WEBVTT - Bloomberg Wall Street Week March 17th, 2023 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.840 --> 0:00:08.320 to the markets this week. USCPI members reinforcing concerns about inflation, 0:00:08.440 --> 0:00:11.559 the financial stories that cheap our world a really different 0:00:11.600 --> 0:00:14.520 reaction to Mark. It's more indications of just how hot 0:00:14.560 --> 0:00:16.959 the US economy really is. Through the eyes of the 0:00:17.000 --> 0:00:21.400 most influential voices Larry Summers, the former Treachery Secretary, Katherine Keening, 0:00:21.560 --> 0:00:25.240 CEO of ny Moen, Samzel Sherman and founder of Equatic 0:00:25.360 --> 0:00:28.840 Group Investment in Bloomberg wool Street Week with David Weston 0:00:29.000 --> 0:00:33.760 from Bloomberg Radio. An irresistible force meets an immovable object 0:00:33.920 --> 0:00:37.440 as inflation fever continues, but the central bank remedy to 0:00:37.520 --> 0:00:40.800 bring it down shakes Global Wall Street to its core. 0:00:41.400 --> 0:00:44.599 This is Bloomberg Wall Street Week. I'm David Weston, this 0:00:44.600 --> 0:00:47.840 week's special contributor. Larry Summers on reacting to the bank 0:00:47.880 --> 0:00:51.919 crisis without giving up the fight against inflation. I think 0:00:51.920 --> 0:00:57.240 it's appropriate, at least on current facts, to raise rates 0:00:57.400 --> 0:01:02.240 by twenty five basis points. The economists Danny Bettos on 0:01:02.280 --> 0:01:05.040 whether we should have seen it coming, well, I think 0:01:05.040 --> 0:01:09.080 we are seeing a realization that the banks are more 0:01:09.160 --> 0:01:11.920 fragile than people thought they were. And Joshua Friedman of 0:01:12.040 --> 0:01:14.960 Kenyon Valley Partners on what it all means for credit 0:01:15.160 --> 0:01:30.640 and for private equity. Any other week we'd be talking 0:01:30.640 --> 0:01:33.920 about the ECB decision on Thursday to raise rates. Despite 0:01:33.959 --> 0:01:37.400 all the uncertainty surrounding the banks, the Governing Council today 0:01:37.720 --> 0:01:41.640 decided to increase the three key ECB interest rates by 0:01:41.680 --> 0:01:45.120 fifty basis points and a Russian fighter jet forcing down 0:01:45.120 --> 0:01:49.000 a US drone over the Black Sea. This incident demonstrates 0:01:49.000 --> 0:01:52.360 a lack of competence in addition to being unsafe and unprofessional, 0:01:52.600 --> 0:01:56.480 and China is lowering its growth target to achieve and 0:01:56.560 --> 0:02:00.400 around five percent growth. It's not an easy task. It's 0:02:00.440 --> 0:02:04.919 going to require redoubled efforts. But this week we watched 0:02:04.920 --> 0:02:08.040 as the foundations of the banking sector trembled in the 0:02:08.040 --> 0:02:11.040 face of the failure of Silicon Valley Bank. There's never 0:02:11.120 --> 0:02:14.839 just one cop roach like we've seen several banks here 0:02:14.919 --> 0:02:17.800 fault end of Signature Bank. It was the second largest 0:02:17.840 --> 0:02:20.560 bank failure in US history, followed by the third largest 0:02:20.600 --> 0:02:23.720 bank failure in US history when Signature Bank was taken 0:02:23.720 --> 0:02:26.400 over its wealth. And if that weren't enough, the systemically 0:02:26.400 --> 0:02:31.200 important Credit Suite Teacher as it first announced material weaknesses 0:02:31.280 --> 0:02:34.560 in its financial reporting controls, even as its chairman Uric 0:02:34.720 --> 0:02:38.680 Kerner reassured Bloomberg's Francine Laque that it was not seeing 0:02:38.760 --> 0:02:42.960 fund outflows material good influence. Yesterday still I had a 0:02:43.000 --> 0:02:45.639 Climb meeting which was very positive from that one. So 0:02:45.639 --> 0:02:47.800 so far it's come, but I think it's only days 0:02:47.800 --> 0:02:50.160 TiAl goodness. But by the end of the week, the 0:02:50.240 --> 0:02:53.160 Swiss National Bank had to step in with guarantees of 0:02:53.200 --> 0:02:57.320 liquidity as pressure built for some strategic resolution for Switzerland's 0:02:57.480 --> 0:03:02.320 second largest bank, and the hits just kept on coming 0:03:02.360 --> 0:03:05.840 as First Republic Bank came under siege, prompting Secretary Yelling 0:03:05.880 --> 0:03:08.200 to put together a group of banks to inject thirty 0:03:08.200 --> 0:03:11.160 billion dollars in depots posits into the bank, which as 0:03:11.160 --> 0:03:14.240 of Friday's clothes did not appear to have stopped the doubts. 0:03:14.480 --> 0:03:16.840 And as we head into the weekend now markets are 0:03:16.880 --> 0:03:19.760 reacting to reports of UBS possibly stepping in to help 0:03:19.800 --> 0:03:22.959 with problems at Credit Suite. Through it, all equities held 0:03:23.000 --> 0:03:25.680 up reasonably well. The SMP five hundred ended up the 0:03:25.680 --> 0:03:28.920 week up one point four percent. Then Azek was up 0:03:29.040 --> 0:03:32.639 four point four percent. Investors flocked to the relative safety 0:03:32.720 --> 0:03:35.560 of bonds, taking the yield on the ten year down 0:03:35.600 --> 0:03:38.000 three DP basis points, ending the week just over three 0:03:38.000 --> 0:03:40.120 point four percent, and the yield on the two year 0:03:40.240 --> 0:03:42.840 fell over seven basis points to wind up just over 0:03:42.960 --> 0:03:45.320 three point eight percent. Take us through it all. We 0:03:45.320 --> 0:03:48.480 welcome now Peter Krauss. He's chairman and CEO of Aperture Investors, 0:03:48.480 --> 0:03:51.120 So welcome back, Peter. Great to have you here. Did here, David? So, 0:03:51.160 --> 0:03:53.240 as we sit here, it's hard to know exactly what 0:03:53.320 --> 0:03:55.520 to address because it's moving. It's moving on both sides 0:03:55.520 --> 0:03:58.120 of the Atlantic with credit suis ubs maybe over there, 0:03:58.360 --> 0:04:00.720 we've still got new Republican and other issue here. So 0:04:00.840 --> 0:04:03.960 as an investor, what do you do in these circumstances? Yeah, Look, 0:04:03.960 --> 0:04:06.960 it's very difficult. Investing is alway to challenge, but in 0:04:07.240 --> 0:04:11.480 these markets it's even more difficult. Risk is hard to 0:04:11.520 --> 0:04:14.520 take right now because if we really don't know where 0:04:14.560 --> 0:04:16.680 to take the risk, it's very difficult to put the 0:04:16.760 --> 0:04:20.120 risk on. So I think right now, in today's markets, 0:04:20.279 --> 0:04:24.000 probably investors shouldn't be committing more to a particular risk position. 0:04:24.320 --> 0:04:26.160 I'm not sure they should reduce their risk, because it's 0:04:26.160 --> 0:04:28.039 hard to know where to reduce the risk. None of 0:04:28.080 --> 0:04:29.840 us thought the two year was going to rally a 0:04:29.960 --> 0:04:33.960 hundred basis points in less than seven days. That's a dramatic, 0:04:34.040 --> 0:04:36.800 dramatic move, and none of us had any thought that, 0:04:36.920 --> 0:04:39.480 in fact, these banks were as unstable as they are. 0:04:39.920 --> 0:04:41.680 So I think at the present time, if I was 0:04:41.760 --> 0:04:45.960 investing incremental dollars, I'd probably have it in cash. So 0:04:46.560 --> 0:04:49.040 as a practical matter, what we saw was silicon value. 0:04:49.080 --> 0:04:50.680 Back in other places, it seemed to be a mismatch, 0:04:51.080 --> 0:04:54.000 a mismatch with respect to duration and respect to liquidity. 0:04:54.040 --> 0:04:56.919 As you had long term treasuries and other securities matched 0:04:56.960 --> 0:05:00.480 up against deposits, people could withdraw right away. Where might 0:05:00.520 --> 0:05:02.719 there be similar mismatches? Do you think in the system, 0:05:02.760 --> 0:05:05.760 either in the banking system or beyond the banking system. Now, 0:05:05.800 --> 0:05:08.000 I think that's an excellent point. I think one of 0:05:08.040 --> 0:05:10.440 the challenges that the world has, this is not just 0:05:10.480 --> 0:05:14.159 a US issue, is that for ten plus years, interest 0:05:14.240 --> 0:05:18.320 rates have been very benign, inflation benign, volatility benign, and 0:05:18.440 --> 0:05:21.240 people have gotten comfortable with that, and so they've invested 0:05:21.360 --> 0:05:24.920 more money than they probably would historically into private assets, 0:05:25.160 --> 0:05:29.359 into public private equity, into private credit, and places in 0:05:29.400 --> 0:05:32.400 which they don't have liquidity, and now that interest rates 0:05:32.440 --> 0:05:34.799 are much much higher in the front end, that cost 0:05:34.839 --> 0:05:37.640 of that liquidity is actually significant. And what we're seeing 0:05:37.800 --> 0:05:42.160 is the disintermediation of cash moving to where you can 0:05:42.200 --> 0:05:44.920 get five percent in short rates, whereas before you were 0:05:44.960 --> 0:05:48.280 getting zero. So, yes, it's happening in the banking system. 0:05:48.440 --> 0:05:51.920 It's happening any place that is actually benefited from very 0:05:51.960 --> 0:05:54.799 low rates and low volatility. It's happening in the insurance 0:05:54.839 --> 0:05:58.320 business where actually people who have insurance policies are saying, well, 0:05:58.360 --> 0:06:01.320 if I actually terminate my insurance policy and buy a 0:06:01.360 --> 0:06:04.239 new one, or actually buy a public security like a bond, 0:06:04.279 --> 0:06:06.240 I might get a better return. So we're going to 0:06:06.320 --> 0:06:10.400 see this continue to roll through the economic environment, and 0:06:10.480 --> 0:06:13.240 it's not over yet and it's going to continue. Part 0:06:13.279 --> 0:06:16.279 of the problem is marketing to market. We haven't had it, 0:06:16.600 --> 0:06:19.159 and obviously we've now learned the banking sector when it 0:06:19.160 --> 0:06:21.240 comes to some of these long term treasures. You've been 0:06:21.240 --> 0:06:23.000 on Wall Street week before talking about in some of 0:06:23.000 --> 0:06:25.520 the private markets, private credit, private equity, and things like that, 0:06:26.040 --> 0:06:27.880 how does that work its way through the system, because 0:06:27.880 --> 0:06:30.200 sooner or later, if it's less worth less, we have 0:06:30.240 --> 0:06:32.760 to recognize that. Yeah, I think that that's right. Look, 0:06:32.800 --> 0:06:35.520 what we sort of don't want is we don't want 0:06:35.600 --> 0:06:38.800 people with private assets to be forced to sell because 0:06:38.839 --> 0:06:42.600 they're not liquid. They ultimately will be sold at significant discounts, 0:06:42.839 --> 0:06:45.360 and the buyers of them are going to charge the 0:06:45.400 --> 0:06:48.760 lat for little liquidity. So it would be better if 0:06:48.800 --> 0:06:52.080 people who had those assets could hold them. But you're right, 0:06:52.320 --> 0:06:55.320 they're valued at rates or levels that are probably higher 0:06:55.360 --> 0:06:57.960 than what their actual value is, and so we have 0:06:58.000 --> 0:07:01.919 to sort of engineer a change over time. So foundations, endowments, 0:07:01.920 --> 0:07:05.080 pension plans, any investor that has a sizeable amount of 0:07:05.080 --> 0:07:07.479 private equity or private capital is going to have to 0:07:07.480 --> 0:07:10.600 figure out where to take their incremental dollars and invest 0:07:10.640 --> 0:07:13.560 them in public securities. And I think another issue that 0:07:13.640 --> 0:07:17.480 people have is they spend out of these foundations turn endowments. 0:07:17.520 --> 0:07:22.120 So if your private equity investment is not actually selling 0:07:22.160 --> 0:07:24.840 companies and producing cash, then you're gonna have to take 0:07:24.840 --> 0:07:26.960 that cash from the public side, which is going to 0:07:27.040 --> 0:07:32.200 put more pressure on that unequal or imbalanced ratio. So 0:07:32.280 --> 0:07:34.320 I think this is again not going to get solved 0:07:34.560 --> 0:07:37.239 over the short run, and it could create some acute 0:07:37.320 --> 0:07:39.680 cases in which people have to sell these assets. Where 0:07:39.680 --> 0:07:41.760 does this TELEFED. We've got a FED meeting coming up 0:07:41.800 --> 0:07:44.680 next week. We had the ECP this week say the 0:07:44.760 --> 0:07:47.960 course as it was anticipated with the fifty basis point increase, 0:07:48.000 --> 0:07:49.240 What does it say to the FED? Does the FED 0:07:49.280 --> 0:07:51.240 need to be worried about financial stability? At this point? 0:07:51.600 --> 0:07:55.160 FED is worried about financial stability. They've proved that over 0:07:55.200 --> 0:07:57.800 the weekend they did exactly what they should have done, 0:07:57.840 --> 0:08:01.360 which was to stabilize the two bankings situations that the 0:08:01.440 --> 0:08:05.960 FDIC took over and the transaction that you discussed earlier 0:08:06.080 --> 0:08:09.960 where large US New York banks put money into the 0:08:10.040 --> 0:08:13.720 end of First Republic. Having said that, inflation is still 0:08:13.840 --> 0:08:16.120 very high, and we have to think about the fact 0:08:16.120 --> 0:08:20.200 that inflation affects the broad economy, not just the banks. 0:08:20.440 --> 0:08:24.520 And if we don't continue to fight inflation, then the 0:08:24.520 --> 0:08:26.000 bill we're gonna have to pay at the end it's 0:08:26.000 --> 0:08:28.360 going to be even bigger. So I think that the 0:08:28.600 --> 0:08:31.680 liquidity that was created by the bank actions over the 0:08:31.720 --> 0:08:34.640 weekend created space for the FED to actually continue to 0:08:34.640 --> 0:08:37.600 take rates up by twenty five basis points. Will they 0:08:37.600 --> 0:08:40.440 continue to watch the banking situation more carefully, Of course 0:08:40.440 --> 0:08:43.319 they will. That could change in the future if a 0:08:43.400 --> 0:08:47.120 systemic bank fails, that may actually change the Fed's position, 0:08:47.360 --> 0:08:49.480 But for right now, I think the FED probably moves 0:08:49.520 --> 0:08:52.640 twenty five basis points. Would you expect going forward investors 0:08:52.679 --> 0:08:54.760 would be a little less so willing to put it 0:08:54.800 --> 0:08:56.880 in private and maybe you stick on the public market. 0:08:57.040 --> 0:08:59.480 I do think the cost of liquidity has now gone 0:08:59.520 --> 0:09:02.480 up antically and where it was kind of a no 0:09:02.559 --> 0:09:05.319 brainer to put money in private assets given what you 0:09:05.320 --> 0:09:08.000 would get in public assets or certainly in short data 0:09:08.080 --> 0:09:11.520 public assets, that's changed dramatically, and so I do think 0:09:11.559 --> 0:09:14.120 on the margin for two reasons. One the rebalancing issue 0:09:14.160 --> 0:09:17.800 we discussed, and two is the relative attractiveness of the 0:09:17.920 --> 0:09:22.040 yields of public securities versus private securities. I also think 0:09:22.120 --> 0:09:24.560 that there is going to be a reckoning in the 0:09:24.600 --> 0:09:28.320 private capital or the private credit world, where the loans 0:09:28.360 --> 0:09:29.920 that have been made have been made over the last 0:09:29.960 --> 0:09:32.760 ten years in a very benign credit environment. People look 0:09:32.800 --> 0:09:35.720 at the credit history of those assets and see very 0:09:35.720 --> 0:09:38.400 few losses and feel comfortable with that. That could change. 0:09:38.640 --> 0:09:41.440 And if people then begin to understand well, those populations 0:09:41.760 --> 0:09:45.360 of loans are not quite as free from credit risk 0:09:45.400 --> 0:09:48.000 as I thought. That will also make people think a 0:09:48.040 --> 0:09:50.160 little bit more about putting money in the public side 0:09:50.400 --> 0:09:52.480 versus the private side. What does this mean for if 0:09:52.480 --> 0:09:54.400 I can call it this the real economy, I mean, 0:09:54.760 --> 0:09:57.000 for example, to be very direct with you, is a 0:09:57.000 --> 0:09:59.440 recession more likely today than it was a week ago. Yes, 0:10:00.120 --> 0:10:02.520 to be very direct with you, I think that the 0:10:02.600 --> 0:10:06.360 FED has been saying again since it started raising rates, 0:10:06.400 --> 0:10:11.480 they want to restrict financial conditions. If you restrict financial conditions, 0:10:11.520 --> 0:10:14.560 by definition, you have to slow growth. Of course, the 0:10:14.600 --> 0:10:16.960 FED is trying to slow growth without creating a recession. 0:10:17.280 --> 0:10:19.480 That is a very hard thing to do. With the 0:10:19.520 --> 0:10:24.200 banking crisis, you're probably also seeing financial conditions both loosen 0:10:24.280 --> 0:10:26.760 as a result of the Fed's action, but also tighten 0:10:26.880 --> 0:10:30.400 as a result of regional banks husbanding their cash and 0:10:30.520 --> 0:10:33.680 not lending as aggressively and wearing more about credit risk 0:10:33.920 --> 0:10:36.920 and therefore on the margin, probably not lending. So I 0:10:37.000 --> 0:10:39.559 suspect on the real economy, by the end of the 0:10:39.640 --> 0:10:43.280 year there will be a significant slowing, potential recession, and 0:10:43.320 --> 0:10:45.920 that's what we need, because we're not going to get 0:10:45.920 --> 0:10:48.560 inflation down unless that happens. Peters, so great to have 0:10:48.559 --> 0:10:51.679 your here again. That's Peter Krauss of Aperture Investments coming up. 0:10:51.760 --> 0:10:54.880 Economists editor in chief Zanni Bedos joins us about yet 0:10:54.920 --> 0:10:57.640 another banking crisis. Well, we may risk by counting the 0:10:57.720 --> 0:10:59.920 government to make it all go away. This is Wall 0:11:00.000 --> 0:11:08.640 Street Week. I'm Bloomberg. This is Bloomberg Wall Street Week 0:11:08.880 --> 0:11:19.040 with David Weston from Bloomberg Radio. This is Wall Street Week. 0:11:19.120 --> 0:11:21.280 I'm David Weston. It has been quite a week in 0:11:21.320 --> 0:11:24.679 the markets, and particularly triggered by some crises in several banks. 0:11:24.880 --> 0:11:26.679 But now it's time to take a step back and 0:11:26.720 --> 0:11:30.040 maybe think about broader consequences of what we have seen 0:11:30.160 --> 0:11:31.920 this week and help us do that. We're welcome to 0:11:32.120 --> 0:11:35.880 Zanny Minton Batto. She is editor in chief of the Economist. So, Zannie, 0:11:35.960 --> 0:11:37.760 welcome back. It's great to have you here. Thank you 0:11:37.760 --> 0:11:39.240 for having me. It's great to be back here. So 0:11:39.280 --> 0:11:42.160 you had you were covering the two eight two thousand 0:11:42.160 --> 0:11:45.040 and nine great great financial crisis. Do you have PTSD? 0:11:47.040 --> 0:11:49.840 I certainly have a sense of I'm as You're right. 0:11:49.880 --> 0:11:52.640 I lived in Washington throughout that crisis, and I'm here. 0:11:52.679 --> 0:11:55.079 I was here in the US this last weekend when 0:11:55.120 --> 0:11:58.320 the whole news broke about Silicon Valley Bank, and there 0:11:58.400 --> 0:12:00.720 was definitely a sense of daja. It's not on the 0:12:00.720 --> 0:12:04.760 scale yet, but it's also I think more systemic than 0:12:05.200 --> 0:12:07.640 people thought even a week ago. So I think we 0:12:07.679 --> 0:12:13.440 are seeing a realization that the banks are more fragile 0:12:13.480 --> 0:12:16.880 than people thought they were. Because after the twenty eight 0:12:16.880 --> 0:12:18.920 financial crisism, we can we can talk about this, but 0:12:19.080 --> 0:12:23.280 there was a huge amount of regulation and recapitalization and 0:12:23.320 --> 0:12:26.200 focus on strengthening the banks. But two things kind of 0:12:26.440 --> 0:12:29.160 we've now realized happens since then. One is that some 0:12:29.360 --> 0:12:32.679 of that regulatory framework was rolled back in twenty seventeen 0:12:32.679 --> 0:12:35.920 and eighteen, and so Silicon Valley Bank would have been 0:12:35.960 --> 0:12:40.000 required to have much more rigorous supervision and to have 0:12:40.120 --> 0:12:42.800 had a kind of what's called a plan for its 0:12:42.840 --> 0:12:46.040 own demise, which the systemically important big banks have to have. 0:12:46.400 --> 0:12:48.720 And the original rules were that any bank bigger than 0:12:48.720 --> 0:12:51.000 without it's more than fifty billion would have to do that. 0:12:51.000 --> 0:12:53.400 That was raised to two hundred and fifty billion, and 0:12:53.440 --> 0:12:56.199 so Silicon Valley Bank and others didn't were no longer 0:12:56.240 --> 0:12:59.360 subject to that. Rigger had they been subject to it, 0:13:00.080 --> 0:13:03.079 this might not have happened. Secondly, and more importantly, the 0:13:03.520 --> 0:13:07.000 whole reorganization after two thousand and two thousand and nine 0:13:07.320 --> 0:13:09.960 was designed to focus on problems of credit because that 0:13:10.040 --> 0:13:13.120 was the cause of the financial crisis. Inflation was loan 0:13:13.240 --> 0:13:17.600 that people worried about deflation. No one worried about duration risk, 0:13:17.760 --> 0:13:21.120 no one worried about what happened to the value of 0:13:21.600 --> 0:13:25.960 treasuries on banks balance sheets when interest rates rose very sharply. 0:13:26.120 --> 0:13:28.840 That wasn't sund part of the thinking in two and nine, 0:13:28.840 --> 0:13:32.400 two ten, when these regularly reforms were done. And now 0:13:32.440 --> 0:13:34.720 we're in an environment where we've had obviously the fastest 0:13:34.720 --> 0:13:38.880 interest rate rise in decades, and we're seeing the consequences 0:13:38.920 --> 0:13:42.560 that actually these large holdings of government bonds, which would 0:13:42.600 --> 0:13:45.560 deem to be part of making banks safer, are less 0:13:45.600 --> 0:13:48.240 safer than you thought because the banks have effectively, if 0:13:48.240 --> 0:13:50.199 you marking to market, they have big losses on them. 0:13:50.360 --> 0:13:52.760 At the same time, we do have the Sunday announcement 0:13:53.000 --> 0:13:55.600 that basically said everything's gonna be fine. We'll back up 0:13:55.640 --> 0:13:58.320 all the pleasant no matter why everything seems super systemic. 0:13:58.400 --> 0:14:00.440 The government steps in makes it all better. We did 0:14:00.480 --> 0:14:02.880 have that, and that's the I think when we look 0:14:02.920 --> 0:14:04.520 back at this episode, that is going to be the 0:14:04.600 --> 0:14:09.480 extraordinary development that on Sunday, not only were all depositors 0:14:09.640 --> 0:14:12.640 in those two banks bailed out, and of course there 0:14:12.720 --> 0:14:15.360 was an FDIC limit of two hundred and fifty thousand, 0:14:15.440 --> 0:14:18.680 that's you know, exemption made all depositors bailed out. But 0:14:18.800 --> 0:14:22.960 in addition, the FED instituted for one year supposedly a 0:14:23.000 --> 0:14:27.480 facility that banks could get liquidity at the par value 0:14:27.920 --> 0:14:30.400 of any treasuries and any government bonds that they hold. 0:14:30.640 --> 0:14:32.920 And the idea of a lender of last resort is 0:14:33.000 --> 0:14:37.280 to lend freely, quickly against good collateral and out of 0:14:37.360 --> 0:14:40.640 punitive rate. But what we've seen really in the last 0:14:40.680 --> 0:14:43.880 few years, a few decades actually has been an expansion 0:14:44.640 --> 0:14:48.520 of the Federal reserves kind of definition of what being 0:14:48.520 --> 0:14:51.360 a lender of last resort is, lending against much more collateral, 0:14:51.760 --> 0:14:54.440 lending more freely, becoming After two thousand and eight two 0:14:54.440 --> 0:14:56.520 thousand nine, people talked of the FED as a market 0:14:56.560 --> 0:15:00.040 maker of last resort much broader. And what happen and 0:15:00.120 --> 0:15:02.440 Las Sunday was a very big shift because in effect, 0:15:02.880 --> 0:15:07.280 it wasn't imposing any haircut on the bank's ability to borrow. 0:15:07.440 --> 0:15:09.760 They can borrow a POW, which meant in effect they're 0:15:09.760 --> 0:15:13.600 getting subsidized by the Federal for their liquidity. And it's 0:15:13.600 --> 0:15:15.640 supposed to be a one year facility. I don't know. 0:15:15.760 --> 0:15:17.840 Those kind of one year facilities have a habit of changing, 0:15:17.840 --> 0:15:20.760 and that's a big shift in what the Fed does. Ny, 0:15:20.800 --> 0:15:22.640 it's so great to have you back on Walsteran. Thank 0:15:22.640 --> 0:15:24.480 you so much for being here. That that's any Minton 0:15:24.560 --> 0:15:29.720 Bettos of The Economist. Welcome now Dave Gitlin, he's chairman 0:15:29.760 --> 0:15:33.120 and CEO of Carrier Global Corporation and he joins us. Now, 0:15:33.160 --> 0:15:34.920 thank you so much for being here with us on 0:15:35.080 --> 0:15:37.360 Wall Street week. So we've had a busy week in 0:15:37.400 --> 0:15:39.960 the markets. A lot has gone on, triggered really by 0:15:40.000 --> 0:15:42.880 the sort of banking crisis started with Silicon Valley Bank. 0:15:43.280 --> 0:15:45.560 I wonder for you, who runs a company that actually 0:15:45.560 --> 0:15:48.120 makes things, sells things in the real world, what effect 0:15:48.160 --> 0:15:50.200 does it hell on you. Well, first, the good news 0:15:50.320 --> 0:15:52.640 is that we have known material exposure to the regional banks. 0:15:52.640 --> 0:15:55.880 The banks involved particularly they're more broadly the regional banks, 0:15:55.920 --> 0:15:59.160 so we're protected there. Our relationships are with the bulgh 0:15:59.160 --> 0:16:01.600 bracket franks. So rates are lower, but do you see 0:16:01.640 --> 0:16:04.000 any tightening of credit? Do you see any reluctance to 0:16:04.080 --> 0:16:06.040 extend credit at this point? Is that picking up at 0:16:06.040 --> 0:16:07.960 all or do you have to anticipate that possibility. We 0:16:08.000 --> 0:16:11.280 have to anticipate anticipate that possibility. We haven't seen that yet. 0:16:11.720 --> 0:16:14.160 But rates coming down is over a positive thing for 0:16:14.200 --> 0:16:16.080 our market because you know, we look at some of 0:16:16.080 --> 0:16:18.440 the rates going up has had a delling effect on 0:16:18.440 --> 0:16:21.400 the new housing market. So we should see some benefit 0:16:21.480 --> 0:16:24.560 in housing as rates start to come down, and our 0:16:24.640 --> 0:16:27.120 larger customers on the property side, as rates come down, 0:16:27.160 --> 0:16:29.720 that'll be a positive thing for commercial construction as well. 0:16:29.760 --> 0:16:31.760 We have the Federal Reserve meeting next week and there's 0:16:31.760 --> 0:16:33.360 a lot of debate about what they're likely to do. 0:16:33.720 --> 0:16:35.880 Talk about the other side of this equation. We're seeing 0:16:35.880 --> 0:16:38.840 the situation with the banks. We'll need to support them. 0:16:39.000 --> 0:16:40.640 At the same time, we do have inflation. We're still 0:16:40.680 --> 0:16:44.000 getting inflation numbers on how does that affect carrier's business. Well, 0:16:44.080 --> 0:16:47.040 if you're a company that has the ability to raise 0:16:47.120 --> 0:16:49.840 price and keep price but also reduced costs, that spread 0:16:49.840 --> 0:16:52.920 can be very beneficial. So we look over the last 0:16:52.960 --> 0:16:55.280 eighteen months and many of our businesses we've raised price 0:16:55.360 --> 0:16:58.880 six times, so we've been coming off very significant price increases. 0:16:58.920 --> 0:17:01.120 We raise price over billion and a half dollars last 0:17:01.200 --> 0:17:03.440 year on a base of twenty billions, so we realized 0:17:03.960 --> 0:17:07.000 last year over seven and a half percent of price increases. 0:17:07.520 --> 0:17:10.320 While we have been experiencing inflation, we look at this 0:17:10.400 --> 0:17:13.120 year inflation is not over. We came out with new 0:17:13.160 --> 0:17:15.800 price increases in January to kind of keep pace with 0:17:15.880 --> 0:17:19.280 the inflationary pressures that we see. But at the same time, 0:17:19.359 --> 0:17:21.879 we will be brutally tenacious on taking costs out of 0:17:21.880 --> 0:17:24.919 the business. We reduced GNA from nine percent to seven percent. 0:17:25.280 --> 0:17:28.280 We're going very aggressively after working with our supply chain 0:17:28.320 --> 0:17:30.960 partners to really partner with suppliers that want to be 0:17:31.000 --> 0:17:33.320 on the journey with us to take costs out. We're 0:17:33.320 --> 0:17:36.600 going back after the basics of getting productivity in our factories, 0:17:36.640 --> 0:17:41.440 so maintain increased price as appropriate and then aggressively reduce costs. 0:17:41.480 --> 0:17:44.399 Are you facing much pressure on the labor side. We are. 0:17:44.440 --> 0:17:46.919 We are. It's mostly acute in the United States. We 0:17:46.960 --> 0:17:49.359 don't have as many you know, we have about fifty 0:17:49.400 --> 0:17:51.600 five thousand people eighty percent of them are outside the 0:17:51.680 --> 0:17:54.400 United States, and most of the labor pressures we see 0:17:54.520 --> 0:17:57.240 still are in the United States, but we're starting to 0:17:57.280 --> 0:18:00.000 see some loosening there. Where are the customers right now, 0:18:00.200 --> 0:18:02.800 maybe are they moving to How is your business changing? 0:18:03.119 --> 0:18:06.800 We look both geographically and bi vertically. Geographically, you know, 0:18:06.840 --> 0:18:08.760 it does look like slower growth in the United States 0:18:08.800 --> 0:18:10.480 and Europe. But I will tell you I was just 0:18:10.560 --> 0:18:14.040 in Saudi last week. The opportunity for infrastructure spend in 0:18:14.040 --> 0:18:17.280 Saudi Arabia is tremendous. It's a once in a generation opportunity. 0:18:17.359 --> 0:18:19.159 But we met with the PIF that has more than 0:18:19.160 --> 0:18:21.919 seven hundred billion dollars that they're investing and with the 0:18:21.960 --> 0:18:24.240 Giga projects that they're investing in. They're going to invest 0:18:24.240 --> 0:18:28.160 more than seven hundred billion dollars in Nielm in erosian 0:18:28.240 --> 0:18:30.359 A housing projects. So we want to be front and 0:18:30.400 --> 0:18:34.320 center as they build out significant infrastructure in Saudi Arabia. 0:18:34.400 --> 0:18:36.760 India looks very encouraging right now, so we want to 0:18:36.800 --> 0:18:39.719 invest very strongly in India. And I think China's going 0:18:39.720 --> 0:18:42.439 to surprise to the upside. There is this geopolitical cloud 0:18:42.520 --> 0:18:44.960 between the United States and Europe and China. But I 0:18:45.000 --> 0:18:46.919 will tell you that if you get beyond the cloud 0:18:46.960 --> 0:18:49.119 and you look in the trenches, there is really strong 0:18:49.160 --> 0:18:51.920 opportunity in China. And what we've done in China is 0:18:51.960 --> 0:18:54.679 shift our focus from property and real estate over to 0:18:54.720 --> 0:18:57.879 the industrial and infrastructure side. It was seventy thirty one 0:18:57.920 --> 0:19:01.879 way now it's seventy percent I and I infrastructure and industrial. 0:19:01.920 --> 0:19:05.280 So we see a positive opportunity in China. And then 0:19:05.280 --> 0:19:07.399 we look by vertical. We just got a shift for 0:19:07.480 --> 0:19:11.320 where there's more opportunities, so Data Center strong, the Chips 0:19:11.359 --> 0:19:15.200 Act is bringing more investment into infrastructure and industrials. In 0:19:15.240 --> 0:19:20.080 the United States, we look at low end certain parts 0:19:20.080 --> 0:19:22.959 of real estate look very encouraging. So we have an 0:19:23.000 --> 0:19:25.760 ability to shift some of our focus and we're landing 0:19:25.800 --> 0:19:28.720 some very encouraging deals here in the United States. You 0:19:28.800 --> 0:19:32.359 mentioned sustainability earlier. Tell us about the Inflation Reduction Acts 0:19:32.359 --> 0:19:36.000 some of the other issues, such as the Bipartisan Infrastructure Bill. 0:19:36.240 --> 0:19:39.040 What is that doing to your business? It's significant, you know, 0:19:39.080 --> 0:19:41.760 you look at the Inflation Reduction Acts. Three hundred and 0:19:41.800 --> 0:19:43.960 seventy billion is going to be spent on clean energy, 0:19:44.320 --> 0:19:46.399 and we expect to be a big recipient, there's going 0:19:46.440 --> 0:19:49.040 to be a two thousand dollars incentive to go to heatpumps. 0:19:49.440 --> 0:19:52.040 Heatpumps is a very significant trend of the United States. 0:19:52.080 --> 0:19:54.639 Thirty five percent of all of our split systems that 0:19:54.680 --> 0:19:57.359 we sell for air conditioning for homes today are heatpumps. 0:19:57.400 --> 0:20:00.040 So if you can use that two thousand dollars and 0:20:00.160 --> 0:20:02.560 have to shift from not only cooling only to a 0:20:02.600 --> 0:20:05.439 heat pump, but use it to shift to a variable speed, 0:20:05.640 --> 0:20:08.440 more energy efficient heat pump, that will have a very 0:20:08.480 --> 0:20:10.840 significant impact. Dave, thank you so much for being a 0:20:10.800 --> 0:20:12.400 Wall Street We're really glad to have you here. As 0:20:12.480 --> 0:20:15.280 Dave Gitlin, he is the chairman and CEO of Carrier 0:20:15.400 --> 0:20:20.000 Global Corporation. Coming up, we wrap up a wild week 0:20:20.040 --> 0:20:23.560 with our special contributor Larry Summers of Harvard. That's next 0:20:23.560 --> 0:20:34.040 on Wall Street Week on Bloomberg. This is Wall Street Week. 0:20:34.040 --> 0:20:36.159 I'm David Western. We're joined once again now by our 0:20:36.240 --> 0:20:38.240 very special contributor here on Wall Street Week. He is 0:20:38.320 --> 0:20:40.479 Larry Summers, of course of Harvard. So, Larry, there are 0:20:40.480 --> 0:20:42.280 so many things to cover, it's hard to know where 0:20:42.280 --> 0:20:43.840 to start, but let's go through a few of them 0:20:43.880 --> 0:20:45.919 and how you would be looking at it if you 0:20:45.960 --> 0:20:49.159