Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston, bringing you
Speaker 2: stories of capitalism this week, reconciliation, what's needed to make
Speaker 2: the tough decisions surrounding the national debt, and a look
Speaker 2: at one of Wall Street's passion assets. We talk with collectors, advisors,
Speaker 2: and auctioneers about the big business of fine art, but
Speaker 2: we start with a story about demand, specifically the demand
Speaker 2: for artificial intelligence. We know it will be big, and
Speaker 2: that means we're going to need massive computing power from
Speaker 2: data centers, and lots of them.
Speaker 3: When you see the world's leading technology companies who are
Speaker 3: as close to this as anybody, making the scale of
Speaker 3: investments that they are, to me, that's an extraordinary sign
Speaker 3: of the potential that they see in the future.
Speaker 2: Eric Schwartz is CEO of cyrus I, one of the
Speaker 2: largest data center owners and operators in the world. Schwartz
Speaker 2: is at the forefront of a modern gold rush as
Speaker 2: big tech companies scramble for the resources to turn electricity
Speaker 2: into computing power. We wanted to see for ourselves what
Speaker 2: the building blocks of the AI boom looked like. And
Speaker 2: so we traveled to Texas, a state with one of
Speaker 2: the highest numbers of data centers in the United States.
Speaker 2: In a suburb north of Dallas, we met with Schwartz
Speaker 2: at one of his firm's new facilities. It spans nearly
Speaker 2: a million square feet. We toured the massive, high ceiling
Speaker 2: building filled with row upon row of black cabinets shielding
Speaker 2: racks of computers from prying eyes, all of which are
Speaker 2: built a meter or so above ground level to permit
Speaker 2: an elaborate system to pump cool air up into the
Speaker 2: computer ax That explains the high ceilings, which let the
Speaker 2: warm air rise to be recycled through the cooling system.
Speaker 2: Schwartz says the race to build data centers like his
Speaker 2: in Texas is only getting started, with Cyrus one in
Speaker 2: the process of adding additional buildings and capacity next to
Speaker 2: its current facilities.
Speaker 3: The risk to us as a developer for those customers
Speaker 3: is to ensure that we can keep up with their
Speaker 3: demand and that we're delivering both capacity and service at
Speaker 3: the levels they require. They're all operating mission critical infrastructure,
Speaker 3: and their expectations are intensely high. We do our best
Speaker 3: and are constantly investing to ensure that we can keep
Speaker 3: up with those expectations. But our real challenge is to
Speaker 3: make sure that we're keeping up with their requirements because
Speaker 3: they're counting on this infrastructure to support the growth investments
Speaker 3: that they're making.
Speaker 2: Keeping up with those requirements is not going to be easy.
Speaker 2: But the good news for the United States is that
Speaker 2: it has a strong head start. There are more than
Speaker 2: seven thousand data centers worldwide, with nearly two thousand in
Speaker 2: America alone. US data center capacity grew almost a quarter
Speaker 2: in the last year alone, with another seventy percent set
Speaker 2: to come online from centers already under construction.
Speaker 3: Today, the United States is a substantially larger data center
Speaker 3: market than the other regions around the world, and that's
Speaker 3: driven in part by the adoption of the Internet, by
Speaker 3: the presence of the large technology companies who are based here,
Speaker 3: but also by the fact that investment and progress against
Speaker 3: artificial intelligence here in the United States is further advanced
Speaker 3: than it is in other regions, and so right now
Speaker 3: you'll see much stronger demanding growth in the United States.
Speaker 3: Other countries around the world are very focused on the
Speaker 3: implications of artificial intelligence and are concerned about making sure
Speaker 3: that they have the infrastructure in their economies to keep up.
Speaker 3: And so we're seeing and will continue to see efforts
Speaker 3: by other countries around the world to support that type
Speaker 3: of infrastructure in their countries to support their economies and
Speaker 3: their growth.
Speaker 2: Valtimore Slayzak is kkir's global head of Digital Infrastructure. His
Speaker 2: firm is making big investments in data centers, including when
Speaker 2: it teams with Global Infrastructure partners to buy Eric Schwartz's
Speaker 2: Cyrus one for fifteen billion dollars back in twenty twenty two.
Speaker 2: Like Schwartz, he sees big opportunities coming in Europe and
Speaker 2: in Asia.
Speaker 4: US is definitely, at least from our perspective, well ahead
Speaker 4: in terms of the deployment of AI, and I think
Speaker 4: it is a strategic element of I think the growth
Speaker 4: going forward. If you just think about a couple of
Speaker 4: maybe examples cloud companies, US cloud companies have about seventy
Speaker 4: five percent global market share in terms of AI funding.
Speaker 4: Eighty percent of it is coming in the United States.
Speaker 4: So US is definitely leading the charge, so to speak,
Speaker 4: in terms of deployment. But I think we see the
Speaker 4: similar playbook being applied in Europe and in Asia Pacific.
Speaker 4: But just to try to quantify the scale of it.
Speaker 4: US data center market is about a fifteen gigabott market
Speaker 4: growing to forty gigawatts. European market is about six gigabotte market,
Speaker 4: likely going to triple or quadruple over the next four
Speaker 4: or five years to twenty gigabotts, and then Asia Pacific
Speaker 4: x China is on a similar trajectory, so the scale
Speaker 4: is really different between US and those other markets.
Speaker 2: Meeting that growing demand for data centers will not be easy.
Speaker 2: There are a host of potential hurdles that people like
Speaker 2: Christine Wood, headed the data center practice at Burns McDonald,
Speaker 2: are finding ways to overcome.
Speaker 5: We're looking at water availability, connectivity, location, demand, latency, and
Speaker 5: then we secondarily look at the regulations, whether or not
Speaker 5: they have zoning appropriate, zoning requirements, tax incentives, and really
Speaker 5: if it makes a business business sense to be in
Speaker 5: that specific location. And then once you go into more
Speaker 5: of the design and construction, what we're starting to see
Speaker 5: and what we have been doing, especially with our construction arm,
Speaker 5: is that we really want to get ahead of some
Speaker 5: of the labor and craft labor shortages that we see
Speaker 5: out on site, and so we are designing data centers
Speaker 5: that are more modular, have skid are able to work
Speaker 5: within the craft shops of these different self performed contractors,
Speaker 5: so that we can deploy these data centers more rapidly
Speaker 5: and on a scalable basis.
Speaker 2: But as big as those obstacles may be, the biggest
Speaker 2: by far is finding the electricity of the centers require,
Speaker 2: with Goldman Sachs estimating that they already consume one to
Speaker 2: two percent of all the power supplied worldwide and that
Speaker 2: that number could double by the end of the decade.
Speaker 5: Power is becoming the long pole in the tent to
Speaker 5: be able to find a data center site, and so
Speaker 5: it really starts with that is the power puzzle that
Speaker 5: we're seeing associated with the data center sites. And so
Speaker 5: when we're walking through looking for great sites and supporting
Speaker 5: our clients on the site due diligence is we're looking for.
Speaker 5: Power is the number one item.
Speaker 2: For data centers and their clients. Having enough power is necessary,
Speaker 2: but not sufficient. The power also has to be there
Speaker 2: without fail and without interruption of any kind.
Speaker 3: No excuses. The infrastructure that it's operating here needs to
Speaker 3: be available twenty four hours a day, three hundred and
Speaker 3: sixty five days a year. Without interruption. So where it
Speaker 3: starts is that for all of the equipment that we
Speaker 3: have deployed here, whether it's the battery banks, whether it's
Speaker 3: the cooling units, all of that, there is always a
Speaker 3: backup for that equipment in the event that something were
Speaker 3: to fail, and things always fail and you need to
Speaker 3: have a backup to ensure that you don't have an interruption.
Speaker 2: That backup at cyrus One's new Texas facility means layer
Speaker 2: after layer of redundancy. The facility gets power straight from
Speaker 2: the grid, but if that fails, batteries located behind the
Speaker 2: data center kick in. Those batteries are kept fully charged
Speaker 2: by a series of generators which are constantly running, and
Speaker 2: if all else fails, behind the batteries are a role
Speaker 2: of equally large diesel powered locomotive engines. If a power
Speaker 2: outage lasts beyond the life of the batteries, the engines
Speaker 2: take over to ensure there's nothing to stop the center's operation,
Speaker 2: including its elaborate cooling system, no matter what the problem.
Speaker 2: Eric Schwartz says this unprecedented need for a liable power
Speaker 2: goes beyond just finding out where to get it and
Speaker 2: how to make sure it's uninterrupted. It also demands an
Speaker 2: upgrade if the entire way we generate and distribute power
Speaker 2: in the United States and elsewhere.
Speaker 3: So data centers are effectively technology factories, and like any factory,
Speaker 3: we draw power to operate to operate the factory. And
Speaker 3: so the challenge and the work that we do is
Speaker 3: to work very closely with the utilities and the grid
Speaker 3: operators to identify the right locations where we can connect
Speaker 3: to that power and ultimately deliver it to our customers.
Speaker 3: And this requires work and require there's a lot of collaboration.
Speaker 3: But the United States in particular, then other countries as
Speaker 3: well are investing in growing their power infrastructure, not only
Speaker 3: for scale but for sustainability, and we're very focused on
Speaker 3: making sure that we're locating in the right places.
Speaker 4: Ultimately, what we think is will require a comprehensive solution.
Speaker 4: So the technology companies themselves are large consumers of of
Speaker 4: course this infrastructure, but that's not the only demand driver.
Speaker 4: It's also unsharing, it's electrification. So there's other what I
Speaker 4: would say are great signs of economic progress and growth
Speaker 4: in the United States, and we should be really proud
Speaker 4: of that, but it requires a new investment in generation
Speaker 4: and in transmission right, it's something that we really haven't
Speaker 4: seen over the last twenty years. So if you look
Speaker 4: at the US grid over the last twenty years, effectively
Speaker 4: stagnated in terms of the demand growth at about forty
Speaker 4: one hundred TARO wide hours. What's really interesting that there's
Speaker 4: been an interesting energy transition during that time. We've decommissioned
Speaker 4: a lot of call plants that's dropped by a sixty
Speaker 4: five percent, We've increased generation from natural gas by at
Speaker 4: one hundred and seventy percent, and increased generation from renewables,
Speaker 4: and so the grid itself has really gone a very
Speaker 4: positive transformation. And so what do we think with this
Speaker 4: level of growth. The expectation is that the men side
Speaker 4: of energy will have to go up at a two
Speaker 4: to three percent, which is really different than what the
Speaker 4: industry had seen over the last twenty years. And so
Speaker 4: it require new generation to be developed and likely increase
Speaker 4: investments in the transmission infrastructure to help enable this. And
Speaker 4: I think from our perspective, we believe that again this
Speaker 4: partnership could really create a power powerful solution.
Speaker 2: The source of the energy used to power data centers
Speaker 2: has become a key part of the equation At a
Speaker 2: time when the world is trying to wean itself off
Speaker 2: of fossil fuels, it raises the question of whether meeting
Speaker 2: the demand will come at the cost of warming the
Speaker 2: planet even further, something that those commissioning new data centers
Speaker 2: have very much in mind.
Speaker 5: We continue to see our clients have a lot of
Speaker 5: sustainability goals around renewable and green energy, which is really
Speaker 5: really great to see, and so with that, you also
Speaker 5: want to think about where that capacity is coming from.
Speaker 5: With renewables, solar and wind come on and off the
Speaker 5: grid because the sun's not always shining or the wind's
Speaker 5: not always blowing, and so a lot of times, some
Speaker 5: of the other power generation plants, especially nuclear, they can't
Speaker 5: ramp up and down on the grid like solar and
Speaker 5: wind can. And so you actually have some capacity available
Speaker 5: at some of these nuclear power plants in order to
Speaker 5: serve some of these data center customers. And then data
Speaker 5: centers also are a really good marriage for that nuclear
Speaker 5: plant because they have a constant load.
Speaker 2: Cyrus One's customers are demanding that it find more ways
Speaker 2: to get power from sustainable sources, but the company owner
Speaker 2: KKR is seeking the same not just for Cyrus one,
Speaker 2: but for its infrastructure investments overall spike in power demand.
Speaker 2: What does that mean for the climate, Because at the
Speaker 2: same time we were trying to get away from fossil fuels.
Speaker 2: Try to say the climate, how do you put those
Speaker 2: two together.
Speaker 4: We're obviously a huge investor in energy transition and we're
Speaker 4: big believers in that. I don't think that those are
Speaker 4: necessarily mutually exclusive. It's part of a comprehensive solution. So
Speaker 4: as I just mentioned investments in generation effectively decommissioned call plants,
Speaker 4: investments and natural gas plants, those are not only things
Speaker 4: that help affordability, but also energy security. So we believe,
Speaker 4: as you know, through our portfolio, we've been a very
Speaker 4: large investor in renewable We have ten renewal platforms across
Speaker 4: the globe, invested over thirty four billion dollars in sustainability
Speaker 4: since twenty and ten, and we think that's an important
Speaker 4: part of this solution.
Speaker 1: You're listening to Bloomberg Wall Straight Week with David Weston
Speaker 1: from Bloomberg Radio. This is Bloomberg Wall Straight Week with
Speaker 1: David Weston's from Bloomberg Radio.
Speaker 2: This is a story about reconciliation, something we may not
Speaker 2: set out to achieve, something we might even resist as
Speaker 2: long as we can, but something that most of us
Speaker 2: end up coming around to in the end, reconciling with
Speaker 2: one another today for the sake of what our children
Speaker 2: need tomorrow. There's no shortage of issues, important issues for
Speaker 2: us to disagree about, like whether our economy needs the
Speaker 2: government to tax less.
Speaker 6: Cut taxes very substantially and create a great economy, or
Speaker 6: spend more.
Speaker 7: First time home buyers with twenty five thousand dollars, or.
Speaker 2: What we should do about our southern border.
Speaker 7: Allowing these millions and millions of people to come into
Speaker 7: our country, and look at what's happening to the towns
Speaker 7: all over the United States.
Speaker 8: Have a broken immigration system and we need to fix it.
Speaker 2: Every year in the Mountains of Colorado, the Aspen Economic
Speaker 2: Strategy Group gathers leaders from business, government, and academia to
Speaker 2: find common ground on important issue like these, seeking to
Speaker 2: use evidence about the effects of policy to resolve policy
Speaker 2: differences and to bring us closer to that reconciliation we
Speaker 2: all need. So we went to Aspen to speak with
Speaker 2: the group's executive director, Melissa Karney, who said that today
Speaker 2: reconciliation faces a unique threat.
Speaker 7: What's really interesting and I think challenging is our country
Speaker 7: is definitely facing a reconsideration of an economic paradigm, and
Speaker 7: from both parties, we're seeing a move towards more nationalist sentiment,
Speaker 7: more protectionist sentiment, things that really move away from the
Speaker 7: market based economic framework that's driven growth and dynamism for
Speaker 7: so long. And so the agenda for this year is
Speaker 7: really based on all, right, let's take this as given
Speaker 7: to you. Political concerns, national security concerns, domestic discontent are
Speaker 7: driving this reconsideration. And so we're pulling together people who
Speaker 7: have studied these issues, who have worked on these issues,
Speaker 7: who have been in government and grappled with these issues
Speaker 7: for a very long time, to try and say, what
Speaker 7: kind of trade policy should the US pursue. How can
Speaker 7: we pursue industrial policy in a way that preserves and
Speaker 7: promotes economic dynamism and economic growth while addressing the very
Speaker 7: real national security and economic domestic challenges that are driving
Speaker 7: this reconsideration.
Speaker 2: One of the biggest issues in Aspen this year the
Speaker 2: federal debt and what can be done about it. Since
Speaker 2: the early two thousands, the United States has faced an
Speaker 2: annual budget deficit as the government began spending more than
Speaker 2: it collected through taxes. That deficit was made worse, first
Speaker 2: by the Great Financial Crisis and then by the COVID
Speaker 2: nineteen pandemic. In both instances, the US government stepped in
Speaker 2: to rescue the economy, sending the federal debt surging from
Speaker 2: nine point four trillion dollars before the Great Financial Crisis
Speaker 2: to a whopping thirty five trillion dollars to day. And
Speaker 2: the debt just keeps on coming, with the Congressional Budget
Speaker 2: Office expecting it to go by an additional two trillion
Speaker 2: dollars this year alone. But if there's any good news
Speaker 2: about the deficit, it could be that its alarming size
Speaker 2: might force America's leaders to do something about it, even
Speaker 2: if it means coming together from very different places. First
Speaker 2: rule of holes is to stop digging, and you have
Speaker 2: to the people who are in those positions of consequence
Speaker 2: responsibility have to understand that they have to govern with
Speaker 2: a recognition of limits. Tim Geitner served as Treasury Secretary
Speaker 2: and President Obama's decidedly democratic administration, but when it comes
Speaker 2: to the federal deficit, he's not far away from former
Speaker 2: Republican House Speaker, Kevin McCarthy.
Speaker 9: You got to do something with the debt. You can't
Speaker 9: maintain because what we did when COVID had and you
Speaker 9: look in just hindsight, we didn't know what was going
Speaker 9: to happen, so we up the spending knowing what was
Speaker 9: coming out, but Congress never pulls it back. You've got
Speaker 9: some entitlements that are so critical, but you want to
Speaker 9: sustain those and be able to So you've got to
Speaker 9: deal with it now, but you've got to do it
Speaker 9: in a bipartisan manner. Otherwise one party attacks the other.
Speaker 2: Like McCarthy, Tim Geidner sees, bipartisanship is the only way
Speaker 2: to address a problem that's only becoming more complicated with
Speaker 2: each passing year.
Speaker 6: In some ways, it's a much harder challenge because we're
Speaker 6: going to have to spend more in defense, and because
Speaker 6: we have an aging population, it's going to be more
Speaker 6: expensive to give them healthcare over time, and so we're
Speaker 6: starting from a very bad place. They're going to have
Speaker 6: to make some trade offs, and of course these are
Speaker 6: things you know you can't do in a partisan basis.
Speaker 6: You know, one of the great strengths of what Hank
Speaker 6: is built here is you know, you do get people
Speaker 6: from different parts of the polical spectrum who disagree on
Speaker 6: fundamental things to come together and sit there and listen
Speaker 6: to people deep expertise, to debate hard things, and to
Speaker 6: try to recreate a place where you can have hard,
Speaker 6: pragmatic conversations about those tough trade offs ahead.
Speaker 2: That Hank is talking about is his predecessor as Treasure Secretary,
Speaker 2: Hank Paulson, who served under President George W. Bush. Paulson
Speaker 2: agrees with both Geitner and McCarthy that the debt is
Speaker 2: a big problem, but he also sees a silver lining.
Speaker 10: I would say, so I get asked all the time
Speaker 10: about the economy, and I say, listen, don't ask me
Speaker 10: about when the Fed's going to kind of interest rates
Speaker 10: or what have you. Because we're in a great spot here.
Speaker 10: But the one thing we know, the big cloud on
Speaker 10: the horizon is our federal debt. It's unsustainable and if
Speaker 10: not checked, it's altimately going to destroy our prosperity, which
Speaker 10: can undermine our security, which is rooted in our economic strength.
Speaker 10: And so the way I think about it, if you
Speaker 10: want to look at the dark cloud right on the
Speaker 10: negative side, that so many of us who have talked
Speaker 10: about the deficit for so long it looks like we're
Speaker 10: crying wolf, right, and so politicians and both parties sort
Speaker 10: of are ignoring it. Right. But the longer we wait,
Speaker 10: the more expensive it's going to be and the more
Speaker 10: dangerous it's going to be to clean up this mess
Speaker 10: before it strangles us. And so again, but that's the
Speaker 10: bad news. Now what's the good news. The good news
Speaker 10: is we're a rich country. Right there's a lot we
Speaker 10: can do if we start working on it right away.
Speaker 10: We're gonna need both revenues. We're gonna need taxes and
Speaker 10: we're gonna need spending cuts. And people on each side
Speaker 10: don't like to hear that, but there's plenty of ways
Speaker 10: we can raise revenues and not impede growth by just
Speaker 10: closing preferences and loopholes in the tax code. And believe me,
Speaker 10: you can't deal with us without dealing with entitlements. But
Speaker 10: you can clearly deal with entitlements through means testing and
Speaker 10: other mechanisms while protecting those that need it the most.
Speaker 10: So we can do both.
Speaker 2: If Hank Paulson says we can get there, many of
Speaker 2: us will believe him. He helped lead us out of
Speaker 2: the Great Financial Crisis after all. But even if we
Speaker 2: have a sense of where we need to go, what
Speaker 2: are the steps between here and there? Paulson says part
Speaker 2: of the answer is having a Treasury secretary who has
Speaker 2: the trust of the president and ultimately those on both
Speaker 2: sides of the isle.
Speaker 10: The number one priority is, first and foremost, develop a
Speaker 10: relationship of trust with the presidents, because Treasury secretary sounds
Speaker 10: like it's a very important position, and it is, but
Speaker 10: all the power really comes to what's delegated by the president,
Speaker 10: and then the relationships they can build on both sides
Speaker 10: of the isle. Right, So what you have to do
Speaker 10: is you have to convince Democrats and Republicans come with
Speaker 10: ways to bring them together. Regulators are independent, but you
Speaker 10: can have a lot to say if you build relationships.
Speaker 10: So I think a lot of it first and foremost
Speaker 10: is building that relationship of trust, right with the president,
Speaker 10: with both sides Democrats and Republicans in Congress, and with
Speaker 10: your colleagues.
Speaker 2: Pulson's successor agree Ease, but says a Treasury secretary needs
Speaker 2: to balance working across the aisle with speaking truth to.
Speaker 6: Power and with markets and with people around the world
Speaker 6: that want to believe that they can trust in what
Speaker 6: you say, and you'll make choices with integrity. But I
Speaker 6: think Hank's absolutely right. The most important thing is that
Speaker 6: you have to recognize you have to be in a
Speaker 6: position where you are able to say what you think
Speaker 6: is truth and what is important for the country to
Speaker 6: do or not to do. And sometimes you have to
Speaker 6: be the break and the constraint, and sometimes you have
Speaker 6: to be the accelerator, the catalysts that try to move
Speaker 6: a system that's hard to move to better choices.
Speaker 10: I've always said, you don't want some other's Treasury secretary
Speaker 10: who's a politician who wants some day to be president
Speaker 10: of the United States, right, because there's a tendency to
Speaker 10: say what people want to hear, right, And you need
Speaker 10: to talk about what people need to hear. But you
Speaker 10: need to have the support of your president to be
Speaker 10: able to speak that way.
Speaker 2: But let's face it, if we're politically easy to fix
Speaker 2: our problem of rising down, we would have done it
Speaker 2: long before.
Speaker 11: Now.
Speaker 2: Kevin McCarthy knows a thing or two about the intersection
Speaker 2: of politics and policy.
Speaker 9: The interesting part about government. You've got very best idea,
Speaker 9: but that doesn't mean it passes. So you have to
Speaker 9: understand policy and politics, and if you don't understand both,
Speaker 9: you're not going to be successful at either.
Speaker 2: And when it comes to the politics of the debt,
Speaker 2: Kevin McCarthy favors taking a chapter from history from other
Speaker 2: times when Congress needed to take big action that was
Speaker 2: politically fraud.
Speaker 9: The way to really tackle it is to look at
Speaker 9: the way we handled after the Soviet Union collapsed in
Speaker 9: the ninety right. We had all these military bases, but
Speaker 9: the member of Congress is not going to vote to
Speaker 9: shut it down, so they created what was called a
Speaker 9: brack a base realignment and closure. So if we create
Speaker 9: something like this where all parties get to appoint some
Speaker 9: they have to one package has to be able to
Speaker 9: come out of that committee, no amendments. You voted up
Speaker 9: or voted down. So at the end of the day,
Speaker 9: that decision will be made on both parties doing it together.
Speaker 9: Don't criticize each other, but that decision now. And these
Speaker 9: big problems that are macro problems, you can't solve them
Speaker 9: by one party, and our government is not designed where
Speaker 9: one party rules. You have to have compromise.
Speaker 2: In the end, it's not that we need to be
Speaker 2: reconciled to doing something about the national debt. It's not
Speaker 2: really about what needs to be done. It's not even
Speaker 2: about how we could go about it. It comes down
Speaker 2: to reconciling ourselves to doing something. Now, if we fail,
Speaker 2: we're going to have to reconcile ourselves to imposing the
Speaker 2: problem on the next generation.
Speaker 1: You're listening to Bloomberg Wall Straight Week with David Weston
Speaker 1: from Bloomberg Radio. This is Bloomberg Wall Straight Week with
Speaker 1: David Weston from Bloomberg Radio.
Speaker 12: Ladies and gentlemen, of course, we'll welcome to our twentieth
Speaker 12: century and contemporary evening seal.
Speaker 2: This is a story about investing in our passions. For many,
Speaker 2: art is a passion, but it's also a big business,
Speaker 2: one that generated over sixty five billion dollars in sales
Speaker 2: last year. And at the core of that business are
Speaker 2: people who buy the art, people like Peter Krauss.
Speaker 11: Remember these pieces of work, are these these assets, if
Speaker 11: you want to call them that. They don't produce an income.
Speaker 11: They don't have a coupon associated with them. The only
Speaker 11: income that you get is the appreciation.
Speaker 2: Krauss is chairman and CEO of Aperture Investors, and has
Speaker 2: spent a career in finance, including as head of Alliance Bernstein.
Speaker 2: With his wife, he has also become one of the
Speaker 2: most avid art collectors on Wall Street.
Speaker 11: My wife and I've been collecting since we got married,
Speaker 11: which is forty four years. And the first thing we
Speaker 11: bought was really sort of a small print, and I
Speaker 11: said to the galerist, who's not alive any longer, I said, well,
Speaker 11: you know what I like, and if you have any more,
Speaker 11: give me a call. And he looked at me and
Speaker 11: he said, here's what we're going to do. If you
Speaker 11: want to collect art, he will come in every Saturday
Speaker 11: and I will show you aren't. But if you think
Speaker 11: I'm going to call you on the phone and tell
Speaker 11: you there's something for you to come and see, that's
Speaker 11: not happening. And I took his adminission seriously and we
Speaker 11: went we my wife and I went in every Saturday,
Speaker 11: and every Saturday he showed us work, most of which
Speaker 11: we couldn't afford, but all kinds of paintings, very little sculpture,
Speaker 11: but some. And we finally found a painting that we
Speaker 11: liked and we bought and it was six thousand dollars
Speaker 11: and we paid for it five hundred dollars a month
Speaker 11: until it was paid off.
Speaker 2: Over the decades, Kraus and his wife Jill have added
Speaker 2: to that single work, paid for an installments, and assembled
Speaker 2: a very large collection. It's people like the Krouses who
Speaker 2: are at the center of a growing web of players,
Speaker 2: including auction houses, banks and advisors. They connect one of
Speaker 2: the kind assets to collectors of all levels, from the
Speaker 2: very experienced to those just starting out.
Speaker 8: A lot of times clients because they're because art is
Speaker 8: such a passion for them, it's a pastime, and so
Speaker 8: they'll let their guard down, which is, you know, wonderful,
Speaker 8: But at the same time, you might you don't want
Speaker 8: to be caught off guard and have a surprise later
Speaker 8: and buy something that maybe you know was overpriced or
Speaker 8: you just weren't aware of all of the factors involved.
Speaker 2: Forteini Zidis is head of art Finance at City, one
Speaker 2: of the major banks that have added art advisory and
Speaker 2: financing to their investment offerings. When needed, they lend against
Speaker 2: the investors' collections to provide the liquidity needed to acquire
Speaker 2: new art. Zidis works with Mary Kate O'Hare who runs
Speaker 2: City's art advisory business.
Speaker 13: One of the most important roles of an art advisor
Speaker 13: is the ability to tell a client no, because you
Speaker 13: you know, sometimes clients will send us stuff and say,
Speaker 13: what do you think about this, and it's it's you know,
Speaker 13: I think again. We're always looking out for our client's
Speaker 13: best interest.
Speaker 3: We are.
Speaker 13: You want to make sure they're getting the best they
Speaker 13: can So if we don't think it's the right piece,
Speaker 13: we'll explain the reasons why. Then the client is equipped
Speaker 13: with the information, they can always make a decision say nope,
Speaker 13: I love it, but then they go into it with
Speaker 13: eyes wide open.
Speaker 2: Doing that can be a challenge in a market that's
Speaker 2: notoriously opaque, but for buyers like Peter Krauss, variety and
Speaker 2: risk can be both a bug and feature setting art
Speaker 2: far apart from the kind of assets he's spent his
Speaker 2: life investing in.
Speaker 11: It's not like the stock market where you want to
Speaker 11: buy a share of Tesla, and all the shares of
Speaker 11: Tesla are exactly the same. Whether it's the first share
Speaker 11: or the a share of the one million share, doesn't matter.
Speaker 11: They're all the same. That's not true for it.
Speaker 2: While each work of art is unique. So there's a
Speaker 2: big business in bringing some clarity to the market and
Speaker 2: in bringing together the buyers and sellers. Enter Edward Dolman, well.
Speaker 14: Basically it's a sort of perfect form of the market.
Speaker 14: It's is the ultimates of demand and supply where the
Speaker 14: two meet with an auctioneer in front of all our
Speaker 14: clients who have come along to bid for the works
Speaker 14: of art that we've offered for sale.
Speaker 2: After a twenty seven year career at Christie's, Edward Dolman
Speaker 2: became CEO of Phillips, which specializes in contemporary art. Auction
Speaker 2: Houses like Phillips, Southeby's and Christie's provide a public forum
Speaker 2: for price discovery at events throughout the year, including big
Speaker 2: ones in the spring and the fall.
Speaker 14: So the art business is essentially driven by this auction machine.
Speaker 14: But round it is a huge sort of ecosystem of
Speaker 14: galleries and collectors and museums and art institutions. So we're
Speaker 14: a big community. But I do think the auctions are
Speaker 14: properly at the heart of it.
Speaker 12: And we can open up with good interests on the
Speaker 12: phones in the room and online. Good luck to you all.
Speaker 12: At sixty seventy eighty thousand, I have with advanced it already.
Speaker 14: It's been transformed actually in the time that I've been
Speaker 14: in it advance, which is a long time, that's thirty
Speaker 14: five years. When I first started, the market was opaque,
Speaker 14: to say the least. The only people had any pricing
Speaker 14: information where the auctioneers and the dealers who attended the
Speaker 14: auctions and wrote down all the.
Speaker 10: Prices in their catalogs.
Speaker 14: And I think the biggest transformative event in our world
Speaker 14: has been information and access to data. So really the
Speaker 14: market we see now, what's so different about it is
Speaker 14: the access to information that everybody has who's in that
Speaker 14: room competing, whether they're in Asia or South America, or
Speaker 14: Europe or America, they have access to the same information.
Speaker 2: Better information is one change in the auction business. Another
Speaker 2: is the size of the guarantees auction houses are called
Speaker 2: upon to give sellers and methods they've developed to help
Speaker 2: share the risk of those guarantees with would be buyers.
Speaker 14: As the sort of scale of of the auctions have
Speaker 14: gone bigger, just in terms of monetary values, it's impossible
Speaker 14: for the auction houses to take the risk on their
Speaker 14: own balance sheets, and so you know, there has been
Speaker 14: a very sophisticated sort of development of the concept of
Speaker 14: the irrevocable bid, where an auction house will look and
Speaker 14: try and find someone who wants to take the risk
Speaker 14: from you, someone who actually loves the work of art
Speaker 14: is very interesting wants to buy it at that particular level.
Speaker 14: A key part of the auction business now is looking
Speaker 14: for these counterparties and trying to make sure that the
Speaker 14: risk is spread and is taken off the auction house
Speaker 14: balance sheet and placed.
Speaker 11: Elsewhere who like to open the bidding here.
Speaker 2: The price may be public, and the seller may be
Speaker 2: protected by guarantees and arobical bids, But for the buyer
Speaker 2: the question remains whether a work of art is worth
Speaker 2: the prices being bid, and also how those prices might
Speaker 2: be financed, which is we're for teenize Itis and her
Speaker 2: colleagues at City come in at one.
Speaker 4: Hundred seventy million for the wall is selling here to
Speaker 4: you one U seventy million dollars.
Speaker 8: The art market can be still opaque. It has gained
Speaker 8: transparency in some ways, but in many ways it still
Speaker 8: remains not a transparent market. A novice collector might need
Speaker 8: some guidance. So some of the things we look at
Speaker 8: when evaluating art, be that for an acquisition, a sale,
Speaker 8: as collateral for an art loan for insurance purposes, we
Speaker 8: look at a range of factors. We look at an
Speaker 8: artist's market history it's a more established artist. We look
Speaker 8: at longevity of that market and what's happening. We look
Speaker 8: at the individual artwork itself, so the sale history of
Speaker 8: that work, oftentimes or not oftentimes, but sometimes artworks might
Speaker 8: show up for sale several times at auction, and what
Speaker 8: does that tell you? Did it fail to sell? Is
Speaker 8: it unquote fresh to the market? Work for which sometimes
Speaker 8: there's a premium because that work has been off the
Speaker 8: market for a number of years, and that creates a
Speaker 8: lot of kind of excitement when it comes up for sale.
Speaker 2: Banks like City rely on their assessment of works value
Speaker 2: in making loans to the buyers a good many loans.
Speaker 2: According to Deloitte, outstanding borrowing against art could surpass thirty
Speaker 2: six billion dollars this year, up from a projected twenty
Speaker 2: nine to thirty four billion dollars in twenty twenty three. Banks,
Speaker 2: non banks and boutique lenders have increased their lending by
Speaker 2: one hundred and nineteen percent over the past five years,
Speaker 2: but these loans are not simply secured by the value
Speaker 2: of the art being bought. They're made to the purchasers themselves.
Speaker 8: As a bank, we offer recourse loans, which is different
Speaker 8: than asset based lenders. So the art is definitely you know, important,
Speaker 8: and that's why the clients are able to typically live
Speaker 8: with the art on their wall, So we don't take
Speaker 8: possession of the art, so clients keep it in their homes.
Speaker 8: Typically the art can appreciate in value and they can
Speaker 8: take that capital and put it towards other investments, purchase
Speaker 8: more art, you know, various purposes, but it is primarily
Speaker 8: based on the client's financial picture. There are asset based
Speaker 8: lenders out there for sure that are competing. However, it's
Speaker 8: a different model, I would say, because in some cases
Speaker 8: they may have to take possession of the art. Typically
Speaker 8: the rates would be higher than what a bank would offer.
Speaker 2: As borrows money becomes a bigger piece of the puzzle.
Speaker 2: It also means that now, more than ever before, the
Speaker 2: fortunes of the art industry have become more closely tied
Speaker 2: with interest rates, which may help explain why overall art
Speaker 2: market sales were down four percent last year from the
Speaker 2: year before.
Speaker 14: You can actually look at the growth or contractions in
Speaker 14: our market get a better understanding of the relationship of
Speaker 14: art and finance, and I think it reflects a lot
Speaker 14: of the lending that I was talking about, the sort
Speaker 14: of explosion in terms of lending against works of art.
Speaker 14: The interest rates on those loans have become a more
Speaker 14: and more significant player in our world. So whilst the
Speaker 14: stock markets have done reasonably well over the last couple
Speaker 14: of years, you know, the art market has felt a
Speaker 14: little bit of a decline, and I think that has
Speaker 14: been driven largely by interest rates and significantly higher levels
Speaker 14: of interest rates we have now than we add for
Speaker 14: a long time between twenty forteen and sort of twenty
Speaker 14: twenty two.
Speaker 12: Fourteen million, nine hundred thousands.
Speaker 2: Today the art market is larger and more transparent than
Speaker 2: in the past, and it's interwoven with interest rates and
Speaker 2: financing and expert advisors. But in the end, whether you're
Speaker 2: an art investor, a collector, or something of a mix
Speaker 2: of the two, the value of your purchase depends in
Speaker 2: part and whether it will resonate through times. In the media.
Speaker 2: More generally, we follow a certain phenomena that rise up
Speaker 2: and all of a sudden, there's a great deal of
Speaker 2: interest a certain artists or a certain form of art
Speaker 2: sometimes which goes away from your experience over quite a
Speaker 2: few years in this business. Can you discern the difference
Speaker 2: between a fad and a trend?
Speaker 14: It's a very good question. I don't think I can.
Speaker 10: That's the truth.
Speaker 11: I think it's impossible. I literally think it's impossible. I
Speaker 11: think that if you were to ask yourself the question,
Speaker 11: if you went back to Renaissance times and we're in
Speaker 11: Leonardo da Vinci's studio and he was painting the Mona Lisa,
Speaker 11: would you have known? Probably hard to tell.
Speaker 2: But fortunately for a true collector like Peter Krass, it's
Speaker 2: not about predicting where the market will go.
Speaker 11: As a collector, the key issue is trying to unlock
Speaker 11: the language that the artist is using to communicate their
Speaker 11: feelings or whatever they're putting into the art. And it's
Speaker 11: trying to figure out that language. That's the mystery of me.
Speaker 11: And where you figure out that language, then all of
Speaker 11: a sudden you see what the artist is doing. You
Speaker 11: may not like it, it may not speak to you.
Speaker 11: But if it does speak to you, if that language
Speaker 11: is something you read and it does excite you and
Speaker 11: it moves you.
Speaker 2: That's interesting for the true art collector. As for the
Speaker 2: true artist, maybe it doesn't matter how many people are
Speaker 2: moved by a piece. One can be enough that does it.
Speaker 2: For this edition of Bloomberg Wall Street Week, I'm David Weston.
Speaker 10: Stay with us.
Speaker 2: Today's top stories and global business headlines are coming up
Speaker 2: right now