down

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Speaker 2: to reconciling ourselves to doing something. Now, if we fail,

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Speaker 2: we're going to have to reconcile ourselves to imposing the

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Speaker 2: problem on the next generation.

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Speaker 1: You're listening to Bloomberg Wall Straight Week with David Weston

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Speaker 1: from Bloomberg Radio. This is Bloomberg Wall Straight Week with

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Speaker 1: David Weston from Bloomberg Radio.

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Speaker 12: Ladies and gentlemen, of course, we'll welcome to our twentieth

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Speaker 12: century and contemporary evening seal.

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Speaker 2: This is a story about investing in our passions. For many,

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Speaker 2: art is a passion, but it's also a big business,

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Speaker 2: one that generated over sixty five billion dollars in sales

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Speaker 2: last year. And at the core of that business are

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Speaker 2: people who buy the art, people like Peter Krauss.

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Speaker 11: Remember these pieces of work, are these these assets, if

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Speaker 11: you want to call them that. They don't produce an income.

441
00:24:15,680 --> 00:24:19,080
Speaker 11: They don't have a coupon associated with them. The only

442
00:24:19,160 --> 00:24:20,919
Speaker 11: income that you get is the appreciation.

443
00:24:21,960 --> 00:24:25,679
Speaker 2: Krauss is chairman and CEO of Aperture Investors, and has

444
00:24:25,680 --> 00:24:29,679
Speaker 2: spent a career in finance, including as head of Alliance Bernstein.

445
00:24:30,160 --> 00:24:32,280
Speaker 2: With his wife, he has also become one of the

446
00:24:32,280 --> 00:24:34,560
Speaker 2: most avid art collectors on Wall Street.

447
00:24:35,000 --> 00:24:37,440
Speaker 11: My wife and I've been collecting since we got married,

448
00:24:37,480 --> 00:24:40,320
Speaker 11: which is forty four years. And the first thing we

449
00:24:40,359 --> 00:24:44,760
Speaker 11: bought was really sort of a small print, and I

450
00:24:44,920 --> 00:24:48,399
Speaker 11: said to the galerist, who's not alive any longer, I said, well,

451
00:24:48,440 --> 00:24:50,960
Speaker 11: you know what I like, and if you have any more,

452
00:24:51,040 --> 00:24:53,439
Speaker 11: give me a call. And he looked at me and

453
00:24:53,480 --> 00:24:56,280
Speaker 11: he said, here's what we're going to do. If you

454
00:24:56,359 --> 00:24:59,040
Speaker 11: want to collect art, he will come in every Saturday

455
00:24:59,400 --> 00:25:01,640
Speaker 11: and I will show you aren't. But if you think

456
00:25:01,680 --> 00:25:03,240
Speaker 11: I'm going to call you on the phone and tell

457
00:25:03,280 --> 00:25:05,240
Speaker 11: you there's something for you to come and see, that's

458
00:25:05,280 --> 00:25:12,360
Speaker 11: not happening. And I took his adminission seriously and we

459
00:25:12,400 --> 00:25:14,880
Speaker 11: went we my wife and I went in every Saturday,

460
00:25:15,760 --> 00:25:18,800
Speaker 11: and every Saturday he showed us work, most of which

461
00:25:18,800 --> 00:25:24,520
Speaker 11: we couldn't afford, but all kinds of paintings, very little sculpture,

462
00:25:24,520 --> 00:25:28,080
Speaker 11: but some. And we finally found a painting that we

463
00:25:28,359 --> 00:25:32,119
Speaker 11: liked and we bought and it was six thousand dollars

464
00:25:32,920 --> 00:25:35,320
Speaker 11: and we paid for it five hundred dollars a month

465
00:25:35,720 --> 00:25:37,120
Speaker 11: until it was paid off.

466
00:25:37,880 --> 00:25:40,879
Speaker 2: Over the decades, Kraus and his wife Jill have added

467
00:25:40,920 --> 00:25:44,320
Speaker 2: to that single work, paid for an installments, and assembled

468
00:25:44,359 --> 00:25:48,000
Speaker 2: a very large collection. It's people like the Krouses who

469
00:25:48,080 --> 00:25:50,480
Speaker 2: are at the center of a growing web of players,

470
00:25:50,840 --> 00:25:55,000
Speaker 2: including auction houses, banks and advisors. They connect one of

471
00:25:55,000 --> 00:25:58,359
Speaker 2: the kind assets to collectors of all levels, from the

472
00:25:58,480 --> 00:26:01,120
Speaker 2: very experienced to those just starting out.

473
00:26:01,960 --> 00:26:05,679
Speaker 8: A lot of times clients because they're because art is

474
00:26:05,720 --> 00:26:09,680
Speaker 8: such a passion for them, it's a pastime, and so

475
00:26:10,000 --> 00:26:13,040
Speaker 8: they'll let their guard down, which is, you know, wonderful,

476
00:26:13,160 --> 00:26:15,160
Speaker 8: But at the same time, you might you don't want

477
00:26:15,160 --> 00:26:17,320
Speaker 8: to be caught off guard and have a surprise later

478
00:26:17,480 --> 00:26:20,639
Speaker 8: and buy something that maybe you know was overpriced or

479
00:26:20,720 --> 00:26:24,200
Speaker 8: you just weren't aware of all of the factors involved.

480
00:26:24,960 --> 00:26:28,159
Speaker 2: Forteini Zidis is head of art Finance at City, one

481
00:26:28,200 --> 00:26:30,760
Speaker 2: of the major banks that have added art advisory and

482
00:26:30,800 --> 00:26:34,960
Speaker 2: financing to their investment offerings. When needed, they lend against

483
00:26:35,000 --> 00:26:38,080
Speaker 2: the investors' collections to provide the liquidity needed to acquire

484
00:26:38,160 --> 00:26:41,720
Speaker 2: new art. Zidis works with Mary Kate O'Hare who runs

485
00:26:41,760 --> 00:26:43,680
Speaker 2: City's art advisory business.

486
00:26:44,359 --> 00:26:47,160
Speaker 13: One of the most important roles of an art advisor

487
00:26:47,400 --> 00:26:51,320
Speaker 13: is the ability to tell a client no, because you

488
00:26:51,320 --> 00:26:53,920
Speaker 13: you know, sometimes clients will send us stuff and say,

489
00:26:53,960 --> 00:26:57,399
Speaker 13: what do you think about this, and it's it's you know,

490
00:26:57,560 --> 00:27:00,679
Speaker 13: I think again. We're always looking out for our client's

491
00:27:00,760 --> 00:27:01,480
Speaker 13: best interest.

492
00:27:02,080 --> 00:27:02,879
Speaker 3: We are.

493
00:27:03,280 --> 00:27:05,040
Speaker 13: You want to make sure they're getting the best they

494
00:27:05,080 --> 00:27:07,600
Speaker 13: can So if we don't think it's the right piece,

495
00:27:07,880 --> 00:27:11,320
Speaker 13: we'll explain the reasons why. Then the client is equipped

496
00:27:11,359 --> 00:27:13,880
Speaker 13: with the information, they can always make a decision say nope,

497
00:27:13,960 --> 00:27:15,639
Speaker 13: I love it, but then they go into it with

498
00:27:15,680 --> 00:27:16,480
Speaker 13: eyes wide open.

499
00:27:17,280 --> 00:27:19,880
Speaker 2: Doing that can be a challenge in a market that's

500
00:27:19,920 --> 00:27:24,000
Speaker 2: notoriously opaque, but for buyers like Peter Krauss, variety and

501
00:27:24,119 --> 00:27:27,640
Speaker 2: risk can be both a bug and feature setting art

502
00:27:27,720 --> 00:27:30,359
Speaker 2: far apart from the kind of assets he's spent his

503
00:27:30,440 --> 00:27:31,560
Speaker 2: life investing in.

504
00:27:32,440 --> 00:27:34,600
Speaker 11: It's not like the stock market where you want to

505
00:27:34,640 --> 00:27:39,080
Speaker 11: buy a share of Tesla, and all the shares of

506
00:27:39,119 --> 00:27:42,160
Speaker 11: Tesla are exactly the same. Whether it's the first share

507
00:27:42,240 --> 00:27:44,560
Speaker 11: or the a share of the one million share, doesn't matter.

508
00:27:44,560 --> 00:27:46,400
Speaker 11: They're all the same. That's not true for it.

509
00:27:47,119 --> 00:27:49,399
Speaker 2: While each work of art is unique. So there's a

510
00:27:49,440 --> 00:27:52,720
Speaker 2: big business in bringing some clarity to the market and

511
00:27:52,760 --> 00:27:57,960
Speaker 2: in bringing together the buyers and sellers. Enter Edward Dolman, well.

512
00:27:57,800 --> 00:28:00,280
Speaker 14: Basically it's a sort of perfect form of the market.

513
00:28:00,440 --> 00:28:03,240
Speaker 14: It's is the ultimates of demand and supply where the

514
00:28:03,280 --> 00:28:06,760
Speaker 14: two meet with an auctioneer in front of all our

515
00:28:06,840 --> 00:28:10,080
Speaker 14: clients who have come along to bid for the works

516
00:28:10,080 --> 00:28:11,800
Speaker 14: of art that we've offered for sale.

517
00:28:12,600 --> 00:28:15,760
Speaker 2: After a twenty seven year career at Christie's, Edward Dolman

518
00:28:15,800 --> 00:28:20,399
Speaker 2: became CEO of Phillips, which specializes in contemporary art. Auction

519
00:28:20,480 --> 00:28:24,520
Speaker 2: Houses like Phillips, Southeby's and Christie's provide a public forum

520
00:28:24,600 --> 00:28:28,320
Speaker 2: for price discovery at events throughout the year, including big

521
00:28:28,320 --> 00:28:30,160
Speaker 2: ones in the spring and the fall.

522
00:28:31,240 --> 00:28:35,080
Speaker 14: So the art business is essentially driven by this auction machine.

523
00:28:35,119 --> 00:28:38,760
Speaker 14: But round it is a huge sort of ecosystem of

524
00:28:39,360 --> 00:28:46,440
Speaker 14: galleries and collectors and museums and art institutions. So we're

525
00:28:46,480 --> 00:28:49,280
Speaker 14: a big community. But I do think the auctions are

526
00:28:49,280 --> 00:28:50,480
Speaker 14: properly at the heart of it.

527
00:28:50,760 --> 00:28:53,920
Speaker 12: And we can open up with good interests on the

528
00:28:53,960 --> 00:28:57,320
Speaker 12: phones in the room and online. Good luck to you all.

529
00:28:57,440 --> 00:29:01,959
Speaker 12: At sixty seventy eighty thousand, I have with advanced it already.

530
00:29:02,200 --> 00:29:05,120
Speaker 14: It's been transformed actually in the time that I've been

531
00:29:05,160 --> 00:29:08,160
Speaker 14: in it advance, which is a long time, that's thirty

532
00:29:08,200 --> 00:29:12,720
Speaker 14: five years. When I first started, the market was opaque,

533
00:29:13,040 --> 00:29:15,400
Speaker 14: to say the least. The only people had any pricing

534
00:29:15,400 --> 00:29:18,120
Speaker 14: information where the auctioneers and the dealers who attended the

535
00:29:18,120 --> 00:29:19,480
Speaker 14: auctions and wrote down all the.

536
00:29:19,440 --> 00:29:20,760
Speaker 10: Prices in their catalogs.

537
00:29:20,880 --> 00:29:25,560
Speaker 14: And I think the biggest transformative event in our world

538
00:29:25,560 --> 00:29:29,160
Speaker 14: has been information and access to data. So really the

539
00:29:29,200 --> 00:29:31,680
Speaker 14: market we see now, what's so different about it is

540
00:29:32,760 --> 00:29:35,960
Speaker 14: the access to information that everybody has who's in that

541
00:29:36,120 --> 00:29:40,520
Speaker 14: room competing, whether they're in Asia or South America, or

542
00:29:40,560 --> 00:29:43,240
Speaker 14: Europe or America, they have access to the same information.

543
00:29:44,040 --> 00:29:47,720
Speaker 2: Better information is one change in the auction business. Another

544
00:29:48,040 --> 00:29:50,960
Speaker 2: is the size of the guarantees auction houses are called

545
00:29:51,000 --> 00:29:54,480
Speaker 2: upon to give sellers and methods they've developed to help

546
00:29:54,560 --> 00:29:57,560
Speaker 2: share the risk of those guarantees with would be buyers.

547
00:29:58,480 --> 00:30:01,480
Speaker 14: As the sort of scale of of the auctions have

548
00:30:01,520 --> 00:30:06,760
Speaker 14: gone bigger, just in terms of monetary values, it's impossible

549
00:30:06,800 --> 00:30:09,440
Speaker 14: for the auction houses to take the risk on their

550
00:30:09,480 --> 00:30:13,800
Speaker 14: own balance sheets, and so you know, there has been

551
00:30:14,000 --> 00:30:18,600
Speaker 14: a very sophisticated sort of development of the concept of

552
00:30:18,640 --> 00:30:22,400
Speaker 14: the irrevocable bid, where an auction house will look and

553
00:30:22,400 --> 00:30:25,600
Speaker 14: try and find someone who wants to take the risk

554
00:30:25,680 --> 00:30:27,800
Speaker 14: from you, someone who actually loves the work of art

555
00:30:27,880 --> 00:30:31,040
Speaker 14: is very interesting wants to buy it at that particular level.

556
00:30:31,280 --> 00:30:33,440
Speaker 14: A key part of the auction business now is looking

557
00:30:33,440 --> 00:30:36,480
Speaker 14: for these counterparties and trying to make sure that the

558
00:30:36,560 --> 00:30:40,000
Speaker 14: risk is spread and is taken off the auction house

559
00:30:40,040 --> 00:30:42,360
Speaker 14: balance sheet and placed.

560
00:30:41,960 --> 00:30:44,560
Speaker 11: Elsewhere who like to open the bidding here.

561
00:30:45,280 --> 00:30:47,840
Speaker 2: The price may be public, and the seller may be

562
00:30:47,880 --> 00:30:51,959
Speaker 2: protected by guarantees and arobical bids, But for the buyer

563
00:30:52,440 --> 00:30:55,240
Speaker 2: the question remains whether a work of art is worth

564
00:30:55,280 --> 00:30:58,480
Speaker 2: the prices being bid, and also how those prices might

565
00:30:58,520 --> 00:31:01,520
Speaker 2: be financed, which is we're for teenize Itis and her

566
00:31:01,520 --> 00:31:04,040
Speaker 2: colleagues at City come in at one.

567
00:31:03,920 --> 00:31:08,040
Speaker 4: Hundred seventy million for the wall is selling here to

568
00:31:08,120 --> 00:31:10,040
Speaker 4: you one U seventy million dollars.

569
00:31:11,240 --> 00:31:15,600
Speaker 8: The art market can be still opaque. It has gained

570
00:31:15,600 --> 00:31:19,280
Speaker 8: transparency in some ways, but in many ways it still

571
00:31:19,320 --> 00:31:23,600
Speaker 8: remains not a transparent market. A novice collector might need

572
00:31:23,640 --> 00:31:26,240
Speaker 8: some guidance. So some of the things we look at

573
00:31:26,280 --> 00:31:30,680
Speaker 8: when evaluating art, be that for an acquisition, a sale,

574
00:31:31,040 --> 00:31:35,000
Speaker 8: as collateral for an art loan for insurance purposes, we

575
00:31:35,000 --> 00:31:37,440
Speaker 8: look at a range of factors. We look at an

576
00:31:37,560 --> 00:31:41,400
Speaker 8: artist's market history it's a more established artist. We look

577
00:31:41,440 --> 00:31:45,560
Speaker 8: at longevity of that market and what's happening. We look

578
00:31:45,600 --> 00:31:49,400
Speaker 8: at the individual artwork itself, so the sale history of

579
00:31:49,440 --> 00:31:53,800
Speaker 8: that work, oftentimes or not oftentimes, but sometimes artworks might

580
00:31:54,080 --> 00:31:56,840
Speaker 8: show up for sale several times at auction, and what

581
00:31:56,880 --> 00:31:59,360
Speaker 8: does that tell you? Did it fail to sell? Is

582
00:31:59,360 --> 00:32:03,640
Speaker 8: it unquote fresh to the market? Work for which sometimes

583
00:32:03,680 --> 00:32:06,360
Speaker 8: there's a premium because that work has been off the

584
00:32:06,400 --> 00:32:08,160
Speaker 8: market for a number of years, and that creates a

585
00:32:08,200 --> 00:32:11,480
Speaker 8: lot of kind of excitement when it comes up for sale.

586
00:32:12,240 --> 00:32:15,520
Speaker 2: Banks like City rely on their assessment of works value

587
00:32:15,520 --> 00:32:18,160
Speaker 2: in making loans to the buyers a good many loans.

588
00:32:18,600 --> 00:32:22,880
Speaker 2: According to Deloitte, outstanding borrowing against art could surpass thirty

589
00:32:22,920 --> 00:32:26,440
Speaker 2: six billion dollars this year, up from a projected twenty

590
00:32:26,520 --> 00:32:30,320
Speaker 2: nine to thirty four billion dollars in twenty twenty three. Banks,

591
00:32:30,440 --> 00:32:33,920
Speaker 2: non banks and boutique lenders have increased their lending by

592
00:32:33,920 --> 00:32:36,360
Speaker 2: one hundred and nineteen percent over the past five years,

593
00:32:36,720 --> 00:32:39,320
Speaker 2: but these loans are not simply secured by the value

594
00:32:39,320 --> 00:32:43,160
Speaker 2: of the art being bought. They're made to the purchasers themselves.

595
00:32:43,880 --> 00:32:46,800
Speaker 8: As a bank, we offer recourse loans, which is different

596
00:32:46,840 --> 00:32:53,840
Speaker 8: than asset based lenders. So the art is definitely you know, important,

597
00:32:54,560 --> 00:32:57,640
Speaker 8: and that's why the clients are able to typically live

598
00:32:57,680 --> 00:32:59,480
Speaker 8: with the art on their wall, So we don't take

599
00:32:59,520 --> 00:33:02,840
Speaker 8: possession of the art, so clients keep it in their homes.

600
00:33:02,880 --> 00:33:06,200
Speaker 8: Typically the art can appreciate in value and they can

601
00:33:06,240 --> 00:33:10,480
Speaker 8: take that capital and put it towards other investments, purchase

602
00:33:10,520 --> 00:33:14,000
Speaker 8: more art, you know, various purposes, but it is primarily

603
00:33:14,040 --> 00:33:19,600
Speaker 8: based on the client's financial picture. There are asset based

604
00:33:19,960 --> 00:33:25,880
Speaker 8: lenders out there for sure that are competing. However, it's

605
00:33:25,920 --> 00:33:29,520
Speaker 8: a different model, I would say, because in some cases

606
00:33:29,600 --> 00:33:33,720
Speaker 8: they may have to take possession of the art. Typically

607
00:33:33,760 --> 00:33:37,920
Speaker 8: the rates would be higher than what a bank would offer.

608
00:33:38,320 --> 00:33:40,960
Speaker 2: As borrows money becomes a bigger piece of the puzzle.

609
00:33:41,080 --> 00:33:44,280
Speaker 2: It also means that now, more than ever before, the

610
00:33:44,320 --> 00:33:47,560
Speaker 2: fortunes of the art industry have become more closely tied

611
00:33:47,600 --> 00:33:51,240
Speaker 2: with interest rates, which may help explain why overall art

612
00:33:51,240 --> 00:33:54,320
Speaker 2: market sales were down four percent last year from the

613
00:33:54,400 --> 00:33:55,000
Speaker 2: year before.

614
00:33:55,640 --> 00:33:59,200
Speaker 14: You can actually look at the growth or contractions in

615
00:33:59,200 --> 00:34:03,280
Speaker 14: our market get a better understanding of the relationship of

616
00:34:03,520 --> 00:34:06,800
Speaker 14: art and finance, and I think it reflects a lot

617
00:34:06,800 --> 00:34:08,480
Speaker 14: of the lending that I was talking about, the sort

618
00:34:08,480 --> 00:34:11,120
Speaker 14: of explosion in terms of lending against works of art.

619
00:34:11,400 --> 00:34:14,680
Speaker 14: The interest rates on those loans have become a more

620
00:34:14,680 --> 00:34:18,239
Speaker 14: and more significant player in our world. So whilst the

621
00:34:18,239 --> 00:34:21,160
Speaker 14: stock markets have done reasonably well over the last couple

622
00:34:21,200 --> 00:34:24,040
Speaker 14: of years, you know, the art market has felt a

623
00:34:24,080 --> 00:34:26,359
Speaker 14: little bit of a decline, and I think that has

624
00:34:26,400 --> 00:34:31,000
Speaker 14: been driven largely by interest rates and significantly higher levels

625
00:34:31,000 --> 00:34:33,120
Speaker 14: of interest rates we have now than we add for

626
00:34:33,200 --> 00:34:36,680
Speaker 14: a long time between twenty forteen and sort of twenty

627
00:34:36,760 --> 00:34:37,480
Speaker 14: twenty two.

628
00:34:37,960 --> 00:34:39,799
Speaker 12: Fourteen million, nine hundred thousands.

629
00:34:40,120 --> 00:34:43,480
Speaker 2: Today the art market is larger and more transparent than

630
00:34:43,520 --> 00:34:46,480
Speaker 2: in the past, and it's interwoven with interest rates and

631
00:34:46,520 --> 00:34:50,239
Speaker 2: financing and expert advisors. But in the end, whether you're

632
00:34:50,239 --> 00:34:53,479
Speaker 2: an art investor, a collector, or something of a mix

633
00:34:53,520 --> 00:34:56,520
Speaker 2: of the two, the value of your purchase depends in

634
00:34:56,560 --> 00:35:01,240
Speaker 2: part and whether it will resonate through times. In the media.

635
00:35:01,280 --> 00:35:05,440
Speaker 2: More generally, we follow a certain phenomena that rise up

636
00:35:05,480 --> 00:35:06,799
Speaker 2: and all of a sudden, there's a great deal of

637
00:35:06,800 --> 00:35:09,399
Speaker 2: interest a certain artists or a certain form of art

638
00:35:09,960 --> 00:35:13,640
Speaker 2: sometimes which goes away from your experience over quite a

639
00:35:13,640 --> 00:35:16,480
Speaker 2: few years in this business. Can you discern the difference

640
00:35:16,520 --> 00:35:17,960
Speaker 2: between a fad and a trend?

641
00:35:20,200 --> 00:35:23,640
Speaker 14: It's a very good question. I don't think I can.

642
00:35:24,440 --> 00:35:25,200
Speaker 10: That's the truth.

643
00:35:25,320 --> 00:35:29,319
Speaker 11: I think it's impossible. I literally think it's impossible. I

644
00:35:29,400 --> 00:35:33,920
Speaker 11: think that if you were to ask yourself the question,

645
00:35:34,719 --> 00:35:37,239
Speaker 11: if you went back to Renaissance times and we're in

646
00:35:37,320 --> 00:35:40,920
Speaker 11: Leonardo da Vinci's studio and he was painting the Mona Lisa,

647
00:35:41,080 --> 00:35:45,080
Speaker 11: would you have known? Probably hard to tell.

648
00:35:45,280 --> 00:35:49,040
Speaker 2: But fortunately for a true collector like Peter Krass, it's

649
00:35:49,080 --> 00:35:51,200
Speaker 2: not about predicting where the market will go.

650
00:35:51,960 --> 00:35:55,800
Speaker 11: As a collector, the key issue is trying to unlock

651
00:35:56,200 --> 00:36:00,520
Speaker 11: the language that the artist is using to communicate their

652
00:36:00,560 --> 00:36:04,080
Speaker 11: feelings or whatever they're putting into the art. And it's

653
00:36:04,120 --> 00:36:07,279
Speaker 11: trying to figure out that language. That's the mystery of me.

654
00:36:08,200 --> 00:36:11,279
Speaker 11: And where you figure out that language, then all of

655
00:36:11,320 --> 00:36:13,080
Speaker 11: a sudden you see what the artist is doing. You

656
00:36:13,120 --> 00:36:15,440
Speaker 11: may not like it, it may not speak to you.

657
00:36:15,840 --> 00:36:17,760
Speaker 11: But if it does speak to you, if that language

658
00:36:17,800 --> 00:36:19,840
Speaker 11: is something you read and it does excite you and

659
00:36:19,880 --> 00:36:20,400
Speaker 11: it moves you.

660
00:36:21,040 --> 00:36:24,759
Speaker 2: That's interesting for the true art collector. As for the

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Speaker 2: true artist, maybe it doesn't matter how many people are

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Speaker 2: moved by a piece. One can be enough that does it.

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Speaker 2: For this edition of Bloomberg Wall Street Week, I'm David Weston.

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Speaker 10: Stay with us.

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Speaker 2: Today's top stories and global business headlines are coming up

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Speaker 2: right now