Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: Jim Karen, chief investment Officer of Portfolio Solutions at Morgan
Speaker 2: Stanley Investment Management, he's back with us. We've got a
Speaker 2: little bit of a special treat for this last hour
Speaker 2: of Bloomberg Business Week Daily. He's joining us for the
Speaker 2: rest of the show. Jim, it's good to see you.
Speaker 2: Welcome back, Thank you.
Speaker 3: It's great to see both of you.
Speaker 2: And thanks for taking the time this afternoon. You know,
Speaker 2: we obviously weren't planning on starting with Alan Greenspan and
Speaker 2: his life and legacy. We're going to talk about the FED.
Speaker 2: We'll talk about rates, risk, portfolio positioning, the US versus
Speaker 2: the rest of the world. Matt Miller wants us to
Speaker 2: talk about motorcycles. Yes, I don't think I will be
Speaker 2: able to do that.
Speaker 1: In an intelligent way that we'll I did's ride on
Speaker 1: it with two other people. That was dangerous when I
Speaker 1: was really young.
Speaker 2: But we do want to start with Alan Greenspan in
Speaker 2: the legacy because early in your career, I mean, he
Speaker 2: was the FED chair. You knew he was it.
Speaker 3: He was a legend. So I you know, if we
Speaker 3: put this in and I think it's very important to
Speaker 3: have context around this. He started his position as chair
Speaker 3: and nineteen eighty seven, he ended in two thousand and six.
Speaker 3: That's a nineteen year period. So for most people's that's
Speaker 3: a large chunk of their career. I started the business
Speaker 3: in ninety one ninety two. That's all I knew for
Speaker 3: fourteen or fifteen years of the starting point of my career.
Speaker 3: He was somebody that was not going to be challenged
Speaker 3: easily by other members of the FED. It's whatever he
Speaker 3: said went and that was it. But he also did
Speaker 3: a bunch of different things. He changed things at the
Speaker 3: FED in the sense that he made it a lot
Speaker 3: more transparent, if I could say those words. So, what
Speaker 3: the way the FED operated, and we take this for
Speaker 3: granted today that you find out on Wednesday at two
Speaker 3: o'clock what the Fed's decision was and we all go
Speaker 3: to work. Prior to green Span, it was vulgar. And
Speaker 3: what happened at about four fifteen four ten on a
Speaker 3: Thursday afternoon, you got money data. Based on what the
Speaker 3: money supply data was, that was the change in policy.
Speaker 3: You had to figure it out. Nobody told you if
Speaker 3: it was twenty five or fifty basis points you were
Speaker 3: guessing and you were trying to analyze and figure out
Speaker 3: what that was. So what green Span started to introduce
Speaker 3: through communications and things like that was what today we
Speaker 3: take for granted, was absolutely monumental in groundbreaking as far
Speaker 3: as saying, hey, by the way, we just hiked or
Speaker 3: cut twenty five basis points and that's and that's all
Speaker 3: it is.
Speaker 2: Is it too much?
Speaker 1: Though, like would some say it's gone too far?
Speaker 3: So there's been iterations like there's there's pre green Span
Speaker 3: and then there's post green Span. Right, So what happened
Speaker 3: in the nineteen years subsequent, you know, from two thousand
Speaker 3: and six, say to two thousand and you know, twenty
Speaker 3: twenty six. What we've had now is Bernanki, Yellin, and Powell,
Speaker 3: they've all followed effectively the green Span mode, but they
Speaker 3: added on to it. Now. Clearly Bernanki had a very
Speaker 3: special situation in the financial crisis. He had to do
Speaker 3: enhance communications and things and things of that nature. I
Speaker 3: think that what is is it too much today? In
Speaker 3: terms of communication? I'm gonna say that it is a
Speaker 3: bit because what the FED is trying to do is
Speaker 3: they're trying to telegraph and televise too much such that
Speaker 3: they're actually directing and dictating how the markets should think
Speaker 3: about things, as opposed to what Warsh said, which is
Speaker 3: let the markets figure it out. I mean, so the
Speaker 3: way I think about it managed well, I mean, you
Speaker 3: know the way I think about Kevin Warsh. If I'm
Speaker 3: going to put him in this in this period of
Speaker 3: time from nineteen eighty seven to twenty twenty six, I'm
Speaker 3: going to say that what green what Worsh is trying
Speaker 3: to do is bring us back to the period that
Speaker 3: was pre Ben Bernanke. So it was green Span in
Speaker 3: the nineteen nineties, so very similar economic setup, too big
Speaker 3: cap X cycle, big productivity boom. You know that, you
Speaker 3: know that we're going through. And I think what Worsh
Speaker 3: is trying to do is bring us back to that
Speaker 3: period where he lets the markets assess what monetary policy
Speaker 3: ought to be, as opposed to what Greenspan did. Greenspan
Speaker 3: was the guy that really started to come in because
Speaker 3: the Vulcar and everybody else just looked at money supply
Speaker 3: M one, M two. They were you know, very very
Speaker 3: much and that's what they did. Greenspan was one who
Speaker 3: started saying, you know, we should think about GDP, growth
Speaker 3: in the labor market and inflation, and let's talk about
Speaker 3: inflation anchoring and all of these various things. Things that
Speaker 3: we think of today is very common, it was very
Speaker 3: uncommon at the time. So I'd say, let's give Kevin
Speaker 3: Warsh an opportunity. This is his moment in history. He
Speaker 3: wants to remake the FED. But this isn't groundbreaking what
Speaker 3: I think Warsh is trying to do. I think he's
Speaker 3: just getting back to a period that looks more like
Speaker 3: the nineteen nineties.
Speaker 2: So it's fair to say you see a hint or
Speaker 2: more of Alan Greenspan in Kevin Worsh today.
Speaker 3: Yeah, I do now now, Now, you know, whenever you
Speaker 3: compare somebody to like somebody who was a legend and
Speaker 3: somebody's just starting out, that's always a very very difficult
Speaker 3: you know. We'll see how Warsh does. Right, It's going
Speaker 3: to be a long journey and long road ahead. But
Speaker 3: I think on paper, conceptually, what Kevin Worsh is trying
Speaker 3: to do is get the FED back to a much
Speaker 3: more narrow focus, not as narrow as the Vulcar FED,
Speaker 3: which was just money supply, but something that's a little
Speaker 3: more growth, inflation, outlook, jobs market. But let's ease up
Speaker 3: on the communications. I think he's really just going back
Speaker 3: to a nineteen nineties green Span model right now. And
Speaker 3: that's my perspective. And a lot of people weren't even
Speaker 3: around in the nineties in this business practicing, right, so
Speaker 3: they don't really have a good perspective on this. It
Speaker 3: wasn't chaos, It was fine. You know, you just have
Speaker 3: to get used to the new there's a new sheriff
Speaker 3: in town.
Speaker 1: What's the downside of kind of where we are and
Speaker 1: what we expect from today's Fed.
Speaker 3: I think the downside is that there's a lot of
Speaker 3: mission creep with the FED. Right so now we have
Speaker 3: to put this in context as well. Prior to the
Speaker 3: financial crisis, we had this much more narrow This is
Speaker 3: what green Span kind of created. I mean, he opened
Speaker 3: it up more transparency than Bernank kicked the door wide open.
Speaker 3: He had to. We had a financial crisis, we had
Speaker 3: interest policy, we had QWI, we had policy rates at zero,
Speaker 3: so we had to find a way to communicate policy
Speaker 3: to the markets. I totally get it. But what happens
Speaker 3: is is that once the FED starts to have this
Speaker 3: mission creep and they start to be asked to do
Speaker 3: more and more, even from a regulatory standpoint, or even
Speaker 3: you know, the FED was being asked, what's your policy
Speaker 3: on climate? You know, you know, things like that. This
Speaker 3: is not what the Fed's job is. The FED and
Speaker 3: according to Kevin Warsh, should color in a very very
Speaker 3: narrow set of lines and stick to what their job is.
Speaker 3: Under Vulcar, it was money supply.
Speaker 1: Well, what if the economy has gotten more complicated? Climate
Speaker 1: change is an issue. Companies have to think about it,
Speaker 1: you know, because it is ultimately going to impact their
Speaker 1: bottom line.
Speaker 2: This does it affective duel mandate?
Speaker 1: I guess some might say, well it might, it can't work, Yeah,
Speaker 1: you can extrapolate.
Speaker 3: Right, So what Warsh is basically saying is don't ask
Speaker 3: me that question. That is an elected officials job to do.
Speaker 3: My job is Kevin Warsh, right, if you're Kevin Warsh,
Speaker 3: if you're the chair of the FED, is to is
Speaker 3: price stability in full employment and to really focus on
Speaker 3: the price stability component.
Speaker 1: But don't you sometimes need Okay, I'm going to get
Speaker 1: into trouble by needing a figure that's not political. But
Speaker 1: we understand that politics has certainly crept its way dim
Speaker 1: into the US Central Bank. But I think there are
Speaker 1: times we look at the FED chair, even if there
Speaker 1: is a political backdrop, as being kind of a voice
Speaker 1: of reason on all of these major issues that will
Speaker 1: impact economic growth globally, will impact corporate bottom lines, Like
Speaker 1: is it not important to have that voice of reason?
Speaker 3: It is absolutely important to have a voice of reason.
Speaker 3: But in a position like that, in the way that
Speaker 3: I believe that Warsh interprets it is that it's a
Speaker 3: very narrow remit. And one of the things that he
Speaker 3: said is that the FED should have absolute independence on
Speaker 3: a narrow set of items. Everything else this this is
Speaker 3: not this is what the FED is. That's not what
Speaker 3: the FED does. And I think keeping that very very
Speaker 3: clear and setting these boundaries, right, you know, we all
Speaker 3: have to set boundaries, right, you know, this is a
Speaker 3: very important aspect of things. Is like, look, don't ask
Speaker 3: me these questions. I mean, these aren't questions that are
Speaker 3: for Kevin Walsh, right, you know. So that's what he's
Speaker 3: basically saying, And what he's basically what he says ultimately
Speaker 3: is that the FED can do its job better if
Speaker 3: it's just doing the job that it was tasked to do,
Speaker 3: but is not being asked to solve all these other problems.
Speaker 2: In the words of j. Powell, will stick to our
Speaker 2: knitting is what he said over and over exactly right.
Speaker 2: So it just reminds me of that sort of go
Speaker 2: to for him. We're speaking with Jim Karen, the CIO
Speaker 2: of Portfolio Solutions at Morgan Stanley Investment Management. So, so
Speaker 2: what does all this mean for rates under a Warsh regime?
Speaker 1: So this is pretty clear.
Speaker 2: Yeah, it was in the market in a very clear way.
Speaker 3: The market well yeah, so I have a very out
Speaker 3: of consensus view on this, Okay, Okay, so I actually
Speaker 3: think Warsh was more dubvish than what the markets thought. Okay,
Speaker 3: so I know what he said in a traditional interpretation.
Speaker 2: So market's got it wrong.
Speaker 3: I think so so so effectively under a Bernanky, a Yelling,
Speaker 3: and a Powell. If that's your mindset, and say, look traditionally,
Speaker 3: if I think about what war said and I use
Speaker 3: that framework BERNANKI Yelling, and Powell, then yes he was
Speaker 3: absolutely very hawkish, right, you know, you know, there's no question.
Speaker 3: But I think if you read between the lines and
Speaker 3: listen to what he's really saying. What he's saying is
Speaker 3: that like is he's going to create these task forces
Speaker 3: in terms of like, so, how do we think about
Speaker 3: the data. So if you were to ask me a
Speaker 3: week ago, two weeks ago, what is the Fed's most
Speaker 3: favored measure of inflation, I'd say core PCEE. That's the
Speaker 3: Fed's favored measure of inflation. Today. I don't know what
Speaker 3: it is. I don't know what the task force is
Speaker 3: going to say that it is. Is it year over
Speaker 3: year PC or is it month over month or is
Speaker 3: it three month over there? This is what the task
Speaker 3: force is going to figure out. So the market, I think,
Speaker 3: for the next six months until this task force gets
Speaker 3: us all done, is going to be very confused as
Speaker 3: to what the inputs are to the fed's large scale
Speaker 3: policy model, which is there what they call the FURBUS
Speaker 3: model Federal Reserve Bank of the US model. And what
Speaker 3: Warsh is doing is he's not saying I'm going to
Speaker 3: change the model. What he's saying is I want to
Speaker 3: look at different inputs. I want to look at labor
Speaker 3: data in a different way. I want to think about
Speaker 3: productivity differently. Kevin Warsh is a supply side economist. He's
Speaker 3: going to start to create a lot of supply side
Speaker 3: indicators to inform him as opposed to the more traditional
Speaker 3: demand side components of the economy and those indicators. This
Speaker 3: is in my career and I've been doing this since
Speaker 3: ninety one ninety two, so about thirty four years. Is
Speaker 3: the most monumental shift that I've seen take place. I
Speaker 3: inherited Greenspan. When I started, Greenspan was there. That's all
Speaker 3: I knew. This is a major shift. And I think
Speaker 3: that people are underestimating how monumental of a shift this is.
Speaker 3: And where they going to get it wrong is by
Speaker 3: applying what they've learned over the last twenty five thirty
Speaker 3: years under a green Span to then say, oh, well,
Speaker 3: this is what it's This is how I would interpret this.
Speaker 3: I think the rules or the ground is shifting. Not
Speaker 3: the rules have change, but the ground to shifting so.
Speaker 1: Good that it's shifting. Could that we kind of take
Speaker 1: a look at a system that we've been kind of
Speaker 1: moving along for a long time.
Speaker 3: Well, I mean, you know, changes happened, right, So green
Speaker 3: Span changed it right when he came in because he
Speaker 3: felt that and you and you mentioned yourself the economy
Speaker 3: has changed, right, So when we look at labor data
Speaker 3: and labor statistics, I think the data has been challenged
Speaker 3: for the last five years. The non farm payroll data
Speaker 3: for me used to be the sun rose and set on.
Speaker 3: The non farm payroll data for me for most of
Speaker 3: my career, last five years not very informative. Weekly jobbles
Speaker 3: claims were a bit better. So I think there's a
Speaker 3: lot of challenge to the data.
Speaker 2: So what is the what's the bat I mean, there's
Speaker 2: no single best piece of data, but what's replaced the
Speaker 2: non farm payrolls.
Speaker 3: So this is what Worsh is trying to figure out
Speaker 3: in terms of looking at the is using this task force. Right,
Speaker 3: So you've got this other series, this Quarterly Census of
Speaker 3: Employment in Wages a QCEW series. This is the thing
Speaker 3: that constantly gets revised or revises down the monthly non
Speaker 3: farm payroll numbers and things like that. So so what
Speaker 3: I think Worsh is going to try to do is
Speaker 3: use more real time estimates of the market and to
Speaker 3: try to understand whether it's inflation data, maybe even shorter
Speaker 3: term measures. I'm not saying that we're going to live
Speaker 3: and die by the weekly jobas claims number. But I'm
Speaker 3: just saying, you know, you've got jolts, you've got these
Speaker 3: other surveys, you have other industries that create surveys of
Speaker 3: data as well. Why not start to look at this
Speaker 3: a little bit more broadly.
Speaker 1: Well, it's interesting that you say that because we get
Speaker 1: PCE this week, right, and worsh is not so keen
Speaker 1: on this read in terms of inflation, Is he right?
Speaker 1: And is there something to maybe rethink about this two
Speaker 1: percent target that we obsess about that maybe that doesn't
Speaker 1: make sense because we can't seem to get there.
Speaker 3: Yeah, yeah, yeah, No, I mean, I mean this is
Speaker 3: you know, same thing the nineties. We didn't really get
Speaker 3: to two percent as a target either. We didn't even
Speaker 3: really have the target of two percent at that time,
Speaker 3: which is another thing. So maybe, as I'm saying, as
Speaker 3: Kevin Warsh is kind of going back to the nineties,
Speaker 3: maybe we should think about the target. Is it more
Speaker 3: of a range or is it a specific point target?
Speaker 3: And the other thing that I think is going to
Speaker 3: be very very different is that the way that the
Speaker 3: traditional way over the last twenty five years or so
Speaker 3: that we thought about controlling inflation was to adjust the
Speaker 3: jobs market. Right, So if inflation's running too hot, this
Speaker 3: is the irrational exuberance. How do you control inflation? You
Speaker 3: kill the jobs market, you create a recession, you get
Speaker 3: the unemployment rate up, you get prices back down, and
Speaker 3: you tamp down inflation. What Warsh is saying is that
Speaker 3: if you're in this period of higher productivity, then lower
Speaker 3: levels of unemployment. So an unemployment rate that say falls
Speaker 3: from four point three to three point eight or something
Speaker 3: like that, doesn't necessarily mean that it's going to be
Speaker 3: inflationary if it's because you're getting higher productive growth. That's
Speaker 3: a very supply side view of the world. And basically
Speaker 3: saying that if industry is creating more efficiencies, that doesn't
Speaker 3: necessarily create a higher inflation rate. So a lot is changing,
Speaker 3: and you know, it's a lot of people should really
Speaker 3: just you know, when they speak to say, Look, I'm
Speaker 3: not really sure, but what I think is as opposed
Speaker 3: to being so definitive. So I'm keeping a very open
Speaker 3: mind about all of this.
Speaker 2: Does aay I completely change everything that we're talking about?
Speaker 1: Possibly?
Speaker 3: Possibly, you know, I mean, I think the issues with
Speaker 3: AI that I have in economic forecasting is that it's
Speaker 3: kind of just going to look at the survey data.
Speaker 3: It's it's going to look at the available data sets
Speaker 3: that are out there unless you train it to look at.
Speaker 2: I just mean that from productivity for something. Oh yeah,
Speaker 2: that's what I mean.
Speaker 3: Hundred yeah, yeah, I see what you're thinking.
Speaker 2: Yeah, not on the data analysis, but just on productivity
Speaker 2: and what it does to this economy.
Speaker 3: So in my view, it does, right. So I think
Speaker 3: the productivity, I think you're going to get a lot.
Speaker 3: I think you can get higher levels of growth and
Speaker 3: lower levels of unemployment. But if it's more productive because
Speaker 3: AI is becoming more efficient, is going to be it's
Speaker 3: going to be a positive. So when we think about AI,
Speaker 3: people think about it in terms of profit margins, right,
Speaker 3: and today the way they think about it is it
Speaker 3: reduces costs, so more AI, less junior analysts, higher unemployment rate,
Speaker 3: and that's kind of the negative view of AI. I
Speaker 3: don't think it's going to work that way. I think
Speaker 3: what we're going to see is you're going to have
Speaker 3: more AI. It's going to create more demand. It's the
Speaker 3: Javon's paradox, right, Whereas when something becomes cheaper, you demand
Speaker 3: more of it, which is what I think AI is
Speaker 3: going to do. You'd have more people asking critical questions
Speaker 3: of this tool called AI, and we're going to be
Speaker 3: judging the results of these things, and ultimately, if you
Speaker 3: get better, more efficient decisions and higher productivity, these are
Speaker 3: the companies that you know that actually use this. These
Speaker 3: are the winners. There's a lot of creative destruction here.
Speaker 3: There are going to be winners and losers.
Speaker 1: Yeah, I agree. Do you think that that means that
Speaker 1: some of the companies we talk about NonStop could be
Speaker 1: a possible loser down the road?
Speaker 2: Yeah?
Speaker 3: Absolutely, right. So it's all about adapting and it's looking
Speaker 3: at companies that can actually use this tool very efficiently.
Speaker 3: So right now, there's a big productivity gap between the
Speaker 3: way that we evaluate this.
Speaker 1: Right.
Speaker 3: We're just in the infancy of all this stuff. Right,
Speaker 3: So if you ask any individual person, hey, do you
Speaker 3: use AI? Yes? I do. Are you more productive because
Speaker 3: you use it? Yes? I am Okay, Now go ask
Speaker 3: the CEO of that company if your employees thirty percent
Speaker 3: more productive? Are your profits thirty percent higher? And they're
Speaker 3: going to say I don't think so. Not yet. Over time,
Speaker 3: that gap, that productivity gap is going to narrow relative
Speaker 3: to the individual being more productive in the company, becoming
Speaker 3: more productive. Companies right now don't quite know how to
Speaker 3: use this tool efficiently or effectively.
Speaker 2: But I think the concern that a lot of people
Speaker 2: have is that, well, maybe when an employee leaves, that
Speaker 2: employee doesn't need to be replaced by headcount, and it's
Speaker 2: the margins that where you'll see and fewer people producing
Speaker 2: the same amount of work. Great for shareholders, not so
Speaker 2: great for those folks with jobs.
Speaker 3: Yeah, it could be right. So my take on it
Speaker 3: is that the real power of a powerful user of
Speaker 3: AI is somebody who can ask really good, creative, insightful questions.
Speaker 3: So the work that you know, whether it's software programmers,
Speaker 3: engineers that create a lot of the software, a lot
Speaker 3: of that work is going to get displaced, I think.
Speaker 3: But the people asking the questions, the more creative questions
Speaker 3: that come in that try to solve problems, I think
Speaker 3: that doesn't go away. And then you have to judge it,
Speaker 3: you have to interpret it, and then you have to
Speaker 3: apply it. And I think that's where the job growth
Speaker 3: is actually going to be.
Speaker 1: So maybe that liberal arts education.
Speaker 2: Hey one said a Boden guy here and a Colby
Speaker 2: guy here, We're getting along right now, Yes.
Speaker 1: Exact girl here, but no, but I think about that
Speaker 1: a lot like learning how to you know, ask the
Speaker 1: right question. And we keep talking about this too. It's
Speaker 1: not these basic simple questions. It's really complicated, smart, thoughtful questions.
Speaker 2: And the critical thinking that you develop when you're writing
Speaker 2: those papers late at night that now AI is writing
Speaker 2: for you. Unfortunately, so the kids aren't learning how.
Speaker 3: To do well think about it. I mean, like, you know,
Speaker 3: you may not be able to code, but you can
Speaker 3: ask a lot of really good questions, right, so there
Speaker 3: you go. I mean, and if you could ask really
Speaker 3: good questions, well, don't worry about it. The machine's going
Speaker 3: to code for you.
Speaker 2: Exactly. If you have a vision for something because you
Speaker 2: have an analytical mind, right, you have an idea for
Speaker 2: creating something, you no longer need to find that person
Speaker 2: to code for you. You can get clot code or
Speaker 2: code X from open air to do it for so.
Speaker 3: Albert Einstein said that the true measure of intelligence is imagination.
Speaker 3: It's not all these hard technicals. Is if you're very imaginative,
Speaker 3: that's actual intelligence. I'll go with Albert Einstein on this one.
Speaker 1: Yeah, it makes us think, you know, there are people
Speaker 1: who've been writing things about you know, you have to
Speaker 1: give you your mind, your brain kind of a moment
Speaker 1: to think, right, some space to think rather than kind
Speaker 1: of NonStop either on a computer or on your phone
Speaker 1: and thinking things through. Having said that, we've got about
Speaker 1: four minutes, We're gonna take a break and come back
Speaker 1: and talk some more because I want to address some
Speaker 1: of the things that the President has been saying when
Speaker 1: it comes to the spend that we see NonStop, and
Speaker 1: we've been talking a lot about SpaceX now tapping the
Speaker 1: debt market. I don't know how do you work that
Speaker 1: into the investment narrative? Is it smart? Do we get nervous?
Speaker 1: We just had our credit analyst on and kind of
Speaker 1: all in on Elon and comfortable with it that we
Speaker 1: don't even know where this is all going. But if
Speaker 1: you're going to bet on someone, this guy seems to
Speaker 1: make sense.
Speaker 3: Well, Look, I mean things are going to go in cycles,
Speaker 3: There's no question about this. So there is a large
Speaker 3: spend right now, and everybody's going to ask a question,
Speaker 3: is the juice worth the squeeze? Right We're spending a
Speaker 3: lot of money. Are we going to get the profits?
Speaker 3: Or is this going to happen. I think it will.
Speaker 3: It's going to happen over time, but it has to
Speaker 3: be an enterprise solution, meaning that companies, Corporate America is
Speaker 3: who's going to build data centers in space for example.
Speaker 3: Right it's going to be the need from business that says, hey,
Speaker 3: I've got a whole team of people that I just
Speaker 3: hired and they're using this AI engine, this AI tool,
Speaker 3: creating agents NonStop, and their productivity is off the charts.
Speaker 3: We need to do more of this. It's an enterprise
Speaker 3: solution that's going to actually create the profitability. And I
Speaker 3: don't think we're I don't think we're close to it
Speaker 3: yet because right now you're asking CEO's like, oh so
Speaker 3: is this profitly? Like, yeah, I think it is. I
Speaker 3: mean they're not quite surey to measure it well.
Speaker 2: The flip side of that is some some CFOs pulling
Speaker 2: back on those tokens because they're not necessarily seeing the
Speaker 2: ross uber for example expensive.
Speaker 3: Yeah, yeah, yeah, it's a cost. It's a cost component.
Speaker 3: But like anything else, you know, tokenization is going to
Speaker 3: get commoditized, it's going to become cheaper. Do you remember, like, oh,
Speaker 3: don't print in color right, you can't print in color
Speaker 3: because ink was more. Nobody really says that anymore, right,
Speaker 3: you know. So I think it's one of these things
Speaker 3: that it's like, you know, I think it's going to
Speaker 3: get cheaper.
Speaker 2: What did I tell you, Carol? When I started working
Speaker 2: here six years ago? I was like, I like working
Speaker 2: here because they don't count how many pages you print
Speaker 2: in color as opposed to where I used to work.
Speaker 2: And they're like, do not print in color, do not
Speaker 2: print at all?
Speaker 1: Yeah, exactly, let's read off of it. Yeah, you know,
Speaker 1: it's funny when we talk and I feel like, I mean,
Speaker 1: we don't know what the timeframe is here, do we?
Speaker 1: We really don't. We're taking a day by day, week
Speaker 1: by week, month by month in terms of just kind
Speaker 1: of watching how this, you know, evolves. But what I
Speaker 1: do find interesting and we mentioned ROI like our conversations
Speaker 1: have evolved a lot more to talk about that. When
Speaker 1: we're talking about artificial intelligence. We weren't doing that necessarily
Speaker 1: a year and a half ago.
Speaker 3: Yeah. So I think if you look at any business cycle, right,
Speaker 3: you've got the early adopters, you've got the late adopters, right,
Speaker 3: it's never a straight line it's never like you're early
Speaker 3: then all of a sudden you kind of get through.
Speaker 3: It's it's always exponential. So you start off, there are
Speaker 3: going to be some early adopters. The way that the
Speaker 3: market's going to identify that is these are the companies
Speaker 3: who are going to get rewarded.
Speaker 2: So Jim just adopters, early adopters. Well, I think it's
Speaker 2: fair to say some of those are getting.
Speaker 3: Rewarded right now. Yeah, exactly.
Speaker 2: But apart from those companies, the front the developers of
Speaker 2: the frontier models, the hyper scalers just in the last
Speaker 2: you know, forty five seconds we have with you before
Speaker 2: we take a break and come back, who else could
Speaker 2: be winners?
Speaker 1: Like?
Speaker 2: Where else could you find?
Speaker 3: I think you're going to find it all across the spectrum.
Speaker 3: You know, it's not a question of specific industries. It's
Speaker 3: really a question of which companies in which sectors are
Speaker 3: adopting these tools in unlocking op grating leverage. That's going
Speaker 3: to happen in healthcare, that's going to happen in industry,
Speaker 3: that's going to happen in software and technology, it's going
Speaker 3: to happen all the sector. Financial sector, financials are pretty efficient,
Speaker 3: but I would say, but even still financials. You know,
Speaker 3: these are all you know, managed care networks, which are
Speaker 3: very cost intensive, very heavy, you know, you know, workforce intensive. Uh.
Speaker 3: And the companies that do this right are they're going
Speaker 3: to unlock a lot of operating leverage. And those are
Speaker 3: cash flows I want to buy. So I don't think
Speaker 3: there's any one sector, one company is.
Speaker 1: The president right though? If that war had continued, would
Speaker 1: there be an economic catastrophe for the United States?
Speaker 3: Yeah, I think there would have been a significant slowdown.
Speaker 3: I mean, ultimately the inventories and the oil supply shortages
Speaker 3: would have caught up. And everybody is pretty well versed
Speaker 3: on the numbers.
Speaker 2: But is the challenge now that he said that out loud?
Speaker 2: Iran knows they have that leverage.
Speaker 3: I don't think it's news to them. I mean, I
Speaker 3: think they're following the same flow of information that the
Speaker 3: rest of us are and calculating the amount of barrels
Speaker 3: of oil that the world needs and and things like that,
Speaker 3: and it was creating some real you know, shortages and
Speaker 3: some pressures. And I also think though that what I
Speaker 3: what I ran also knew is that the world and
Speaker 3: you know, China's a big consumer of oil for example,
Speaker 3: would have some patience up to a certain point, and
Speaker 3: then they would start to I ran would start to
Speaker 3: feel a lot of different pressure from their partners because
Speaker 3: then it would really become, you know, a much bigger issue.
Speaker 3: But look, I mean, you know, ultimately, I do think
Speaker 3: though we're at a stage where the point of this conflict,
Speaker 3: as far as it matters to the markets with oil prices,
Speaker 3: I think is largely behind US. I mean where oil
Speaker 3: is today or you know, in the mid seventies, whether
Speaker 3: you're looking at WTI or Branch, which is around seventy
Speaker 3: seven at the moment, this is way below what I
Speaker 3: thought it was going to be. I would have said
Speaker 3: mid eighties. I wouldn't have guessed in the seventies. So
Speaker 3: I think I think there's a lot to this. Well.
Speaker 2: I think one challenge that that people have right now
Speaker 2: when they look at where the US and Iran are negotiations,
Speaker 2: is that there is this sort of sixty days to
Speaker 2: get to some sort of solution with the enrichment of
Speaker 2: uranium for any purpose. Yeah, I think it's fair to
Speaker 2: say if you look at the historical corollary with like
Speaker 2: the JCPOA, you know, that took over a.
Speaker 3: Year to negotiate. Yeah, it's gonna take time.
Speaker 2: But does that mean But the difference is we have
Speaker 2: all these US assets and service members in the region
Speaker 2: and they're kind of just there as the threat of
Speaker 2: a cudgel, right.
Speaker 3: Yeah, and I think that there's gonna be some withdrawal
Speaker 3: of that. Like over, I think that's part of the
Speaker 3: sixty day agreement, that there has to be some withdrawal
Speaker 3: of troops from the region. I think what's different this
Speaker 3: time is that there are consequences for Iran, Whereas like
Speaker 3: the JCPOA and everything else was like, listen, we want
Speaker 3: you to have this agreement. We've come to this agreement.
Speaker 3: It's taken us a year. This is what we want
Speaker 3: you to do, and if you don't do it, we'll
Speaker 3: just keep asking nicely. This time, I think you know
Speaker 3: what Trump is introduced in this is is that there's
Speaker 3: there's a carrot and then there's the stick. Right. There
Speaker 3: are consequences to this, and that I think is a
Speaker 3: differentiating factor, at least for me in terms of volatility
Speaker 3: in markets. I mean, we are going to go through
Speaker 3: periods where, oh, well this happened, this somebody fired on
Speaker 3: this person and this one, you know, and is a
Speaker 3: Strait's going to be closed. And oh I'm counting the ships.
Speaker 3: I counted five less and you're going to get these headlines.
Speaker 3: This isn't going away. This is going to create volatility
Speaker 3: in the markets. But overall, on average, where the flow is,
Speaker 3: I think that the flow is going to be a
Speaker 3: lot better. And it's really about denuclearizing Iran. I think
Speaker 3: this was his ultimate gold and demilitarizing them to the
Speaker 3: point where they can't exert that kind of influence that
Speaker 3: they had in the past. Is it regime change, No,
Speaker 3: it's probably a regime evolution. But we'll see, you know
Speaker 3: how that all plays out. But it's not over yet.
Speaker 1: Right, And Jim to that point, President Trump said just
Speaker 1: after market closed, if Aron doesn't behave I will do
Speaker 1: what I need to do. So right, we're going to
Speaker 1: just have to kind of live with this. What do
Speaker 1: you think is the most important market conversation we should
Speaker 1: be having right now? So?
Speaker 3: I think it's inflation. I mean, if we just look
Speaker 3: at what happened last week, right, we had some Fed
Speaker 3: governors go from zero rate hikes to two plus rate hikes, right,
Speaker 3: So it makes me wonder are they seeing something that
Speaker 3: we're not seeing. I'm a little concerned about that. Now,
Speaker 3: maybe they're overreacting, who knows, But you know, if if
Speaker 3: they're right, and if we do have very sticky starborn
Speaker 3: inflation above three percent for a period of time, that's
Speaker 3: not going to be good for the financial markets at all.
Speaker 3: So the I think what the belief is is that
Speaker 3: what we're seeing for inflation today is it's not so
Speaker 3: much at the core, it's primarily at the headline. It's
Speaker 3: going to be it's not going to be long lasting.
Speaker 3: It's going to it's going to filter through. But if
Speaker 3: that turns out not to be the case, then you're
Speaker 3: going to get higher interest rates in that it's going
Speaker 3: to slow the markets down, and the markets are not
Speaker 3: really anticipating that.
Speaker 2: Maybe a good segue to talk portfolio positioning because you
Speaker 2: and the team over at Morgan Stanley Investment Management, you
Speaker 2: like the US yeap, you like Japan, yep, You're underweight Europe.
Speaker 3: Yeah. I think that Europe is just going to have
Speaker 3: more headwinds in terms of trying, number one, to figure
Speaker 3: out what their reindustrialization plans are. I mean, Germany's been
Speaker 3: struggling for the last several years in terms of growth.
Speaker 3: They're manufacturing their autos, They're trying to figure out how
Speaker 3: to handle China with exports and imports. Energy prices are
Speaker 3: just you know, are just going to be stickier in Europe.
Speaker 3: They don't have the energy security or the source of
Speaker 3: energy that the US has, So I think the costs
Speaker 3: and also higher inflation in Europe. Like the US can
Speaker 3: handle three percent inflation, it did it in the nineties,
Speaker 3: and you know, you know, the US economy is geared
Speaker 3: to do that. Europe is much more of a rigid
Speaker 3: economy that's based on more fixed incomes and fixed costs.
Speaker 3: When you get an exoger and a shock of higher inflation,
Speaker 3: it really cuts into profits, so their ability to grow,
Speaker 3: and also from a political standpoint, what that does to
Speaker 3: people and how they vote and everything else can really
Speaker 3: start to blow back on industry. So it's not that
Speaker 3: we're abandoning Europe. We like Europe. It's just that if
Speaker 3: I had to choose, I would choose the US and
Speaker 3: Japan over Europe. So in a portfolio, it's a zero
Speaker 3: some game. If I'm overweight something, I've got to be
Speaker 3: underweight something else. So I choose to be Underwait Europe
Speaker 3: can't go.
Speaker 1: I still have more questions.
Speaker 2: You got to get Jim bad This was amazing.
Speaker 3: Thank you. It's great to be here with you both.
Speaker 1: Thank you really timely and great to get your view
Speaker 1: on Alan Greenspan and then just kind of broaden it out.
Speaker 1: Thank you so much. Thank you really appreciate Jim Karen,
Speaker 1: his chief Investment Officer of Portfolio Solutions at Morgan Stanley
Speaker 1: Investment Management, joining us right here in studio