Bloomberg Audio Studios, podcasts, radio news. This is Wall Street Week. I'm David Weston.
The attempted assassination of former President Trump and the tragic shooting of innocent bystanders shook a nation already in the throes of a tumultuous presidential campaign and added to the momentum that mister Trump was already experiencing in the race. Take us through the market reaction and what a second
term of a Trump presidency could mean for investors. Welcome now, Stephen Rattner, chairman of Willed Advisors, which invests the personal and philanthropic assets of Michael Bloomberg, our founder and majority shareholder. I always a treat to have you here, Steve. Thank you for coming back.
Thanks for having me, David.
So, one of the themes of this week is, so this so called Trump trade, given what's going on, apparently we don't know about what's going on. Apparently in the campaign it seems like at least it's a substantial possibility that Donald Trump will be our next president. What is in the Trump trade? What are people reacting to in the market.
Well, well, first of all, there's a number of different things going on in the market at the moment. There are a lot of cross currents and so forth. But if we want to just focus on the Trump trade, his probability of success is now close to seventy percent, and that has made the market wake up and say, okay,
so what are we looking at? And so it really spans a huge gamut of things, everything from gun manufacturers, for profit education which thinks they're going to benefit if he stops us through the loan forgiveness, to the GSS Fanny and Freddie because maybe he won't, he won't take the dividends sweep anymore, energy stocks, manufacturing companies that might benefit from the tariffs, and so investors are rushing around looking for all the different places they think they would
benefit from another Trump presidency.
One of the things I think we've seen is in the bond curve, basically for treasuries, because there's a sense that actually there's going to be higher rates out there in the long end of the curve, which changes a fair number of things. What is the possibility of a Trump presidency with these economic policies leading to more inflation, therefore the Fed baby having to raise rates again.
Well, the bond trades a little complicated because we did have that good in the sense of being a slightly soft jobs number, and the predicted number of FED rate cuts is now up to something over two and therefore the ten years started to come down. And now you have the Trump piece layering on that, pushing it up
a little bit, but not hugely. But I don't think there's a lot of doubt that his fiscal policies, as expressed would be would be inflationary and therefore biased toward higher interest rates.
So talk about that Tax Cutting Jobs Act specific We had Scott Bessen on last week and he said, oh.
No, don't worry about it.
We're gonna save a lot of money. We're gonna save a trillion dollars a year from the basically undoing the Inflation Reduction Act. We're gonna save another trillion by redoing Medicare. And now I will note that when President Trump had came in the first time, he said they were going to get rid of Obamacare. That would save us low money, but one of the prospects that actually would cut back into of the spending under the Bide administration.
Well, remember that we didn't get rid of Obamacare because John McCain and because while he had technically had control of both houses of Congress, lost a Republican that costs him that. So a lot of this is going to depend on what happens to Congress. If both houses of Congress go Republican, then he's obviously got much more scope to do a bunch of stuff. Whether he really would do it or not, who knows. The record of the first Trump presidency was not good from a fiscal point
of view. The deficit went up by hundreds of billions of dollars before COVID ever arrived, in large part because the TCJA never came close to paying for itself. It was close to two trillion dollar costs with no offsets in spending and no real revenues associated with it.
So that's all on the text, the revenue side, as it were. What about tariffs? The one thing President Trouble has always seemed to enjoy has been imposing tariffs, particularly on China, but not only on China. Frankly, he likes tariffs. That does, of course increase the cost to the consumers and therefore I guess inflation.
Sure, And by the way, his last set of tariffs, which were far less robust than what he's talking about now rare. He's something like thirty billion of revenue. I thought you were going to ask about revenue, very little contribution to revenue.
The evidence is overwhelming.
Many economists have studied this that essentially one hundred percent ninety five, one hundred and five percent something in that ballpark was paid for by consumers. None of it was paid for by China. Maybe a little of it came out of the companies in terms of profit margins, but essentially it was paid for by consumers and was therefore inflationary. Now they were very limited tariffs. Start talking about ten percent across the board on all imports, you're in a different ballgame.
Well, we talked about inflation. One of the things we naturally think about is the feder reserve.
It's their job. Actually, it has price stability.
Right. There's a lot of speculation, not necessarily coming from Donald Trump himself, it's from people around him like Peter.
Navarro who talked about firing J. Powell.
But what are the prospects of really undermining to some extent the independence of the Fed.
That's to me incredibly scary. I think the independence of the Fed. They don't get everything right, they got inflation wrong. Will stipulate to that they got some stuff wrong in twenty nineteen. They may have gotten some stuff wrong coming out of the GFC, although they did a great job generally in the GFC. But let's just stipulate independence of the FED is critical and central to our economic success.
There's no sands or butts about that. You would not want the Congress or the White House in charge of monetary policy. And so any step to undermine the FED by any president of either party should be something that we all push back as strongly as possible.
So overall, why do we find so many investors who are backing President Trump giving everything you just said? What do you see they don't or what do they see you don't?
They have a variety of reasons that I understand their reasons. For example, one of the biggest reasons you hear is the regulatory stuff. There's no question, and now, in fairness to the President, although he appointed these people, they are
independent regulatory agencies. But nonetheless a lot of what the FTC has been trying to do, a lot of what the SEC has been trying to do, even the FCC, the FDA really has upset business, and they simply feel that this president is too progressive, and they feel that his vice president, should she become president, is even more progressive, and they don't like any of that.
And there are other reasons, but that's a good.
Example, maybe the main example of what they They just don't think this is a pro business administration. I would say, even though I do support the president, acting businessmen with some regularity is really not the way to get their support.
I don't think. That's not what my mother taught me.
Fair No, okay, Steve, I'm delighted to say he's going to be staying with us as we turn to the rest of the world, particularly whether investors might be falling out of love with the so called Magnificent seven. That's nextell Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. Stephen Ratner of will It Advisors has
stayed with us. So see, let's talk about the rest of the world as it were, and particularly those big tech companies that have been getting so much money with huge I would say huge capital investment about AI.
Yeah, look, those companies have had a great run.
Obviously in Vidia we all know about, but Microsoft, Google and so forth Amazon, And the question really is whether the market is valuing this situation appropriately. You're talking about massive cap X by on estimates anywhere from six hundred billion to one point two trillion dollars per year on this kind of stuff. And the question the market is starting to ask itself is are the revenues going to
be there to offset it? And that cap X is not just a cash expense, but it runs through the income statement and depreciation and so forth, and so.
It affects their margins.
It affects their profits, and you have to earn You have to create a huge amount of revenue to justify the magnitude of the cap X that is going on right as we speak.
So see back in the olden days at capsities, for gimer, when I was running budgets, if I had a capital expense, I had to show what the projections were about when I would save that money back just what And we usually had a rule about a couple of years, maybe two and a half years, we had to earn it back.
Is anybody taking pencil and paper, if they have it anymore, and doing that with AI, Is anybody actually thinking about where do we really see this in the real economy in terms of increased productivity.
Well, that's exactly what's happening now to some degree, and why you're starting to see a bit of a rotation. It might be just a mean reversion after a big run. It might be people doing what you talk about, but people are doing it. And by the way, this is a very debated subject. There's not a preponderance of view on one side or the other. And I don't even frankly have conviction myself. I think you could argue either way,
although I think the numbers are pretty daunting. But what you're starting to see the analysts do is exactly what you said. They're starting to pencil into their projections. This is the level of capex, this is a level of depreciation we're going to be taking for it. This is the amount of revenue we have to generate to justify that and achieve the kind of paybacks you're talking about.
And you say to yourself, is this really plausible?
Are we really going to you know, is Microsoft really going to be able to generate thirty billion dollars of revenue from AI? I think that's actually a roughly right number. In the next over the two years from now, and given that at the moment this stuff is essentially free, you might pay ten dollars a month for this or that, it's a real open question whether those kind of revenues are there.
Let me just make one other point, which is.
That if you think back on the success of Microsoft, Google, Facebook, they were essentially software companies. I mean, there was certainly some Capex involved in that, but nothing on the scale of what we're talking about here. And so we're in a whole different world, a whole different boat all game for these companies. And by the way, it's also a competitive ballgame. Open AI is not going to own all of AI. Microsoft is not going to own all of AI.
It's going to be very They all have to protect their market share and it's going to be a pretty competitive world.
So, Steve, I'm never going to ask you about specific investments that you're making or not making it, but just attitude investor. When you're looking at this phenomenon, you're looking at the NVIDIAs of this world, and Microsoft and others just take off like a rocket ship. It must be difficult to stay out of it. I mean, if you're running a big fund or something like that when you're seeing the fear of being left behind must be enormous.
But what do you do when you don't know whether it's going to work or not going to work?
Yes, this has been a challenge for active investors this year because these big companies Microsoft is something like a seven point three or seven point five percent waiting in
the SMP. Very few money managers have a seven percent position in anything, and so it's very when you know, you know the numbers, when you disaggregate the magnificent seven from the rest of the market, what the differences are, and so it's been very tough for active ma That's point one point two is Look, this is no different than any other investment. You do your best work, you figure it out as best you can, and you make
a bet and sometimes you're right, sometimes you're wrong. I would say we tend to be pretty conservative in our view of this stuff, and a little bit of the view that we've seen some of these movies before and we want to be a little careful about piling in, especially late in the game.
Is there a risk that the enormous success of that Magnificent seven what are you going to call them, is masking other weakness in stock markets. As you say, you look at the rest of the market, it has not done all that well. And yet we tend to gloss over that and say a bit market and the aggregate boys doing great.
It's totally masking it.
If you take the magnificent seven out and you start looking at some sectors, especially things like manufacturing, industrial stuff like that. Markets actually had a pretty poor run over the last certainly this year and even I think last year, and so yes, I think we're starting to see when we listen to companies, we listen to our managers, we are starting to see signs of softness in the economy on the consumer side, on the manufacturing side, and so forth.
I don't think the economy is falling out of bed, but we definitely are in the later stages of an expansion.
Let me ask about an ancillary part to the AI. If I we talk about Nvidia and much of the things, but the power required to drive this general AI is enormous. I mean, I'm hearing stories now. They're just really in a lot of story and that's really driving a lot of demand for power. Is that an investment opportunity?
We have invested around this opportunity. I would say modestly. We were actually kind of early to it. Others have now caught on to it. And if you look at the stocks, for example, of nuclear utilities that have less regulated power and also clean power, which is important to
these hyperscalers, they've shot up. I think people have woken up to the fact that the conventional projections of electricity demand over the next five to ten years we're ridiculously conservative relative to what's going to happen, and we're going to face a major I believe we're going to face a significant power crunch in this country unless we do something, and so running to the conflict between the desire to reduce our dependence on fossil fuels and.
The need for power that's right in front of us.
That's just what I was going to ask, because this goes right against the need to deal with the climate where we were trying to give up the fossil fuels, and this drives us back into it. Unless you go, for example, the nuclear maybe there's small modular reactors.
As you know, I think you may even talk about on your show. Bill Gates has a project I think out in Wyoming or someplace to build not a small reactor, but a new technology that involves less less heat and less water and so on and so forth. But it's going to be done in twenty thirty. He doesn't have a permit for it. So we're a long way. I think we're a long way from nuclear happening. It could happen.
I think the technology is there, whether it's small nuclear reactors or different kinds of nuclear technology, but I see no support at all from people to do it. And so the result is we're going to have probably some coal staying around longer than any of us would like, probably building more what it called ccgts natural gas generating facilities in order to support the renewables, because obviously the
sun doesn't always shine, the wind doesn't always blow. We all know that, so you have to have baseload power. And we're going to find that we are doing more with fossil fuels than any of us would like.
So so find as Steve gives us. Because you're a long term investor, you're looking out their ways and you look at the economy overall, and we've had extraordinary time of growth from World War Two on, but certainly in the last thirty years or so that's been challenged. More recently, productivity has sort of backed off a bit. Maybe it's coming back or maybe not. As you look long term, what do you think of the opportunities for an investor
in the economy. What do you think are likely to be with us for a while and really grow.
You have to have a view about some of the things you just said. We definitely the real problem in the economy is slow productivity growth. In my opinion, there's a decent chance that AI will change that. It could be like the Industrial Revolution or lots of other periods in our past where we really get a transformational kind of change, and that would really be good for all kinds of businesses, whether manufacturing business, consumer businesses and so forth.
And so that to me is really the most interesting thing in front of us. Hard to invest around for all the reasons we talked about, But beyond that, I can't tell you there's a particular sector that I would focus on as being the place to go. I do worry a lot in terms of economic challenges about the budget deficit, the impact on interest rates, the fact that we are going to have to deal with this sooner or later. But at the moment, I think we're actually not in a terrible place.
Okay, Steve, it's such a treat you have you here. Thank you so much that it's Stephen Rattner of will It Advisors