1 00:00:00,240 --> 00:00:02,960 Speaker 1: This is Bloomberg Wall Street Week, and we may not 2 00:00:03,000 --> 00:00:05,280 Speaker 1: have an overall recession, We're having a rolling recession. To 3 00:00:05,360 --> 00:00:07,040 Speaker 1: kind of roll looks pretty strongly it is when it 4 00:00:07,080 --> 00:00:07,680 Speaker 1: comes to jobs. 5 00:00:07,720 --> 00:00:09,840 Speaker 2: The financial stories that shape our world. 6 00:00:09,960 --> 00:00:13,640 Speaker 1: Three major regional bank failures send shockwaves through the banking system. 7 00:00:13,680 --> 00:00:15,480 Speaker 1: We're all trying to figure out what to make of 8 00:00:15,600 --> 00:00:17,000 Speaker 1: generative AI. 9 00:00:16,920 --> 00:00:19,320 Speaker 2: Through the eyes of the most influential voices. 10 00:00:19,440 --> 00:00:22,400 Speaker 1: Welcome down, Doctor Paul Krugman, Ryan moynihan, Bank of America, 11 00:00:22,560 --> 00:00:25,279 Speaker 1: deebro Lair of the Paulson Institute, well Then Hubbard of 12 00:00:25,280 --> 00:00:26,280 Speaker 1: the Columbia Business School. 13 00:00:26,280 --> 00:00:30,160 Speaker 2: Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 14 00:00:30,360 --> 00:00:33,920 Speaker 1: Higher rates, battle with inflation, the federal debt reaches for 15 00:00:34,000 --> 00:00:37,560 Speaker 1: the stratosphere, regional banks pull back from the precipice, real 16 00:00:37,640 --> 00:00:41,600 Speaker 1: estate values plummet, and breakthroughs. An artificial intelligence may save 17 00:00:41,720 --> 00:00:44,960 Speaker 1: us all or make it all worse. Welcome to a 18 00:00:45,000 --> 00:00:48,160 Speaker 1: special year end edition of Bloomberg Wall Street Week, bringing 19 00:00:48,159 --> 00:00:50,600 Speaker 1: you some of the stories that defined the year twenty 20 00:00:50,680 --> 00:01:05,840 Speaker 1: twenty three for Global Wall Street. The year that's just 21 00:01:05,920 --> 00:01:08,720 Speaker 1: about to end did not lack for drama. From a 22 00:01:08,800 --> 00:01:11,959 Speaker 1: tragic fire that wiped out an entire town in Maui, 23 00:01:12,319 --> 00:01:15,320 Speaker 1: the Taylor Swift taking the entertainment world by storm with 24 00:01:15,480 --> 00:01:18,120 Speaker 1: her aras tour from the coronation of a new King 25 00:01:18,160 --> 00:01:21,120 Speaker 1: of England to what seemed like an endless series of 26 00:01:21,160 --> 00:01:23,800 Speaker 1: votes to select a Speaker of the House of Representatives. 27 00:01:23,920 --> 00:01:26,520 Speaker 1: But through it all, the story that most dominated the 28 00:01:26,560 --> 00:01:29,759 Speaker 1: worlds of business and commerce was inflation and what the 29 00:01:29,760 --> 00:01:32,440 Speaker 1: FED was doing about it, with historic rate heights and 30 00:01:32,600 --> 00:01:37,319 Speaker 1: all that aftermath for markets. So we start our review 31 00:01:37,360 --> 00:01:40,400 Speaker 1: of the year with the Fed and the economy. In August, 32 00:01:40,480 --> 00:01:43,480 Speaker 1: we talked at the Aspen Economic Strategy Group meetings with 33 00:01:43,600 --> 00:01:47,600 Speaker 1: two regional FED presidents, Austin Goulsby and Raphael Basse, about 34 00:01:47,600 --> 00:01:50,680 Speaker 1: how they saw the quest for a so called soft landing, 35 00:01:51,000 --> 00:01:54,560 Speaker 1: whether we could get inflation down without cratering the economy. 36 00:01:55,000 --> 00:01:57,680 Speaker 1: Austin Goulsby of the Chicago FED turned to the lessons 37 00:01:57,720 --> 00:02:01,800 Speaker 1: of that monetary policy sage cash. 38 00:02:02,680 --> 00:02:07,520 Speaker 3: We've much remarked on the stickiness and persistence of services inflation, 39 00:02:08,320 --> 00:02:11,760 Speaker 3: but we knew that that's not that's not where we 40 00:02:11,840 --> 00:02:14,840 Speaker 3: went wrong over at the end of last year beginning 41 00:02:14,840 --> 00:02:18,799 Speaker 3: of this year, with inflation lasting a little longer than 42 00:02:18,800 --> 00:02:22,120 Speaker 3: we thought. It has been that goods prices, while down, 43 00:02:22,520 --> 00:02:25,400 Speaker 3: have not gone all the way down to where they 44 00:02:25,480 --> 00:02:29,360 Speaker 3: were before the pandemic. I feel like that's kind of 45 00:02:29,400 --> 00:02:32,760 Speaker 3: started and that's put the FED on this line. I mean, 46 00:02:32,800 --> 00:02:36,400 Speaker 3: it's a thin line to walk, but getting the prices 47 00:02:36,480 --> 00:02:40,359 Speaker 3: down without having a big recession, We're gonna Johnny cash 48 00:02:40,440 --> 00:02:43,920 Speaker 3: this thing and walk that line, and that that's for 49 00:02:44,040 --> 00:02:47,920 Speaker 3: sure the goal, and goods prices got to come down. 50 00:02:48,320 --> 00:02:50,799 Speaker 3: And then the next one's got to be housing. As 51 00:02:50,800 --> 00:02:55,760 Speaker 3: you know, it's the housing that's in the CPI is 52 00:02:56,400 --> 00:02:58,680 Speaker 3: based on a bunch of market rents and it takes 53 00:02:58,720 --> 00:03:01,280 Speaker 3: a while to flow through. So hopefully as we go 54 00:03:01,360 --> 00:03:03,560 Speaker 3: into the fall, that's that's going to be the next one. 55 00:03:03,560 --> 00:03:05,480 Speaker 1: So also gonna stick with the Johnny cash. Yeah, walk 56 00:03:05,520 --> 00:03:08,000 Speaker 1: in that line. How long is the line? And we 57 00:03:08,080 --> 00:03:10,160 Speaker 1: know that the target is two percent. It doesn't feel 58 00:03:10,160 --> 00:03:11,679 Speaker 1: like you're going to come off that two percent goal, 59 00:03:12,040 --> 00:03:14,679 Speaker 1: but how long until you get there? How patient can 60 00:03:14,720 --> 00:03:14,960 Speaker 1: you be? 61 00:03:15,680 --> 00:03:18,760 Speaker 3: We got to be somewhat patient. You know, take as 62 00:03:19,000 --> 00:03:22,800 Speaker 3: just a microcosmic example this thing with housing. We've seen 63 00:03:22,880 --> 00:03:26,680 Speaker 3: the market rents coming down, but it takes a while 64 00:03:27,520 --> 00:03:30,120 Speaker 3: for that to flow through into the let's call it 65 00:03:30,160 --> 00:03:33,840 Speaker 3: the average housing prices that are in the CPI. And 66 00:03:33,880 --> 00:03:37,640 Speaker 3: it's got to be patient. I know everybody wants to say, ah, fine, vove, 67 00:03:37,640 --> 00:03:40,480 Speaker 3: we're done it. That's that's not how it works. If 68 00:03:40,480 --> 00:03:44,520 Speaker 3: you walk the golden path and you walk that line, 69 00:03:45,040 --> 00:03:48,360 Speaker 3: it's it's going to take a while. And the rather 70 00:03:48,400 --> 00:03:52,440 Speaker 3: than arguing about the peak rate of how many more 71 00:03:53,000 --> 00:03:55,720 Speaker 3: rate increases do there need to be, what we should 72 00:03:55,760 --> 00:03:58,640 Speaker 3: probably start thinking about is that, well, how long does 73 00:03:58,720 --> 00:04:03,000 Speaker 3: this last that you're going to be at these elevated rates. 74 00:04:03,080 --> 00:04:07,119 Speaker 3: It's been a five hundred plus basis point increase over 75 00:04:07,160 --> 00:04:11,560 Speaker 3: a relatively short period. If you hold at five and 76 00:04:11,600 --> 00:04:15,800 Speaker 3: a quarter, five and a half, five and whatever while 77 00:04:15,840 --> 00:04:19,440 Speaker 3: inflation goes down, that is a restrictive environment. Holding is 78 00:04:20,160 --> 00:04:22,640 Speaker 3: increasing restrictiveness in that sense. 79 00:04:22,920 --> 00:04:26,000 Speaker 1: Raphael Bostic, the Atlanta FAED, didn't draw on country music 80 00:04:26,040 --> 00:04:28,159 Speaker 1: in assessing the economy, but he did say it was 81 00:04:28,200 --> 00:04:31,039 Speaker 1: a long process that would take time, and that we 82 00:04:31,080 --> 00:04:34,120 Speaker 1: shouldn't lose sight of how differently rural areas of his 83 00:04:34,240 --> 00:04:37,359 Speaker 1: district were experiencing an economy that was booming in the 84 00:04:37,360 --> 00:04:39,000 Speaker 1: big metropolitan areas. 85 00:04:40,640 --> 00:04:43,480 Speaker 4: I'm not expecting this to be a two month or 86 00:04:43,480 --> 00:04:46,919 Speaker 4: three month period. My outlook is that we'll still be 87 00:04:47,080 --> 00:04:50,039 Speaker 4: in a restrictive territory well into twenty twenty four, and 88 00:04:50,080 --> 00:04:52,520 Speaker 4: it will just take a while for the inflationary pressures 89 00:04:52,520 --> 00:04:54,520 Speaker 4: that we've seen over the last year and a half 90 00:04:54,800 --> 00:04:56,880 Speaker 4: to fully dissipate and get us back to two percent. 91 00:04:57,000 --> 00:04:58,840 Speaker 1: You'll need to see some more data before you come 92 00:04:58,880 --> 00:05:00,719 Speaker 1: up with a position on where you should be headed 93 00:05:00,760 --> 00:05:03,560 Speaker 1: in the future meetings. But what data points particularly will 94 00:05:03,640 --> 00:05:04,440 Speaker 1: you be focused on. 95 00:05:04,839 --> 00:05:07,880 Speaker 4: So I'm looking at really three things. The first is 96 00:05:08,000 --> 00:05:10,080 Speaker 4: the actual inflation rate, so we've got to make sure 97 00:05:10,120 --> 00:05:12,719 Speaker 4: that inflation is not moving away from target or even 98 00:05:12,800 --> 00:05:16,600 Speaker 4: starting to stall. The second is the breadth of inflation. 99 00:05:16,800 --> 00:05:20,440 Speaker 4: So in all of these indices, you know, they track 100 00:05:20,520 --> 00:05:23,840 Speaker 4: the prices for a number of different goods. At the 101 00:05:23,839 --> 00:05:28,120 Speaker 4: height of the inflation trouble, eighty percent of the goods 102 00:05:28,120 --> 00:05:30,479 Speaker 4: they tracked had inflation rates of five percent or more. 103 00:05:31,040 --> 00:05:35,160 Speaker 4: Today it's twenty eight percent, and this is in the CPI, 104 00:05:35,320 --> 00:05:38,520 Speaker 4: and then in the ordinary times is fifteen to twenty 105 00:05:38,640 --> 00:05:41,599 Speaker 4: so we can get back to that. That's a great thing. 106 00:05:41,760 --> 00:05:44,839 Speaker 4: And then the third is expectations, because as you know, 107 00:05:45,760 --> 00:05:47,880 Speaker 4: people make decisions based on what they expect things to 108 00:05:47,960 --> 00:05:50,080 Speaker 4: be in the future. And if they start to expect 109 00:05:50,080 --> 00:05:52,880 Speaker 4: that inflation is going to be different than our two 110 00:05:52,920 --> 00:05:55,479 Speaker 4: percent target and that's not what's happening now, then they're 111 00:05:55,480 --> 00:05:59,159 Speaker 4: going to make different decisions and our economic capacity will 112 00:05:59,200 --> 00:06:01,760 Speaker 4: be lower, and definitely want to make sure that doesn't happen. 113 00:06:01,880 --> 00:06:03,680 Speaker 1: You talk about the breadth of the inflation, let's talk 114 00:06:03,680 --> 00:06:06,120 Speaker 1: about it breadth in a different sense. You were responsible 115 00:06:06,160 --> 00:06:09,040 Speaker 1: for a good sized region of the country. There have 116 00:06:09,120 --> 00:06:11,840 Speaker 1: to be variations within that region. You've got Atlanta, You've 117 00:06:11,839 --> 00:06:14,280 Speaker 1: got Miami, You've got a lot of rural areas. As 118 00:06:14,320 --> 00:06:16,039 Speaker 1: you look at that region, where do you see the 119 00:06:16,080 --> 00:06:18,760 Speaker 1: biggest variations that we should be paying attention to. 120 00:06:19,080 --> 00:06:20,640 Speaker 4: Well, they're a good number of them. And you know, 121 00:06:20,800 --> 00:06:23,520 Speaker 4: it's funny that you say that because in my district 122 00:06:23,640 --> 00:06:26,840 Speaker 4: is all are parts of six states in the Southeastern 123 00:06:26,920 --> 00:06:30,359 Speaker 4: United States, very large and very diverse, and right before 124 00:06:30,400 --> 00:06:34,000 Speaker 4: the pandemic, we were using a theme one district, many economies, 125 00:06:34,320 --> 00:06:37,240 Speaker 4: and so when you look across the southeast, you have 126 00:06:37,440 --> 00:06:43,760 Speaker 4: the big metros Atlanta, Nashville, Tampa. These places are growing 127 00:06:44,200 --> 00:06:47,080 Speaker 4: fast as there's a lot of pressure on housing as 128 00:06:47,120 --> 00:06:50,600 Speaker 4: a result, but the trajectory there is very positive. You 129 00:06:50,600 --> 00:06:53,560 Speaker 4: don't have to travel very far in the district to 130 00:06:53,760 --> 00:06:56,160 Speaker 4: notice also that there are places that aren't growing at all. 131 00:06:56,200 --> 00:06:59,480 Speaker 4: A lot of rural places are struggling. And as I've 132 00:06:59,520 --> 00:07:01,719 Speaker 4: gone around in the district, you know, I start to 133 00:07:01,760 --> 00:07:05,760 Speaker 4: see these variations. And I've been talking to a lot 134 00:07:05,760 --> 00:07:08,560 Speaker 4: of elected officials, and one of the things they're really 135 00:07:08,600 --> 00:07:12,640 Speaker 4: concerned about is trying to broaden the geography of growth. 136 00:07:13,000 --> 00:07:16,240 Speaker 1: That was Chicago FED President Austin Goulsby and Atlanta FED 137 00:07:16,280 --> 00:07:21,480 Speaker 1: President Raphael Bostik with their approaches to monetary policy. When 138 00:07:21,520 --> 00:07:24,560 Speaker 1: we weren't worrying about inflation and whether the cure could 139 00:07:24,600 --> 00:07:27,119 Speaker 1: end up worse than a disease, many of us spent 140 00:07:27,280 --> 00:07:30,400 Speaker 1: time this year worrying about that federal debt, reaching over 141 00:07:30,480 --> 00:07:33,440 Speaker 1: thirty three trillion dollars, which is over one hundred and 142 00:07:33,520 --> 00:07:36,920 Speaker 1: twenty percent of GDP. Republicans claimed that it was the 143 00:07:36,960 --> 00:07:40,320 Speaker 1: Democrat's fault and threatened to repeatedly shut down the government. 144 00:07:40,880 --> 00:07:43,200 Speaker 1: Democrats claimed it was all because of the tax cut 145 00:07:43,240 --> 00:07:46,760 Speaker 1: the Republicans insisted on, and as everyone talked over each 146 00:07:46,800 --> 00:07:49,520 Speaker 1: other about the problem, no one seemed to do much 147 00:07:49,520 --> 00:07:52,400 Speaker 1: about it. So we turned to two men who know 148 00:07:52,520 --> 00:07:55,400 Speaker 1: the potential and the potential risks for the US economy 149 00:07:55,440 --> 00:07:58,520 Speaker 1: better than just about anyone. Hank Paulson, who served as 150 00:07:58,600 --> 00:08:01,600 Speaker 1: Treasury Secretary under President and George W. Bush during the 151 00:08:01,640 --> 00:08:05,160 Speaker 1: Great Financial Crisis, and his successor Tim Geidner, who helped 152 00:08:05,200 --> 00:08:07,600 Speaker 1: bring us out of that crisis based on the foundation 153 00:08:07,760 --> 00:08:10,960 Speaker 1: that Hank had built. They reassured us that the economy 154 00:08:11,000 --> 00:08:13,960 Speaker 1: remained strong, but they also warned that we couldn't go 155 00:08:14,080 --> 00:08:16,800 Speaker 1: on forever without addressing that federal deficit. 156 00:08:18,280 --> 00:08:20,000 Speaker 5: If you look at the economy day, it's a pretty 157 00:08:20,000 --> 00:08:22,160 Speaker 5: resilient economy. You know, we've been through a lot of challenges, 158 00:08:22,800 --> 00:08:25,200 Speaker 5: and we look pretty strong today in a relative sense, 159 00:08:25,520 --> 00:08:27,680 Speaker 5: but we have a lot of long term challenges, and 160 00:08:27,720 --> 00:08:30,480 Speaker 5: the fiscal channels are part of those challenges. And you know, 161 00:08:30,680 --> 00:08:32,640 Speaker 5: if you think about all the things we face in 162 00:08:32,640 --> 00:08:34,920 Speaker 5: this more dangerous world, and you know, a country with 163 00:08:35,120 --> 00:08:38,480 Speaker 5: very high levels of poverty and shoe challenges and innovation, 164 00:08:39,840 --> 00:08:42,160 Speaker 5: it's important to make sure that we have people focused 165 00:08:42,240 --> 00:08:46,319 Speaker 5: on research that can help inform better public policy choices 166 00:08:46,400 --> 00:08:48,319 Speaker 5: at the national level in these things, and that requires 167 00:08:48,320 --> 00:08:51,079 Speaker 5: bringing people together from all sorts of disciplines, all parts 168 00:08:51,120 --> 00:08:53,840 Speaker 5: of the economy, both parties, trying to figure out how 169 00:08:53,840 --> 00:08:57,079 Speaker 5: to build trust and knowledge help shape those outcomes. 170 00:08:57,120 --> 00:08:58,760 Speaker 1: Hank looking at the program, one of the issues we 171 00:08:58,800 --> 00:09:00,640 Speaker 1: can be talked about is how much more you're spending 172 00:09:00,840 --> 00:09:03,720 Speaker 1: the deficit. And that subject's been around for quite a while. 173 00:09:03,760 --> 00:09:06,000 Speaker 1: You've dealt with it before. What are the prospects of 174 00:09:06,040 --> 00:09:08,480 Speaker 1: actually coming up with solutions that might be implemented. 175 00:09:08,720 --> 00:09:12,920 Speaker 6: Well, let me tell you something. I'm an optimist. You 176 00:09:13,000 --> 00:09:14,760 Speaker 6: need to be an optimist to do what we're doing. 177 00:09:15,240 --> 00:09:17,720 Speaker 6: And I believe what we're doing here is a major 178 00:09:17,840 --> 00:09:20,280 Speaker 6: step forward and doing this because if we can have 179 00:09:20,480 --> 00:09:24,240 Speaker 6: great research and get people together across parties and come 180 00:09:24,320 --> 00:09:27,720 Speaker 6: up with simprific ideas and get the facts out and 181 00:09:27,760 --> 00:09:32,120 Speaker 6: think tanks to both political parties, we can make progress. Now, 182 00:09:32,240 --> 00:09:38,360 Speaker 6: you're right, the trajectory, our fiscal trajectory is concerning. But 183 00:09:38,400 --> 00:09:41,080 Speaker 6: we are a rich country and we've got time to 184 00:09:41,120 --> 00:09:43,320 Speaker 6: deal with it. But we need to do some things 185 00:09:44,320 --> 00:09:48,600 Speaker 6: in the next few years to change that trajectory. And 186 00:09:49,360 --> 00:09:51,679 Speaker 6: I think that's going to be very important, and to 187 00:09:51,760 --> 00:09:55,800 Speaker 6: do that, it's going to take doing things on both 188 00:09:55,840 --> 00:09:58,760 Speaker 6: the spending side and the revenue side. We're going to 189 00:09:58,800 --> 00:10:01,199 Speaker 6: need more revenues and we're going to need to figure 190 00:10:01,200 --> 00:10:06,559 Speaker 6: out how to deal with some difficult issues in areas 191 00:10:06,679 --> 00:10:07,560 Speaker 6: like the entitlements. 192 00:10:08,080 --> 00:10:09,760 Speaker 1: Expect me. One of the things that two of you share, 193 00:10:09,840 --> 00:10:12,559 Speaker 1: besides having been the treasure sectors, is being in Washington 194 00:10:12,640 --> 00:10:14,080 Speaker 1: time where you had a pretty good sense of what 195 00:10:14,200 --> 00:10:16,480 Speaker 1: needed to get done. But getting it done is harder 196 00:10:16,520 --> 00:10:18,280 Speaker 1: than figuring out the answer. And I wonder if that 197 00:10:18,360 --> 00:10:21,800 Speaker 1: might be true when it comes to debt and deficit, entitlements, 198 00:10:22,080 --> 00:10:22,840 Speaker 1: taxes right now. 199 00:10:23,200 --> 00:10:25,360 Speaker 5: Yeah, I mean, these long term things that are very 200 00:10:25,400 --> 00:10:30,360 Speaker 5: hard you can't do with just one party. You have 201 00:10:30,400 --> 00:10:33,000 Speaker 5: to do them in a way that commands broader support 202 00:10:33,040 --> 00:10:35,560 Speaker 5: across the political spectrum, and you have to build that. 203 00:10:36,000 --> 00:10:40,320 Speaker 5: And why are people disappointed with outcomes from this political system. 204 00:10:40,320 --> 00:10:43,520 Speaker 5: It's partly because people are uncertain about what works. They 205 00:10:43,559 --> 00:10:45,600 Speaker 5: don't know how to think about the trade offs, and 206 00:10:45,679 --> 00:10:49,120 Speaker 5: so by giving them a better basis of knowledge for 207 00:10:49,200 --> 00:10:52,760 Speaker 5: making those trade offs, thinking about the range of outcomes 208 00:10:52,840 --> 00:10:56,320 Speaker 5: solutions might work, you can improve the odds that we 209 00:10:56,440 --> 00:10:59,400 Speaker 5: bend the arc of governance closer to something that's. 210 00:10:59,280 --> 00:11:04,160 Speaker 1: Competent coming up dealing with the banking scare in March. 211 00:11:04,280 --> 00:11:07,000 Speaker 1: Where did we go wrong and what did we do right? 212 00:11:07,520 --> 00:11:10,600 Speaker 1: We hear from special contributor Larry Summers of Harvard Bloomberg, 213 00:11:10,679 --> 00:11:14,120 Speaker 1: Senior Executive editor of Stephanie Flanders, and former Federal Reserve 214 00:11:14,280 --> 00:11:19,840 Speaker 1: governor Daniel Torulo. That's next on Wall Street Week on Bloomberg. 215 00:11:21,160 --> 00:11:25,400 Speaker 2: This is Bloomberg Wall Street Week with David Weston from 216 00:11:25,480 --> 00:11:28,320 Speaker 2: Bloomberg Radio. 217 00:11:32,880 --> 00:11:35,240 Speaker 1: This is our year end review on Wall Street Week. 218 00:11:35,360 --> 00:11:38,400 Speaker 1: I'm David Weston. The financial world was shaken to its 219 00:11:38,400 --> 00:11:40,520 Speaker 1: core in March this year when there was a run 220 00:11:40,559 --> 00:11:43,760 Speaker 1: on Silicon Valley Bank, followed in short order by First 221 00:11:43,760 --> 00:11:47,439 Speaker 1: Republic and Signature Bank. Regulars stepped in and put things 222 00:11:47,480 --> 00:11:50,880 Speaker 1: back together in reasonably short order, but the experience raised 223 00:11:50,880 --> 00:11:53,520 Speaker 1: a host of questions about what went wrong and what 224 00:11:53,720 --> 00:11:55,679 Speaker 1: needed to be done to fix it for the future. 225 00:11:56,080 --> 00:11:58,560 Speaker 1: So Wall Street Week gathered a panel of experts to 226 00:11:58,600 --> 00:12:03,000 Speaker 1: address those questions. Our special contributor Larry Summers, Bloomberg's Senior 227 00:12:03,040 --> 00:12:06,600 Speaker 1: executive editor for Economics and Government, Stephanie Flanders, and Harvard's 228 00:12:06,640 --> 00:12:08,880 Speaker 1: Dan Tarullo, who served on the Board of the Federal 229 00:12:08,880 --> 00:12:11,800 Speaker 1: Reserve during the Great Financial Crisis and took point on 230 00:12:12,000 --> 00:12:12,960 Speaker 1: bank regulation. 231 00:12:14,720 --> 00:12:17,079 Speaker 7: It is important when we're thinking about what the implications are. 232 00:12:17,280 --> 00:12:19,560 Speaker 7: You know, you have to distinguish what is an outlier 233 00:12:19,760 --> 00:12:22,120 Speaker 7: about not just Silicon Valley Bank, but others that have 234 00:12:22,160 --> 00:12:27,520 Speaker 7: got into trouble in this episode. What is fundamentally a 235 00:12:27,640 --> 00:12:32,040 Speaker 7: regulatory stupidity, you know, a very traditional problem the interest 236 00:12:32,080 --> 00:12:35,679 Speaker 7: rate risk that was just hiding in plain sight, and 237 00:12:35,760 --> 00:12:38,400 Speaker 7: what is a genuinely new issue which was not being 238 00:12:38,440 --> 00:12:42,360 Speaker 7: fully taken into account by anyone looking at the risks. 239 00:12:42,400 --> 00:12:44,080 Speaker 7: And I think when you look at something like Silicon 240 00:12:44,120 --> 00:12:46,240 Speaker 7: Valley Bank, you know clearly it was an outlier in 241 00:12:46,280 --> 00:12:49,000 Speaker 7: the speed with which deposits have been built up, in 242 00:12:49,080 --> 00:12:53,800 Speaker 7: its massive exposure to uninsured deposits and reliance on that 243 00:12:54,800 --> 00:12:57,440 Speaker 7: for funding. I hope it was an outlier in not 244 00:12:57,520 --> 00:12:59,679 Speaker 7: having a chief risk officer for nine months, which was 245 00:12:59,679 --> 00:13:04,360 Speaker 7: an extraordinary state of affairs. But what was very traditional 246 00:13:04,360 --> 00:13:06,719 Speaker 7: about this, and as a discussion with Larry and Dan 247 00:13:07,000 --> 00:13:10,040 Speaker 7: is suggesting, was that you know, right here was a 248 00:13:10,080 --> 00:13:13,200 Speaker 7: massive interest rate risk that was whether or not it 249 00:13:13,240 --> 00:13:15,560 Speaker 7: was in the stress test was something that central banks 250 00:13:15,559 --> 00:13:18,120 Speaker 7: should have been thinking very hard about. And I think 251 00:13:18,120 --> 00:13:20,040 Speaker 7: it was sort of striking that. We had a lot 252 00:13:20,040 --> 00:13:22,160 Speaker 7: of the debate around this, what are the hidden risk? 253 00:13:22,240 --> 00:13:24,319 Speaker 7: You know, all the conversations that you will have had, David, 254 00:13:24,320 --> 00:13:26,920 Speaker 7: when you ask regulators what's keeping you up at night, 255 00:13:26,960 --> 00:13:29,319 Speaker 7: they would always talk about private equity. They'd talk about 256 00:13:29,360 --> 00:13:32,400 Speaker 7: non bank shadow banking. Has been the thing that people 257 00:13:32,480 --> 00:13:35,880 Speaker 7: were you know, was this worry for all these years, 258 00:13:35,960 --> 00:13:39,400 Speaker 7: and in fact it was the most obvious problem sitting 259 00:13:39,520 --> 00:13:43,320 Speaker 7: on bank balance sheets as a direct result of monetary 260 00:13:43,320 --> 00:13:46,520 Speaker 7: policy actions by central banks that has actually caused this issue. 261 00:13:46,559 --> 00:13:48,240 Speaker 7: I would just say, though one of the reasons maybe 262 00:13:48,280 --> 00:13:50,559 Speaker 7: they weren't looking at that so closely, or that I'd 263 00:13:50,600 --> 00:13:53,240 Speaker 7: be interested to know what Dan and Larry think about this. 264 00:13:53,320 --> 00:13:55,280 Speaker 7: You know, there is an element of this which is new, 265 00:13:55,640 --> 00:13:59,040 Speaker 7: and we see in the speed with which deposits left 266 00:13:59,320 --> 00:14:04,120 Speaker 7: these instituts, and that's the non stickiness of those deposits. 267 00:14:04,480 --> 00:14:05,880 Speaker 7: And I think, you know, one of the things that 268 00:14:05,920 --> 00:14:09,120 Speaker 7: regulators were thinking when they looked considered interest rate risk 269 00:14:09,200 --> 00:14:13,800 Speaker 7: potentially was that there was a sort of a self 270 00:14:13,840 --> 00:14:17,240 Speaker 7: hedging mechanism in a bank of the fact that deposits 271 00:14:17,240 --> 00:14:19,920 Speaker 7: would be slow to move if they weren't being paid 272 00:14:19,960 --> 00:14:22,280 Speaker 7: the higher interest rates. That is no longer the case, 273 00:14:22,600 --> 00:14:26,200 Speaker 7: and I think that probably does have longer term implications 274 00:14:26,600 --> 00:14:29,760 Speaker 7: for regulation and potentially longer term implications for how much 275 00:14:29,800 --> 00:14:30,840 Speaker 7: we ensure deposits. 276 00:14:31,360 --> 00:14:33,680 Speaker 1: Yeah, I think there's a question for either Larry or Dan. 277 00:14:34,280 --> 00:14:37,560 Speaker 1: Does our entire approach to deposits change given what we've seen. 278 00:14:37,600 --> 00:14:39,200 Speaker 1: The fact is they're not as stick as we thought 279 00:14:39,200 --> 00:14:39,560 Speaker 1: they were. 280 00:14:39,680 --> 00:14:42,840 Speaker 8: I'd like to have a sense of exactly what the 281 00:14:42,880 --> 00:14:47,200 Speaker 8: deposit profiles of this group of banks is as a whole, 282 00:14:47,640 --> 00:14:52,440 Speaker 8: because in theory, at least, the supervisors should already have 283 00:14:52,520 --> 00:14:57,440 Speaker 8: been distinguishing among different kinds of uninsured deposits, some of 284 00:14:57,480 --> 00:15:02,200 Speaker 8: which have always been understood to be eminently runnable, others 285 00:15:02,240 --> 00:15:05,960 Speaker 8: of which have were thought to be at least somewhat 286 00:15:06,080 --> 00:15:11,920 Speaker 8: stickier than ensured retail deposits. If it turns out that 287 00:15:11,960 --> 00:15:14,520 Speaker 8: those and this is what Stephanie I think was suggesting 288 00:15:14,600 --> 00:15:20,200 Speaker 8: that those middle categories have changed, then you're going to 289 00:15:20,240 --> 00:15:23,200 Speaker 8: need a change in regulation and not just in supervision. 290 00:15:23,560 --> 00:15:27,440 Speaker 9: I agree with what Dan said, but I would put 291 00:15:27,480 --> 00:15:33,280 Speaker 9: it this way. We know that the Fed staff has 292 00:15:33,320 --> 00:15:38,480 Speaker 9: a problem with discontinuous change. They basically entirely missed the 293 00:15:38,560 --> 00:15:43,440 Speaker 9: discontinuous change in inflation because they stuck with their model 294 00:15:44,000 --> 00:15:48,920 Speaker 9: and its traditions. And I think the broad concern that 295 00:15:48,960 --> 00:15:53,280 Speaker 9: someone has to put is that for the first time ever, 296 00:15:54,080 --> 00:15:58,320 Speaker 9: we are now in a world of highly digital banking, 297 00:15:59,040 --> 00:16:02,840 Speaker 9: with the ability to withdraw funds extremely quickly and with 298 00:16:02,920 --> 00:16:06,360 Speaker 9: the ability to put them somewhere else extremely quickly and 299 00:16:06,480 --> 00:16:10,800 Speaker 9: easily because of digital account opening. So we're in this 300 00:16:10,880 --> 00:16:15,840 Speaker 9: super digital world, and we're in a superdigital world with 301 00:16:16,640 --> 00:16:19,960 Speaker 9: five percent interest rates, and we've never been in a 302 00:16:20,040 --> 00:16:25,680 Speaker 9: high interest rate, super digital world before. And large amounts 303 00:16:25,720 --> 00:16:31,320 Speaker 9: of the economics of the banking industry rest on earning 304 00:16:31,440 --> 00:16:40,200 Speaker 9: substantial interest premiums on deposits and whatever the traditional models 305 00:16:40,280 --> 00:16:44,600 Speaker 9: are of what's sticky and what's not. The fact that 306 00:16:44,640 --> 00:16:48,640 Speaker 9: we've had the world's fastest run and the world's biggest 307 00:16:48,760 --> 00:16:53,680 Speaker 9: run at the sixteenth largest bank in the country managed 308 00:16:53,720 --> 00:16:56,920 Speaker 9: to have the biggest bank run in history has to 309 00:16:57,040 --> 00:17:01,800 Speaker 9: teach us that there's a lot of reason to be 310 00:17:02,000 --> 00:17:06,439 Speaker 9: open to a much wider range of possibilities about the 311 00:17:06,560 --> 00:17:11,639 Speaker 9: risks associated with deposits then. 312 00:17:12,400 --> 00:17:13,920 Speaker 10: We thought previously. 313 00:17:14,560 --> 00:17:17,240 Speaker 9: And so it seems to me that you asked me 314 00:17:17,280 --> 00:17:20,240 Speaker 9: earlier what I would be thinking about if I was 315 00:17:20,280 --> 00:17:23,560 Speaker 9: in the Treasury Department, and I guess I would be 316 00:17:23,680 --> 00:17:28,960 Speaker 9: feeling my responsibility as the share of the Financial Stability 317 00:17:28,960 --> 00:17:34,239 Speaker 9: Oversight Council very strongly at a moment like this, and 318 00:17:34,280 --> 00:17:38,359 Speaker 9: I'd be thinking about making sure that whatever I was 319 00:17:38,440 --> 00:17:44,200 Speaker 9: saying and doing, I was adding to confidence rather than 320 00:17:45,480 --> 00:17:51,000 Speaker 9: subtracting from confidence in the very short run, that if 321 00:17:51,320 --> 00:17:55,800 Speaker 9: you're in an institution and that institution fails, it's going 322 00:17:55,880 --> 00:17:58,919 Speaker 9: to be okay for you if that happens right now, 323 00:17:59,400 --> 00:18:02,320 Speaker 9: because if you're not sending that signal in a reasonably 324 00:18:02,400 --> 00:18:05,680 Speaker 9: clear way, you'd never know where the runs are going 325 00:18:05,760 --> 00:18:11,399 Speaker 9: to start next. I'd be thinking about this issue that 326 00:18:11,480 --> 00:18:17,320 Speaker 9: I just raised of the new high interest rate digital world. 327 00:18:17,720 --> 00:18:20,080 Speaker 10: And I'd be thinking about. 328 00:18:21,160 --> 00:18:26,080 Speaker 9: Making sure that there was some broader discussion of the 329 00:18:26,119 --> 00:18:33,320 Speaker 9: whole official financial community about these questions of stress testing, 330 00:18:33,760 --> 00:18:38,400 Speaker 9: because I must say, doing stress testing for twenty twenty two, 331 00:18:39,160 --> 00:18:43,440 Speaker 9: even if it was started in twenty twenty one, without 332 00:18:43,520 --> 00:18:51,160 Speaker 9: considering unusual increases in interest rates as a stressor, is 333 00:18:51,760 --> 00:18:53,920 Speaker 9: really very problematic. 334 00:18:54,920 --> 00:18:57,040 Speaker 1: So I'm going to think about this speed of digital 335 00:18:57,160 --> 00:18:59,520 Speaker 1: just for a moment. It's been talked about by others 336 00:18:59,560 --> 00:19:02,119 Speaker 1: as well. Well, digital's not going away, at least not 337 00:19:02,200 --> 00:19:03,520 Speaker 1: that I can see. It's not going to we can 338 00:19:03,760 --> 00:19:06,880 Speaker 1: we can't regulate digital out of existence. Are there other 339 00:19:06,960 --> 00:19:10,399 Speaker 1: possible radiatory responses there? I mean, we have circuit breakers 340 00:19:10,440 --> 00:19:11,919 Speaker 1: when it comes to stock market right if there's too 341 00:19:12,000 --> 00:19:14,440 Speaker 1: much move too quickly. Stephan will ask you the question, 342 00:19:14,720 --> 00:19:16,719 Speaker 1: is there a prospect of having something that's the equivalent 343 00:19:16,760 --> 00:19:18,480 Speaker 1: of a circuit breaker for deposits? 344 00:19:20,280 --> 00:19:21,760 Speaker 7: I think, I mean, I think there's a whole range 345 00:19:21,800 --> 00:19:23,360 Speaker 7: of things we could get into. I think one could 346 00:19:23,359 --> 00:19:26,959 Speaker 7: also think about, you know, the degree of how we 347 00:19:27,000 --> 00:19:30,480 Speaker 7: look at liquidity ratios and liquidity buffers might have to 348 00:19:30,560 --> 00:19:33,680 Speaker 7: change if you know, there is that lack of there's 349 00:19:33,720 --> 00:19:36,400 Speaker 7: a lack of stickiness. If we think that those deposits 350 00:19:36,440 --> 00:19:38,520 Speaker 7: could go much faster, you may even get I mean, 351 00:19:38,520 --> 00:19:41,120 Speaker 7: a number of people have drawn the conclusion. It's quite 352 00:19:41,160 --> 00:19:43,560 Speaker 7: a leap from here that this is one of the 353 00:19:43,560 --> 00:19:48,920 Speaker 7: biggest arguments for having a central bank digital currency, because 354 00:19:49,359 --> 00:19:54,000 Speaker 7: then you can automatically have a claim on the central 355 00:19:54,000 --> 00:19:57,359 Speaker 7: bank for your deposits and you don't face any of 356 00:19:57,400 --> 00:19:59,240 Speaker 7: these issues. It's a big leap from where we are now. 357 00:19:59,280 --> 00:20:01,760 Speaker 7: And it means a fun the metal change to the 358 00:20:01,840 --> 00:20:03,280 Speaker 7: model of banking that we've had. 359 00:20:03,560 --> 00:20:06,760 Speaker 1: That was Larry Summers, Stephanie Flanders, and Dan Trulo. 360 00:20:08,000 --> 00:20:08,399 Speaker 9: Coming up. 361 00:20:08,440 --> 00:20:10,800 Speaker 1: Bank of America has a special vantage point on the 362 00:20:10,880 --> 00:20:14,359 Speaker 1: US economy with its extensive retail deposits, its role in 363 00:20:14,440 --> 00:20:17,439 Speaker 1: middle market banking, and its global reach. We'll get a 364 00:20:17,440 --> 00:20:19,360 Speaker 1: sense of where things are headed in the new year 365 00:20:19,400 --> 00:20:23,160 Speaker 1: from the top Bank of America Chair and CEO Brian moynihan. 366 00:20:24,920 --> 00:20:27,200 Speaker 1: That's next on Wall Street Week on Bloomberg. 367 00:20:28,640 --> 00:20:32,879 Speaker 2: This is Bloomberg Wall Street Week with David Weston from 368 00:20:33,000 --> 00:20:35,600 Speaker 2: Bloomberg Radio. 369 00:20:40,119 --> 00:20:42,760 Speaker 1: This is a special year end edition of Wall Street Week. 370 00:20:42,880 --> 00:20:46,600 Speaker 1: I'm David Weston. Twenty twenty three held some surprises for markets, 371 00:20:46,840 --> 00:20:49,840 Speaker 1: with more rate hikes from the FED, a stronger US consumer, 372 00:20:49,840 --> 00:20:53,200 Speaker 1: and a stronger equity market. Overall, all of these affected 373 00:20:53,200 --> 00:20:55,919 Speaker 1: Bank of America's business in a host of ways. We 374 00:20:56,000 --> 00:20:58,760 Speaker 1: sat with BFA Chair and CEO Brian moynihan on his 375 00:20:58,840 --> 00:21:01,119 Speaker 1: trading floor at the end of the year for a 376 00:21:01,160 --> 00:21:04,200 Speaker 1: sense of where we've been and where we're going next year. 377 00:21:06,359 --> 00:21:09,320 Speaker 11: While we start with our core economics assumptions, the team 378 00:21:09,720 --> 00:21:12,560 Speaker 11: Candice and the team have basically put out a new 379 00:21:12,600 --> 00:21:15,440 Speaker 11: set yesterday, and so their view as United States grows 380 00:21:15,440 --> 00:21:17,800 Speaker 11: in the upper ones fourth quarter of next year to 381 00:21:17,840 --> 00:21:19,399 Speaker 11: fourth courde this year one point eight, I think it 382 00:21:19,440 --> 00:21:21,760 Speaker 11: is their view is that the soft landing is a 383 00:21:21,760 --> 00:21:24,960 Speaker 11: little stronger. In other words, that they have a one 384 00:21:25,000 --> 00:21:27,200 Speaker 11: percent growth rate in the first three quarters next year 385 00:21:27,320 --> 00:21:29,520 Speaker 11: versus half a percent, So it's a little stronger one 386 00:21:29,600 --> 00:21:31,560 Speaker 11: percent a little bit plus. And all that means that 387 00:21:31,600 --> 00:21:34,320 Speaker 11: the unemployment rate they also predict stays near four, doesn't 388 00:21:34,320 --> 00:21:35,879 Speaker 11: get up into the four and a half range that 389 00:21:35,920 --> 00:21:36,200 Speaker 11: they have. 390 00:21:36,160 --> 00:21:36,960 Speaker 10: Before four to four. 391 00:21:37,400 --> 00:21:39,520 Speaker 11: So all that protection we put them together is a 392 00:21:39,560 --> 00:21:42,280 Speaker 11: stronger economy for the United States, and then twenty fourths 393 00:21:43,359 --> 00:21:46,080 Speaker 11: mid to high ones. Twenty five then tips over and 394 00:21:46,080 --> 00:21:48,320 Speaker 11: gets a little stronger. And the rest of the world, though, 395 00:21:48,440 --> 00:21:51,280 Speaker 11: is next year they have it in sort of two 396 00:21:51,320 --> 00:21:54,679 Speaker 11: point eight percent GDP growth, underneath the three percent target, 397 00:21:54,720 --> 00:21:56,520 Speaker 11: and it moves to that in twenty five, and that's 398 00:21:56,520 --> 00:21:58,880 Speaker 11: really driven by China. They have slowing down in India, 399 00:21:58,920 --> 00:22:00,560 Speaker 11: they have slowing down a little bit just because of 400 00:22:00,600 --> 00:22:01,680 Speaker 11: general demand patterns. 401 00:22:02,000 --> 00:22:03,800 Speaker 1: What does that mean for back of America. Let's assume 402 00:22:03,840 --> 00:22:06,479 Speaker 1: that all those economic consumptions prove to be true. What 403 00:22:06,480 --> 00:22:07,520 Speaker 1: does that mean for your business? 404 00:22:07,840 --> 00:22:10,080 Speaker 11: Well, if the economy is good, we're always going to 405 00:22:10,080 --> 00:22:12,199 Speaker 11: be in pretty good shape. And then so we are 406 00:22:12,200 --> 00:22:15,280 Speaker 11: out there driving organic growth. So we'll have a million 407 00:22:15,280 --> 00:22:17,880 Speaker 11: more consumers during the next year who open checking accounts, 408 00:22:17,880 --> 00:22:20,360 Speaker 11: whether it's a primary house account, will have many thousands 409 00:22:20,359 --> 00:22:23,000 Speaker 11: of wealth managed customers, many thousands of middle market customers. 410 00:22:23,000 --> 00:22:25,520 Speaker 11: So in the trading business, the team's done a good 411 00:22:25,600 --> 00:22:28,640 Speaker 11: job and they'll keep driving that. So against the backdrop 412 00:22:28,680 --> 00:22:32,359 Speaker 11: where you have reasonably solid growth I call it, and 413 00:22:32,680 --> 00:22:35,080 Speaker 11: less risk of recession. The risk on trade will help 414 00:22:35,280 --> 00:22:38,000 Speaker 11: the trading teams. But when we look across the core business, 415 00:22:38,359 --> 00:22:41,080 Speaker 11: the organic growth never stopped even during the pandemic. We're 416 00:22:41,080 --> 00:22:43,320 Speaker 11: adding net new checking accounts. I think this will be 417 00:22:43,359 --> 00:22:45,040 Speaker 11: the twentieth quarter in a row for net new checking 418 00:22:45,080 --> 00:22:47,679 Speaker 11: account growth and things like that. So you're seeing that. 419 00:22:47,720 --> 00:22:49,800 Speaker 11: The second thing is driving operating leverage. We've seen our 420 00:22:49,840 --> 00:22:52,280 Speaker 11: expense base come from sixteen point two to If we 421 00:22:52,359 --> 00:22:55,040 Speaker 11: bound fifteen to six this quarter, that gives sets us 422 00:22:55,080 --> 00:22:57,520 Speaker 11: up next year as a revenue from NII hits the 423 00:22:57,520 --> 00:23:00,760 Speaker 11: trough and comes out, we'll make more money it's solid 424 00:23:00,840 --> 00:23:02,760 Speaker 11: and so we feel pretty good. But you're in this 425 00:23:02,840 --> 00:23:06,000 Speaker 11: transition year the whole industry is whereas rates come down, 426 00:23:06,720 --> 00:23:08,399 Speaker 11: some people think it's a good thing, some think it's 427 00:23:08,400 --> 00:23:10,560 Speaker 11: a bad thing. But the short term cash that we're 428 00:23:10,840 --> 00:23:12,720 Speaker 11: three hundred and fifty billion up we carry on a 429 00:23:12,720 --> 00:23:14,919 Speaker 11: given day that's just sitting at the FED starts to 430 00:23:14,960 --> 00:23:17,160 Speaker 11: lose as much yield, and that that's what we'll face 431 00:23:17,200 --> 00:23:19,000 Speaker 11: a little bit. But on the good news is the 432 00:23:19,040 --> 00:23:21,520 Speaker 11: longer term stuff becomes much more valuable. 433 00:23:21,600 --> 00:23:24,240 Speaker 1: So that's a solid economic year. Perhaps we're have in 434 00:23:24,280 --> 00:23:27,560 Speaker 1: front of us in twenty twenty four. What about interest rates? 435 00:23:27,560 --> 00:23:30,240 Speaker 1: We spend another year in twenty trades three just fascinated 436 00:23:30,240 --> 00:23:31,480 Speaker 1: with the Fed. What is the Fed doing? 437 00:23:31,520 --> 00:23:31,879 Speaker 6: Going up? 438 00:23:31,880 --> 00:23:33,600 Speaker 1: Going down? Are we going to get a year when 439 00:23:33,640 --> 00:23:35,560 Speaker 1: we don't focus quite as much? How does it affect 440 00:23:35,560 --> 00:23:36,960 Speaker 1: Bank of America interest rates? 441 00:23:37,080 --> 00:23:40,760 Speaker 11: Well, the US economy is this huge, diverse, huge economy, 442 00:23:40,800 --> 00:23:43,600 Speaker 11: And to talk about the FED really happens in periods 443 00:23:43,600 --> 00:23:46,119 Speaker 11: of transition, and this is a period of transition. In 444 00:23:46,160 --> 00:23:48,280 Speaker 11: other economies, a central bank has much more to do 445 00:23:48,320 --> 00:23:50,399 Speaker 11: with the integration economy. Here, it's you know, at the 446 00:23:50,480 --> 00:23:52,080 Speaker 11: end of the day, yes, they have a big balance sheet, 447 00:23:52,119 --> 00:23:53,480 Speaker 11: but the balance sheet of all of us. 448 00:23:53,400 --> 00:23:54,560 Speaker 10: Around it a lot bigger. 449 00:23:54,840 --> 00:23:55,080 Speaker 6: Yes. 450 00:23:55,119 --> 00:23:58,360 Speaker 11: They drive activity through interest rates, yes, but only really 451 00:23:58,359 --> 00:24:01,119 Speaker 11: in transition times. So what they're you know, what a 452 00:24:01,359 --> 00:24:03,680 Speaker 11: good central bank team trying to do is get to normalcy, 453 00:24:03,760 --> 00:24:07,080 Speaker 11: right get you know, they've got inflation price and they've 454 00:24:07,119 --> 00:24:10,120 Speaker 11: got unemployment dual mandate, and they've got both in pretty 455 00:24:10,119 --> 00:24:12,120 Speaker 11: good shape. And now they got to sort of keep 456 00:24:12,160 --> 00:24:14,720 Speaker 11: gliding into that. So I think the fascination with the 457 00:24:14,720 --> 00:24:18,200 Speaker 11: federal ease as the rate curve gets a little more normal. 458 00:24:18,359 --> 00:24:20,639 Speaker 11: It's very unusual have an inverted rate curve, very unusual 459 00:24:20,680 --> 00:24:23,880 Speaker 11: to have a five hundred basis points increase almost instantaneously 460 00:24:23,920 --> 00:24:27,040 Speaker 11: over thirteen months in rates, very unusual to have all 461 00:24:27,080 --> 00:24:28,760 Speaker 11: that happened. But now they've got to bring it back 462 00:24:28,800 --> 00:24:31,720 Speaker 11: to normal. Meanwhile, those great companies we work with, the 463 00:24:31,800 --> 00:24:34,359 Speaker 11: tens of thousands of middle market companies and millions and 464 00:24:34,359 --> 00:24:36,400 Speaker 11: millions of small business, those are who drive the economy. 465 00:24:36,400 --> 00:24:38,000 Speaker 11: And one of the things in the US we get 466 00:24:38,080 --> 00:24:39,960 Speaker 11: so fascinated with the rate structure, we forget that what's 467 00:24:39,960 --> 00:24:42,000 Speaker 11: really going to happen is that people employ. 468 00:24:41,760 --> 00:24:44,359 Speaker 10: People paying them. People are getting. 469 00:24:44,080 --> 00:24:47,159 Speaker 11: Promoted, the people buying things, that's what really drives the economy, 470 00:24:47,160 --> 00:24:49,439 Speaker 11: and the Fed's just trying to adjust at the margin 471 00:24:49,520 --> 00:24:51,280 Speaker 11: to keep the thing in line, and that's that's what 472 00:24:51,320 --> 00:24:52,960 Speaker 11: they've done. So they've made their adjustments and now they've 473 00:24:52,960 --> 00:24:54,919 Speaker 11: got to normalize, and we believe that that means they 474 00:24:54,920 --> 00:24:56,919 Speaker 11: got to bring rates down next year to ensure that 475 00:24:56,920 --> 00:24:58,320 Speaker 11: they don't tip it into a recession. 476 00:25:00,080 --> 00:25:02,760 Speaker 1: That was Bank of America Chair and CEO Brian moynihan. 477 00:25:03,680 --> 00:25:06,440 Speaker 1: This was a rough year for real estate as employers 478 00:25:06,480 --> 00:25:09,200 Speaker 1: struggle to get workers back into the office and home 479 00:25:09,240 --> 00:25:12,960 Speaker 1: buyers face dramatic increases in mortgage rays. Real estate is 480 00:25:13,000 --> 00:25:15,840 Speaker 1: the largest unit in Blackstone, and we talk with its 481 00:25:15,840 --> 00:25:18,919 Speaker 1: CFO Michael Jay about the challenges as well as some 482 00:25:19,000 --> 00:25:20,359 Speaker 1: of the misconceptions. 483 00:25:22,600 --> 00:25:24,760 Speaker 12: I think. You know, when you see the acronym CRE 484 00:25:24,960 --> 00:25:27,639 Speaker 12: in a newspaper article, you can be sure it's probably 485 00:25:27,680 --> 00:25:30,600 Speaker 12: going to portray the sector and paint it with a 486 00:25:30,640 --> 00:25:35,480 Speaker 12: broad brush. And the reality is it's The reality is 487 00:25:35,520 --> 00:25:38,320 Speaker 12: there's real bifurcation in terms of the dynamics in the sector. 488 00:25:38,359 --> 00:25:40,680 Speaker 12: In real estate as an industry, it's a big industry. 489 00:25:41,359 --> 00:25:45,080 Speaker 12: You have one sector, traditional office especially in the US 490 00:25:45,359 --> 00:25:48,080 Speaker 12: that really does a fundamental challenges in vacancy levels of 491 00:25:48,119 --> 00:25:50,040 Speaker 12: twenty percent plus and so forth. That happens to be 492 00:25:50,080 --> 00:25:52,360 Speaker 12: a very small portion of our portfolio, less than two 493 00:25:52,359 --> 00:25:55,240 Speaker 12: percent of our global real estate equity portfolio. And then 494 00:25:55,280 --> 00:25:58,240 Speaker 12: you have a number of sectors where fortunately we're concentrated 495 00:25:58,280 --> 00:26:01,439 Speaker 12: through I think some good sector selection decision like logistics, 496 00:26:01,760 --> 00:26:06,120 Speaker 12: data centers, a number of areas in rental, housing, life 497 00:26:06,119 --> 00:26:11,159 Speaker 12: science's office where where the fundamentals are really quite good vacancies, 498 00:26:11,160 --> 00:26:14,320 Speaker 12: and many of those sectors are at two to five percent, 499 00:26:14,359 --> 00:26:17,280 Speaker 12: which is almost at or just above the frictional level 500 00:26:17,280 --> 00:26:20,320 Speaker 12: of vacancy. You know, market rents growing at double digits, 501 00:26:20,359 --> 00:26:23,560 Speaker 12: and a number of those sectors, so it really matters 502 00:26:23,560 --> 00:26:26,880 Speaker 12: where you invest in the portfolio construction. I think our 503 00:26:26,920 --> 00:26:29,479 Speaker 12: firm is created in real estate over the last decade 504 00:26:29,560 --> 00:26:31,719 Speaker 12: or really you know, some of our some of our 505 00:26:31,760 --> 00:26:32,360 Speaker 12: finest work. 506 00:26:32,400 --> 00:26:32,840 Speaker 9: Is a firm. 507 00:26:33,000 --> 00:26:35,560 Speaker 1: You've got a big company and you're buying and selling 508 00:26:35,640 --> 00:26:38,080 Speaker 1: all the time, but there have been some recent reports 509 00:26:38,080 --> 00:26:40,840 Speaker 1: of some selling in the real estate area, particular warehouses. 510 00:26:41,119 --> 00:26:43,400 Speaker 1: If you look at your portfolio overall, would you say 511 00:26:43,400 --> 00:26:46,000 Speaker 1: you're a net buyer, right now or seller of real 512 00:26:46,119 --> 00:26:47,040 Speaker 1: estate in total. 513 00:26:47,920 --> 00:26:50,320 Speaker 12: You know, I went through in my litany of the 514 00:26:50,359 --> 00:26:53,320 Speaker 12: deals we've done that to your point, the fact that 515 00:26:53,320 --> 00:26:56,520 Speaker 12: even the last month we've sold a big portfolio Logistics 516 00:26:56,560 --> 00:26:58,959 Speaker 12: and we bought three others. By the way, three billion 517 00:26:59,000 --> 00:27:02,359 Speaker 12: dollars is in relate to having a portfolio that's one 518 00:27:02,400 --> 00:27:03,800 Speaker 12: hundred billion dollar plus. 519 00:27:03,880 --> 00:27:05,720 Speaker 10: So it's our. 520 00:27:05,640 --> 00:27:08,800 Speaker 12: Business and given different strategies, with different time horizons and 521 00:27:09,359 --> 00:27:12,159 Speaker 12: sort of return targets, to be in the business of 522 00:27:12,200 --> 00:27:14,960 Speaker 12: buying and selling when it makes sense, never forced to 523 00:27:14,960 --> 00:27:17,480 Speaker 12: do it. But we can be opportunistic again, both on 524 00:27:17,520 --> 00:27:19,280 Speaker 12: the buying and selling side, and so I wouldn't say 525 00:27:19,280 --> 00:27:20,840 Speaker 12: we're net buyers or sellers one way. 526 00:27:20,760 --> 00:27:21,080 Speaker 6: Or the other. 527 00:27:23,000 --> 00:27:26,120 Speaker 1: In addition to Michael Chaya Blackstone, we talked with Kathy Marcus, 528 00:27:26,160 --> 00:27:28,960 Speaker 1: co CEO of real Estate at Prudential, who explained the 529 00:27:29,080 --> 00:27:33,560 Speaker 1: necessary transition real estate was going through in twenty twenty three. 530 00:27:35,040 --> 00:27:38,280 Speaker 13: I think sellers are having a very tough time coming 531 00:27:38,320 --> 00:27:42,280 Speaker 13: to term with the new prices and the gap between 532 00:27:42,400 --> 00:27:46,160 Speaker 13: where buyers and sellers think things should trade, and then 533 00:27:46,320 --> 00:27:48,560 Speaker 13: overlay that with where the lenders may or may not 534 00:27:48,640 --> 00:27:53,560 Speaker 13: be willing to lend. It's the transaccess market is so 535 00:27:53,720 --> 00:27:57,199 Speaker 13: muted right now. I can't actually remember a time that 536 00:27:57,280 --> 00:28:01,600 Speaker 13: it's been dismuted before, and it's only gotten worse since 537 00:28:01,680 --> 00:28:03,760 Speaker 13: rates have spiked, you know, really just recently. 538 00:28:04,040 --> 00:28:06,240 Speaker 1: Well, if you have to refinance in this world is 539 00:28:06,280 --> 00:28:08,680 Speaker 1: a very different world from just two or three years ago, 540 00:28:10,240 --> 00:28:12,080 Speaker 1: at what point to do? A lot of the sellers 541 00:28:12,119 --> 00:28:14,240 Speaker 1: have to refinance, and it really has to change what's 542 00:28:14,280 --> 00:28:14,680 Speaker 1: going on. 543 00:28:15,800 --> 00:28:18,719 Speaker 13: Well, that will happen over time, and there are you know, 544 00:28:19,160 --> 00:28:21,399 Speaker 13: maturities that are coming up. There are maturities that have 545 00:28:21,440 --> 00:28:24,359 Speaker 13: already occurred where there's been a bit of a kicking 546 00:28:24,359 --> 00:28:27,520 Speaker 13: the can down the road, particularly in the office sector. 547 00:28:27,560 --> 00:28:30,200 Speaker 13: So if you think about it and office loan matures 548 00:28:30,640 --> 00:28:34,639 Speaker 13: and so what normally happens. You could refinance that office 549 00:28:34,680 --> 00:28:39,120 Speaker 13: asset generally at the same or higher loan balance, or 550 00:28:39,120 --> 00:28:41,440 Speaker 13: you could sell the asset. Neither one of those things 551 00:28:41,480 --> 00:28:44,480 Speaker 13: is really possible right now. The option that's available to 552 00:28:44,560 --> 00:28:48,959 Speaker 13: people right now is to potentially extend the loan, and 553 00:28:49,160 --> 00:28:52,240 Speaker 13: often that requires some sort of an equity paydown, which 554 00:28:53,080 --> 00:28:56,640 Speaker 13: particularly office space, is not that appealing to borrowers because 555 00:28:56,680 --> 00:28:59,520 Speaker 13: in some cases they feel like they're throwing good money 556 00:28:59,520 --> 00:28:59,800 Speaker 13: after that. 557 00:29:00,280 --> 00:29:02,640 Speaker 1: So that's office space. As you suggest that, there are 558 00:29:02,680 --> 00:29:05,320 Speaker 1: a lot of different parts that come under real estate, 559 00:29:05,360 --> 00:29:08,480 Speaker 1: and there's a big variety. Where are there some opportunities 560 00:29:08,480 --> 00:29:11,040 Speaker 1: out there right now that you're interested, particularly within the 561 00:29:11,080 --> 00:29:12,480 Speaker 1: broader real estate market. 562 00:29:12,720 --> 00:29:15,600 Speaker 13: I'm really glad you mentioned that, because it is definitely 563 00:29:15,640 --> 00:29:19,960 Speaker 13: a common misconception that the office sector dominates the investable 564 00:29:20,040 --> 00:29:23,080 Speaker 13: universe in real estate, and that's not the case. It's 565 00:29:23,120 --> 00:29:26,080 Speaker 13: never been the case that it's dominated. It certainly has 566 00:29:26,160 --> 00:29:28,920 Speaker 13: been higher than it is right now. But in the 567 00:29:28,960 --> 00:29:32,920 Speaker 13: private markets, if allocations to office were in the high 568 00:29:32,960 --> 00:29:36,480 Speaker 13: forty percent range, they're now about twenty percent. And in 569 00:29:36,520 --> 00:29:39,400 Speaker 13: the public markets, the percentage of the read index that 570 00:29:39,720 --> 00:29:43,600 Speaker 13: is pure office is hovering somewhere around five percent. So 571 00:29:43,800 --> 00:29:47,080 Speaker 13: it is far less of a sort of eight hundred 572 00:29:47,120 --> 00:29:49,400 Speaker 13: pound gorilla than it was at one point. But I 573 00:29:49,480 --> 00:29:52,280 Speaker 13: do think that gets a little bit overblown in terms 574 00:29:52,320 --> 00:29:55,320 Speaker 13: of where we see opportunity right now. The operative term 575 00:29:55,400 --> 00:30:00,440 Speaker 13: is necessity things like housing, things like grocery, anchored retail, 576 00:30:00,680 --> 00:30:04,240 Speaker 13: things like in phil logistics, so the basic necessities of life, 577 00:30:04,280 --> 00:30:09,000 Speaker 13: we call them sort of necessity retail, necessity properties. It's food, shelter, 578 00:30:09,120 --> 00:30:11,520 Speaker 13: and your Amazon deliveries right, the things that nobody can 579 00:30:11,560 --> 00:30:12,000 Speaker 13: live without. 580 00:30:14,040 --> 00:30:18,520 Speaker 1: That was Kathy Marcus of Prudential coming up. For many, 581 00:30:18,680 --> 00:30:21,960 Speaker 1: it was the buzzword of the year. Generative AI was 582 00:30:22,000 --> 00:30:25,680 Speaker 1: all the rage, particularly after chat GPT came on the scene. 583 00:30:25,880 --> 00:30:28,320 Speaker 1: We talked with Marty shave As a Six Street Partners. 584 00:30:29,040 --> 00:30:31,320 Speaker 1: That's next on Wall Street Week on Bloomberg. 585 00:30:34,040 --> 00:30:38,280 Speaker 2: This is Bloomberg Wall Street Week with David Weston from 586 00:30:38,400 --> 00:30:39,320 Speaker 2: Bloomberg Radio. 587 00:30:45,640 --> 00:30:48,120 Speaker 1: This is a special year end edition of Wall Street Week. 588 00:30:48,200 --> 00:30:51,320 Speaker 1: I'm David Weston Global. Wall Street, like much of the world, 589 00:30:51,520 --> 00:30:55,760 Speaker 1: was captivated by the prospects for generative artificial intelligence. Marty 590 00:30:55,800 --> 00:30:58,640 Speaker 1: Shavez a six Street Partners, has been working on integrating 591 00:30:58,680 --> 00:31:01,800 Speaker 1: computers into Wall stret since he came out of Stanford 592 00:31:01,800 --> 00:31:04,760 Speaker 1: with his PhD. So we asked him how different this 593 00:31:04,880 --> 00:31:08,000 Speaker 1: new version of AI is from what we have seen before. 594 00:31:10,440 --> 00:31:14,200 Speaker 14: I started working on Wall Street in ninety three, and 595 00:31:14,240 --> 00:31:17,840 Speaker 14: in ninety three when people like me showed up on 596 00:31:17,880 --> 00:31:21,360 Speaker 14: Wall Street, I often got asked, could you help me 597 00:31:21,560 --> 00:31:23,920 Speaker 14: figure out how to print this document. 598 00:31:23,600 --> 00:31:27,000 Speaker 10: Or turn my computer on and off? R What is 599 00:31:27,040 --> 00:31:28,680 Speaker 10: this kind of quant. 600 00:31:28,840 --> 00:31:31,560 Speaker 14: Math and software guy doing here? So it took a 601 00:31:31,560 --> 00:31:35,440 Speaker 14: little while where we people like me could find the 602 00:31:35,480 --> 00:31:39,000 Speaker 14: problems that we could actually solve that would help us 603 00:31:39,040 --> 00:31:42,080 Speaker 14: make better markets for our clients and manage our risk 604 00:31:42,160 --> 00:31:45,120 Speaker 14: more effectively. That's something we've been working on for a 605 00:31:45,240 --> 00:31:48,560 Speaker 14: very long time, bringing math to Wall Street. And so 606 00:31:48,760 --> 00:31:52,280 Speaker 14: I've had an opportunity to see many iterations of this movie, 607 00:31:52,320 --> 00:31:53,040 Speaker 14: of this movie. 608 00:31:53,120 --> 00:31:55,000 Speaker 10: So initially one of. 609 00:31:55,000 --> 00:31:57,160 Speaker 14: The things I might work on would be, we've got 610 00:31:57,200 --> 00:31:58,600 Speaker 14: a complicated book of risk. 611 00:31:59,000 --> 00:31:59,800 Speaker 10: How do we hedge it? 612 00:32:00,080 --> 00:32:03,320 Speaker 14: We've got thirty seconds to make a phone call and 613 00:32:03,520 --> 00:32:06,120 Speaker 14: construct the first order hedge of the book. All right, 614 00:32:06,200 --> 00:32:08,719 Speaker 14: so we do that lots of math and software. We 615 00:32:08,760 --> 00:32:11,400 Speaker 14: want to do it reliably. We don't want to make mistakes. 616 00:32:11,600 --> 00:32:13,560 Speaker 14: We certainly don't want to loose, toate and get the 617 00:32:13,600 --> 00:32:16,400 Speaker 14: wrong hedge and maybe make the risk position worse. 618 00:32:16,760 --> 00:32:18,840 Speaker 10: And we got pretty good at that. But I remember 619 00:32:18,840 --> 00:32:19,760 Speaker 10: thinking even then. 620 00:32:19,840 --> 00:32:22,880 Speaker 14: Okay, so now we're calculating this hedge and the person 621 00:32:22,960 --> 00:32:25,640 Speaker 14: next to me is calling the exchange and saying buy 622 00:32:25,680 --> 00:32:28,479 Speaker 14: or sell that many futures. I remember thinking, even as 623 00:32:28,480 --> 00:32:31,480 Speaker 14: a kid, well, we could do that part too, But 624 00:32:31,560 --> 00:32:35,640 Speaker 14: it took a long time. Eventually we got there, especially 625 00:32:35,760 --> 00:32:38,800 Speaker 14: in equities, markets that were exchange traded where there was 626 00:32:38,840 --> 00:32:39,360 Speaker 14: a lot of. 627 00:32:39,360 --> 00:32:41,320 Speaker 10: Data, and we could close that loop. 628 00:32:41,440 --> 00:32:43,760 Speaker 14: You could do some analysis, and then you could say 629 00:32:43,920 --> 00:32:45,680 Speaker 14: this is the trade we should do, and then you 630 00:32:45,680 --> 00:32:48,880 Speaker 14: could have the computers just do that trade. And at 631 00:32:48,880 --> 00:32:51,959 Speaker 14: the time that began, there was a lot of concerns, 632 00:32:52,040 --> 00:32:54,840 Speaker 14: how could that go wrong? What if the computer puts in. 633 00:32:54,800 --> 00:32:55,760 Speaker 10: The wrong trade. 634 00:32:55,840 --> 00:32:59,000 Speaker 14: And then the whole loop got faster and faster, and 635 00:32:59,120 --> 00:33:02,600 Speaker 14: computers were put in orders with a latency of sub 636 00:33:02,640 --> 00:33:06,320 Speaker 14: one millisecond, much faster than a trader could ever operate. 637 00:33:06,720 --> 00:33:09,880 Speaker 10: And then we actually had some train wrecks. 638 00:33:10,520 --> 00:33:14,120 Speaker 14: There was a company night trading where the algos run 639 00:33:14,120 --> 00:33:18,240 Speaker 14: amuck and kept putting orders into the exchange that were 640 00:33:18,280 --> 00:33:21,040 Speaker 14: at the wrong price, and so all the orders got 641 00:33:21,080 --> 00:33:24,640 Speaker 14: taken out on the other side, and they eroded their 642 00:33:24,680 --> 00:33:27,720 Speaker 14: capital in forty five minutes, and then they were bankrupt. 643 00:33:28,080 --> 00:33:29,280 Speaker 10: So some things have. 644 00:33:29,280 --> 00:33:33,920 Speaker 14: Gone horribly wrong we learned from those episodes. I'm in 645 00:33:34,000 --> 00:33:38,560 Speaker 14: the camp that sees AI as essentially wonderful, but still 646 00:33:38,800 --> 00:33:43,000 Speaker 14: more of the same, So more math, more analysis, things 647 00:33:43,040 --> 00:33:46,400 Speaker 14: going faster and faster, and yet I think there are 648 00:33:46,440 --> 00:33:51,480 Speaker 14: some principles that are stable in time, So here's one. 649 00:33:51,600 --> 00:33:55,239 Speaker 14: I remember a town hall years ago where I was 650 00:33:55,280 --> 00:33:59,240 Speaker 14: talking and I said, there's really three strategies that I 651 00:33:59,360 --> 00:34:03,400 Speaker 14: see when it comes to computers. Number one is, you 652 00:34:03,400 --> 00:34:05,600 Speaker 14: could be a person who tells the computers what to do. 653 00:34:06,040 --> 00:34:08,560 Speaker 14: That's my strategy, and it's working pretty well for me, 654 00:34:08,760 --> 00:34:13,480 Speaker 14: it's not for everybody. Number Two, you could collaborate effectively 655 00:34:13,880 --> 00:34:17,120 Speaker 14: with the computers and the people who tell the computers 656 00:34:17,160 --> 00:34:17,680 Speaker 14: what to do. 657 00:34:18,120 --> 00:34:20,080 Speaker 10: And I recommend that to everybody. 658 00:34:20,360 --> 00:34:24,160 Speaker 14: Everybody can embrace that strategy and use the computers to 659 00:34:24,200 --> 00:34:28,440 Speaker 14: give yourself a force multiplier, leverage a superpower, and then 660 00:34:28,480 --> 00:34:31,480 Speaker 14: go on and do more interesting things that the computers 661 00:34:31,520 --> 00:34:35,040 Speaker 14: can't do. And you always worry, well, maybe we won't 662 00:34:35,080 --> 00:34:37,640 Speaker 14: be needed at all and the computers will take over. 663 00:34:37,800 --> 00:34:39,160 Speaker 10: I've never seen that happen. 664 00:34:39,760 --> 00:34:43,400 Speaker 14: The third strategy, which I have also seen, is stand 665 00:34:43,440 --> 00:34:45,960 Speaker 14: in the way of progress. See if, in the name 666 00:34:46,000 --> 00:34:49,759 Speaker 14: of your job security, you can stop the computers, and 667 00:34:50,120 --> 00:34:53,440 Speaker 14: that is really dumb, and don't do that, and some 668 00:34:53,480 --> 00:34:57,480 Speaker 14: people do do that. I think that that advice applies today. 669 00:34:57,880 --> 00:35:01,400 Speaker 14: I think everybody needs to be looking at computers and 670 00:35:01,480 --> 00:35:02,600 Speaker 14: generative AI. 671 00:35:02,760 --> 00:35:06,759 Speaker 10: And thinking how can I use this to be more productive. 672 00:35:06,960 --> 00:35:10,919 Speaker 14: So the way I would think about generative AI is, yes, 673 00:35:11,000 --> 00:35:14,400 Speaker 14: there's some amazing things that could happen. There's some terrible 674 00:35:14,480 --> 00:35:18,120 Speaker 14: things that we must work to mitigate and prevent. But 675 00:35:18,239 --> 00:35:22,040 Speaker 14: the central case is that it makes us more productive. 676 00:35:23,200 --> 00:35:25,919 Speaker 1: That doesn't put this year end review on Wall Street Week. 677 00:35:26,160 --> 00:35:28,959 Speaker 1: I'm David Weston, This is Bloomberg. See you next week.