Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, We're having
Speaker 2: a rolling recession. Econy of roll looks pretty strongly. It
Speaker 2: is when it comes to jobs.
Speaker 1: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI.
Speaker 3: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well Then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 3: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: A war continues, a strike moves toward conclusion, and the
Speaker 2: US economy just keeps on keeping on. This is Bloomberg
Speaker 2: Wall Street Week. I'm David Weston this week. Roger Altman
Speaker 2: of Evercore on the financial world coming to terms with
Speaker 2: a world of higher bond yield.
Speaker 4: With the very long, roughly fifteen year period of ultra
Speaker 4: low interest rates is over.
Speaker 2: And Tom Knight's former US investor in Israel, on what
Speaker 2: the Israel war with Hamas means for the rest of us.
Speaker 5: We're not at war with the policity people quite the
Speaker 5: offer said, We're at war with Hamas.
Speaker 2: Global Wall Street spent the week dealing with a new
Speaker 2: version of the issues it faced last week, starting with
Speaker 2: Israeli military action against Hamas in Gaza, as diplomatic efforts
Speaker 2: continued to keep the war from spreading in the region.
Speaker 1: Israel has it right, and I would add a responsibility
Speaker 1: to respond to the slaughter of their people, and we
Speaker 1: will ensure Israel has what a need to defend itself
Speaker 1: against these terrorists.
Speaker 2: And humanitarian groups struggled to get food, medicine, and fuel
Speaker 2: to those in desperate need.
Speaker 1: We've seen this picture before and it doesn't look very good,
Speaker 1: particularly when you have so many civilians who are caught
Speaker 1: in the middle.
Speaker 2: Back in the United States, the UAW strike brought a
Speaker 2: tentative agreement with four.
Speaker 1: We reached a historic agreement.
Speaker 6: As you know, in our union, the members are the
Speaker 6: highest authority.
Speaker 2: And big tech earnings came in mixed.
Speaker 7: I think you know alls that and done Cloud is
Speaker 7: the major story here, But at the end of the day,
Speaker 7: it really is good.
Speaker 8: Numbers a front all their businesses.
Speaker 9: Alphabet, the parent company of Google, pretty much only missed
Speaker 9: in its Cloud division, sales of eight point four to
Speaker 9: one billion below street estimates of eight point six billion,
Speaker 9: also missing on the bottom line in that unit as well.
Speaker 2: Morgan Stanley named its new CEO, Ted Pick, taking over
Speaker 2: from James Gorman the first of the year.
Speaker 10: That next cycle is going to be investment banking led,
Speaker 10: and it means that inequities.
Speaker 1: You want to be one or two every quarter as
Speaker 1: we have in the last decade. We have fixed income business,
Speaker 1: we were structured. It's now a top.
Speaker 5: Five business, and investment banking is going to lead the
Speaker 5: next cycle.
Speaker 2: The House of Representatives, after three long weeks, finally came
Speaker 2: up with a speaker.
Speaker 10: The challenge before us is great, but the time for
Speaker 10: action is now.
Speaker 2: But through it all, the US economy continued to surprise
Speaker 2: in a good way, with GDP growth numbers way trend,
Speaker 2: with the third quarter growing by four point nine percent.
Speaker 6: It's a good strong number, and it chose an economy
Speaker 6: sixteen very well. Let's remember it is just one quarter's number.
Speaker 2: But as much as the economy soared this week, it
Speaker 2: did not bring the markets along with it. The S
Speaker 2: and P five hundred was down over two and a
Speaker 2: half percent for the week, falling to forty one seventeen.
Speaker 2: That is well below the median year end number projected
Speaker 2: by our Bloomberg Elves, which is up at forty four
Speaker 2: to thirty five. The NASAC was down just over two
Speaker 2: point six percent, and this week we can't blame the
Speaker 2: cell off in stocks on a similar move away from bonds,
Speaker 2: as the yield actually gave up nearly fifteen basis points
Speaker 2: on the week. Here to t help us sort it
Speaker 2: all out are Chris Harvey, Wells Fargo head of Equity
Speaker 2: Strategy and Kristin Bitterley City Global Wealth, head of Investment Solutions.
Speaker 2: By the way, congratulates on your big promotion titled yeah
Speaker 2: good for years, so much good for you. So Chris,
Speaker 2: let me start with you, what did we see in
Speaker 2: the markets this week? I mean, there were a lot
Speaker 2: of factors of play. We had the war in Israel,
Speaker 2: we had the GDP numbers. What do you think really
Speaker 2: is driving the market right now?
Speaker 7: So even though rates went down, it's still concern we
Speaker 7: don't know where the ceiling is on interest rates and
Speaker 7: so as a result, it's really hard to have an
Speaker 7: equity floor.
Speaker 11: You combine that.
Speaker 7: With geopolitical, which is just a complete Nutter wild card.
Speaker 11: And then the reaction to earnings.
Speaker 8: We had.
Speaker 7: The earnings overall were okay, you had some good, you
Speaker 7: had some bad, but the overall guidance the market really
Speaker 7: didn't like.
Speaker 11: And you throw that all together and it was a
Speaker 11: difficult week.
Speaker 2: We've got the FOMC next week. Is that going to
Speaker 2: help us? Because most people think we know what it's
Speaker 2: going to do, which is nothing.
Speaker 7: It may help us. I have my fingers crossed. I'm
Speaker 7: hoping it will help us. There's really two things next week.
Speaker 7: It's the Treasury refunding announcement and it's FOMC.
Speaker 11: If the Treasury.
Speaker 7: Announces and they don't need as much paper as people suspect,
Speaker 7: or they come in line with expectations, that's a good thing.
Speaker 7: If the FOMC plays ball and says, okay, we're done,
Speaker 7: we're good here for now, that could stabilize the markets.
Speaker 7: But it's going to take a lot to really stabilize
Speaker 7: the market. It's they're very generate at this point in time.
Speaker 7: And again I don't want to overemphasize geopolitical, but it
Speaker 7: really adds a whole new dimension.
Speaker 2: To things Christian where are you do we have a
Speaker 2: sense of where the market is going, particularly when it
Speaker 2: comes to rates and yields.
Speaker 12: Yeah.
Speaker 13: So I think everyone was hopeful that during this earning
Speaker 13: season we would go back to fundamentals, it would be
Speaker 13: stories about companies, and I think what happened over the
Speaker 13: past couple of weeks, given geopolitics, given the rise in oil,
Speaker 13: and just given the fact that the tenure crossed over
Speaker 13: five percent, it became much more about these macro conditions.
Speaker 13: And when we look at the price action, yes, it's
Speaker 13: given back some of that increase, But when we look
Speaker 13: at the price action on the tenure and the effect
Speaker 13: of tightening that that implies. So we don't expect that
Speaker 13: the Fed's going to raise rates or do anything next week.
Speaker 13: But I think the big question here is, in this
Speaker 13: environment of rates being higher for longer and the market
Speaker 13: doing some of the financial tightening for the FED, what
Speaker 13: is really then the backdrop for corporate profitability and how
Speaker 13: much is it.
Speaker 2: Up to the Fed at this point? I mean, the
Speaker 2: Fed didn't rates that really drove those yields. The yields
Speaker 2: went up on their own, and Chris, you mentioned the
Speaker 2: auction coming up this week. Part of it is the
Speaker 2: supply of treasuries.
Speaker 8: Christmas.
Speaker 13: Part of it is the supply, so you have to
Speaker 13: look at supply, demand and balances when it comes to
Speaker 13: the tenure. So you have the supply, you have the
Speaker 13: increased issuance, and then you have the question around who
Speaker 13: is buying. And I think one of the things that
Speaker 13: we have seen from our investors is, yes, you have
Speaker 13: the attractiveness of the front part of the yield curve,
Speaker 13: but you also have even going out kind of two
Speaker 13: to five years, you have really attractive yields. You have
Speaker 13: corporate investment grade bonds that you know at five years
Speaker 13: five years are yielding around six to six and a
Speaker 13: half percent. So there are really really attractive parts within
Speaker 13: the fixed income market where you don't have to go
Speaker 13: out ten years. So we see a lot of the
Speaker 13: activity still concentrated on that front end.
Speaker 2: Of the curve.
Speaker 7: So let me just play off that because I think
Speaker 7: Kristen hit onto something.
Speaker 11: It's really on a tenure.
Speaker 7: It's not so much about fundamentals, it's about technicals and
Speaker 7: it's about positioning. And the technicals aren't great, especially if
Speaker 7: the Treasury comes out with they need more paper.
Speaker 11: Than people expect. That's going to be a problem.
Speaker 7: The other issue is if you're long further out on
Speaker 7: the curve, right, if you're a long duration buyer, you're
Speaker 7: probably underwater at this point in time. You're trying to
Speaker 7: catch a falling knife. There's lots of disincentives at this
Speaker 7: point in time. And Chris and I were talking earlier,
Speaker 7: who's last who's that buyer of the treasury, who's that
Speaker 7: buyer of long duration assets? And it's really hard to
Speaker 7: find that person at this point in time, and everyone's
Speaker 7: waiting for somebody else to step up, And that's a problem.
Speaker 2: Maybe all long duration. But you can get real return
Speaker 2: on cash or close to cash about to two years
Speaker 2: or so. Like that Does that hurt equity sales because
Speaker 2: by the way, I can get some return by just
Speaker 2: keeping it in money markets.
Speaker 11: I think it hurts all risk product.
Speaker 7: So why go out on the curve when you can
Speaker 7: get a higher yield at the front end of the curve.
Speaker 7: I don't need to take that duration risk. And then
Speaker 7: for equities, hey, I have this stable earnings in a
Speaker 7: period where there's a lot of instability, maybe I'll just
Speaker 7: put a portion of it there. And so yes, to
Speaker 7: a certain degree, it is hurting equities.
Speaker 2: Kristin, what about that duration question, because do I want
Speaker 2: to keep it in case or near cash or at
Speaker 2: some point should I lock in some of those rates
Speaker 2: even on the fixed income because it may shift the
Speaker 2: other way.
Speaker 13: I think it's a balance. So when you look at
Speaker 13: it building an income portfolio, I think if there's one
Speaker 13: bright spot, it is the fact that you can build
Speaker 13: really attractive fixed income portfolios. A portion of that is
Speaker 13: going to be TVL. So the fact that you can
Speaker 13: get really high yields on the very very short end
Speaker 13: of the curve. We are encouraging our investors to take
Speaker 13: advantage of that. But remember you have real reinvestment risks,
Speaker 13: So depending upon what happens from here on out, you
Speaker 13: are going to have that moment in time where that
Speaker 13: yield is not going to be there. So the idea
Speaker 13: that you can get above five percent going out two
Speaker 13: to five years, you don't even have to stretch in
Speaker 13: terms of credit quality. You can get this within investment
Speaker 13: grade corporates, you can stay within government bonds, and you
Speaker 13: can actually have this very diversified portfolio that's providing income
Speaker 13: within mid to high single digits. So your earlier question
Speaker 13: if you're an investor getting mid to high single digits
Speaker 13: without really stretching in credit quality. How attractive are equities
Speaker 13: at these levels?
Speaker 11: And that's the fight.
Speaker 7: Now, there is one thing that's going on, and I'm
Speaker 7: sure Christen has seen this and talked about it, is
Speaker 7: the negative carry. In other words, the Yal curve has
Speaker 7: been incredibly inverted for a long time. If we go
Speaker 7: back to July, it was over one hundred bases points
Speaker 7: of inversion. Now we're only looking at fifteen twenty. That
Speaker 7: was one of the reasons why the duration players weren't
Speaker 7: stepping up is because it didn't make any sense.
Speaker 11: There was a real negative carry there.
Speaker 7: But as that curve goes to zero, it looks like
Speaker 7: it's going to go to zero. Now you can start
Speaker 7: having people move out in the curve without being penalized.
Speaker 7: But we haven't seen that yet, and that's what we're
Speaker 7: looking for, and maybe that will also beside FOMC and
Speaker 7: Treasury help stabilize the bond.
Speaker 2: So help me on that. Understand it, because I've read
Speaker 2: about so called pancake Right, we visually have a flat curve,
Speaker 2: it's not tilted one way or the other. Let's assume
Speaker 2: the moment it goes and stays around a flat curve
Speaker 2: for a while, and how does that change my portfolio building?
Speaker 7: So what it does, it's not. It doesn't penalize you
Speaker 7: for going out on the curve. So when the curve
Speaker 7: is negative, right when it's inverted, you're giving up a
Speaker 7: lot of carrier, giving up a lot of yields.
Speaker 11: So you have to get duration right.
Speaker 7: In other words, you have to get it right when
Speaker 7: interest rates start to fall, otherwise it's going to be
Speaker 7: a very painful process. As the curve flattens out, we
Speaker 7: don't have to play around with that.
Speaker 11: That becomes less of an issue.
Speaker 7: And if you look at the macro, yes, the macro
Speaker 7: right here, right now is a little bit troubling. But
Speaker 7: an inflation has come down. The Fed looks like it's
Speaker 7: going to stop. And if you go back to six
Speaker 7: when the Fed stopped there tightening that four to six
Speaker 7: tightening cycle, real rates drop, nominal race drop once they stopped,
Speaker 7: And so there could be a catalyst here, a small one,
Speaker 7: albeit for duration buyers.
Speaker 11: But we'll see.
Speaker 2: Okay, Thank you so very much to Chris Harvey as
Speaker 2: wells Rogo and Kristin Bitterly of City coming up. Sky
Speaker 2: high federal deficits help drive borrowing costs up. We talk
Speaker 2: with Evercred Roger Altman about how Washington fiscal actions affect
Speaker 2: Wall Street. That's the next time Wall Street Week Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. This week
Speaker 2: brought a tentative settlement between the UAW and Ford, with
Speaker 2: reports that GM instillances may not be too far behind,
Speaker 2: but it comes with a price of substantially higher wages.
Speaker 2: So Christen, let me start with you. We do have
Speaker 2: the settlement. We do see labor costs going up. Ups
Speaker 2: reported it. You saw it affected their earnings. Are we
Speaker 2: seeing much margin pressure such so far because of labor
Speaker 2: as far as you can.
Speaker 13: Tell from the earning seats, You know what I would
Speaker 13: say this earning season, I actually think we continue to
Speaker 13: see some resiliency within earnings and there's actually potentially a
Speaker 13: path to seeing positive earnings growth, which has not been
Speaker 13: the case for the past three quarters. I would say though,
Speaker 13: in terms of the market reaction and what we're seeing
Speaker 13: around earnings, it's much more of a macro picture rates
Speaker 13: are still in the driver's seat, But the other part
Speaker 13: that's in the driver's seat is tech. And so you've
Speaker 13: seen some pretty binary react in terms of not only
Speaker 13: the earnings but also forward guidance in terms of their expectations,
Speaker 13: and the market is heavily reacting to that. And if
Speaker 13: you look at volatility around earnings, we are seeing a
Speaker 13: wider spread in terms of some of those movements than
Speaker 13: we have seen in prior earning seasons.
Speaker 2: So, Chris, when I hear tech, I think about magnificent seven, right,
Speaker 2: isn't that we call it these days? That's what we
Speaker 2: are they holding up? Because we saw a little bit
Speaker 2: of shakiness in some of those magnificent seven this week.
Speaker 7: So the answer to that is the stocks aren't holding
Speaker 7: up that well.
Speaker 11: What it is is some good, some bad.
Speaker 7: The underlying fundamentals fine, right, the reaction function.
Speaker 11: Not so fine.
Speaker 7: In some cases that's part of guidance. But here's a
Speaker 7: funny thing. If you're a company, your stock's up one
Speaker 7: hundred percent, you're looking forward, you might want to manage
Speaker 7: expectations bring things down, so your stock goes down five
Speaker 7: ten percent. You're already up one hundred You want to
Speaker 7: load those expectations for next year. You want to set
Speaker 7: things up for next year. And so it's not quite
Speaker 7: clear to me if it's a man of expectations or
Speaker 7: they're really saying something that we're not seeing, because the
Speaker 7: results for some of the companies are actually quite good.
Speaker 2: Well, what are the patterns that you're seeing so far,
Speaker 2: Chris in this earning season.
Speaker 7: So surprisingly, what we're seeing is margins are holding up well,
Speaker 7: we're seeing top line beats.
Speaker 11: But the issue is, or the rub.
Speaker 7: Is, guidance hasn't been as good as it has been
Speaker 7: in the past, and companies are being taken down a
Speaker 7: notch due to that.
Speaker 11: Whether that's because they're.
Speaker 7: Again they're seeing something that we're not seeing, they're being
Speaker 7: more conservative, they're managing expectations unclear, But the underlying fundamentals
Speaker 7: in the here and the now are fine. The last
Speaker 7: thing I'd say is that when we look at earnings
Speaker 7: and we go through transcripts, assuming we go through transcripts
Speaker 7: and we look at what the c suite is saying,
Speaker 7: we are seeing things that tone chains get a little
Speaker 7: bit darker around the consumer, which isn't a surprise, but
Speaker 7: it's something we're watching very closely.
Speaker 2: Which is something you mentioned earlier, Kristen exactly.
Speaker 13: I think the other thing, too is when you look
Speaker 13: at going back to this conversation around Tech and the
Speaker 13: Magnificent seven, those stocks are priced for perfection, right, So
Speaker 13: of course there's going to be a little bit of
Speaker 13: an overreaction to and giving back some of the gains
Speaker 13: that we've experienced here to date because as we all know,
Speaker 13: the market has been so concentrated in those seven stocks.
Speaker 13: So I think what is interesting is as we're kind
Speaker 13: of if we've seen the bottoming of corporate earnings and
Speaker 13: now we're kind of pivoting into modest growth. I do
Speaker 13: think twenty twenty four, Chris, I'm not sure about your
Speaker 13: view on this, but I think twenty twenty four the
Speaker 13: outlook is a little bit too rosy, especially if you're
Speaker 13: higher for longer rates.
Speaker 11: I think that's right.
Speaker 13: But within that there are opportunities in some of these
Speaker 13: sectors and some.
Speaker 2: Of the price effect. Yeah, we'll talk about defensive stocks.
Speaker 2: Let's talk about small and mid caps, because yeah, those
Speaker 2: are not I don't think price.
Speaker 8: Perfection, no.
Speaker 13: If you look at small and mid caps, I think
Speaker 13: the interesting thing is, of course, if you're in a
Speaker 13: higher interest rate environment. This idea that are their balance
Speaker 13: sheets clean? Are they exposed to floating rate debt? But
Speaker 13: within let's take like midcaps. Within mid caps, you have
Speaker 13: parts of that market that actually are profitable. Let's take
Speaker 13: like industrials. Right, So if we're looking at industrials, you're
Speaker 13: looking at infrastructure, defense. Industrials are only like ten percent
Speaker 13: of large cap, but like twenty percent of mid cap.
Speaker 13: Are there opportunities within there to have exposure that makes
Speaker 13: sense from a valuation perspective as as well as a
Speaker 13: go forward perspective?
Speaker 11: Absolutely?
Speaker 2: Okay, thank you so very much to Chris Harvey as
Speaker 2: well as Fargo and Kristen's Bitterly of a City. Israel's
Speaker 2: war with Hamas is entering its fourth week now, with
Speaker 2: continued strikes and counter strikes on Gaza and israel efforts
Speaker 2: to get humanitarian aid into the territory and feverish diplomatic
Speaker 2: efforts to contain the conflicts. Welcome now, Tom Nydes He's
Speaker 2: a former Morgan Stanley COO, former Deputy Secretary of State,
Speaker 2: and he also just stepped down as US ambassador Israel
Speaker 2: last month. So Tom, thank you so much for joining us.
Speaker 2: Good to have you here. We all see the consequences
Speaker 2: for people living in Israel and in Gaza every day
Speaker 2: in video, but for many of the rest of us,
Speaker 2: particularly in the business world, the consequences made determined and
Speaker 2: determined by whether or not this conflict spreads beyond Israel
Speaker 2: and Amas. What are the factors from your point of
Speaker 2: view that will determine whether it does spread?
Speaker 1: Well? Listen, David, First, I appreciate you having me.
Speaker 5: This is the question because ultimately one of the things
Speaker 5: that the present has been very clear about, regardless of
Speaker 5: you you love him or hate him, the reality has
Speaker 5: been very clear to the Iranians because the Iranian proxies
Speaker 5: we're really talking about hesbl in particular, as he likes
Speaker 5: to say, superpowers don't bluff. And it's also helped that
Speaker 5: they move to some very large ships into the Mediterranean
Speaker 5: every day. This White House is working to put pressure
Speaker 5: on those proxies, those in Lebanon and yes, in Syria,
Speaker 5: but more really, the Iranians don't do it. Don't do
Speaker 5: it because the Two Front war. Who's that question, will
Speaker 5: have the enormous consequences in the state of Israel, and
Speaker 5: to be clear, will have enormous consequences to Lebanon and Iran.
Speaker 5: So I think when they're sitting around thinking about this
Speaker 5: in Tehran, I think thinking long and hard about what
Speaker 5: the consequences.
Speaker 1: Could be of them getting involved. But it certainly is
Speaker 1: a risk.
Speaker 2: Sometime we see, for example, sexual a state blink and
Speaker 2: going to the region, we see various activities. I'm sure
Speaker 2: nine tenths of what's going on we never see and
Speaker 2: we're not meant to see without revealing anything you shouldn't
Speaker 2: reveal that's confidential. What sorts of things do you expect
Speaker 2: is going on behind the scenes.
Speaker 5: Well, first of all, they're pushing the Israelis very strongly
Speaker 5: about getting humanitarian aid into Gaza. Listen, Hamas is doing
Speaker 5: exactly what they want to do. They want to create
Speaker 5: unbelievable carnage in Israel, which they certainly did. They then really,
Speaker 5: as you know, don't really care about the Palacinian people.
Speaker 1: They're using them as human shields.
Speaker 5: You know, this is Hamas isn't seen around and says
Speaker 5: let's come up with a two state solution. Now Hamas
Speaker 5: is like Isis and their goal is destroy the state
Speaker 5: of Israel. On the other hand, the vast vast majority
Speaker 5: of Palaestinians just want to live in peace and prosperity
Speaker 5: and freedom.
Speaker 1: You know.
Speaker 5: They We're not at war with the Palacinia people. Quite
Speaker 5: the opposite, we're at war with Hamas. And so I
Speaker 5: think what the President and Secretary Blincoln is trying to
Speaker 5: do is relieve this humanitarian suffering that's going on in Gaz.
Speaker 8: It's it's it's terrible.
Speaker 5: It's on the phone with a very close friend of
Speaker 5: mine just this morning who has a very large business
Speaker 5: in the West Bank and.
Speaker 1: Has many, many, many people.
Speaker 5: In Gaza with his operations there. It's heartbreaking. So I
Speaker 5: don't you know, I don't like any of this, to
Speaker 5: say the least. We should keep focus on how we
Speaker 5: got here. But at the end of the day, what
Speaker 5: you're hearing, what you're not hearing is the pressure that
Speaker 5: that Secretary of Blincoln and the President and the Vice
Speaker 5: President is putting on not only the Egyptians and the
Speaker 5: Qataris and all the people that begin this humanitarian aid,
Speaker 5: and also to make sure the Israelis are making smart
Speaker 5: military decisions.
Speaker 1: And I think that's very important as well.
Speaker 2: You mentioned Katar, you mentioned Egypt, one other Saudi Arabia.
Speaker 2: It could play a very significant role here. What do
Speaker 2: you expect to go on in Sali Arabia. We thought
Speaker 2: we might have been on the brink actually of a
Speaker 2: peace agreement between sell Out Arabia and Israel that certainly
Speaker 2: been put off for the time being.
Speaker 1: Well, you know, David, as you know you and I've
Speaker 1: spoken about this.
Speaker 5: I've been a very strong advocate of getting a deal
Speaker 5: done with Saudi Arabia. A normalized deal with Saudi Arabia
Speaker 5: and the State of Israel and with security agreements in
Speaker 5: the United States would only be better for the region,
Speaker 5: just like the Abraham Accords were. If you look at
Speaker 5: the abram Cords that were obviously done on the Trump administration,
Speaker 5: I praise up all the time when I was in
Speaker 5: the region, the idea of Bahrain in Morocco and the
Speaker 5: UAE was a game changer for the region. And this
Speaker 5: situation would be even worse if it wasn't the case. Now,
Speaker 5: How grand would it be today if we had a
Speaker 5: normalization with Saudi Arabia and Israel.
Speaker 1: Because ultimately that makes the region more secure.
Speaker 5: So I am I'm actually quite confident after this is over,
Speaker 5: and god knows how long it will be that the
Speaker 5: size will in fact want to re engage because quite frankly,
Speaker 5: they see the same threat that we see in Israel sees,
Speaker 5: which is the Iranian threat.
Speaker 2: Tom, thank you so very much for being on Wall Street.
Speaker 2: We really appreciate that's Tom Knydes, former US Ambassador to Israel,
Speaker 2: coming up. Sky high federal deficits help drive borrowing costs up.
Speaker 2: We talk with Evercred Roger Altman about how Washington fiscal
Speaker 2: actions affect Wall Street. That's next on Wall Street Week
Speaker 2: on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston.
Speaker 8: Global.
Speaker 2: Wall Street is trying to come to terms with higher yields,
Speaker 2: driven in no small part by the federal deficit and
Speaker 2: the need for more borrowing, something that FED Chair J
Speaker 2: Powell say they pay attention to it the FED, but
Speaker 2: that former Treasury Secretary Larry Summer says is a bigger
Speaker 2: problem perhaps than the FED may understand.
Speaker 10: The Actually the fiscal authorities have oversight over us and
Speaker 10: not the other way around, So we stay away from that.
Speaker 10: So I would just say everyone knows that it's not
Speaker 10: a secret, and about all I can say is we
Speaker 10: know that we're on an unsustainable path fiscally.
Speaker 3: There was a big Newfoundland of a dog that wasn't
Speaker 3: barking as he was speaking, and that's everything about the
Speaker 3: federal fiscal situation.
Speaker 2: For a better sense of what these deficits in Congress,
Speaker 2: this difficulty in dealing with them may mean for the
Speaker 2: world of Wall Street. Welcome now back Roger Oltman. He's
Speaker 2: founder and senior chairman of Evercore. Roger, thank you so
Speaker 2: much for being.
Speaker 8: Back with I could be here with you, David, So
Speaker 8: you've had a lot of.
Speaker 2: Experience in Washington, the Treasury Department, as well as here
Speaker 2: on Wall Street. First of all, explain what you think j.
Speaker 2: Powell means when he says it's unsustainable.
Speaker 4: Well, as Herbside once said, when something's unsustainable, it actually stops.
Speaker 4: But I know what I think when I hear that term.
Speaker 4: I'm not sure exactly what he means, but as a
Speaker 4: person who's spent so much time in and around markets,
Speaker 4: I think that it's just a matter of time before
Speaker 4: global financial markets turn their attention to this very poor
Speaker 4: fiscal trajectory in the United States and reject it and
Speaker 4: absent unless we change course fiscally on our own voluntarily
Speaker 4: before that moment, there'll be a crisis, and it will
Speaker 4: only be Many would argue it will only be a
Speaker 4: crisis that will cause the authorities to adjust fiscal policy,
Speaker 4: for example, additional revenue. So that's what I think of
Speaker 4: when I hear the term unsustainable as a relation to
Speaker 4: the deficit. They will come a moment of reckoning when
Speaker 4: financial markets reject this course, will have a crisis, and
Speaker 4: that will force the hands of the Congress and the
Speaker 4: executive branch in terms of changing policy.
Speaker 8: That's not a good way to do it. I hope
Speaker 8: we don't do it that way. Be much better to.
Speaker 4: In effect agree that we need a different path and
Speaker 4: proactively choose one. But at the moment you have to
Speaker 4: be a real optimist to think that's going to be
Speaker 4: the way it happens.
Speaker 2: We like to think of markets as anticipating the future
Speaker 2: to some extent and discounting it and really taking into account.
Speaker 2: Are the markets not discounting at all right now? Or
Speaker 2: is that perhaps part of the reason we're seeing, for example,
Speaker 2: the yield on the thirty year for example, go up.
Speaker 2: Is it because of some beginning of concern about repaying
Speaker 2: role at debt.
Speaker 4: It's hard to say. I would not say that right
Speaker 4: this moment. Fiscal concerns are one of the top two
Speaker 4: or three factors driving markets.
Speaker 8: Whether they're affecting the thirty year debatable.
Speaker 4: There recently been a couple of very sloppy treasury auctions,
Speaker 4: although they were shorter maturity auctions than that, and that's
Speaker 4: always a sign of concern. And keep in mind we're
Speaker 4: at a moment we have this very poor fiscal trajectory,
Speaker 4: at a moment of quantitative tightening.
Speaker 8: So has gone from.
Speaker 4: Buying billions of dollars of treasury and government backed securities
Speaker 4: during the quantitative easing period, which lasted a very long time,
Speaker 4: to now selling down aggressively its bond portfolio. And what
Speaker 4: that means is it's adding to the supply in effect
Speaker 4: of treasuries that the market has to absorb because the
Speaker 4: FED is a seller, and then you have the Treasury
Speaker 4: itself issuing giant amounts of new securities.
Speaker 8: That's adding to the complexity.
Speaker 2: So Roger, let's go beyond the deficit and talk about
Speaker 2: other things that are affecting business today, and specifically what
Speaker 2: we've seen in the yields, because goodness knows, they've come
Speaker 2: up a long way, really fast.
Speaker 4: Well, we've seen, to quote my friend Howard Mark, say,
Speaker 4: see change in the financial market environment in the sense
Speaker 4: that the very long, roughly fifteen year period of ultra
Speaker 4: low interest rates, at least, I would argue, is over.
Speaker 4: It's not temporarily interrupted, it's over. And now today, in
Speaker 4: round numbers, we have a five percent ten year yield
Speaker 4: and we haven't seen that for I think since two
Speaker 4: thousand and seven, and I think a lot of market participants,
Speaker 4: in particular to your question, business leaders are just beginning
Speaker 4: to grasp that we are in a new era in
Speaker 4: terms of the structure of interest rates. It's a profound
Speaker 4: change because it affects not just obviously cost of capital,
Speaker 4: but it affects asset allocation. It affects returns. I mean,
Speaker 4: if you're a financial imagine you're a private equity firm
Speaker 4: and they are so ubiquitous, this fundamentally changes the return
Speaker 4: prospects for them because the cost of that leverage is
Speaker 4: such that they can't leverage XYZ investment to the same
Speaker 4: degree today that they could have a year or two ago.
Speaker 8: But I think a lot of people are just waking
Speaker 8: up to this.
Speaker 4: And I'm sure some people listening to this would disagree
Speaker 4: that we've seen the end of ultra low interest rates,
Speaker 4: but I'm convinced we have and.
Speaker 8: It's really a profound change.
Speaker 4: Now, how much it affects you as a CEO depends
Speaker 4: on the nature of your business, how capital intensive it is.
Speaker 4: Are you, by the nature of your business, a you
Speaker 4: generate consistent free cash flow or are you generating deficits
Speaker 4: instead and doing a lot of financing. So, if you're Apple,
Speaker 4: you actually do borrow because of your international business versus
Speaker 4: domestic and the role of share buybacks, but you're not
Speaker 4: a net borrower in terms of net debt, and it
Speaker 4: affects you, but it doesn't affect you very dramatically. But
Speaker 4: if you're Blackstone or your Kkar or your Apollo and
Speaker 4: so forth, very dramatic effect.
Speaker 2: So you say some corporate leaders are just waking up
Speaker 2: to this process, is that at least impart the answer
Speaker 2: fundamental question, at least I have The economy seems to
Speaker 2: be charging along. When you look at GDP numbers, you
Speaker 2: look at retail sales, you look at so many indicators,
Speaker 2: even the labor market. Maybe loosening a bit, but it's
Speaker 2: still pretty strong labor market. How can the economy doing
Speaker 2: this well, We've had this many rate hikes out of
Speaker 2: the FED and this increase in the yields on the bonds.
Speaker 8: I think the economy is slowing.
Speaker 2: Now.
Speaker 8: You're right that it's still resilient.
Speaker 4: It's not falling off a cliff where there's no evidence
Speaker 4: at the moment of an incipient recession, I mean like
Speaker 4: next week or next month.
Speaker 8: But I think it is slowing.
Speaker 4: You look at the housing sector, and of course the
Speaker 4: sharp rise and mortgage rates always would have the effect
Speaker 4: that's having here, but new home sales, mortgage applications all
Speaker 4: sharply down, as you would imagine.
Speaker 8: And you look at a whole series of other surveys.
Speaker 8: At evercorep we do.
Speaker 4: A series of proprietary surveys trucking, temporary employment agencies, airlines, restaurants,
Speaker 4: a whole series of them, and we do them regularly,
Speaker 4: and I think it's quite a good set of data, and.
Speaker 8: They're pointing to a serious slowdown.
Speaker 4: So the composite reading of our surveys is above recession levels.
Speaker 8: But it's come down a lot.
Speaker 4: So I think the economy, despite the backward looking strong
Speaker 4: data is slowing down?
Speaker 8: Are we about to have a recession? I don't think so.
Speaker 4: I don't know about next year, but I don't think
Speaker 4: in the rest of this year twenty twenty three.
Speaker 8: But this definitely slow down occurring.
Speaker 2: By the way, for your data, I get Adheimens slides
Speaker 2: every day and I read them every day. Well, you
Speaker 2: know what I mean, I do know executly what maan.
Speaker 2: I read those surveys every single day in some slide form.
Speaker 2: So how does a corporate CEO respond? I mean, obviously
Speaker 2: there's a lot of different corporate CEOs, a lot of
Speaker 2: different reactions. But do they just pull on their horns
Speaker 2: at this point? In partly because it's more expensive, but
Speaker 2: also important because I CEO don't know exactly where it's.
Speaker 8: Going well, and of course it depends on what your
Speaker 8: business is.
Speaker 4: So you're seeing some surprising strength given the level of
Speaker 4: interest rates giving and how old this recovery simply is
Speaker 4: this recovery is more than three years old. It began
Speaker 4: in the early second half of twenty twenty. You know,
Speaker 4: you see Walmart doing very well, you see Procter and
Speaker 4: Gamble doing very well, and those are really broad based companies,
Speaker 4: and they're a sign of the resilience of this economy.
Speaker 4: On the other hand, you know, you see some companies
Speaker 4: there been some bigger earnings reports the last day or
Speaker 4: two which have been somewhat disappointing alphabet and so forth.
Speaker 8: Really depends on the business you're in. But if you
Speaker 8: take all these.
Speaker 4: Earnings reports together, they do show resilience. I say, it's slowing,
Speaker 4: but there's still considerable resilience, especially businesses that depend on
Speaker 4: the day and day out consumer, because the consumer still has,
Speaker 4: for example, considerable excess pandemic related excess savings, and as
Speaker 4: you say, labor markets remain pretty tight, and so consumers
Speaker 4: are doing well from an employment point of view, and
Speaker 4: a lot of consumers are right about even in terms
Speaker 4: of real after income, but still they are resilient.
Speaker 2: Roger, it's oh, such a pleasure I have you with
Speaker 2: this here on Wall Street. Thank you so much. Such
Speaker 2: Roger Altman of Evercore coming up when okay, Boomer is
Speaker 2: a not so subtle hint that we should be getting
Speaker 2: off the stage. That's next time, Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: Finally, one more thought. The big elephant in the whole
Speaker 2: system is the baby boomer generation that marches through like
Speaker 2: a herd of elephants. That's how Senator Lindsay Graham described
Speaker 2: one of the biggest fiscal challenges we face. But the
Speaker 2: problem goes way past just bankrupting Social Security and medicare.
Speaker 2: Everywhere we look these days, we find baby boomers and yes,
Speaker 2: that is my generation, and we remain on the stage
Speaker 2: without making room for the generations coming up behind us.
Speaker 2: There are a few exceptions, to be sure, like Ray Daalio,
Speaker 2: who has decided to step down from Bridgewater.
Speaker 6: I'm at a phase in my life where it's very natural,
Speaker 6: seventy four years old and the most important thing for
Speaker 6: me is to pass along everything.
Speaker 2: But for every Ray Dalio, it seems there's a host
Speaker 2: of US boomers who are just fine staying in the limelight.
Speaker 2: We see it in network television, where the long running
Speaker 2: Bachelor series on ABC has added a Golden Bachelor version,
Speaker 2: complete with an eligible widower looking for love at that
Speaker 2: Golden get It Golden Age of set two. We see
Speaker 2: it in sports, as Phil Nicholson won the PGA Championship
Speaker 2: just two years ago at the age of fifty and
Speaker 2: is still competing on the tour. We even see it
Speaker 2: in real estate, as the elderly hold onto their homes longer,
Speaker 2: putting even more stress on an already troubled housing market.
Speaker 12: We call that phenomenon aging in place. And what used
Speaker 12: to be is that the home ownership rate when you
Speaker 12: hit about sixty five would drop precipitously. But like in
Speaker 12: everything else, with the Baby Boomer generation, they're behaving differently,
Speaker 12: and so they are something like ten percentage points more
Speaker 12: likely to be homeowners.
Speaker 2: And when it comes to the economy overall, once again,
Speaker 2: it's the boomers, as Bank of America analysis this week
Speaker 2: found that boomers and traditionalists are the only groups to
Speaker 2: increase consumption. But maybe the biggest example of US boomers
Speaker 2: holding on is on the concert stage, with the Rolling
Speaker 2: Stones still touring led by lead singer Mick Jagger at
Speaker 2: age eighty, Neil Diamond going strong at eighty two, and
Speaker 2: the much younger Bonnie Rait on stage at seventy three.
Speaker 2: And then there's the Boss.
Speaker 8: This is what I've presented to you all these years,
Speaker 8: as my long and noisy prayer, as my.
Speaker 2: Magic trick, Bruce Springsteen, at seventy four, started his latest
Speaker 2: tour this year, so he'll be going at least well
Speaker 2: into twenty twenty four. But Bruce Springsteen is once again
Speaker 2: leading the way for boomers, not quite by getting off
Speaker 2: the stage, than by taking a big step toward that,
Speaker 2: selling off his music catalog and getting a cool five
Speaker 2: hundred million dollars for it. That is a record amount,
Speaker 2: with the buyers backed in part by Blackstone, KKR and Blackrock.
Speaker 2: And right now it looks like Springsteen's timing was once
Speaker 2: again impeccable. As Bloomberg opinion commist Leonel Laurent lays out
Speaker 2: this week, licensing music isn't as easy as it may
Speaker 2: have appeared, and the funds that bought those boomer catalogs
Speaker 2: are getting hit with lower valuations. Mister Springsteen may have
Speaker 2: sold at the top of the market, But you know
Speaker 2: one performer who isn't worried about any of this the
Speaker 2: very much not boomer Taylor Swift. As we learned this
Speaker 2: week that Miss Swift is now a billionaire in her
Speaker 2: own right, and boy has she taken over the stage
Speaker 2: from older artists. So maybe the younger generation will push
Speaker 2: us all off the stage after all. Eventually, this has
Speaker 2: been the most extraordinary experience of my entire life. That
Speaker 2: does it For this episode of One All Street Week,
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.